Registration No. 33-44670
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Pre-Effective Amendment No. _____ _____
Post-Effective Amendment No._15__ __X__
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No._____ _____
(Check appropriate box or boxes)
Principal Life Insurance Company Separate Account B
- --------------------------------------------------------------------------------
(Exact Name of Registrant)
Principal Life Insurance Company
- --------------------------------------------------------------------------------
(Name of Depositor)
The Principal Financial Group, Des Moines, Iowa 50392
- --------------------------------------------------------------------------------
(Address of Depositor's Principal Executive Offices) (Zip Code)
Depositor's Telephone Number, including Area Code (515) 248-3842
M. D. Roughton, The Principal Financial Group, Des Moines, Iowa 50392
- --------------------------------------------------------------------------------
(Name and Address of Agent for Service)
It is proposed that this filing will become effective (check appropriate box)
___ immediately upon filing pursuant to paragraph (b) of Rule 485
_X_ on May 1, 2000 pursuant to paragraph (b) of Rule 485
___ 60 days after filing pursuant to paragraph (a)(1) of Rule 485
___ on (date) pursuant to paragraph (a)(1) of Rule 485
___ 75 days after filing pursuant to paragraph (a)(2) of Rule 485
___ on (date) pursuant to paragraph (a)(2) of Rule 485
If appropriate, check the following box:
___ This post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
<PAGE>
PRINCIPAL LIFE INSURANCE COMPANY SEPARATE ACCOUNT B
PREMIER VARIABLE - GROUP VARIABLE ANNUITY CONTRACTS
Registration Statement on Form N-4
Cross Reference Sheet
Form N-4 Item Caption in Prospectus
Part A
1. Cover Page Principal Life Insurance Company
Separate Account B Premier Variable (A Group
Variable Annuity Contract for Employer-
Sponsored Qualified and Non-Qualified
Retirement Plans)
2. Definitions Glossary of Special Terms
3. Synopsis Expense Table and Example, Summary
4. Condensed Financial Condensed Financial Information,
Information Independent Auditors
5. General Description Summary, Description of
of Registrant Principal Life Insurance
Company, Principal Life
Insurance Company Separate Account B,
Voting Rights
6. Deductions Expense Table and Example, Deductions Under the
Contracts, Mortality and Expense Risks Charge,
Other Expenses, Application Fee and Transfer
Fee, Contract Administrative Expense,
Recordkeeping Expense, Compensation to Sales,
Representative, Distribution of the Contract
7. General Description of Summary, The Contract, Contract Values
Variable Annuity Contract and Accounting Before Annuity Commencement
Date, Income Benefits, Payment on Death of
Plan Participant, Withdrawals and Transfers,
Other Contractual Provisions, Contractholders'
Inquiries
8. Annuity Period Income Benefits
9. Death Benefit Payment on Death of Plan Participant,
Federal Tax Status
10. Purchases and Contract Summary, The Contract, Contract Values and
Value Accounting Before Annuity Commencement
Date, Other Contractual Provisions,
Distribution of the Contract
11. Redemptions Summary, Income Benefits, Withdrawals and
Transfers
12. Taxes Summary, Principal Life Insurance Company
Separate Account B, Income Benefits,
Federal Tax Status
13. Legal Proceedings Legal Proceedings
14. Table of Contents of Table of Contents of the Statement
the Statement of of Additional Information
Additional Information
Part B Statement of Additional Information Caption**
15. Cover Page Principal Life Insurance Company
Separate Account B Premier Variable - A Group
Variable Annuity Contract for Employer
Sponsored Qualified and Non-Qualified
Retirement Plans Issued by Principal Life
Insurance Company
16. Table of Contents Table of Contents
17. General Information None
and History
18. Services Independent Auditors**
19. Purchase of Securities Summary**, Deductions Under
Being Offered the Contracts**, Withdrawals and Transfers**,
Distribution of the Contract**
20. Underwriters Summary**, Distribution of the Contract**,
Underwriting Commissions
21. Calculation of Calculation of Yield and Total Return
Performance Data
22. Annuity Payments Income Benefits**
23. Financial Statements Financial Statements
** Prospectus caption given where appropriate.
<PAGE>
PRINCIPAL LIFE INSURANCE COMPANY
SEPARATE ACCOUNT B
PREMIER VARIABLE
(A Group Variable Annuity Contract
For Employer- Sponsored Qualified
And Non-Qualified Retirement Plans)
Issued by Principal Life Insurance Company (the "Company")
Prospectus dated May 1, 2000
This Prospectus concisely sets forth information about Principal Life Insurance
Company Separate Account B, Premier Variable (a Group Variable Annuity Contract)
(the "Contract") that an investor ought to know before investing. It should be
read and retained for future reference.
Additional information about the Contracts, including a Statement of Additional
Information, dated May 1, 2000, has been filed with the Securities and Exchange
Commission. The Statement of Additional Information is incorporated by reference
into this Prospectus. The table of contents of the Statement of Additional
Information appears on page 31 of this Prospectus. A copy of the Statement of
Additional Information can be obtained, free of charge, upon request by writing
or telephoning:
Princor Financial Services Corporation
a company of
the Principal Financial Group
Des Moines, IA 50392
Telephone: 1-800-633-1373
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
This Prospectus is valid only when accompanied by the current prospectus for
Principal Variable Contracts Fund, Inc. (the "Fund") which should be kept for
future reference.
TABLE OF CONTENTS
Page
Glossary of Special Terms .............................................. 3
Expense Table and Example .............................................. 5
Summary ............................................................... 7
Condensed Financial Information......................................... 9
Description of Principal Life Insurance Company ........................ 10
Principal Life Insurance Company Separate Account B .................... 10
Deductions Under the Contract .......................................... 12
Mortality and Expense Risks Charge ................................ 12
Other Expenses ........................................................ 12
Application Fee.................................................... 12
Contract Administration Expense.................................... 12
Recordkeeping Expense.............................................. 13
Location Fee ...................................................... 14
Flexible Income Option Charge...................................... 14
Documentation Expense.............................................. 14
Compensation to Sales Representative............................... 15
Special Services................................................... 15
Surplus Distribution at Sole Discretion of the Company ................. 15
The Contract .......................................................... 15
Contract Values and Accounting
Before Annuity Commencement Date .................................. 15
Investment Accounts ........................................... 15
Unit Value .................................................... 16
Net Investment Factor ......................................... 16
Hypothetical Example of Calculation
of Unit Value for All Divisions Except the
Money Market Division..................................... 16
Hypothetical Example of Calculation
of Unit Value for the Money Market Division............... 16
Income Benefits ................................................... 17
Variable Annuity Payments...................................... 17
Selecting a Variable Annuity ............................. 17
Forms of Variable Annuities .............................. 17
Basis of Annuity Conversion Rates ........................ 18
Determining the Amount
of the First Variable Annuity Payment .................... 19
Determining the Amount of the
Second and Subsequent Monthly
Variable Annuity Payments ............................ 19
Hypothetical Example of Calculation
of Variable Annuity Payments ............................. 19
Flexible Income Option......................................... 20
Payment on Death of Plan Participant............................... 20
Prior to Annuity Purchase Date ................................ 20
Subsequent to Annuity Purchase Date ........................... 21
Withdrawals and Transfers ......................................... 21
Cash Withdrawals .............................................. 21
Transfers Between Divisions ................................... 22
Transfers to the Contract ..................................... 22
Transfers to a Companion Contract ............................. 22
Special Situation Involving Alternate Funding Agents .......... 22
Postponement of Cash Withdrawal or Transfer ................... 22
Loans ......................................................... 23
Other Contractual Provisions ...................................... 23
Contribution Limits ........................................... 23
Assignment .................................................... 23
Cessation of Contributions .................................... 23
Substitution of Securities..................................... 23
Changes in the Contract ....................................... 23
Statement of Values..................................................... 24
Services Available by Telephone......................................... 24
Distribution of the Contract............................................ 24
Performance Calculation................................................. 24
Voting Rights .......................................................... 25
Federal Tax Status...................................................... 26
Taxes Payable by Owners of Benefits and Annuitants................. 26
Tax-Deferred Annuity Plans..................................... 26
Public Employee Deferred Compensation Plans.................... 27
401(a) Plans................................................... 27
Creditor-Exempt Non-Qualified Plans............................ 28
General Creditor Non-Qualified Plans........................... 29
Fund Diversification............................................... 29
State Regulation ....................................................... 29
Legal Opinions ........................................................ 30
Legal Proceedings ...................................................... 30
Registration Statement.................................................. 30
Independent Auditors.................................................... 30
Contractholders' Inquiries.............................................. 31
Table of Contents of the Statement of Additional Information............ 31
This Prospectus does not constitute an offer of, or solicitation of any offer to
acquire, any interest or participation in the Contracts in any jurisdiction in
which such an offer or solicitation may not lawfully be made. No person is
authorized to give any information or to make any representations in connection
with the Contracts other than those contained in this Prospectus.
GLOSSARY OF SPECIAL TERMS
Account -- Series or portfolio of a Mutual Fund in which a Separate Account
Division invests.
Aggregate Investment Account Value -- The sum of the Investment Account Values
for Investment Accounts which correlate to a Plan Participant.
Annual Average Balance -- The total value at the beginning of the Deposit Year
of all Investment Accounts which correlate to a Plan Participant under the
contract and other Plan assets which correlate to a Plan Participant that are
not allocated to the contract or an Associated or Companion Contract but for
which the Company provides recordkeeping services ("Outside Assets"), adjusted
by the time weighted average of Contributions to, and withdrawals from,
Investment Accounts and Outside Assets (if any) which correlate to the Plan
Participant during the period.
Annuity Change Factor -- The factor used to determine the change in value of a
Variable Annuity in the course of payment.
Annuity Commencement Date -- The beginning date for Annuity Payments.
Annuity Premium -- The amount applied under the Contract to purchase an annuity.
Annuity Purchase Date -- The date an Annuity Premium is applied to purchase an
annuity.
Associated Contract -- An annuity contract issued by the Company to the same
Contractholder to fund the same or a comparable Plan as determined by the
Company.
Commuted Value -- The dollar value, as of a given date, of remaining Annuity
Payments. It is determined by the Company using the interest rate assumed in
determining the initial amount of monthly income and assuming no variation in
the amount of monthly payments after the date of determination.
Companion Contract -- An unregistered group annuity contract offering guaranteed
interest crediting rates and which is issued by the Company to the
Contractholder for the purpose of funding benefits under the Plan. The Company
must agree in writing that a contract is a Companion Contract.
Contract Date -- The date this contract is effective, as shown on the face page
of the contract.
Contract Year -- A period beginning on a Yearly Date and ending on the day
before the next Yearly Date.
Contractholder -- The entity to which the contract will be issued, which will
normally be an Employer, an association, or a trust established for the benefit
of Plan Participants and their beneficiaries.
Contributions -- Amounts contributed under the contract which are accepted by
the Company.
Deposit Year -- The twelve-month period ending on a day selected by the
Contractholder.
Division -- The part of Separate Account B which is invested in shares of an
Account of a Mutual Fund.
Employer -- The corporation, sole proprietor, firm, organization, agency or
political subdivision named as employer in the Plan and any successor.
Flexible Income Option -- A periodic distribution from the contract in an amount
equal to the minimum annual amount determined in accordance with the minimum
distribution rules of the Internal Revenue Code, or a greater amount as
requested by the Owner of Benefits.
Funding Agent -- An insurance company, custodian or trustee designated by the
Contractholder and authorized to receive any amount or amounts transferred from
the contract described in this Prospectus. Funding Agent will also mean
Principal Life Insurance Company where the Contractholder directs the Company to
transfer such amounts from the contract described in this Prospectus to another
group annuity contract issued by the Company to the Contractholder.
Internal Revenue Code ("Code") -- The Internal Revenue Code of 1986, as amended,
and the regulations thereunder. Reference to the Internal Revenue Code means
such Code or the corresponding provisions of any subsequent revenue code and any
regulations thereunder.
Investment Account -- An account that correlates to a Plan Participant
established under the contract for each type of Contribution and for each
Division in which the Contribution is invested.
Investment Account Value -- The value of an Investment Account for a Division
which on any date will be equal to the number of units then credited to such
account multiplied by the Unit Value of this series of contracts for that
Division for the Valuation Period in which such date occurs.
Mutual Fund -- A registered open-end investment company in which a Division of
Separate Account B invests.
Net Investment Factor -- The factor used to determine the change in Unit Value
of a Division during a Valuation Period.
Normal Income Form -- The form of benefit to be provided under the Plan if the
Owner of Benefits does not elect some other form. If the Plan does not specify a
Normal Income Form, the Normal Income Form shall be: (a) for an unmarried Plan
Participant, the single life with ten years certain annuity option described in
this Prospectus, or (b) for a married Plan Participant, the joint one-half
survivor annuity option described in this Prospectus.
Notification -- Any form of notice received by the Company at the Company's home
office and approved in advance by the Company including written forms,
electronic transmissions, telephone transmissions, facsimiles and photocopies.
Owner of Benefits -- The entity or individual that has the exclusive right to be
paid benefits and exercise rights and privileges pursuant to such benefits. The
Owner of Benefits is the Plan Participant under all contracts except contracts
used to fund General Creditor Non-Qualified Plans (see "Summary") wherein the
Contractholder is the Owner of Benefits.
Plan -- The plan established by the Employer in effect on the date the contract
is executed and as amended from time to time, which the Employer has designated
to the Company in writing as the Plan funded by the contract.
Plan Participant -- A person who is (i) a participant under the Plan, (ii) a
beneficiary of a deceased participant, or (iii) an alternate payee under a
Qualified Domestic Relations Order in whose name an Investment Account has been
established under this contract.
Qualified Domestic Relations Order -- A Qualified Domestic Relations Order as
defined in Internal Revenue Code Section 414 (p)(1)(A).
Quarterly Date -- The last Valuation Date of the third, sixth, ninth and twelfth
month of each Deposit Year.
Separate Account B -- A separate account established by the Company under Iowa
law to receive Contributions under the contract offered by this Prospectus and
other contracts issued by the Company. It is divided into Divisions, each of
which invest in a corresponding Account of the Principal Variable Contracts
Fund, Inc.
Termination of Employment -- A Plan Participant's termination of employment with
the Employer, determined under the Plan and as reported to the Company.
Total and Permanent Disability -- The condition of a Plan Participant when, as
the result of sickness or injury, the Plan Participant is prevented from
engaging in any substantial gainful activity and such total disability has been
continuous for a period of at least six months. For contracts sold in the state
of Pennsylvania, the term shall have the same meaning as defined in the Plan.
The Plan Participant must submit due proof thereof which is acceptable to the
Company.
Unit Value -- The value of a unit of a Division of Separate Account B.
Valuation Date -- The date as of which the net asset value of an Account is
determined.
Valuation Period -- The period between the time as of which the net asset value
of an Account is determined on one Valuation Date and the time as of which such
value is determined on the next following Valuation Date.
Variable Annuity Payments -- A series of periodic payments, the amounts of which
are not guaranteed but which will increase or decrease to reflect the investment
experience of the Capital Value Division of Separate Account B. Periodic
payments made pursuant to the Flexible Income Option are not Variable Annuity
Payments.
Variable Annuity Reserves -- The reserves held for annuities in the course of
payment for the contract.
Yearly Date -- The Contract Date and the same day of each year thereafter.
EXPENSE TABLE AND EXAMPLE
The following tables depict fees and expenses applicable to the aggregate of all
Investment Accounts that correlate to a Plan Participant established under the
contract. The purpose of the table is to assist the Owner of Benefits in
understanding the various costs and expenses that an Owner of Benefits will bear
directly or indirectly. The table reflects expenses of the Separate Account as
well as the expenses of the Account in which the Separate Account invests and is
based on expenses incurred during the fiscal year ended December 31, 1999. The
Example below which includes only mortality and expense risks charges and
expenses of the underlying Accounts, should not be considered a representation
of past or future expenses; actual expenses may be greater or lesser than those
shown. See "Deductions under the Contract."
EXPENSE TABLE
Transaction Expenses None
Annual Contract Fee None
Separate Account Annual Expenses
(as a percentage of average account value)
- -------------------------------------------------
Mortality and Expense Risk Fees .42%
Annual Expenses of Accounts
- --------------------------------
(as a percentage of average net assets of the
following Accounts)
Management Other Total Accounts
Fees Expenses Annual Expenses
Balanced Account .57% .01% .58%
Bond Account .49 .01 .50
Capital Value Account .43* .00 .43
Government Securities Account .49 .01 .50
Growth Account .45* .00 .45
International Account .73* .05 .78
MidCap Account .61 .00 .61
Money Market Account .50 .02 .52
* Based on the management fee schedule in effect during the fiscal year.
Modifications to the schedule were effective 1/1/2000.
The Expense Table depicts fees and expenses applicable to the Aggregate
Investment Account Values which correlate to a Plan Participant under the
Contract. At the discretion of the Contractholder, these fees are paid by the
Contractholder or assessed against Investment Accounts which correlate to Plan
Participants. The Expense Table does not include expenses billed directly to and
paid by the Contractholder pursuant to a separate service and expense agreement
with the Contractholder. Except as noted below, the Contractholder must pay the
following expenses (subject to certain adjustments; see "Deductions Under the
Contract" and "Other Expenses"):
<TABLE>
<S> <C>
Application Fee $925 Application Fee.
Contract Administration Expenses* $650 for Standard Plans ($1,000 for custom or
outside Plans) + the amount determined under the Annual Expense Table
(minimum of $1,500).
Recordkeeping Expenses* A graded scale starting at $34 per Plan Participant plus
$1,366 (minimum of $2,250 per Plan) (This charge may be deducted from
Investment Accounts of inactive Plan Participants.) (If the Company
provides recordkeeping services for plan assets other than assets under
this contract or an Associated or Companion Contract, the Contractholder
must pay an outside asset recordkeeping charge that varies depending on the
number of Plan Participants to which such Outside Assets correlate).
Additional location charge.
Location Fee (if applicable) $150 per quarter ($600 annually) for each additional employee group or location.
Flexible Income Option Charge $25 for each Plan Participant receiving benefits
under the Flexible Income Option (this charge may be deducted from
Investment Accounts of inactive Plan Participants).
Documentation Expenses $125 for initial setup or restatement. Additional costs apply for Custom-Written plans.
(for Standard Plan)
Compensation to Sales Either 4.5% of the first $5,000 of annual Contributions
Representative grading down to .25% of contributions in excess of $500,000 or 3.0% of the
first $50,000 of annual Contributions grading down to .25% of Contributions
in excess of $3,000,000.
* May be more or less depending on the number of Plan Participants and
services performed by Company. See "Other Expenses."
</TABLE>
<TABLE>
EXAMPLE
<CAPTION>
Regardless of whether the Investment
Accounts which correlate to a Plan Separate Account
Participant are surrendered at the end Division 1 Year 3 Years 5 Years 10 Years
of the applicable time period: ------------------ ------ ------- ------- --------
<S> <C> <C> <C> <C> <C>
The Owner of Benefits would pay Balanced $10 $32 $55 $122
the following expenses on a $1,000 Bond $9 $29 $51 $113
investment, assuming a 5% annual Capital Value $9 $27 $47 $105
return on assets: Government Securities $9 $29 $51 $113
Growth $9 $28 $48 $107
International $12 $38 $66 $145
MidCap $11 $33 $57 $126
Money Market $10 $30 $52 $115
</TABLE>
SUMMARY
The following summary should be read in conjunction with the detailed
information appearing elsewhere in this Prospectus.
Contract Offered
The group variable annuity contract offered by this Prospectus is issued by the
Company and designed to aid in retirement planning. The contract provides for
the accumulation of Contributions and the payment of Variable Annuity Payments
on a completely variable basis.
The contract is generally available to fund the following types of plans:
1. Tax Deferred Annuity Plans ("TDA Plan"). Annuity purchase plans adopted
pursuant to Section 403(b) of the Code by certain organizations that
qualify for tax-exempt status under Section 501(c)(3) of the Code or
are eligible public schools or colleges. TDA Contracts are issued to
Contractholders, which typically are such tax-exempt organizations or
an association representing such organization or its employees. Plan
Participants may obtain certain Federal income tax benefits provided
under Section 403(b) of the Code (see "Federal Tax Status").
2. Public Employee Deferred Compensation Plans ("PEDC Plan"). Public
Employee Deferred Compensation plans or programs adopted by a unit of a
state or local government and nonprofit organizations pursuant to
Section 457 of the Code. (See "Federal Tax Status"). Note: The contract
is not currently offered to fund governmental 457 Plans in the state of
New York.
3. Qualified Pension or Profit-Sharing Plans ("401(a) Plans"). Plans
adopted pursuant to Section 401(a) of the Code. Participants of 401(a)
Plans obtain income tax benefits provided under the Code as qualified
pension plans.
4. Creditor-Exempt or General Creditor Non-Qualified Plans
("Creditor-Exempt" or "General Creditor" Plan). Employer sponsored
savings, compensation or other plans the contributions for which are
made without Internal Revenue Code restrictions generally applicable to
qualified retirement plans. (See "Federal Tax Status").
The contract will be sold primarily by persons who are insurance agents of or
brokers for Principal Life Insurance Company. In addition, these persons will
usually be registered representatives of Princor Financial Services Corporation,
which acts as distributor for the Contract. See "Distribution of the Contract."
Contributions
The contract prescribes no limits on the minimum Contribution which may be made
to an Investment Account. Plan Participant maximum Contributions are discussed
under "Federal Tax Status." Contributions may also be limited by the Plan. The
Company may also limit Contributions on 60-days notice.
All Contributions made pursuant to the Contract are allocated to one or more
Investment Accounts which correlate to a Plan Participant. An Investment Account
is established for each type of Contribution for each Division of the Separate
Account as directed by the Owner of Benefits. Currently, the Divisions available
under the Contract are: Balanced, Bond, Capital Value, Government Securities,
Growth, International, MidCap and Money Market. The Contractholder may choose to
limit the number of Divisions available to the Owner of Benefits, but the Money
Market Division may not be so restricted to the extent the Division is necessary
to permit the Company to allocate initial Contributions and the Capital Value
Division may not be so restricted to the extent the Division is necessary to
permit the Company to pay Variable Annuity Payments. Additional Divisions may be
added in the future. If no direction is provided for a particular Contribution,
such Contribution will be allocated to an Investment Account which is invested
in the Money Market Division.
Separate Account B
Each of the Divisions corresponds to one of the Accounts in which Contributions
may be invested. The objective of the contract is to provide a return on amounts
contributed that will reflect the investment experience of the Accounts in which
the Divisions to which Contributions are directed are invested. The value of the
Contributions accumulated in Separate Account B prior to the Annuity
Commencement Date will vary with the investment experience of the Accounts.
Each of the Divisions invests only in shares of Accounts of the Principal
Variable Contracts Fund, Inc. as indicated in the table below.
Division Account
-------- -------
Balanced Division Balanced Account
Bond Division Bond Account
Capital Value Division Capital Value Account
Government Securities Division Government Securities Account
Growth Division Growth Account
International Division International Account
MidCap Division MidCap Account
Money Market Division Money Market Account
Distributions, Transfers, and Withdrawals
Variable Annuity Payments will be made on and after a Plan Participant's Annuity
Commencement Date. All Variable Annuity Payments will reflect the performance of
the Account underlying the Capital Value Division and therefore the annuitant is
subject to the risk that the amount of variable annuity payments may decline.
(See "Income Benefits.")
Generally, at any time prior to the Annuity Purchase Date, the Owner of Benefits
may transfer all or any portion of an Investment Account which correlates to a
Plan Participant to another available Investment Account correlating to such
Plan Participant. If a Companion Contract has been issued to the Contractholder
to fund the Plan, and if permitted by the Plan and Companion Contract, amounts
transferred from such Companion Contract may be invested in this contract to
establish Investment Accounts which correlate to a Plan Participant at any time
at least one month before the Annuity Commencement Date. Similarly, if the
Company has issued a Companion Contract to the Contractholder, and if permitted
by the Plan and the Companion Contract, the Owner of Benefits, subject to
certain limitations, may file a Notification with the Company to transfer all or
a portion of the Investment Account values which correlate to a Plan Participant
to the Companion Contract. (See "Withdrawals and Transfers.") In addition,
subject to any Plan limitations or any reduction for vesting provided for in the
Plan as to amounts available, the Owner of Benefits may withdraw cash from the
Investment Accounts that correlate to the Plan Participant at any time prior to
the Plan Participant's termination of employment, disability, retirement or the
Annuity Purchase Date subject to any charges that may be applied. See
"Withdrawals and Transfers." Note that withdrawals before age 59 1/2 may involve
an income tax penalty. See "Federal Tax Status." No withdrawals are permitted
after the Annuity Purchase Date.
CONDENSED FINANCIAL INFORMATION
Financial statements are included in the Statement of Additional Information.
Following are Unit Values for the Premier Variable Annuity Contract for the
periods ended December 31.
<TABLE>
<CAPTION>
Number of
Accumulation Unit Value Accumulation Units
Outstanding
Beginning End Percentage of Change End of Period
of Period of Period from Prior Period (in thousands)
<S> <C> <C> <C> <C>
Balanced Division
Year Ended December 31
1999 $1.787 $1.822 1.96% 16,370
1998 1.604 1.787 11.41 14,770
1997 1.366 1.604 17.42 10,617
1996 1.212 1.366 12.71 7,467
1995 .976 1.212 24.18 3,317
Period Ended December 31, 1994(1) 1.000 .976 (2.40) 125
Bond Division
Year Ended December 31
1999 1.484 1.440 (2.96) 7,415
1998 1.384 1.484 7.23 6,013
1997 1.257 1.384 10.10 4,009
1996 1.232 1.257 2.03 2,612
1995 1.012 1.232 21.74 1,208
Period Ended December 31, 1994(1) 1.000 1.012 1.20 31
Capital Value Division
Year Ended December 31
1999 2.689 2.563 (4.69) 22,466
1998 2.378 2.689 13.08 22,328
1997 1.858 2.378 27.99 21,339
1996 1.510 1.858 23.05 17,962
1995 1.148 1.510 31.53 14,824
1994 1.147 1.148 0.09 13,967
1993 1.067 1.147 7.50 7,980
1992(2) 1.000 1.067 6.70 84
Government Securities Division
Year Ended December 31
1999 1.543 1.532 (0.71) 8,432
1998 1.431 1.543 7.83 8,358
1997 1.302 1.431 9.91 7,686
1996 1.265 1.302 2.92 7,513
1995 1.066 1.265 18.67 7,159
1994 1.120 1.066 (4.82) 6,431
1993 1.021 1.120 9.70 2,553
1992(2) 1.000 1.021 2.10 40
Growth Division
Year Ended December 31
1999 2.145 2.488 15.99 20,774
1998 1.775 2.145 20.85 16,370
1997 1.404 1.775 26.42 11,441
1996 1.253 1.404 12.05 6,802
1995 1.001 1.253 25.17 2,860
Period Ended December 31, 1994(1) 1.000 1.001 0.10 110
International Division
Year Ended December 31
1999 1.663 2.085 25.38 10,814
1998 1.518 1.663 9.55 9,442
1997 1.358 1.518 11.78 7,684
1996 1.090 1.358 24.59 4,298
1995 .958 1.090 13.78 1,672
Period Ended December 31, 1994(1) 1.000 .958 (4.20) 137
MidCap Division
Year Ended December 31
1999 1.940 2.184 12.58 12,883
1998 1.879 1.940 3.25 12,204
1997 1.537 1.879 22.25 9,536
1996 1.274 1.537 20.64 5,722
1995 .991 1.274 28.56 1,896
Period Ended December 31, 1994(1) 1.000 .991 (0.90) 119
Money Market Division
Year Ended December 31
1999 1.296 1.354 4.48 10,632
1998 1.237 1.296 4.77 9,868
1997 1.181 1.237 4.74 6,515
1996 1.128 1.181 4.70 5,379
1995 1.072 1.128 5.22 2,959
1994 1.036 1.072 3.47 1,791
1993 1.013 1.036 2.27 901
1992(2) 1.000 1.013 1.30 2,969
<FN>
(1) Commenced operations on October 3, 1994.
(2) Commenced operations on July 15, 1992.
</FN>
</TABLE>
DESCRIPTION OF PRINCIPAL LIFE INSURANCE COMPANY (The "Company")
Principal Life Insurance Company is a life insurance company with its home
office at the Principal Financial Group, Des Moines, Iowa 50392, telephone
number 515-247-5111. It was originally incorporated under the laws of the State
of Iowa in 1879 as Bankers Life Association, changed its name to Bankers Life
Company in 1911 and changed its name to Principal Mutual Life Insurance Company
in 1986. The name change to Principal Life Insurance Company and reorganization
into a mutual holding company structure took place in 1998. The Company is a
company of the Principal Financial Group, a diversified family of insurance and
financial services corporations.
Principal Life Insurance Company is authorized to do business in the 50 states
of the United States, the District of Columbia, the Commonwealth of Puerto Rico,
and the Canadian Provinces of Alberta, British Columbia, Manitoba, Ontario and
Quebec. The Company offers a full range of products and services for businesses,
groups and individuals including individual insurance, pension plans and
group/employee benefits. The Company has ranked in the upper one percent of life
insurers in assets and premium income and has consistently received excellent
ratings from the major rating firms based upon the Company's claims paying
ability. The Company has $70.1 billion in assets under management and serves
more than 10.1 million individuals and their families.
PRINCIPAL LIFE INSURANCE COMPANY SEPARATE ACCOUNT B
Separate Account B was established on January 12, 1970 pursuant to a resolution
(as amended) of the Executive Committee of the Board of Directors of the
Company. Under Iowa insurance laws and regulations the income, gains or losses,
whether or not realized, of Separate Account B are credited to or charged
against the assets of Separate Account B without regard to the other income,
gains or losses of the Company. Although the assets of Separate Account B, equal
to the reserves and other liabilities arising under the contract, will not be
charged with any liabilities arising out of any other business conducted by the
Company, the reverse is not true. Hence, all obligations arising under the
contract, including the promise to make Variable Annuity Payments, are general
corporate obligations of the Company.
Separate Account B was registered on July 17, 1970 with the Securities and
Exchange Commission as a unit investment trust under the Investment Company Act
of 1940, as amended. Such registration does not involve supervision by the
Commission of the investments or investment policies of Separate Account B.
You may allocate your net premium payments to certain divisions of the Separate
Account and/or the Fixed Account. Currently there are eight divisions available
to you. Not all divisions are available in all states. A current list of
divisions available in your state may be obtained from a sales representative or
our home office.
The underlying fund is a mutual fund registered under the Investment Company Act
of 1940 as an open-end diversified management investment company. It provides
the investment vehicle for the Separate Account. A full description of the Fund,
its investment objectives, policies and restrictions, charges and expenses and
other operational information is contained in the attached prospectus (which
should be read carefully before investing) and the Statement of Additional
Information. Additional copies of these documents are available from a sales
representative or our home office.
Each Division invests in shares of a corresponding Account of an underlying
mutual fund. The underlying mutual fund is NOT available to the general public
directly. The underlying mutual fund is available only to provide investment
options in variable life insurance policies or variable annuity contracts issued
by life insurance companies. Some of the underlying mutual fund Accounts have
been established by investment advisers that manage publicly traded mutual funds
having similar names and investment objectives. While some of the underlying
mutual fund Accounts may be similar to, and may in fact be modeled after
publicly traded mutual funds, you should understand that the underlying mutual
fund Accounts are not otherwise directly related to any publicly traded mutual
fund. Consequently, the investment performance of publicly traded mutual funds
and of any underlying mutual fund Account may differ substantially.
<TABLE>
<CAPTION>
Division Division Invests In Investment Advisor Investment Objective
<S> <C> <C> <C>
Balanced Principal Variable Contracts Invista Capital Management, LLC to generate a total return consisting of
Fund, Inc. through a sub-advisory agreement current income and capital appreciation
Balanced Account while assuming reasonable risks in
furtherance of this objective.
Bond Principal Variable Contracts Principal Management Corporation to provide as high a level of income as is
Fund, Inc. consistent with preservation of capital
Bond Account and prudent investment risk.
Capital Value Principal Variable Contracts Invista Capital Management, LLC to provide long-term capital appreciation
Fund, Inc. through a sub-advisory agreement and secondarily is growth of investment
Capital Value Account income. The Account seeks to achieve its
investment objectives through the purchase
primarily of common stocks,but the Account
may invest in other securities.
Government Securities Principal Variable Contracts Invista Capital Management, LLC to seek a high level of current income,
Fund, Inc. through a sub-advisory agreement liquidity and safety of principal. The
Government Securities Account Account seeks to achieve its objective
through the purchase of obligations issued
or guaranteed by the United States
Government or its agencies, with emphasis
on Government National Mortgage
Association Certificates ("GNMA
Certificates"). Account shares
are not guaranteed by the United States
Government.
Growth Principal Variable Contracts Invista Capital Management, LLC to seek growth of capital. The Account
Fund, Inc. through a sub-advisory agreement seeks to achieve its objective through the
Growth Account purchase primarily of common stocks, but
the Account may invest in other
securities.
International Principal Variable Contracts Invista Capital Management, LLC to seek long-term growth of capital by
Fund, Inc. through a sub-advisory agreement investing in a portfolio of equity
International Account securities domiciled in any of the nations
of the world.
MidCap Principal Variable Contracts Invista Capital Management, LLC to achieve capital appreciation by
Fund, Inc. through a sub-advisory agreement investing primarily in securities of
MidCap Account emerging and other growth-oriented
companies.
Money Market Principal Variable Contracts Principal Management Corporation to seek as high a level of current income
Fund, Inc. available from short-term securities as is
Money Market Account considered consistent with preservation of
principal and maintenance of liquidity by
investing all of its assets in a portfolio
of money market instruments.
</TABLE>
Principal Management Corporation (the "Manager") has executed a sub-advisory
agreement with Invista Capital Management LLC. Under that sub-advisory
agreement, the sub-advisor agrees to assume the obligations of the Manager to
provide investment advisory services for a specific Account. For these services,
the sub-advisor is paid a fee by the Manager.
Accounts: Balanced, Capital Value, Government Securities, Growth,
International and MidCap
Sub-Advisor: Invista Capital Management, LLC ("Invista"), an indirectly
wholly-owned subsidiary of Principal Life Insurance Company and
an affiliate of the Manger was founded in 1985. It manages
investments for institutional investors, including Principal
Life. Assets under management as of December 31, 1999 were
approximately $35.3 billion. Invista's address is 1800 Hub
Tower, 699 Walnut, Des Moines, Iowa 50309.
Each Division purchases shares of an Account at net asset value. In addition,
all distributions made by an Account with respect to shares held by Divisions of
Separate Account B are reinvested at net asset value in additional shares of the
same Account. Contract benefits are provided and charges are made in effect by
redeeming Account shares at net asset value. Values under the Contract, both
before and after the commencement of Variable Annuity Payments, will increase or
decrease to reflect the investment performance of the Accounts and Owners of
Benefits assume the risks of such change in values.
The Company is taxed as a life insurance company under the Internal Revenue
Code. The operations of Separate Account B are part of the total operations of
the Company but are treated separately for accounting and financial statement
purposes and are considered separately in computing the Company's tax liability.
Separate Account B is not affected by federal income taxes paid by the Company
with respect to its other operations, and under existing federal income tax law,
investment income and capital gains attributable to Separate Account B are not
taxed. The Company reserves the right to charge Separate Account B with, and to
create a reserve for, any tax liability which the Company determines may result
from maintenance of Separate Account B. To the best of the Company's knowledge,
there is no current prospect of any such liability.
DEDUCTIONS UNDER THE CONTRACT
A mortality and expense risks charge is deducted under the contract. There are
also deductions from and expenses paid out of the assets of the Accounts. These
expenses are described in the Fund's prospectus.
A. Mortality and Expense Risks Charge
Variable Annuity Payments will not be affected by adverse mortality
experience or by any excess in the actual sales and administrative expenses
over the charges provided for in the contract. The Company assumes the
risks that (i) Variable Annuity Payments will continue for a longer period
than anticipated and (ii) the allowance for administration expenses in the
annuity conversion rates will be insufficient to cover the actual costs of
administration relating to Variable Annuity Payments. For assuming these
risks, the Company, in determining Unit Values and Variable Annuity
Payments, makes a charge as of the end of each Valuation Period against the
assets of Separate Account B held with respect to the contract. The charge
is equivalent to a simple annual rate of .42%. The Company does not believe
that it is possible to specifically identify that portion of the .42%
deduction applicable to the separate risks involved, but estimates that a
reasonable approximate allocation would be .28% for the mortality risks and
.14% for the expense risks. The mortality and expense risks charge may be
changed by the Company at any time by giving not less than 60-days prior
written notice to the Contractholder. However, the charge may not exceed
1.25% on an annual basis, and only one change may be made in any one-year
period. If the charge is insufficient to cover the actual costs of the
mortality and expense risk assumed, the financial loss will fall on the
Company; conversely, if the charge proves more than sufficient, the excess
will be a gain to the Company.
OTHER EXPENSES
The Contractholder is obligated to pay additional expenses associated with the
acquisition and servicing of the contract in accordance with the terms of a
Service and Expense Agreement between the Contractholder and the Company. At the
discretion of the Contractholder these expenses may be paid all or in part by
the Contractholder or the fees will be deducted from Investment Accounts which
correlate to a Plan Participant. If deducted from Investment Accounts, the
charges will be allocated among Investment Accounts which correlate to the Plan
Participant in proportion to the relative value of such Accounts and will be
effected by canceling a number of units in each such Investment Account equal to
such Account's proportionate share of the deductions. The expenses which the
Contractholder pays, if applicable, include an application fee, transfer fee,
contract administration expense, recordkeeping expense, location fee, a Flexible
Income Option charge, documentation expense and in some cases a sales charge. As
part of the Company's policy of ensuring client satisfaction with the services
it provides, the Company may agree to waive the assessment of all or a portion
of these expenses or charges (except for the sales charge) in response to any
reasonably-based complaint from the Contractholder as to the quality of the
services covered by such expenses or charges that the Company is unable to
rectify. These expenses are described below:
A. Application Fee
A $925 application fee is charged to the Contractholder in the first
Contract Year. If a Companion Contract has been issued by the Company to
the Contractholder to fund the Plan, the application fee will be assessed
to the Companion Contract. The total application fee paid by the
Contractholder to obtain both contracts will not exceed $925. If the
Company has issued an Associated Contract to the Contractholder to fund an
employee benefit plan administered by the Company, the application fee for
the contract described in this prospectus will be waived by the Company.
B. Contract Administration Expense
The Contractholder must also pay a contract administration expense. The
contract administration expense is charged quarterly and is equal to
one-fourth of the amount derived by adding $650 ($1,000 for custom or
outside plans) to the amount calculated by multiplying the Quarter end
Balance at the end of each Deposit Year Quarter by the Annual Expense
percentage below. Quarter end Balance is the total of all Investment
Accounts under the contract and other Plan assets not allocated to the
contract or an Associated or Companion Contract ("Outside Assets") at the
end of each Deposit Year Quarter.
Over But Not Over The Annual Expense Is:
----------- ----------- ---------------------------------
$ 0 $ 262,500 $1,500 minimum
262,500 1,000,000 [.0020 x ending balance] + $225
1,000,000 5,000,000 [.0010 x ending balance] + $1,225
5,000,000 10,000,000 [.0005 x ending balance] + $3,725
10,000,000 30,000,000 [.0004 x ending balance] + $4,725
30,000,000 [.0003 x ending balance] + $7,725
Example: Assume a $8,500,000 Quarter-end Balance for a standard plan. The
quarterly contract administration charge is $2,156.25 derived
as follows: [.0005 x $8,500,000] + $3,725 = $7,975 + $650 = $8,625
/ 4 = $2,156.25.
The contract administration expense is also charged if all Investment
Accounts which correlate to a Plan Participant are canceled during the
Deposit Year as a result of a withdrawal. The amount attributable to such
Investment Accounts is determined as described above but is pro-rated to
the date of cancellation.
The contract administration expense will be reduced by 10% if the Company
has issued an Associated Contract to the Contractholder.
The contract administration expense for an employer with both a
non-qualified plan in the contract offered under this prospectus and a
401(k) Plan in a Flexible Investment Annuity ("FIA") Contract (and which
meets our underwriting guidelines) will be calculated based on the quarter
end value of the investment accounts under both contracts (plus $750
annually for general creditor non-qualified plans or $1,000 for creditor
exempt plans) and the proportionate charge will be allocated to Plan
Participants in each contract.
C. Recordkeeping Expense
The Contractholder must also pay a recordkeeping expense. The quarterly
recordkeeping expense is one-fourth of the charge determined from the table
below. The amount of the charge is determined at the end of each quarter
based upon the number of Plan Participants, both active and inactive, for
whom there are Investment Accounts under the contract at the end of the
quarter.
Annual Expense (Benefit Report
Plan Participants Sent to the Contractholder)
----------------- -------------------------------------
1-25 $2,250
26-49 $34 per Plan Participant + $ 1,366
50-99 $31 per Plan Participant + $ 1,516
100-299 $28 per Plan Participant + $ 1,816
300-499 $23 per Plan Participant + $ 3,316
500 - 999 $19 per Plan Participant + $ 5,316
1,000 - 2,499 $14 per Plan Participant + $ 10,316
2,500 - 4,999 $12 per Plan Participant + $ 15,316
5,000 and over $10 per Plan Participant + $ 25,316
Example: Assume 600 Plan Participants with Benefit Reports sent to the
Contractholder: The expense is $16,716 [600 x $19 = $11,400 +
$5,316 = $16,716] / 4 = $4,179. This would be $6.96 per Plan
Participant, per quarter.
The recordkeeping expense is increased by $3 per Plan Participant if
benefit reports are mailed directly to Plan Participants' homes.
If, instead of quarterly benefit reports, the Company provides such reports
annually, the recordkeeping expense is reduced by 9%. Similarly, if such
reports are provided semi-annually, the recordkeeping expense is reduced by
6%. If such reports are provided on a monthly basis, the recordkeeping
expense is increased by 24%.
If the Company performs more (or less) than one 401(k)/401(m)
non-discrimination tests in a Deposit Year, the recordkeeping expense is
increase (reduced) by 3% for each additional test performed (or test not
performed).
The recordkeeping expense is increased by 10% if Plan Contributions are not
reported in the Company's standard format by modem.
A charge of $15 is made to the account of plan participants who make
investment changes/transfers using paper rather than our toll-free number
(1-800-633-1373).
The recordkeeping expense for an employer with both a non-qualified plan in
the contract offered under this prospectus and a 401(k) plan in a FIA
contract will be determined at the point in scale reached under the 401(k)
plan.
If the initial Deposit Year is less than twelve months, an adjustment will
be made in the amount of the charge so that the full amount of the annual
charge per Plan Participant will be assessed during the year.
If all Investment Accounts attributable to a Plan Participant are canceled
during the Deposit Year as a result of a withdrawal, the unassessed portion
of the full annual charge attributable to the Plan Participant will be
charged.
If the Company provides recordkeeping services for Plan assets not
allocated to the contract or an Associated or Companion Contract ("Outside
Assets"), the Contractholder must pay an Outside Asset recordkeeping
expense. The annual charge is calculated based upon the following table.
Number of Plan Participants Outside Asset
with Outside Accounts Annual Recordkeeping
During the Quarter Expense
--------------------------- ---------------------------------
1-25 $1,000 minimum
26-49 $15.30 per member + $614.70
50-99 $13.95 per member + $682.20
100-299 $12.60 per member + $817.20
300-499 $10.35 per member + $1,492.20
500-999 $8.55 per member + $2,392.20
1000-2499 $6.30 per member + $4,642.20
2500-4999 $5.40 per member + $6,892.20
5000 and over $4.50 per member + $11,392.20
The charge calculated in accordance with the above table will be increased
by 15% for the second and each additional Outside Asset for which the
Company provides recordkeeping services. One-fourth of the annual Outside
Asset Recordkeeping Charge will be billed on a quarterly basis. This charge
does not apply if the Outside Assets which correlate to the Plan
Participant consist solely of shares of mutual funds for which a subsidiary
of the Company serves as investment adviser.
The Contractholder may elect to have the recordkeeping expense attributable
to investments in this contract which correlate to inactive Plan
Participants deducted from the Investment Account Values of such Plan
Participants. The portion of the charge attributable to a Plan Participant
will be allocated to his or her Investment Account in proportion to their
relative value.
D. Location Fee
Contractholders may request the Company to provide services to groups of
employees at multiple locations. If the Company agrees to provide such
services, the Contractholder will be charged $150 on a quarterly basis for
each additional employee group or location.
E. Flexible Income Option Charge
An additional charge of $25 annually will be made for any Plan Participant
receiving benefits under the Flexible Income Option. The charge is added to
the portion of the recordkeeping expense attributable to such Plan
Participants. If a Plan Participant is receiving benefits under the
Flexible Income Option from a Companion Contract to which a Flexible Income
Option Charge applies, the charge will not apply to the contract described
in this Prospectus.
F. Documentation Expense
The Company provides a sample Plan document and summary plan descriptions
to the Contractholder. The Contractholder will pay $125 if the
Contractholder uses a Principal Standard Plan. If the Company provides a
sample custom-written Plan, the Contractholder will pay $700 for the
initial Plan or for any restatement thereof, $300 for any amendments
thereto, and $500 for standard summary plan description booklets. If the
Contractholder adopts a Plan other than one provided by the Company, a $900
charge will be made for summary plan description booklets requested by the
Contractholder, if any.
G. Compensation to Sales Representative
A charge will be paid by the Contractholder according to one of the
following schedules:
Schedule A
-------------------------------------------
Amount of Plan Amount Payable as a
Contributions Percent of Plan
in Each Deposit Year Contributions
--------------------- -------------------
The first $ 5,000 4.50%
The next 5,000 3.00
The next 5,000 1.70
The next 35,000 1.40
The next 50,000 0.90
The next 400,000 0.60
Excess over 500,000 0.25
Schedule B
-------------------------------------------
Amount of Plan Amount Payable as
Contributions Percent of Plan
In Each Deposit Year Contributions
--------------------- -------------------
The first$ 50,000 3.00%
The next 50,000 2.00
The next 400,000 1.00
The next 2,500,000 0.50
Excess over 3,000,000 0.25
The applicable sales charge will be determined by the Company. The sales
charge described in Schedule B will apply for certain salary deferral
Plans. The sales charge described in Schedule A will apply if the Plan is
not a salary deferral Plan or if the Plan is a salary deferral Plan subject
to reduced sales expenses. The Contractholder will be notified of the
applicable sales charge prior to the issuance of the Contract.
Contributions made by the Contractholder to the contract described in this
prospectus, a Companion Contract or any Associated Contract will be
combined for purposes of applying the above sales charge schedules.
The Company will not charge a sales charge to Contractholders who acquire
the contract either: (1) directly from the Company upon a recommendation of
an independent pension consultant who charges a fee for its pension
consulting services and who receives no remuneration from the Company in
association with the sale of the contract; or (2) through registered
representatives of the Principal Underwriter who are also Group Insurance
Representative employees of the Company.
H. Special Services
If requested by the Contractholder, the Company may provide special
services not provided as part of the contract administration and
recordkeeping services. The Company will charge the Contractholder the cost
of providing such services.
SURPLUS DISTRIBUTION AT SOLE DISCRETION OF THE COMPANY
It is not anticipated that any divisible surplus will ever be distributable to
the contract in the future because the contract is not expected to result in a
contribution to the divisible surplus of the Company. However, if any
distribution of divisible surplus is made, it will be made to Investment
Accounts in the form of additional units.
THE CONTRACT
The contract will normally be issued to an Employer or association or a trust
established for the benefit of Plan Participants and their beneficiaries. The
Company will issue a pre-retirement certificate describing the benefits under
the contract to Plan Participants who reside in a state that requires the
issuance of such certificates. The initial Contribution which correlates to a
Plan Participant will be invested in the Division or Divisions that are chosen
as of the end of the Valuation Period in which such Contribution is received by
the Company at its home office in Des Moines, Iowa. If the allocation
instructions are late, or not completed, the Company will invest such
unallocated Contributions in the Money Market Division on the date such
Contributions are received. Subsequently, the Company will transfer all or a
portion of such Contributions as of the date complete allocation instructions
are received by the Company in accordance with the allocation specified therein.
After complete allocation instructions have been received by the Company, all
current and future Contributions will be allocated to the chosen Divisions as of
the end of the Valuation period in which such Contributions are received. If
complete allocation instructions are not received by the Company within 105 days
after the initial Contributions are allocated to the Money Market Division, the
Company will remit the Contributions plus any earnings thereon to the
Contractholder. The Contractholder may limit the number of Divisions available
to the Owner of Benefits, but the Money Market Division may not be so restricted
to the extent the Division is necessary to permit the Company to allocate
initial Contributions as described above and the Capital Value Division may not
be so restricted to the extent the Division is necessary to permit the Company
to pay Variable Annuity Payments.
A. Contract Values and Accounting Before Annuity Commencement Date
1. Investment Accounts
An Investment Account or Accounts correlating to a Plan Participant
will be established for each type of Contribution and for each Division
of Separate Account B in which such Contribution is invested.
Investment Accounts will be maintained until the Investment Account
Values are either (a) applied to effect Variable Annuity benefits, (b)
paid to the Owner of Benefits or the beneficiary, (c) transferred in
accordance with the provisions of the contract or (d) cancelled to pay
the recordkeeping expenses for a Plan Participant where Termination of
Employment, retirement or death has occurred or for an alternate payee
under a Qualified Domestic Relations Order.
Each Contribution will be allocated to the Division or Divisions
designated by the Notification on file with the Company and will result
in a credit of units to the appropriate Investment Account. The number
of units so credited will be determined by dividing the portion of the
Contributions allocated to the Division by the Unit Value for such
Division for the Valuation Period within which the Contribution was
received by the Company at its home office in Des Moines, Iowa.
2. Unit Value
The Unit Value for a Contract which participates in a Division of
Separate Account B determines the value of an Investment Account
consisting of contributions allocated to that Division. The Unit Value
for each Division for the contract is determined on each day on which
the net asset value of its underlying Account is determined. The Unit
Value for a Valuation Period is determined as of the end of that
period. The investment performance of the underlying Account and
deducted expenses affect the Unit Value.
For this series of contracts, the Unit Value for each Division will be
fixed at $1.00 for the Valuation Period in which the first amount of
money is credited to the Division. A Division's Unit Value for any
later Valuation Period is equal to its Unit Value for the immediately
preceding Valuation Period multiplied by the Net Investment Factor (see
below) for that Division for this series of contracts for the later
Valuation Period.
3. Net Investment Factor
Each Net Investment Factor is the quantitative measure of the
investment performance of each Division of Separate Account B.
For any specified Valuation Period the Net Investment Factor for a
Division for this series of contracts is equal to
(a) the quotient obtained by dividing (i) the net asset value of a
share of the underlying Account as of the end of the Valuation
Period, plus the per share amount of any dividend or other
distribution made by the Account during the Valuation Period (less
an adjustment for taxes, if any) by (ii) the net asset value of a
share of the Account as of the end of the immediately preceding
Valuation Period,
reduced by
(b) a mortality and expense risks charge, equal to a simple interest
rate for the number of days within the Valuation Period at an
annual rate of 0.42%.
The amounts derived from applying the rate specified in subparagraph
(b) above and the amount of any taxes referred to in subparagraph (a)
above will be accrued daily and will be transferred from Separate
Account B at the discretion of the Company.
4. Hypothetical Example of Calculation of Unit Value for All Divisions
Except the Money Market Division
The computation of the Unit Value may be illustrated by the following
hypothetical example. Assume that the current net asset value of an
Account share is $14.8000; that there were no dividends or other
distributions made by the Account and no adjustment for taxes since the
last determination; that the net asset value of an Account share last
determined was $14.7800; that the last Unit Value was $1.0185363; and
that the Valuation Period was one day. To determine the current Net
Investment Factor, divide $14.8000 by $14.7800 which produces 1.0013532
and deduct from this amount the mortality and expense risks charge of
0.0000090, which is the rate for one day that is equivalent to a simple
annual rate of 0.33%. The result, 1.0013442, is the current Net
Investment Factor. The last Unit Value ($1.0185363) is then multiplied
by the current Net Investment Factor (1.0013442) which produces a
current Unit Value of $1.0199054.
5. Hypothetical Example of Calculation of Unit Value for the Money Market
Division
The computation of the Unit Value may be illustrated by the following
hypothetical example. Assume that the current net asset value of an
Account share is $1.0000; that a dividend of .0328767 cents per share
was declared by the Account prior to calculation of the net asset value
of the Account share and that no other distributions and no adjustment
for taxes were made since the last determination; that the net asset
value of an Account share last determined was $1.0000; that the last
Unit Value was $1.0162734; and that the Valuation Period was one day.
To determine the current Net Investment Factor, add the current net
asset value ($1.0000) to the amount of the dividend ($.000328767) and
divide by the last net asset value ($1.0000), which when rounded to
seven places equals 1.0003288. Deduct from this amount the mortality
and expense risks charge of .0000090 (the proportionate rate for one
day based on a simple annual rate of 0.33%). The result (1.0003198) is
the current Net Investment Factor. The last Unit Value ($1.0162734) is
then multiplied by the current Net Investment Factor (1.0003198),
resulting in a current Unit Value of $1.0165984.
B. Income Benefits
Income Benefits consist of either monthly Variable Annuity Payments or
periodic payments made on a monthly, quarterly, semi-annual or annual basis
pursuant to the Flexible Income Option.
1. Variable Annuity Payments
The amount applied to provide Variable Annuity Payments must be at
least $1,750. Variable Annuity Payments will be provided by the
Investment Accounts which correlate to the Plan Participant held under
the Capital Value Division. Thus, if the Owner of Benefits elects
Variable Annuity Payments, any amounts that are to be used to provide
Variable Annuity Payments will be transferred to Investment Accounts
held under the Capital Value Division as of the last Valuation Date in
the month which begins two months before the Annuity Commencement Date.
After any such transfer, the value of the Capital Value Division
Investment Accounts will be applied on the Annuity Purchase Date to
provide Variable Annuity Payments. The Annuity Commencement Date, which
will be one month following the Annuity Purchase Date, will be the
first day of a month. Thus, if the Annuity Commencement Date is August
1, the Annuity Purchase Date will be July 1, and the date of any
transfers to a Capital Value Division Investment Account will be the
Valuation Date immediately preceding July 1.
The Annuity Commencement Date must be no later than April 1 of the
calendar year following the calendar year in which the Plan
Participant attains age 70 1/2. See "Federal Tax Status."
a. Selecting a Variable Annuity
Variable Annuity Payments will be made to an Owner of Benefits
beginning on the Annuity Commencement Date and continuing
thereafter on the first day of each month. An Owner of Benefits
may select an Annuity Commencement Date by Notification to the
Company. The date selected may be the first day of any month the
Plan allows which is at least one month after the Notification.
Generally, the Annuity Commencement Date cannot begin before the
Plan Participant is age 59 1/2, separated from service, or is
totally disabled. See "Federal Tax Status" for a discussion of
required distributions and the federal income tax consequences of
distributions.
At any time not less than one month preceding the desired Annuity
Commencement Date, an Owner of Benefits may, by Notification,
select one of the annuity options described below (see "Forms of
Variable Annuities"). If no annuity option has been selected at
least one month before the Annuity Commencement Date, and if the
Plan does not provide one, payments which correlate to an
unmarried Plan Participant will be made under the annuity option
providing Variable Life Annuity with Monthly Payments Certain for
Ten Years. Payments to a married Plan Participant will be made
under the annuity option providing a Variable Life Annuity with
One-Half Survivorship.
b. Forms of Variable Annuities
Because of certain restrictions contained in the Internal Revenue
Code and regulations thereunder, an annuity option is not
available under a contract used to fund a TDA Plan, PEDC Plan or
401(a) Plan unless (i) the joint or contingent annuitant is the
Plan Participant's spouse or (ii) on the Plan Participant's
Annuity Commencement Date, the present value of the amount to be
paid while the Plan Participant is living is greater than 50% of
the present value of the total benefit to the Plan Participant and
the Plan Participant's beneficiary (or contingent annuitant, if
applicable).
An Owner of Benefits may elect to have Investment Account Values
applied under one of the following annuity options. However, if
the monthly Variable Annuity Payment would be less than $20, the
Company may, at its sole option, pay the Investment Account Values
in full settlement of all benefits otherwise available.
Variable Life Annuity with Monthly Payments Certain for Zero,
Five, Ten, Fifteen or Twenty Years or Installment Refund Period --
a Variable Annuity which provides monthly payments during the Plan
Participant's lifetime, and further provides that if, at the death
of the Plan Participant, monthly payments have been made for less
than a minimum period, e.g. five years, any remaining payments for
the balance of such period shall be paid to the Owner of Benefits,
if the Owner of Benefits is not the Plan Participant, or to a
designated beneficiary unless the beneficiary requests in writing
that the Commuted Value of the remaining payments be paid in a
single sum. (Designated beneficiaries entitled to take the
remaining payments or the Commuted Value thereof rather than
continuing monthly payments should consult with their tax advisor
to be made aware of the differences in tax treatment.)
The minimum period may be either zero, five, ten, fifteen or
twenty years or the period (called "installment refund period")
consisting of the number of months determined by dividing the
amount applied under the option by the initial payment. If, for
example, $14,400 is applied under a life option with an
installment refund period, and if the first monthly payment
provided by that amount, as determined from the applicable annuity
conversion rates, would be $100, the minimum period would be 144
months ($14,400 divided by $100 per month) or 12 years. A variable
life annuity with an installment refund period guarantees a
minimum number of payments, but not the amount of any monthly
payment or the amount of aggregate monthly payments. The longer
the minimum period selected, the smaller will be the amount of the
first annuity payment.
Under the Variable Life Annuity with Zero Years Certain, which
provides monthly payments to the Owner of Benefits during the Plan
Participant's lifetime, it would be possible for the Owner of
Benefits to receive no annuity payments if the Plan Participant
died prior to the due date of the first payment since payment is
made only during the lifetime of the Plan Participant.
Joint and Survivor Variable Life Annuity with Monthly Payments
Certain for Ten Years -- a Variable Annuity which provides monthly
payments for a minimum period of ten years and thereafter during
the joint lifetimes of the Plan Participant on whose life the
annuity is based and the contingent annuitant named at the time
this option is elected, and continuing after the death of either
of them for the amount that would have been payable while both
were living during the remaining lifetime of the survivor. In the
event the Plan Participant and the contingent annuitant do not
survive beyond the minimum ten year period, any remaining payments
for the balance of such period will be paid to the Owner of
Benefits, if the owner of Benefits is not the Plan Participant, or
to a designated beneficiary unless the beneficiary requests in
writing that the Commuted Value of the remaining payments be paid
in a single sum. (Designated beneficiaries entitled to take the
remaining payments or the Commuted Value thereof rather than
continuing monthly payments should consult with their tax advisor
to be made aware of the differences in tax treatment.)
Joint and Two-Thirds Survivor Variable Life Annuity -- a variable
annuity which provides monthly payments during the joint lives of
a Plan Participant and the person designated as contingent
annuitant with two-thirds of the amount that would have been
payable while both were living continuing until the death of the
survivor.
Variable Life Annuity with One-Half Survivorship -- a variable
annuity which provides monthly payments during the life of the
Plan Participant with one-half of the amount otherwise payable
continuing so long as the contingent annuitant lives.
Under the Joint and Two-thirds Survivor Variable Life Annuity and
under the Variable Life Annuity with One-Half Survivorship, it
would be possible for the Owner of Benefits and/or contingent
annuitant to receive no annuity payments if the Plan Participant
and contingent annuitant both died prior to the due date of the
first payment since payment is made only during their lifetimes.
Other Options -- Other Variable Annuity options permitted under
the applicable Plan may be arranged by mutual agreement of the
Owner of Benefits and the Company.
c. Basis of Annuity Conversion Rates
Because women as a class live longer than men, it has been common
that retirement annuities of equal cost for women and men of the
same age will provide women less periodic income at retirement.
The Supreme Court of the United States ruled in Arizona Governing
Committee vs. Norris that sex distinct annuity tables under an
employer-sponsored benefit plan result in discrimination that is
prohibited by Title VII of the Federal Civil Rights Act of 1964.
The Court further ruled that sex distinct annuity tables will be
deemed discriminatory only when used with values accumulated from
employer contributions made after August 1, 1983, the date of the
ruling.
Title VII applies only to employers with 15 or more employees.
However, certain State Fair Employment Laws and Equal Payment Laws
may apply to employers with less than 15 employees.
The contract described in this Prospectus offers both sex distinct
and sex neutral annuity conversion rates. The annuity rates are
used to convert a Plan Participant's pre-retirement Investment
Account Values to a monthly lifetime income at retirement. Usage
of either sex distinct or sex neutral annuity rates will be
determined by the Contractholder.
For each form of variable annuity, the annuity conversion rates
determine how much the first monthly Variable Annuity Payment will
be for each $1,000 of the Investment Account Value applied to
effect the variable annuity. The conversion rates vary with the
form of annuity, date of birth, and, if sex distinct rates are
used, the sex of the Plan Participant and the contingent
annuitant, if any. The sex neutral guaranteed annuity conversion
rates are based upon (i) an interest rate of 2.5% per annum and
(ii) mortality according to the "1983 Table a for Individual
Annuity Valuation" projected with Scale G to the year 2001, set
back five years in age. The sex distinct female rates are
determined for all Plan Participants in the same way as neutral
rates, as described above. The sex distinct male rates are
determined for all Plan Participants in the same way as sex
neutral rates, as described above, except mortality is not set
back five years in age. The guaranteed annuity conversion rates
may be changed, but no change which would be less favorable to the
Owner of Benefits will take effect for a current Plan Participant.
The contract provides that an interest rate of not less than 2.5%
per annum will represent the assumed investment return. Currently
the assumed investment return used in determining the amount of
the first monthly payment is 4% per annum. This rate may be
increased or decreased by the Company in the future but in no
event will it be less than 2.5% per annum. If, under the contract,
the actual investment return (as measured by an Annuity Change
Factor, defined below) should always equal the assumed investment
return, Variable Annuity Payments would remain level. If the
actual investment return should always exceed the assumed
investment return, Variable Annuity Payments would increase;
conversely, if it should always be less than the assumed
investment return, Variable Annuity Payments would decrease.
The current 4% assumed investment return is higher than the 2.5%
interest rate reflected in the annuity conversion rates contained
in the contract. With a 4% assumption, Variable Annuity Payments
will commence at a higher level, will increase less rapidly when
actual investment return exceeds 4%, and will decrease more
rapidly when actual investment return is less than 4%, than would
occur with a lower assumption.
d. Determining the Amount of the First Variable Annuity Payment
The initial amount of monthly annuity income shall be based on the
option selected, the age of the Plan Participant and contingent
annuitant, if any, and the Investment Account Values applied as of
the Annuity Purchase Date. The initial monthly income payment will
be determined on the basis of the annuity conversion rates
applicable on such date to such conversions under all contracts of
this class issued by the Company. However, the basis for the
annuity conversion rates will not produce payments less beneficial
to the Owner of Benefits than the annuity conversion rate basis
described above.
e. Determining the Amount of the Second and Subsequent Monthly
Variable Annuity Payments
The second and subsequent monthly Variable Annuity Payments will
increase or decrease in response to the investment experience of
the Account underlying the Capital Value Division. The amount of
each payment will be determined by multiplying the amount of the
monthly Variable Annuity Payment due in the immediately preceding
calendar month by the Annuity Change Factor for the Capital Value
Division for the Contract for the calendar month in which the
Variable Annuity Payment is due.
Each Annuity Change Factor for the Capital Value Division for a
calendar month is the quotient of (1) divided by (2), below:
(1) The number which results from dividing (a) the Contract's Unit
Value for the Capital Value Division for the first Valuation
Date in the calendar month beginning one month before the
given calendar month by (b) the Contract's Unit Value for such
Division for the first Valuation Date in the calendar month
beginning two months before the given calendar month.
(2) An amount equal to one plus the effective interest rate for
the number of days between the two Valuation Dates specified
in subparagraph (1) above at the interest rate assumed to
determine the initial payment of variable benefits to the
Owner of Benefits.
f. Hypothetical Example of Calculation of Variable Annuity Payments
Assume that on the date one month before the Annuity Commencement
Date the Investment Account Value that is invested in the Capital
Value Division which correlates to a Plan Participant is $37,592.
Using the appropriate annuity conversion factor (assuming $5.88
per $1,000 applied) the Investment Account Value provides a first
monthly Variable Annuity Payment of $221.04. To determine the
amount of the second monthly payment assume that the Capital Value
Division Unit Value as of the first Valuation Date in the
preceding calendar month was $1.3712044 and the Unit Value as of
the first Valuation Date in the second preceding calendar month
was $1.3273110. The Annuity Change Factor is determined by
dividing $1.3712044 by $1.3273110, which equals 1.0330694, and
dividing the result by an amount corresponding to the amount of
one increased by an assumed investment return of 4% (which for a
thirty day period is 1.0032288). 1.0330694 divided by 1.0032288
results in an Annuity Change Factor for the month of 1.0297446.
Applying this factor to the amount of Variable Annuity Payment for
the previous month results in a current monthly payment of $227.61
($221.04 multiplied by 1.0297446 equals $227.61).
2. Flexible Income Option
Instead of Variable Annuity Payments an Owner of Benefits may choose to
receive Income Benefits under the Flexible Income Option. Unlike
Variable Annuity Payments, payments under the Flexible Income Option
may be made from any Division of the Separate Account. Under the
Flexible Income Option, the Company will pay to the Owner of Benefits a
portion of the Investment Accounts on a monthly, quarterly, semi-annual
or annual basis on the date or dates requested each Year and continuing
for a period not to exceed the life or life expectancy of the Plan
Participant, or the joint lives or life expectancy of such Plan
Participant and the contingent annuitant, if the contingent annuitant
is the Plan Participant's spouse. If the Notification does not specify
from which Investment Accounts payments are to be made, amounts will be
withdrawn on a pro rata basis from all Investment Accounts which
correlate to the Plan Participant. Payments will end, however, on the
date no amounts remain in such Accounts or the date such Accounts are
paid or applied in full as described below. Payments will be subject to
the following:
a. The life expectancy of the Plan Participant and the Plan
Participant's spouse, if applicable, will be determined in
accordance with the life expectancy tables contained in Internal
Revenue Regulation Section 1.72-9. Life expectancy will be
determined as of the date on which the first payment is made. Life
expectancy will be redetermined annually thereafter.
b. Payments may begin any time after the Flexible Income Option is
requested. Payments must begin no later than the latest date
permitted or required by the Plan or regulation to be the Owner of
Benefit's Annuity Commencement Date.
c. Payments will be made annually, semiannually, quarterly, or
monthly as requested by the Owner of Benefits and agreed to by the
Company. The annual amount payable will be the lesser of the
Aggregate Investment Account Values which correlate to the Plan
Participant or the minimum annual amount determined in accordance
with the minimum distribution rules of the Internal Revenue Code.
d. If the Plan Participant should die before the Aggregate Investment
Account Value has been paid or applied in full, the remaining
Investment Account Values will be treated as benefits payable at
death as described in this Prospectus.
e. Year for purposes of determining payments under the Flexible
Income Option means the twelve month period starting on the
installment payment starting date and each corresponding twelve
month period thereafter.
An Owner of Benefits may request a payment in excess of the minimum
described above. Such payment may be equal to all or any portion of the
Investment Accounts which correlate to the Plan Participant; provided,
however, that if the requested payment would reduce the total value of
such accounts to a total balance of less than $1,750 then such request
will be a request for the total of such Investment Accounts.
The Owner of Benefits may request termination of the Flexible Income
Payments by giving the Company Notification (i) requesting an excess
payment equal to the remaining balance of the Aggregate Investment
Account Values which correlate to a Plan Participant, (ii) requesting
that the remaining balance of the Aggregate Investment Account Values
be applied to provide Variable Annuity Payments or (iii) a combination
of (i) and (ii), as long as the amount applied to provide an annuity is
at least $1,750. The Company will make such excess payment on the later
of (i) the date requested, or (ii) the date seven (7) calendar days
after the Company receives the Notification. The Annuity Commencement
Date for amounts so applied will be one month after the Annuity
Purchase Date. The Annuity Purchase Date for amounts so applied will be
the first Valuation Date in the month following the Company's receipt
of the Notification or the first Valuation Date of such subsequent
month as requested.
An additional annual charge of $25.00 will be made if an Owner of
Benefits elects to receive benefits under the Flexible Income Option.
The charge attributable to a Plan Participant will be allocated to his
or her Investment Account in proportion to their relative values.
C. Payment on Death of Plan Participant
1. Prior to Annuity Purchase Date
If a Plan Participant dies prior to the Annuity Purchase Date, the
Company, upon receipt of due proof of death and any waiver or consent
required by applicable state law, will pay the death benefit in
accordance with the provisions of the Plan. The amount of the death
benefit is determined by the terms of the Plan. The Owner of Benefits
may elect to either (1) leave the assets in the contract to the extent
permitted by applicable law; (2) receive such value as a single sum
benefit; or (3) apply the Investment Account Values which correlate to
the Plan Participant to purchase Variable Annuity Payments for the
beneficiary if the aggregate value of such Investment Accounts is at
least $1,750. If the beneficiary does not provide Notification to the
Company within 120 days of the date the Company receives due proof of
death, (i.e. a certified copy of the death certificate, a certified
copy of a decree of a court of competent jurisdiction as to the finding
of death, a written statement by a medical doctor who attended the
deceased during his last illness.), the beneficiary will be deemed a
Plan Participant under the contract described in the Prospectus.
A beneficiary may elect to have all or a part of the amount available
under this contract transferred to any Companion Contract.
Alternatively, this contract may accept all or part of the amount
available under a Companion Contract to establish an Investment Account
or Accounts for a beneficiary under this contract. If the aggregate
value of such Investment Accounts is less than $1,750, the Company may
at its option pay the beneficiary the value of such accounts in lieu of
all other benefits.
An election to receive Variable Annuity Payments must be made prior to
the single sum payment to the beneficiary. Annuity income must be
payable as lifetime annuity income with no benefits beyond the
beneficiary's life or life expectancy. In addition, the amount of the
monthly Variable Annuity Payments must be at least $20, or the Company
may at its option pay the beneficiary the value of the Variable Annuity
Reserves in lieu of all other benefits. The beneficiary's Annuity
Purchase Date will be the first day of the calendar month specified in
the election, but in no event prior to the first day of the calendar
month following the date the Notification is received by the Company.
The amount to be applied will be determined as of the Annuity Purchase
Date. The beneficiary's Annuity Commencement Date will be the first day
of the calendar month following the Annuity Purchase Date. The
beneficiary must be a natural person in order to elect Variable Annuity
Payments. The election must be in writing. The annuity conversion rates
applicable to a beneficiary shall be the annuity conversion rates the
Company makes available to all beneficiaries under this contract. The
beneficiary will receive a written description of the options
available.
2. Subsequent to Annuity Purchase Date
Upon the death of a Plan Participant subsequent to the Annuity Purchase
Date, no benefits will be available except as may be provided under the
form of annuity selected. If provided for under the form of annuity,
the Owner of Benefits or beneficiary will continue receiving any
remaining payments unless the Owner of Benefits or the beneficiary
requests in writing that the Commuted Value of the remaining payments
be paid in a single sum.
D. Withdrawals and Transfers
1. Cash Withdrawals
The contract is designed for and intended to be used to fund retirement
Plans. However, subject to any Plan limitations, any restrictions
imposed by provisions of the Internal Revenue Code or any reduction for
vesting provided for in the Plan as to amounts available, the Owner of
Benefits may withdraw cash from the Investment Accounts which correlate
to a Plan Participant at any time prior to the Annuity Purchase Date.
The Internal Revenue Code generally provides that distributions from
the contracts (except those used to fund Creditor Exempt or General
Creditor Non-qualified Plans) may begin only after the Plan Participant
attains age 59 1/2, terminates employment, dies or becomes disabled, or
in the case of deemed hardship (or, for PEDC Plans, unforeseen
emergencies). Withdrawals before age 59 1/2 may involve an income tax
penalty. See "Federal Tax Status."
The procedure with respect to cash withdrawals is as follows:
(a) The Plan must allow for such withdrawal.
(b) The Company must receive a Notification requesting a cash
withdrawal from the Owner of Benefits on a form either furnished
or approved by the Company. The Notification must specify the
amount to be withdrawn for each Investment Account from which
withdrawals are to be made. If no specification is made,
withdrawals from Investment Accounts will be made on a pro rata
basis.
(c) If a certificate has been issued to the Owner of Benefits the
Company may require that any requests be accompanied by such
certificate.
(d) If the Aggregate Investment Account Values are insufficient to
satisfy the amount of the requested withdrawal and applicable
charges, if any, the amount paid will be reduced to satisfy such
charges.
Any cash withdrawal will result in the cancellation of a number of
units from each Investment Account from which values have been
withdrawn. The number of units cancelled from an Investment Account
will be equal to the amount withdrawn from that Account divided by the
Unit Value for the Division of Separate Account B in which the Account
is invested for the Valuation Period in which the cancellation is
effective.
(Special Note: Under the Texas Education Code, Plan Participants under
contracts issued in connection with Optional Retirement Programs for
certain employees of Texas institutions of higher education are
prohibited from making withdrawals except in the event of termination
of employment, retirement or death of the Plan Participant. Also, see
"Federal Tax Status" for a description of further withdrawal
restrictions.)
2. Transfers Between Divisions
Upon Notification, all or a portion of the value of a Investment
Account which correlates to a Plan Participant may be transferred to
another available Investment Account correlating to such Plan
Participant for the same type of Contribution.
Transfers may be made at any time before the Annuity Purchase Date.
A transfer will be effective as of the end of the Valuation Period in
which the request is received. Any amount transferred will result in
the cancellation of units in the Investment Account from which the
transfer is made. The number of units cancelled will be equal to the
amount transferred from that account divided by the Unit Value of the
Division for the Valuation Period in which the transfer is effective.
The transferred amount will result in the crediting of units in the
Investment Account to which the transfer is made. The number of units
credited will be equal to the amount transferred to that account
divided by the Unit Value of the Division for the Valuation Period in
which the transfer is effective.
3. Transfers to the Contract
If a Companion Contract has been issued by the Company to fund the
Plan, and except as otherwise provided by the applicable Plan, the
contract described in this Prospectus may accept all or a portion of
the proceeds available under the Companion Contract at any time at
least one month before Annuity Commencement Date, subject to the terms
of the Companion Contract.
4. Transfers to a Companion Contract
If a Companion Contract has been issued by the Company to fund the
Plan, except as otherwise provided by the applicable Plan and the
provisions of the Companion Contract, an Owner of Benefits may by
Notification transfer all or a portion of the Investment Account Values
which correlate to a Plan Participant to the Companion Contract. If the
Notification does not state otherwise, amounts will be transferred on a
pro rata basis from the Investment Accounts which correlate to the Plan
Participant. Transfers with respect to a Plan Participant from this
contract to the Companion Contract will not be permitted if this
contract has accepted, within the six-month period preceding the
proposed transfer from this contract to the Companion Contract, a
transfer from an unmatured Investment Account which correlates to the
Plan Participant established under the Companion Contract. An unmatured
Investment Account is an Investment Account which has not reached the
end of its interest guarantee period. In all other respects, such
transfers are subject to the same provisions regarding frequency of
transfer, effective date of transfer and cancellation of units as
described above in "Transfers Between Divisions."
5. Special Situation Involving Alternate Funding Agents
The contract allows the Investment Account Values of all Plan
Participants to be transferred to an alternate Funding Agent with or
without the consent of the Plan Participants. Transfers to an alternate
Funding Agent require Notification from the Contractholder. The amount
to be transferred will be equal to the Investment Account Values
determined as of the end of the Valuation Period in which the
Notification is received. Such transfers will be subject to the
contract administration expense and recordkeeping expense.
6. Postponement of Cash Withdrawal or Transfer
Any cash withdrawal or transfer to be made from the contract or between
Investment Accounts in accordance with the preceding paragraphs will be
made (i) within seven calendar days after Notification for such payment
or transfer is received by the Company at its Home Office or (ii) on
the requested date of payment or transfer, if later. However, such
withdrawal or transfer may be deferred during any period when the right
to redeem Account shares is suspended as permitted under provisions of
the Investment Company Act of 1940, as amended. The right to redeem
shares may be suspended during any period when (a) trading on the New
York Stock Exchange is restricted as determined by the Securities and
Exchange Commission or such Exchange is closed for other than weekends
and holidays; (b) an emergency exists, as determined by the Securities
and Exchange Commission, as a result of which (i) disposal by the
Account of securities owned by it is not reasonably practicable or (ii)
it is not reasonably practicable for the Account fairly to determine
the value of its net assets; or (c) the Commission by order so permits
for the protection of security holders. If any deferment of transfer or
withdrawal is in effect and has not been cancelled by Notification to
the Company within the period of deferment, the amount to be
transferred or withdrawn shall be determined as of the first Valuation
Date following expiration of the permitted deferment, and transfer or
withdrawal will be made within seven calendar days thereafter. The
Company will notify the Contractholder of any deferment exceeding 30
days.
7. Loans.
The Company will not make available a loan option for the contract
described in this Prospectus.
E. Other Contractual Provisions
1. Contribution Limits
The contract prescribes no limits on the minimum Contribution which may
be made to an Investment Account which correlates to a Plan
Participant. Plan Participant maximum Contributions are discussed under
"Federal Tax Status." Contributions may also be limited by the Plan.
The Company may also limit Contributions on 60-days notice.
2. Assignment
No benefits in the course of payment under a contract used to fund a
TDA Plan, 401(a) Plan or Creditor-Exempt Non-Qualified Plan are
assignable, by any Owner of Benefits, Plan Participant, beneficiary or
contingent annuitant and all such benefits under such contracts, shall
be exempt from the claims of creditors to the maximum extent permitted
by law. Benefits in the course of payment for contracts used to fund
PEDC plans and General Creditor Non-Qualified Plans are assignable only
by the Contractholder and such benefits are subject to the claims of
the Contractholder's general creditors.
Investment Account Values which correlate to a Plan Participant are
non-forfeitable by the Owner of Benefits; provided, however, if the
Plan specifically so provides, Investment Account Values which
correlate to a Plan Participant shall be reduced to the extent required
by the vesting provisions of the Plan as of the date the Company
receives Notification of the event requiring the reduction.
3. Cessation of Contributions
A cessation of Contributions with respect to all Plan Participants
shall occur at the election of the Contractholder upon Notification to
the Company, on the date the Plan terminates or on the date no
Investment Account Values remain under the contract or at the election
of the Company upon 60-days notice to the Contractholder. Following a
cessation of Contributions all terms of the contract will continue to
apply except that no further Contributions may be made.
4. Substitution of Securities
If shares of an Account are not available at some time in the future,
or if in the judgment of the Company further investment in such shares
would no longer be appropriate, there may be substituted therefor, or
Contributions received after a date specified by the Company may be
applied to purchase (i) shares of another account or another registered
open-end investment company or (ii) securities or other property as the
Company should in its discretion select. In the event of any investment
pursuant to clause (ii) above, the Company can make such changes as in
its judgment are necessary or appropriate in the frequency and methods
of determination of Unit Values, Net Investment Factors, Annuity Change
Factors, and Investment Account Values, including any changes in the
foregoing which will provide for the payment of an investment advisory
fee; provided, however, that any such changes shall be made only after
approval by the Insurance Department of the State of Iowa. The Company
will give written notice to each Owner of Benefits of any substitution
or such change and any substitution will be subject to the rules and
regulations of the Securities and Exchange Commission.
5. Changes in the Contract
The terms of a contract may be changed at any time by written agreement
between the Company and the Contractholder without the consent of any
Plan Participant, Owner of Benefits, beneficiary, or contingent
annuitant. However, except as required by law or regulation, no such
change shall apply to variable annuities which were in the course of
payment prior to the effective date of the change. The Company will
notify any Contractholder affected by any change under this paragraph.
The Company may unilaterally change the Contract at any time, including
retroactive changes, in order to meet the requirements of any law or
regulation issued by any governmental agency to which the Company is
subject. The Company may add Divisions to Separate Account B at any
time. In addition, the Company may, on 60-days prior notice to the
Contractholder, unilaterally change the basis for determining
Investment Account Values, the Net Investment Factor, the Annuity
Purchase Rates and the Annuity Change Factor; the guaranteed annuity
conversion rates; the Recordkeeping Expense and Contract Administration
Charge; and the provisions with respect to transfers to or from a
Companion Contract or between Investment Accounts.
However, no amendment or change will apply to annuities in the course
of payment except to the extent necessary to meet the requirements of
any law or regulation issued by a governmental agency to which the
Company is subject. In addition, no change in the guaranteed annuity
conversion rates will take effect for a current Plan Participant if the
effect of such amendment or change would be less favorable to the Owner
of Benefits. Also, any change in the contract administration expense or
recordkeeping expense will not take affect as to any Investment
Accounts to be transferred to an Alternate Funding Agent if, prior to
the date of the amendment or change is to take affect, the Company
receives a written request from the Contractholder for payment of all
such Investment Account Values to the Alternate Funding Agent and such
request is not revoked.
Furthermore, the Company may, on 60-days notice to the Contractholder
affected by the change, unilaterally change the mortality and expense
risks charge provided that (a) the charge shall in no event exceed
1.25%, (b) the charge shall not be changed more frequently than once in
any one year period and (c) no change shall apply to annuities which
were in the course of payment prior to the effective date of the
change.
STATEMENT OF VALUES
The Company will furnish each Owner of Benefits at least once during each year a
statement showing the number of units credited to the Investment Account or
Accounts which correlate to the Plan Participant, Unit Values for such
Investment Accounts and the resulting Investment Account Values.
SERVICES AVAILABLE BY TELEPHONE
Telephone Transactions The following transactions may be exercised by telephone
by any Owner of Benefits: 1) transfers between Investment Accounts; and 2)
changes in Contribution allocation percentages. The telephone transactions may
be exercised by telephoning 1-800-633-1373. Telephone transfer requests must be
received by the close of the New York Stock Exchange on a day when the Company
is open for business to be effective that day. Requests made after that time or
on a day when the Company is not open for business will be effective the next
business day.
Although neither the Separate Account nor the Company is responsible for the
authenticity of telephone transaction requests, the right is reserved to refuse
to accept telephone requests when in the opinion of the Company it seems prudent
to do so. The Owner of Benefits bears the risk of loss caused by fraudulent
telephone instructions the Company reasonably believes to be genuine. The
Company will employ reasonable procedures to assure telephone instructions are
genuine and if such procedures are not followed, the Company may be liable for
losses due to unauthorized or fraudulent transactions. Such procedures include
recording all telephone instructions, requesting personal identification
information such as the caller's name, daytime telephone number, social security
number and/or birthdate and sending a written confirmation of the transaction to
the Owner of Benefits' address of record. Owners of Benefits may obtain
additional information and assistance by telephoning the toll free number.
TeleTouch(R) By calling TeleTouch at 1-800-547-7754 and inputting their personal
identification number, Plan Participants may access daily account and investment
information, counselor assistance and more. This service is available Sunday
through Friday from 2 a.m.
to midnight (CT) and Saturday from 2 a.m. to 9 p.m.
Principal Retirement Service Center sm By visiting our internet site at
www.principal.com and inputting your personal identification number, you can
access a variety of information including investment account values, investment
results and retirement planning tools. Plan Participants may also change
investment directions, transfer money and rebalance their portfolios.
DISTRIBUTION OF THE CONTRACT
The contract, which is continuously offered, will be sold primarily by persons
who are insurance agents of or brokers for the Company authorized by applicable
law to sell life and other forms of personal insurance and variable annuities.
In addition, these persons will usually be registered representatives of Princor
Financial Services Corporation, a company of the Principal Financial Group, Des
Moines, Iowa, 50392-0200, a broker-dealer registered under the Securities
Exchange Act of 1934 and a member of the National Association of Securities
Dealers, Inc. Princor Financial Services Corporation, the principal underwriter,
is paid for the distribution of the Contract in accordance with two separate
schedules one of which provides for payment of 4.5% of Contributions scaling
down for Contributions in excess of $5,000 and one which provides for payments
of 3.0% of Contributions scaling down for Contributions in excess of $50,000.
The Contract may also be sold through other selected broker-dealers registered
under the Securities Exchange Act of 1934. Princor Financial Services
Corporation is also the principal underwriter for various registered investment
companies organized by the Company. Princor Financial Services Corporation is a
subsidiary of Principal Financial Services, Inc.
PERFORMANCE CALCULATION
The Separate Account may publish advertisements containing information
(including graphs, charts, tables and examples) about the performance of one or
more of its Divisions. The contract was not offered prior to July 15, 1992.
However, the Divisions invest in Accounts of the Principal Variable Contract
Fund, Inc. These Accounts correspond to open-end investment companies ("mutual
funds") which, effective January 1, 1998, were reorganized into the Accounts of
the Principal Variable Contracts Fund, Inc. as follows:
Old Mutual Fund Name New Corresponding Account Name
----------------------------------------- ------------------------------
Principal Balanced Fund, Inc. Balanced Account
Principal Bond Fund, Inc. Bond Account
Principal Capital Accumulation Fund, Inc. Capital Value Account
Principal Emerging Growth Fund, Inc. MidCap Account
Principal Government Securities Fund, Inc. Government Securities Account
Principal Growth Fund, Inc. Growth Account
Principal Money Market Fund, Inc. Money Market Account
Principal World Fund, Inc. International Account
Some of the Accounts (under their former names) were offered prior to the date
that the Contract was available. Thus, the Separate Account may publish
advertisements containing information about the hypothetical performance of one
or more of its Divisions for this contract had the contract been issued on or
after the date the Account in which such Division invests was first offered. The
hypothetical performance from the date of inception of the Account in which the
Division invests is derived by reducing the actual performance of the underlying
Account by the fees and charges of the Contract as if it had been in existence.
The yield and total return figures described below will vary depending upon
market conditions, the composition of the underlying Account's portfolios and
operating expenses. These factors and possible differences in the methods used
in calculating yield and total return should be considered when comparing the
Separate Account performance figures to performance figures published for other
investment vehicles. The Separate Account may also quote rankings, yields or
returns as published by independent statistical services or publishers and
information regarding performance of certain market indices. Any performance
data quoted for the Separate Account represents only historical performance and
is not intended to indicate future performance. For further information on how
the Separate Account calculates yield and total return figures, see the
Statement of Additional Information.
From time to time the Separate Account advertises its Money Market Division's
"yield" and "effective yield." Both yield figures are based on historical
earnings and are not intended to indicate future performance. The "yield" of the
division refers to the income generated by an investment in the division over a
seven-day period (which period will be stated in the advertisement). This income
is then "annualized." That is, the amount of income generated by the investment
during that week is assumed to be generated each week over a 52-week period and
is shown as a percentage of the investment. The "effective yield" is calculated
similarly but, when annualized, the income earned by an investment in the
division is assumed to be reinvested. The "effective yield" will be slightly
higher than the "yield" because of the compounding effect of this assumed
reinvestment.
In addition, from time to time, the Separate Account may advertise its "yield"
for the Bond Division and Government Securities Division for these contracts.
The "yield" of the Divisions is determined by annualizing the net investment
income per unit for a specific, historical 30-day period and dividing the result
by the ending maximum offering price of the unit for the same period.
Also, from time to time, the Separate Account will advertise the average annual
total return of its various divisions. The average annual total return for any
of the divisions is computed by calculating the average annual compounded rate
of return over the stated period that would equate an initial $1,000 investment
to the ending redeemable contract value.
VOTING RIGHTS
The Company shall vote Account shares held in Separate Account B at regular and
special meetings of shareholders of each Account, but will follow voting
instructions received from persons having the voting interest in the Account
shares.
The number of Account shares as to which a person has the voting interest will
be determined by the Company as of a date which will not be more than ninety
days prior to the meeting of the Account, and voting instructions will be
solicited by written communication at least ten days prior to the meeting.
During the accumulation period, the Owner of Benefits is the person having the
voting interest in the Account shares attributable to the Investment Accounts
which correlate to the Plan Participant. The number of Account shares held in
Separate Account B which are attributable to each Investment Account is
determined by dividing the Investment Account Value attributable to a Division
of Separate Account B by the net asset value of one share of the underlying
Account.
During the annuity period, the person then entitled to Variable Annuity Payments
has the voting interest in the Account shares attributable to the Variable
Annuity. The number of Account shares held in Separate Account B which are
attributable to each Variable Annuity is determined by dividing the reserve for
the Variable Annuity by the net asset value of one Account share. The voting
interest in the Account shares attributable to the Variable Annuity will
ordinarily decrease during the annuity period since the reserve for the Variable
Annuity decreases due to the reduction in the expected payment period.
Account shares for which Owners of Benefits or payees of Variable Annuities are
entitled to give voting instructions, but for which none are received, and
shares of the Account owned by the Company will be voted in the same proportion
as the aggregate shares for which voting instructions have been received.
Proxy material will be provided to each person having a voting interest together
with an appropriate form which may be used to give voting instructions to the
Company.
If the Company determines pursuant to applicable law that Account shares held in
Separate Account B need not be voted pursuant to instructions received from
persons otherwise having the voting interest as provided above, then the Company
may vote Account shares held in Separate Account B in its own right.
FEDERAL TAX STATUS
It should be recognized that the descriptions below of the federal income tax
status of amounts received under the contracts are not exhaustive and do not
purport to cover all situations. A qualified tax advisor should be consulted for
complete information. (For the federal tax status of the Company and Separate
Account B, see "Principal Life Insurance Company Separate Account B".)
A. Taxes Payable by Owners of Benefits and Annuitants
The contract offered in connection with this Prospectus is used with
retirement programs which receive favorable tax deferred treatment under
Federal income tax law and deferred annuity contracts purchased with after
tax dollars. Annuity payments or other amounts received under the contract
are subject to income tax withholding. The amounts withheld will vary among
recipients depending on the tax status of the individual and the type of
payments from which taxes are withheld.
Contributions to contracts used to fund Creditor-Exempt and General
Creditor Non-Qualified Plans do not enjoy the advantages available to
qualified retirement plans, but Contributions invested in contracts used to
Fund Creditor-Exempt Non-qualified Retirement Plans may receive
tax-deferred treatment of the earnings, until distributed from the contract
as retirement benefits.
1. Tax-Deferred Annuity Plans-- (Section 403(b) Annuities for Employees
of Certain Tax-Exempt Organizations or Public Educational Institutions)
Contributions. Under section 403(b) of the Code, payments made by
certain employers (i.e., tax-exempt organizations, meeting the
requirements of section 501(c)(3) of the Code and public educational
institutions) to purchase annuity contracts for their employees are
excludable from the gross income of employees to the extent that the
aggregate Purchase Payments do not exceed the limitations prescribed by
section 402(g), section 403(b)(2), and section 415 of the Code. This
gross income exclusion applies to employer contributions and voluntary
salary reduction contributions.
An individual's voluntary salary reduction contributions under section
403(b) are generally limited to the lesser of $9,500 or 25 percent of
net salary (or 20 percent of gross salary); additional catch-up
contributions are permitted under certain circumstances. Combined
employer and salary reduction contributions are generally limited to
approximately 25 percent of net salary. In addition, for plan years
beginning after December 31, 1988, employer contributions must comply
with various nondiscrimination rules; these rules may have the effect
of further limiting the rate of employer contributions for highly
compensated employees.
Taxation of Distributions. Distributions are restricted. The
restrictions apply to amounts accumulated after December 31, 1988
(including voluntary contributions after that date and earnings on
prior and current voluntary contributions). These restrictions require
that no distributions will be permitted prior to one of the following
events: (1) attainment of age 59 1/2, (2) separation from service, (3)
death, (4) disability, or (5) hardship (hardship distributions will be
limited to the amount of salary reduction contributions exclusive of
earnings thereon).
All distributions from a section 403(b) Plan are taxed as ordinary
income of the recipient in accordance with section 72 of the Code and
are subject to 20% income tax withholding. Distributions received
before the recipient attains age 59 1/2 generally are subject to a 10%
penalty tax in addition to regular income tax. Certain distributions
are excepted from this penalty tax, including distributions following
(1) death, (2) disability, (3) separation from service during or after
the year the Participant reaches age 55, (4) separation from service at
any age if the distribution is in the form of payments over the life
(or life expectancy) of the Plan Participant (or the Plan Participant
and Beneficiary), and distributions (5) to alternate payee pursuant to
a qualified domestic relations order, (6) made on account of certain
levies on income or payments and (7) not in excess of tax deductible
medical expenses.
Required Distributions. Generally, distributions from section 403(b)
Plans must commence no later than April 1 of the calendar year
following the calendar year in which the Plan Participant attains age
70 1/2 and such distributions must be made over a period that does not
exceed the life expectancy of the Plan Participant (or the Plan
Participant and Beneficiary). Plan Participants employed by
governmental entities and certain church organizations may delay the
commencement of payments until April 1 of the calendar year following
retirement if they remain employed after attaining age 70 1/2. However,
upon the death of the Plan Participant prior to the commencement of
annuity payments, the amount accumulated under the contract must be
distributed within five years or, if distributions to a beneficiary
designated under the contract commence within one year of the Plan
Participant's death, distributions are permitted over the life of the
beneficiary or over a period not extending beyond the beneficiary's
life expectancy. If the Plan Participant has commenced receiving
annuity distributions prior to the Plan Participant's death,
distributions must continue at least as rapidly as under the method in
effect at the date of death. Amounts accumulated under a contract on
December 31, 1986, are not subject to these minimum distributions
requirements. A penalty tax of 50% will be imposed on the amount by
which the minimum required distribution in any year exceeds the amount
actually distributed in that year.
Tax-Free Transfers and Rollovers. The Code provides for the tax-free
exchange of one annuity contract for another annuity contract, and the
IRS has ruled that total or partial amounts transferred between section
403(b) annuity contracts and/or 403(b)(7) custodial accounts may
qualify as tax-free exchanges under certain circumstances. In addition,
section 403(b) of the Code permits tax-free rollovers of eligible
rollover distributions from section 403(b) programs to Individual
Retirement Accounts (IRAs) under certain circumstances. If an eligible
rollover distribution is taken as a direct rollover to an IRA (or
another 403(b) plan) the mandatory 20% income tax withholding does not
apply. However, the 20% mandatory withholding requirement does apply to
an eligible rollover distribution that is not made as a direct
rollover. In addition, such a rollover must be completed within 60 days
of receipt of the distribution.
2. Public Employee Deferred Compensation Plans-- (Section 457 Unfunded
Deferred Compensation Plans of Public Employers and Tax-Exempt
Organizations)
Contributions. Under section 457 of the Code, individuals who perform
services for a unit of a state or local government may participate in a
deferred compensation program. Tax-exempt employers may establish
deferred compensation plans under section 457 only for a select group
of management or highly compensated employees and/or independent
contractors.
This type of program allows individuals to defer the receipt of
compensation which would otherwise be presently payable and to
therefore defer the payment of Federal income taxes on the amounts.
Assuming that the program meets the requirements to be considered a
Public Employee Deferred Compensation Plan (an "PEDC Plan"), an
individual may contribute (and thereby defer from current income for
tax purposes) the lesser of $7,500 or 331/3% of the individuals
includible compensation. (Includible compensation means compensation
from the employer which is current includible in gross income for
Federal tax purposes.) During the last three years before an individual
attains normal retirement age, additional catch-up deferrals are
permitted.
The amounts which are deferred may be used by the employer to purchase
the contract offered by this Prospectus. The contract is owned by the
employer and, in fact, is subject to the claims of the employer's
creditors. The employee has no present rights or vested interest in the
contract and is only entitled to payment in accordance with the PEDC
Plan provisions.
Taxation of Distributions. Amounts received by an individual from an
PEDC Plan are includible in gross income for the taxable year in which
such amounts are paid or otherwise made available.
Distributions Before Separation from Service. Distributions generally
are not permitted under an PEDC Plan prior to separation from service
except for unforeseeable emergencies or upon reaching age 70 1/2.
Emergency distributions are includible in the gross income of the
individual in the year in which paid.
Required Distributions. The minimum distribution requirements for PEDC
Plans are generally the same as those for qualified plans and section
403(b) Plans Contracts, except that no amounts are exempted from
minimum distribution requirements.
Tax Free Transfers and Rollovers. Federal income tax law permits the
tax free transfer of PEDC Plan amounts to another PEDC Plan, but not to
an IRA or other type of plan.
3. 401(a) Plans
Contributions. Under Section 401(a) of the Code, payments made by
employers to purchase annuity Contracts for their employees are
excludable from the gross income of employees to the extent that the
aggregate Purchase Payments do not exceed the limitations prescribed by
section 402(g), and section 415 of the Code. This gross income
exclusion applies to employer contributions and voluntary salary
reduction contributions.
An individual's voluntary salary reduction contributions for a 401(k)
plan are generally limited to $10,500 (2000 limit).
For 401(a) qualified plans, the maximum annual contribution that a
member can receive is limited to the lesser of 25% of includible
compensation or $30,000.
Taxation of Distributions. Distributions are restricted. These
restrictions require that no distributions of employer contributions or
salary deferrals will be permitted prior to one of the following
events: (1) attainment of age 59 1/2, (2) separation from service, (3)
death, (4) disability, or (5) for certain 401(a) Plans, hardship
(hardship distributions will be limited to the amount of salary
reduction contributions exclusive of earnings thereon). In-service
distributions may be permitted under various circumstances in certain
plans.
All distributions from a section 401(a) Plan are taxed as ordinary
income of the recipient in accordance with section 72 of the Code.
Distributions received before the recipient attains age 59 1/2
generally are subject to a 10% penalty tax in addition to regular
income tax. Certain distributions are excepted from this penalty tax,
including distributions following (1) death, (2) disability, 3)
separation from service during or after the year the Plan Participant
reaches age 55, (4) separation from service at any age if the
distribution is in the form of payments over the life (or life
expectancy) of the Plan Participant (or the Plan Participant and
Beneficiary), and (5) distributions not in excess of tax deductible
medical expenses.
Required Distributions. Generally, distributions from section 401(a)
Plans must commence no later than April 1 of the calendar year
following the calendar year in which the Participant attains age 70 1/2
and such distributions must be made over a period that does not exceed
the life expectancy of the Plan Participant (or the Plan Participant
and Beneficiary). Following the death of the Plan Participant, the
distribution requirements are generally the same as those described
with respect to 403(b) Plans. A penalty tax of 50% will be imposed on
the amount by which the minimum required distribution in any year
exceeds the amount actually distributed in that year.
Tax-Free Transfers and Rollovers. The Code provides for the tax-free
exchange of one annuity contract for another annuity contract.
Distributions from a 401(a) Plan may also be transferred to a Rollover
IRA.
4. Creditor-Exempt Non-Qualified Plans
Certain employers may establish Creditor-Exempt Non-Qualified Plans.
Under such Plans the employer formally funds the Plan either by
purchasing an annuity contract or by transferring funds on behalf of
Plan Participants to a trust established for the benefit of such Plan
Participants with a direction to the trustee to use the funds to
purchase an annuity contract. The Trustee is the Contractholder and is
considered the nominal owner of the contract. Each Plan Participant as
a Trust beneficiary, is an Owner of Benefits under the contract and is
treated as the owner for income tax purposes.
Taxation of Contract Earnings. Since each Plan Participant for income
tax purposes is considered the owner of the Investment Account or
Accounts which correlate to such Participant, any increase in a
Participant's Investment Account Value resulting from the investment
performance of the Contract is not taxable to the Plan Participant
until received by such Plan Participant.
Contributions. Payments made by the employer to the Trust on behalf of
a Plan Participant are currently includible in the Plan Participant's
gross income as additional compensation and, if such payments coupled
with the Plan Participant's other compensation is reasonable in amount,
such payments are currently deductible as compensation by the Employer.
Taxation of Distributions. In general, partial redemptions from an
Investment Account that are not received by a Plan Participant as an
annuity under the contract allocated to post-August 13, 1982
Contributions under a preexisting contract are taxed as ordinary income
to the extent of the accumulated income or gain under the contract.
Partial redemptions from a contract that are allocated to pre-August
14, 1982 Contributions under a preexisting contract are taxed only
after the Plan Participant has received all of the "investment in the
contract" (Contributions less any amounts previously received and
excluded from gross income).
In the case of a complete redemption of an Investment Account under the
contract (regardless of the date of purchase), the amount received will
be taxed as ordinary income to the extent that it exceeds the Plan
Participant's investment in the contract.
If a Plan Participant purchases two or more contracts from the Company
(or an affiliated company) within any twelve month period after October
21, 1988, those contracts are treated as a single contract for purposes
of measuring the income on a partial redemption or complete surrender.
When payments are received as an annuity, the Plan Participant's
investment in the contract is treated as received ratably over the
expected payment period of the annuity and excluded from gross income
as a tax-free return of capital. Individuals who commence receiving
annuity payments on or after January 1, 1987, can exclude from income
only their unrecovered investment in the contract. Where such
individuals die before they have recovered their entire investment in
the contract on a tax-free basis, are entitled to a deduction of the
unrecovered amount on their final tax return.
In addition to regular income taxes, there is a 10% penalty tax on the
taxable portion of a distribution received before the Plan Participant
attains age 59 1/2 under the contract, unless the distribution is; (1)
made to a Beneficiary on or after death of the Plan Participant, (2)
made upon the disability of the Plan Participant; (3) part of a series
of substantially equal annuity payments for the life or life expectancy
of the Plan Participant or the Plan Participant and Beneficiary; (4)
made under an immediate annuity contract, or (5) allocable to
Contributions made prior to August 14, 1982.
Required Distributions. The Internal Revenue Code does not require a
Plan Participant under a Creditor-Exempt Non-Qualified Plan to commence
receiving distributions at any particular time and does not limit the
duration of annuity payments. However, the contract provides the
Annuity Commencement Date must be no later than the April 1 of the
calendar year following the calendar year in which the Participant
attains age 70 1/2. However, upon the death of the Plan Participant
prior to the commencement of annuity payments, the amount accumulated
under the contract must be distributed within five years or, if
distributions to a beneficiary designated under the contract commence
within one year of the Plan Participant's death, distributions are
permitted over the life of the beneficiary or over a period not
extending beyond the beneficiary's life expectancy. If the Plan
Participant has commenced receiving annuity distributions prior to the
Plan Participant's death, distributions must continue at least as
rapidly as under the method in effect at the date of death.
Tax-Free Exchanges. Under Section 1035 of the Code, the exchange of
one annuity contract for another is not a taxable transaction, but is
reportable to the IRS. Transferring Investment Account Values from
this contract to a Companion Contract would fall within the provisions
of Section 1035 of the Code.
5. General Creditor Non-Qualified Plans
Contributions. Private taxable employers may establish informally
funded, General Creditor Non-Qualified Plans for a select group of
management or highly compensated employees and/or independent
contractors. Certain arrangements of nonprofit employers entered into
prior to August 16, 1989, and not subsequently modified, are subject to
the rules discussed below.
Informally funded General Creditor Non-Qualified Plans represent a bare
contractual promise on the part of the employer to pay wages at some
future time. The contract used to informally fund the employer's
obligation is owned by the employer and is subject to the claims of the
employer's creditors. The Plan Participant has no present right or
vested interest in the contract and is only entitled to payment in
accordance with Plan provisions. If the Employer who is the
Contractholder, is not a natural person, the contract does not receive
tax-deferred treatment afforded other Contractholders under the
Internal Revenue Code.
Taxation of Distributions. Amounts received by an individual from a
General Creditor Non-Qualified Plan are includible in the employee's
gross income for the taxable year in which such amounts are paid or
otherwise made available. Such amounts are deductible by the employer
when paid to the individual.
B. Fund Diversification
Separate Account investments must be adequately diversified in order for
the increase in the value of Creditor-Exempt Non-Qualified Contracts to
receive tax-deferred treatment. In order to be adequately diversified, the
portfolio of each underlying Account must, as of the end of each calendar
quarter or within 30 days thereafter, have no more than 55% of its assets
invested in any one investment, 70% in any two investments, 80% in any
three investments and 90% in any four investments. Failure of an Account to
meet the diversification requirements could result in tax liability to
Creditor-Exempt Non-Qualified Contractholders.
The investment opportunities of the Accounts could conceivably be limited
by adhering to the above diversification requirements. This would affect
all Contractholders, including those owners of contracts for whom
diversification is not a requirement for tax-deferred treatment.
STATE REGULATION
The Company is subject to the laws of the State of Iowa governing insurance
companies and to regulation by the Insurance Department of the State of Iowa. An
annual statement in a prescribed form must be filed by March 1 in each year
covering the operations of the Company for the preceding year and its financial
condition on December 31st of such year. Its books and assets are subject to
review or examination by the Commissioner of Insurance of the State of Iowa or
her representatives at all times, and a full examination of its operations is
conducted periodically by the National Association of Insurance Commissioners.
Iowa law and regulations also prescribe permissible investments, but this does
not involve supervision of the investment management or policy of the Company.
In addition, the Company is subject to the insurance laws and regulations of
other states and jurisdictions in which it is licensed to operate. Generally,
the insurance departments of these states and jurisdictions apply the laws of
the state of domicile in determining the field of permissible investments.
LEGAL OPINIONS
Legal matters applicable to the issue and sale of the contracts, including the
right of the Company to issue contracts under Iowa Insurance Law, have been
passed upon by Karen E. Shaff, Senior Vice President and General Counsel of the
Company.
LEGAL PROCEEDINGS
There are no legal proceedings pending to which Separate Account B is a party or
which would materially affect Separate Account B.
REGISTRATION STATEMENT
This Prospectus omits some information contained in the Statement of Additional
Information (or Part B of the Registration Statement) and Part C of the
Registration Statement which the Company has filed with the Securities and
Exchange Commission. The Statement of Additional Information is hereby
incorporated by reference into this Prospectus. A copy of the Statement of
Additional Information can be obtained upon request, free of charge, by writing
or telephoning Princor Financial Services Corporation. You may obtain a copy of
Part C of the Registration Statement filed with the Securities and Exchange
Commission, Washington, D.C. from the Commission upon payment of the prescribed
fees.
INDEPENDENT AUDITORS
The financial statements of Principal Life Insurance Company Separate Account B
and the consolidated financial statements of Principal Life Insurance Company
which are included in the Statement of Additional Information have been audited
by Ernst & Young LLP, independent auditors, for the periods indicated in their
reports thereon which appear in the Statement of Additional Information.
CONTRACTHOLDERS' INQUIRIES
Contractholders' inquiries should be directed to Princor Financial Services
Corporation, a company of the Principal Financial Group, Des Moines, Iowa
50392-0200, (515) 247-5711.
TABLE OF CONTENTS OF THE STATEMENT OF ADDITIONAL INFORMATION
The table of contents for the Statement of Additional Information is provided
below.
TABLE OF CONTENTS
Page
Independent Auditors................................................ 4
Underwriting Commissions............................................ 4
Calculation of Yield and Total Return............................... 4
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 copy of the Statement of Additional Information, free of charge,
write or telephone:
Princor Financial Services Corporation
a company of
the Principal Financial Group
Des Moines, IA 50392-0200
Telephone: 1-800-633-1373
<PAGE>
PART B
PRINCIPAL LIFE INSURANCE COMPANY SEPARATE ACCOUNT B
PREMIER VARIABLE (A GROUP VARIABLE ANNUITY CONTRACT FOR
EMPLOYER- SPONSORED QUALIFIED AND NON-QUALIFIED RETIREMENT PLANS)
Statement of Additional Information
dated May 1, 2000
This Statement of Additional Information provides information about
Principal Life Insurance Company Separate Account B Premier Variable - Group
Variable Annuity Contracts (the "Contract" or the "Contracts") in addition to
the information that is contained in the Contract's Prospectus, dated May 1,
2000.
This Statement of Additional Information is not a prospectus. It should
be read in conjunction with the Prospectus, a copy of which can be obtained free
of charge by writing or telephoning:
Princor Financial Services Corporation
a company of
the Principal Financial Group
Des Moines, Iowa 50392-0200
Telephone: 1-800-633-1373
TABLE OF CONTENTS
Page
Independent Auditors ..................................................... 4
Underwriting Commissions.................................................. 4
Calculation of Yield and Total Return..................................... 4
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
INDEPENDENT AUDITORS
Ernst & Young LLP, Des Moines, Iowa, serve as independent auditors for Principal
Life Insurance Company Separate Account B and Principal Life Insurance Company
and perform audit and accounting services for Separate Account B and Principal
Life Insurance Company.
UNDERWRITING COMMISSIONS
Aggregate dollar amount of underwriting commissions paid to and retained by
Princor Financial Services Corporation for all Separate Account B contracts:
Year Paid To Retained by
1999 $12,331,736.46 --
1998 $13,709,101.12 --
1997 $11,491,356.06 $340.24
1996 $11,090,837.12 $14,528.47
1995 $5,326,848.77 $26,014.78
CALCULATION OF YIELD AND TOTAL RETURN
The Separate Account may publish advertisements containing information
(including graphs, charts, tables and examples) about the performance of one or
more of its Divisions. The contract was not offered prior to July 15, 1992.
However, the Divisions invest in Accounts of the Principal Variable Contract
Fund, Inc. These Accounts correspond to open-end investment companies ("mutual
funds") which, effective January 1, 1998, were reorganized into the Accounts of
the Principal Variable Contracts Fund, Inc. as follows:
Old Mutual Fund Name New Corresponding Account Name
Principal Balanced Fund, Inc. Balanced Account
Principal Bond Fund, Inc. Bond Account
Principal Capital Accumulation Fund, Inc. Capital Value Account
Principal Emerging Growth Fund, Inc. MidCap Account
Principal Government Securities Fund, Inc. Government Securities Account
Principal Growth Fund, Inc. Growth Account
Principal Money Market Fund, Inc. Money Market Account
Principal World Fund, Inc. International Account
Some of the Accounts (under their former names) were offered prior to the date
that the Contract was available. Thus, the Separate Account may publish
advertisements containing information about the hypothetical performance of one
or more of its Divisions for this contract had the contract been issued on or
after the date the Account in which such Division invests was first offered. The
hypothetical performance from the date of inception of the Account in which the
Division invests is derived by reducing the actual performance of the underlying
Account by the fees and charges of the Contract as if it had been in existence.
The yield and total return figures described below will vary depending upon
market conditions, the composition of the underlying Account's portfolios and
operating expenses. These factors and possible differences in the methods used
in calculating yield and total return should be considered when comparing the
Separate Account performance figures to performance figures published for other
investment vehicles. The Separate Account may also quote rankings, yields or
returns as published by independent statistical services or publishers and
information regarding performance of certain market indices. Any performance
data quoted for the Separate Account represents only historical performance and
is not intended to indicate future performance.
From time to time the Account advertises its Money Market Division's "yield" and
"effective yield" for these contracts. Both yield figures are based on
historical earnings and are not intended to indicate future performance. The
"yield" of the Division refers to the income generated by an investment under
the contract in the Division over a seven-day period (which period will be
stated in the advertisement). This income is then "annualized." That is, the
amount of income generated by the investment during that week is assumed to be
generated each week over a 52-week period and is shown as a percentage of the
investment. The "effective yield" is calculated similarly but, when annualized,
the income earned by an investment in the division is assumed to be reinvested.
The "effective yield" will be slightly higher than the "yield" because of the
compounding effect of this assumed reinvestment. Neither yield quotation
reflects sales load deducted from purchase payments which, if included, would
reduce the "yield" and "effective yield." For the period ended December 31,
1999, the 7-day annualized and effective yields were 5.05% and 5.18%,
respectively.
From time to time, the Separate Account will advertise the average annual total
return of its various divisions for these contracts. The average annual total
return for any of the divisions is computed by calculating the average annual
compounded rate of return over the stated period that would equate an initial
$1,000 investment to the ending redeemable contract value.
Assuming the contract had been offered as of the periods indicated in the table
below, the hypothetical average annual total returns for the periods ending
December 31, 1999 are:
One Year Five Year Ten Year
Balanced Division 1.97% 13.31% 10.98%
Bond Division -3.00% 7.30% 7.38%
Capital Value Division -4.69% 17.42% 12.53%
Government Securities Division -0.70% 7.54% 7.36%
Growth Division 15.95% 19.98% 18.49%(1)
International Division 25.40% 16.83% 13.98%(1)
MidCap Division 12.57% 17.13% 14.94%
Money Market Division 4.41% 4.78% 4.64%
(1) Period from May 2, 1994 - December 31, 1999
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.
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.
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
Mortgage servicing rights 1,081 1,288 778 821
Financial instruments included in Closed
Block (see Note 5) 3,658 3,649 3,587 3,652
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.
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
PART C
PREMIER VARIABLE CONTRACT
OTHER INFORMATION
Item 24. Financial Statements and Exhibits
(a) Financial Statements included in the Registration Statement
(1) Part A:
Condensed Financial Information for the seven years ended
December 31, 1999 and for the period beginning July 15,
1992 and ended December 31, 1992.
(2) Part B:
Principal Life Insurance Company Separate
Account B:
Report of Independent Auditors.
Statement of Net Assets, December 31, 1999.
Statement of Operations for the year ended
December 31, 1999.
Statements of Changes in Net Assets for the years
ended December 31, 1999 and 1998.
Notes to Financial Statements.
Principal Life Insurance Company:
Report of Independent Auditors.
Consolidated Statements of Operations for the years
ended December 31, 1999, 1998 and 1997.
Consolidated Statements of Financial Position,
December 31, 1999 and 1998.
Consolidated Statements of Stockholder's Equity for
the years ended December 31, 1999, 1998 and 1997.
Consolidated Statements of Cash Flows for the
years ended December 31, 1999, 1998 and 1997.
Notes to Consolidated Financial Statements.
(b) Exhibits
(1) Board resolution of Registrant (Filed 3/1/96)
(3a) Distribution Agreement (Filed 3/1/96)
(3b) Selling Agreement (Filed 3/1/96)
(4a) Form of Variable Annuity Contract (Filed 12/16/97)
(4b) Variable Annuity Contract Endorsement (Filed 12/16/97)
(4c) Variable Annuity Contract Rider (Filed 12/16/97)
(5) Form of Variable Annuity Application (Filed 10/23/97)
(6a) Articles of Incorporation of Depositor (Filed 3/1/96)
(6b) Bylaws of Depositor (Filed 3/1/96)
(9) Opinion of Counsel (Filed 3/1/96)
(10a) Consent of Ernst & Young LLP
(10b) Powers of Attorney (Filed 2/28/00)
(13a) Total Return Calculation (Filed 3/1/96)
(13b) Annualized Yield for Separate Account B (Filed 3/1/96)
<PAGE>
Item 25. Officers and Directors of the Depositor
Principal Life Insurance Company is managed by a Board of
Directors which is elected by its policyowners. The directors and
executive officers of the Company, their positions with the Company,
including Board Committee memberships, and their principal business
address, are as follows:
DIRECTORS: Principal
Name, Positions and Offices Business Address
BETSY J. BERNARD U.S. West
Director 1801 California Street
Member, Nominating Committee 52nd Floor
Denver, CO 80202
JOCELYN CARTER-MILLER Motorola, Inc.
Director 1000 Corporate Drive
Member, Audit Committee Suite 700
Ft. Lauderdale, FL 33334
DAVID J. DRURY The Principal Financial Group
Director Des Moines, IA 50392
Chairman of the Board
Chair, Executive Committee
C. DANIEL GELATT, JR. NMT Corporation
Director 2004 Kramer Street
Member, Executive Committee La Crosse, WI 54603
Chair, Human Resources
Committee
J. BARRY GRISWELL The Principal Financial Group
Director, President Des Moines, IA 50392
and Chief Executive Officer
G. DAVID HURD The Principal Financial Group
Director Des Moines, IA 50392
Member, Executive and
Nominating Committees
CHARLES S. JOHNSON Pioneer Hi-Bred International, Inc.
Director 400 Locust, Ste. 700 Capital Square
Member, Audit Committee Des Moines, IA 50309
WILLIAM T. KERR Meredith Corporation
Director 1716 Locust St.
Member, Executive Committee Des Moines, IA 50309-3023
and Chair, Nominating
Committee
LEE LIU IES Industries Inc.
Director Post Office Box 351
Member, Executive and Cedar Rapids, IA 52406
Human Resources Committees
VICTOR. H. LOEWENSTEIN Egon Zehnder International
Director 350 Park Avenue - 8th Floor
Member, Nominating New York, NY 10022
Committee
RONALD D. PEARSON Hy-Vee, Inc.
Director 5820 Westown Parkway
Member, Human Resources West Des Moines, IA 50266
Committee
Federico F. Pena Vestar Capital Partners
Member, Audit 1225 17th Street, Ste 1660
Committee Denver, CO 80202
JOHN R. PRICE The Chase Manhattan Corporation
Director 270 Park Avenue - 44th Floor
Member, Nominating Committee New York, NY 10017
DONALD M. STEWART The College Board
Director 45 Columbus Avenue
Member, Human Resources New York, NY 10023-6992
Committee
ELIZABETH E. TALLETT Dioscor, Inc.
Director 48 Federal Twist Road
Chair, Audit Committee Stockton, NJ 08559
FRED W. WEITZ Essex Meadows, Inc.
Director 800 Second Avenue, Suite 150
Member, Human Resources Des Moines, IA 50309
Committee
Executive Officers (Other than Directors):
JOHN E. ASCHENBRENNER Executive Vice President
PAUL S. BOGNANNO Senior Vice President
GARY M. CAIN Senior Vice President
C. ROBERT DUNCAN Senior Vice President
DENNIS P. FRANCIS Senior Vice President
MICHAEL H.GERSIE Executive Vice President and
Chief Financial Officer
THOMAS J. GRAF Senior Vice President
ROBB B. HILL Senior Vice President
DANIEL J. HOUSTON Senior Vice President
ELLEN Z. LAMALE Senior Vice President and
Chief Actuary
MARY A. O'KEEFE Senior Vice President
RICHARD L. PREY Senior Vice President
KAREN E. SHAFF Senior Vice President and
General Counsel
ROBERT A. SLEPICKA Senior Vice President
NORMAN R. SORENSEN Senior Vice President
CARL C. WILLIAMS Senior Vice President and Chief
Information Officer
LARRY D. ZIMPLEMAN Senior Vice President
Item 26. Persons Controlled by or Under Common Control with Depositor
Principal Financial Services, Inc. (an Iowa corporation) an
intermediate holding company organized pursuant to Section 512A.14 of
the Iowa Code.
Subsidiaries wholly-owned by Principal Financial Services, Inc.
a. Principal Life Insurance Company (an Iowa corporation) a life
group, pension and individual insurance company.
b. Princor Financial Services Corporation (an Iowa Corporation) a
registered broker-dealer.
c. PFG Do Brasil LTDA (Brazil) a Brazilian holding company.
d. Principal Financial Services (Australia), Inc. (an Iowa holding
company) formed to facilitate the acquisition of the Australian
business of BT Australia.
e. Principal Financial Services (NZ), Inc. (an Iowa holding company)
formed to facilitate the acquisition of the New Zealand business
of BT Australia.
f. Principal Capital Management (Singapore) Limited (a Singapore
asset management company).
g. Principal Capital Management (Europe) Limited a fund management
company.
h. Principal Capital Management (Ireland) Limited a fund management
company.
i. Principal Financial Group Investments (Australia) Pty Limited.
Subsidiary wholly-owned by Princor Financial Services Corporation:
a. Principal Management Corporation (an Iowa Corporation) a
registered investment advisor.
Subsidiary wholly-owned by PFG Do Brasil LTDA
a. Brasilprev Previdencia Privada S.A.(Brazil) a pension
administration company.
Subsidiary wholly-owned by Principal Financial Services (Australia),
Inc.:
a. Principal Financial Group (Australia) Holdings Pty Ltd. an
Australian holding company organized in connection with the
contemplated acquisition of BT Australia Funds Management.
Subsidiary wholly-owned by Principal Financial Group (Australia)
Holdings Pty Ltd:
a. Principal Financial Group (Australia) Pty Ltd. an Australia
holding company organized on connection the contemplated
acquisition of BT Australia Funds Management.
Subsidiary wholly-owned by Principal Financial Group (Australia) Pty
Ltd:
a. BT International (Australia) Limited (an Australian holding
company).
Subsidiary wholly-owned by BT Investment (Australia) Limited:
a. Bankers Trust Australia Limited (an Australian holding company).
Subsidiary wholly-owned by Bankers Trust Australia Limited:
a. BT Financial Group Limited an asset management company.
Subsidiaries wholly-owned by BT Financial Group Limited:
a. BT Life Limited a commercial and investment linked life insurance
company.
b. BT Funds Management Limited (an Australian financial services
company).
c. BT Funds Management (International) Limited (an Australian
financial services company).
d. BT Securities Limited (an Australian financial services
company).
e. BT (Queensland) Pty Limited (an Australian financial services
company).
f. BT Portfolio Services Pty Limited (an Australian financial
services company).
g. BT Australia Corporate Services Pty Limited a holding
company.
h. Oniston Pty Ltd (an Australian financial services company).
i. QV1 Pty Limited
Subsidiaries wholly-owned by BT Portfolio Services Limited:
a. BT Custodial Services Pty Ltd (an Australian financial services
company).
b. National Registry Services Pty Ltd. (an Australian financial
services company).
c. National Registry Services (WA) Pty Limited (an Australian
financial services company).
d. BT Finance & Investments Pty Ltd (an Australian financial
services company).
Subsidiaries organized and wholly-owned by BT Australia Corporate
Services Pty Limited:
a. BT Finance Pty Limited (an Australian financial services
company).
b. Chifley Services Pty Limited (an Australian financial services
company).
c. BT Nominees Pty Limited (an Australian financial services
company).
Subsidiary organized and wholly-owned by BT Funds Management Limited:
a. BT Tactical Asset Management Limited (an Australian financial
services company).
Subsidiary organized and wholly-owned by Principal Financial Services
(NZ), Inc.
a. BT Financial Group (NZ) Limited (a New Zealand holding company).
b. BT Hotel Group Pty Limited
c. BT Custodians Limited a manager and trustee of various unit
trusts.
d. Dellarak Pty Limited a trustee company.
Subsidiary organized and wholly-owned by BT Financial Group (NZ)
Limited:
a. BT Portfolio Service (NZ) Limited (a New Zealand financial
services company).
b. BT New Zealand Nominees Limited (a New Zealand financial services
company).
c. BT Funds Management (NZ) Limited (a New Zealand financial
services company).
Subsidiary organized and wholly-owned by Principal Financial Group
Investments (Australia) Pty Limited:
a. Principal Hotels Holdings Pty Ltd. a holding company.
Subsidiary organized and wholly-owned by Principal Hotels Holdings
Pty Ltd.:
a. Principal Hotels Australia Pty Ltd. a holding company.
Subsidiary organized and wholly-owned by Principal Hotels Australia
Pty Ltd.:
a. BT Hotel Limited
Principal Life Insurance Company sponsored the organization of the
following mutual funds, some of which it controls by virtue of owning
voting securities:
Principal Balanced Fund, Inc.(a Maryland Corporation) 0.15% of
shares outstanding owned by Principal Life Insurance Company
(including subsidiaries and affiliates) on January 31, 2000.
Principal Blue Chip Fund, Inc.(a Maryland Corporation) 0.80% of
shares outstanding owned by Principal Life Insurance Company
(including subsidiaries and affiliates) on January 31, 2000.
Principal Bond Fund, Inc.(a Maryland Corporation) 0.67% of shares
outstanding owned by Principal Life Insurance Company (including
subsidiaries and affiliates) on January 31, 2000.
Principal Capital Value Fund, Inc. (a Maryland Corporation)
24.72% of outstanding shares owned by Principal Life Insurance
Company (including subsidiaries and affiliates)on January 31,
2000.
Principal Cash Management Fund, Inc. (a Maryland Corporation)
5.73% of outstanding shares owned by Principal Life Insurance
Company (including subsidiaries and affiliates) on January 31,
2000.
Principal Government Securities Income Fund, Inc. (a Maryland
Corporation) 0.03% of shares outstanding owned by Principal Life
Insurance Company (including subsidiaries and affiliates) on
January 31, 2000.
Principal Growth Fund, Inc. (a Maryland Corporation) 0.37% of
outstanding shares owned by Principal Life Insurance Company
(including subsidiaries and affiliates) on January 31, 2000.
Principal High Yield Fund, Inc. (a Maryland Corporation) 7.80%
of shares outstanding owned by Principal Life Insurance Company
(including subsidiaries and affiliates) on January 31, 2000.
Principal International Emerging Markets Fund, Inc. (a Maryland
Corporation) 34.31% of shares outstanding owned by Principal Life
Insurance Company (including subsidiaries and affiliates) on
January 31, 2000.
Principal International Fund, Inc. (a Maryland Corporation)
24.74% of shares outstanding owned by Principal Life Insurance
Company (including subsidiaries and affiliates) on January 31,
2000.
Principal International SmallCap Fund, Inc. (a Maryland
Corporation) 31.00% of shares outstanding owned by Principal Life
Insurance Company (including subsidiaries and affiliates) on
January 31, 2000.
Principal Limited Term Bond Fund, Inc. (a Maryland Corporation)
21.85% of shares outstanding owned by Principal Life Insurance
Company (including subsidiaries and affiliates) on January 31,
2000.
Principal LargeCap Stock Index Fund, Inc. (a Maryland
Corporation) 100.00% of shares outstanding owned by Principal
Life Insurance Company (including subsidiaries and affiliates) on
February 24, 2000.
Principal MidCap Fund, Inc. (a Maryland Corporation) 0.79% of
shares outstanding owned by Principal Life Insurance Company
(including subsidiaries and affiliates) on January 31, 2000
Principal Partners Aggressive Growth Fund, Inc.(a Maryland
Corporation) 12.91% of shares outstanding owned by Principal Life
Insurance Company (including subsidiaries and affiliates) on
January 31, 2000
Principal Partners LargeCap Growth Fund, Inc.(a Maryland
Corporation) 100.00% of shares outstanding owned by Principal
Life Insurance Company (including subsidiaries and affiliates) on
February 24, 2000
Principal Partners MidCap Growth Fund, Inc.(a Maryland
Corporation) 100.00% of shares outstanding owned by Principal
Life Insurance Company (including subsidiaries and affiliates) on
February 24, 2000
Principal Real Estate Fund, Inc. (a Maryland Corporation) 62.40%
of shares outstanding owned by Principal Life Insurance Company
(including subsidiaries and affiliates) on January 31, 2000
Principal SmallCap Fund, Inc.(a Maryland Corporation) 13.73% of
shares outstanding owned by Principal Life Insurance Company
(including subsidiaries and affiliates) on January 31, 2000.
Principal Special Markets Fund, Inc. (a Maryland Corporation)
83.47% of shares outstanding of the International Emerging
Markets Portfolio, 43.49% of the shares outstanding of the
International Securities Portfolio, 98.66% of shares outstanding
of the International SmallCap Portfolio and 100% of the shares
outstanding of the Mortgage-Backed Securities Portfolio were
owned by Principal Life Insurance Company (including subsidiaries
and affiliates) on January 31, 2000
Principal Tax-Exempt Bond Fund, Inc. (a Maryland Corporation)
0.05% of shares outstanding owned by Principal Life Insurance
Company (including subsidiaries and affiliates) on January 31,
2000.
Principal Utilities Fund, Inc. (a Maryland Corporation) 0.27% of
shares outstanding owned by Principal Life Insurance Company
(including subsidiaries and affiliates) on January 31, 2000.
Principal Variable Contracts Fund, Inc. (a Maryland Corporation)
100% of shares outstanding of the following Accounts owned by
Principal Life Insurance Company and its Separate Accounts on
January 31, 2000: Aggressive Growth, Asset Allocation, Balanced,
Blue Chip, Bond, Capital Value, Government Securities, Growth,
High Yield, International, International SmallCap, LargeCap
Growth, MicroCap, MidCap, MidCap Growth, MidCap Value, Money
Market, Real Estate, SmallCap, SmallCap Growth, SmallCap Value
Stock Index 500, and Utilities.
Subsidiaries organized and wholly-owned by Principal Life Insurance
Company:
a. Principal Holding Company (an Iowa Corporation) a holding company
wholly-owned by Principal Life Insurance Company.
b. PT Asuransi Jiwa Principal Indonesia (an Indonesia Corporation) a
life insuranced corporation which offers group and individual
products.
c. Principal Development Investors, LLC (a Delaware Corporation) a
limited liability company engaged in acquiring and improving real
property through development and redevelopment.
d. Principal Capital Management, LLC (a Delaware Corporation) a
limited liability company that provides investment management
services.
e. Principal Net Lease Investors, LLC (a Delaware Corporation) a
limited liability company which operates as a buyer and seller of
net leased investments.
Subsidiaries wholly-owned by Principal Capital Management, LLC:
a. Principal Structured Investments, LLC (a Delaware Corporation) a
limited liability company that provides product development
administration, marketing and asset management services
associated with stable value products together with other related
institutional financial services including derivatives,
asset-liability management, fixed income investment management
and ancillary money management products.
b. Principal Enterprise Capital, LLC (a Delaware Corporation) a
company engaged in the operation of nonresidential buildings.
c. Principal Commercial Acceptance, LLC (a Delaware Corporation) a
limited liability company involved in purchasing, managing and
selling commercial real estate assets in the secondary market.
d. Principal Real Estate Investors, LLC (a Delaware Corporation) a
registered investment advisor.
e. Principal Commercial Funding, LLC (a Delaware Corporation) a
correspondent lender and service provider for loans.
f. Principal Real Estate Services, LLC (a Delaware Corporation) a
limited liability company which acts as a property manager and
real estate service provider.
Subsidiaries wholly-owned by Principal Holding Company:
a. Principal Bank (a Federal Corporation) a Federally chartered
direct delivery savings bank.
b. Patrician Associates, Inc. (a California Corporation) a real
estate development company.
c. Petula Associates, Ltd. (an Iowa Corporation) a real estate
development company.
d. Principal Development Associates, Inc. (a California Corporation)
a real estate development company.
e. Principal Spectrum Associates, Inc. (a California Corporation) a
real estate development company.
f. Principal FC, Ltd. (an Iowa Corporation) a limited purpose
investment corporation.
g. Equity FC, Ltd. (an Iowa Corporation) engaged in investment
transactions including limited partnership and limited liability
companies.
h. HealthRisk Resource Group, Inc. (an Iowa Corporation) a
management services organization.
i. Invista Capital Management, LLC (an Iowa Corporation) a
registered investment adviser.
j. Principal Residential Mortgage, Inc. (an Iowa Corporation) a
residential mortgage loan broker.
k. Principal Asset Markets, Inc. (an Iowa Corporation) a residential
mortgage loan broker.
l. Principal Portfolio Services, Inc. (an Iowa Corporation) a
mortgage due diligence company.
m. The Admar Group, Inc. (a Florida Corporation) a national managed
care service organization that develops and manages preferred
provider organizations.
n. The Principal Financial Group, Inc. (a Delaware corporation) a
general business corporation established in connection with the
new corporate identity. It is not currently active.
o. Principal Product Network, Inc. (a Delaware corporation) an
insurance broker.
p. Principal Health Care, Inc. (an Iowa Corporation) a developer and
administrator of managed care systems.
q. Dental-Net, Inc. (an Arizona Corporation) holding company of
Employers Dental Services; a managed dental care services
organization. HMO and dental group practice.
r. Principal Financial Advisors, Inc. (an Iowa Corporation) a
registered investment advisor.
s. Delaware Charter Guarantee & Trust Company, d/b/a Trustar
Retirement Services (a Delaware Corporation) a nondepository
trust company.
t. Professional Pensions, Inc. (a Connecticut Corporation) a
corporation engaged in sales, marketing and administration of
group insurance plans and serves as a record keeper and third
party administrator for various clients' defined contribution
plans.
u. Principal Investors Corporation (a New Jersey Corporation) a
registered broker-dealer with the Securities Exchange Commission.
It is not currently active.
v. Principal International, Inc. (an Iowa Corporation) a company
formed for the purpose of international business development.
Subsidiaries organized and wholly-owned by PT Asuransi Jiwa
Principal Indonesia:
a. PT Jasa Principal Indonesia a defined benefit pension company.
b. PT Principal Capital Management Indonesia a fund management
company.
Subsidiary wholly-owned by Invista Capital Management, LLC:
a. Principal Capital - Invista Trust. (a Delaware Corporation) a
business trust and private investment company offering
non-registered units, initially, to tax-exempt entities.
Subsidiary wholly-owned by Principal Residential Mortgage, Inc.:
a. Principal Wholesale Mortgage, Inc. (an Iowa Corporation) a
brokerage and servicer of residential mortgages.
b. Principal Mortgage Reinsurance Company (a Vermont corporation)
a mortgage reinsurance company.
Subsidiaries wholly-owned by The Admar Group, Inc.:
a. Admar Corporation (a California Corporation) a managed care
services organization.
Subsidiaries wholly-owned by Dental-Net, Inc.
a. Employers Dental Services, Inc. (an Arizona corporation) a
prepaid dental plan organization.
Subsidiaries wholly-owned by Professional Pensions, Inc.:
a. Benefit Fiduciary Corporation (a Rhode Island corporation) serves
as a corporate trustee for retirement trusts.
b. PPI Employee Benefits Corporation (a Connecticut corporation) a
registered broker-dealer pursuant to Section 15(b) of the
Securities Exchange Act an a member of the National Association
of Securities Dealers (NASD), limited to the sale of open-end
mutual funds and variable insurance products.
c. Boston Insurance Trust, Inc. (a Massachusetts corporation)
authorized by charter to serve as a trustee in connection with
multiple-employer group life insurance trusts or arrangements,
and to generally participate in the administration of insurance
trusts.
Subsidiaries wholly-owned by Principal International, Inc.:
a. Principal International Espana, S.A. de Seguros de Vida (a Spain
Corporation) a life insurance company (individual group),
annuities and pension.
b. Zao Principal International (a Russia Corporation) inactive.
c. Principal International Argentina, S.A. (an Argentina services
corporation).
d. Principal Asset Management Company (Asia) Ltd. (Hong Kong) a
corporation which manages pension funds.
e. Principal International Asia Limited (a Hong Kong Corporation) a
corporation operating as a regional headquarters for Asia.
f. Principal Insurance Company (Hong Kong) Limited (a Hong Kong
Corporation) group life and group pension products.
g. Principal Trust Company (Asia) Limited (an Asia trust company).
h. Principal International de Chile, S.A. (a Chile Corporation) a
holding company.
i. Principal Mexico Compania de Seguros, S.A. de C.V. (a Mexico
Corporation) a life insurance company (individual and group),
personal accidents.
j. Principal Pensiones, S.A. de C.V. (a Mexico Corporation) a single
premium annuity.
k. Principal Afore, S.A. de C.V. (a Mexico Corporation), a pension
administration company.
l. Principal Consulting (India) Private Limited (an India
corporation) an India consulting company.
Subsidiary wholly-owned by Principal International Espana, S.A. de
Seguros de Vida:
a. Princor International Espana Sociedad Anonima de Agencia de
Seguros (a Spain Corporation) an insurance agency.
Subsidiary wholly-owned by Principal International (Asia) Limited
(Hong Kong):
a. BT Funds Management (Asia) Limited (Hong Kong)(a Hong Kong
Corporation) an asset management company.
Subsidiaries wholly-owned by Principal International Argentina, S.A.:
a. Principal Retiro Compania de Seguros de Retiro, S.A. (an
Argentina Corporation) an individual annuity/employee benefit
company.
b. Principal Life Compania de Seguros, S.A. (an Argentina
Corporation) a life insurance company.
Subsidiary wholly-owned by Principal International de Chile, S.A.:
a. Principal Compania de Seguros de Vida Chile S.A. (a Chile
Corporation) life insurance and annuity company.
Subsidiary wholly-owned by Principal Compania de Seguros de Vida Chile
S.A.:
a. Andueza & Principal Creditos Hipotecarios S.A. (a Chile
Corporation) a residential mortgage company.
Subsidiary wholly-owned by Principal Afore, S.A. de C.V.:
a. Siefore Principal, S.A. de C.V. (a Mexico Corporation) an
investment fund company.
Item 27. Number of Contractowners - As of: March 31, 2000
(1) (2) (3)
Number of Plan Number of
Title of Class Participants Contractowners
-------------- -------------- --------------
BFA Variable Annuity Contracts 76 8
Pension Builder Contracts 535 308
Personal Variable Contracts 5514 125
Premier Variable Contracts 21677 259
Flexible Variable Annuity Contract 40796 40796
Freedom Variable Annuity Contract 268 268
Item 28. Indemnification
None
Item 29. Principal Underwriters
(a) Princor Financial Services Corporation, principal underwriter for
Registrant, acts as principal underwriter for, Principal Balanced Fund, Inc.,
Principal Blue Chip Fund, Inc., Principal Bond Fund, Inc., Principal Capital
Value Fund, Inc., Principal Cash Management Fund, Inc., Principal European
Equity Fund, Inc., Principal Government Securities Income Fund, Inc., Principal
Growth Fund, Inc., Principal High Yield Fund, Inc., Principal International
Emerging Markets Fund, Inc., Principal International Fund, Inc., Principal
International SmallCap Fund, Inc., Principal LargeCap Stock Index Fund, Inc.,
Principal Limited Term Bond Fund, Inc., Principal MidCap Fund, Inc., Principal
Pacific Basin Fund, Inc., Principal Partners Aggressive Growth Fund, Inc.,
Principal Partners LargeCap Growth Fund, Inc., Principal Partners MidCap Growth
Fund, Inc., Principal Real Estate Fund, Inc., Principal SmallCap Fund, Inc.,
Principal Special Markets Fund, Inc., Principal Tax-Exempt Bond Fund, Inc.,
Principal Utilities Fund, Inc., Principal Variable Contracts Fund, Inc. and for
variable annuity contracts participating in Principal Life Insurance Company
Separate Account B, a registered unit investment trust for retirement plans
adopted by public school systems or certain tax-exempt organizations pursuant to
Section 403(b) of the Internal Revenue Code, Section 457 retirement plans,
Section 401(a) retirement plans, certain non- qualified deferred compensation
plans and Individual Retirement Annuity Plans adopted pursuant to Section 408 of
the Internal Revenue Code, and for variable life insurance contracts issued by
Principal Life Insurance Company Variable Life Separate Account, a registered
unit investment trust.
(b) (1) (2)
Positions
and offices
Name and principal with principal
business address underwriter
John E. Aschenbrenner Director
The Principal
Financial Group
Des Moines, IA 50392
Robert W. Baehr Marketing Services
The Principal Officer
Financial Group
Des Moines, IA 50392
Craig L. Bassett Treasurer
The Principal
Financial Group
Des Moines, IA 50392
Michael J. Beer Executive Vice President
The Principal
Financial Group
Des Moines, IA 50392
Jerald L. Bogart Insurance License Officer
The Principal
Financial Group
Des Moines, IA 50392
David J. Drury Director
The Principal
Financial Group
Des Moines, IA 50392
Ralph C. Eucher Director and President
The Principal
Financial Group
Des Moines, IA 50392
Arthur S. Filean Vice President
The Principal
Financial Group
Des Moines, IA 50392
Dennis P. Francis Director
The Principal
Financial Group
Des Moines, IA 50392
Paul N. Germain Vice President-
The Principal Mutual Fund Operations
Financial Group
Des Moines, IA 50392
Ernest H. Gillum Vice President-
The Principal Compliance and Product
Financial Group Development
Des Moines, IA 50392
Thomas J. Graf Director
The Principal
Financial Group
Des Moines, IA 50392
J. Barry Griswell Director and
The Principal Chairman of the
Financial Group Board
Des Moines, IA 50392
Susan R. Haupts Marketing Officer
The Principal
Financial Group
Des Moines, IA 50392
Joyce N. Hoffman Vice President and
The Principal Corporate Secretary
Financial Group
Des Moines, IA 50392
Kraig L. Kuhlers Marketing Officer
The Principal
Financial Group
Des Moines, IA 50392
Ellen Z. Lamale Director
The Principal
Financial Group
Des Moines, IA 50392
Julia M. Lawler Director
The Principal
Financial Group
Des Moines, IA 50392
John R. Lepley Senior Vice
The Principal President - Marketing
Financial Group and Distribution
Des Moines, IA 50392
Kelly A. Paul Systems & Technology
The Principal Officer
Financial Group
Des Moines, IA 50392
Elise M. Pilkington Assistant Director -
The Principal Retirement Consulting
Financial Group
Des Moines, IA 50392
Richard L. Prey Director
The Principal
Financial Group
Des Moines, IA 50392
Layne A. Rasmussen Controller-Mutual Funds
The Principal
Financial Group
Des Moines, IA 50392
Martin R. Richardson Operations Officer-
The Principal Broker/Dealer Services
Financial Group
Des Moines, IA 50392
Elizabeth R. Ring Controller
The Principal
Financial Group
Des Moines, IA 50392
Michael D. Roughton Counsel
The Principal
Financial Group
Des Moines, IA 50392
Jean B. Schustek Product Compliance Officer-
The Principal Registered Products
Financial Group
Des Moines, IA 50392
Kyle R. Selberg Vice President-
The Principal Marketing
Financial Group
Des Moines, IA 50392
Minoo Spellerberg Compliance Officer
The Principal
Financial Group
Des Moines, IA 50392
(c) (1) (2)
Net Underwriting
Name of Principal Discounts and
Underwriter Commissions
Princor Financial $12,331,736.46
Services Corporation
(3) (4) (5)
Compensation on Brokerage
Redemption Commissions Compensation
0 0 0
Item 30. Location of Accounts and Records
All accounts, books or other documents of the Registrant are located
at the offices of the Depositor, The Principal Financial Group, Des
Moines, Iowa 50392.
Item 31. Management Services
Inapplicable
Item 32. Undertakings
The Registrant undertakes that in restricting cash withdrawals from
Tax Sheltered Annuities to prohibit cash withdrawals before the
Participant attains age 59 1/2, separates from service, dies, or
becomes disabled or in the case of hardship, Registrant acts in
reliance of SEC No Action Letter addressed to American Counsel of Life
Insurance (available November 28, 1988). Registrant further undertakes
that:
1. Registrant has included appropriate disclosure regarding the
redemption restrictions imposed by Section 403(b)(11) in its
registration statement, including the prospectus, used in
connection with the offer of the contract;
2. Registrant will include appropriate disclosure regarding the
redemption restrictions imposed by Section 403(b)(11) in any
sales literature used in connection with the offer of the
contract;
3. Registrant will instruct sales representatives who solicit Plan
Participants to purchase the contract specifically to bring the
redemption restrictions imposed by Section 403(b)(11) to the
attention of the potential Plan Participants; and
4. Registrant will obtain from each Plan Participant who purchases a
Section 403(b) annuity contract, prior to or at the time of such
purchase, a signed statement acknowledging the Plan Participant's
understanding of (a) the restrictions on redemption imposed by
Section 403(b)(11), and (b) the investment alternatives available
under the employer's Section 403(b) arrangement, to which the
Plan Participant may elect to transfer his contract value.
REPRESENTATION PURSUANT TO SECTION 26 OF THE INVESTMENT COMPANY ACT OF 1940
Principal Life Insurance Company represents the fees and charges deducted
under the Policy, in the aggregate, are reasonable in relation to the services
rendered, the expenses expected to be incurred, and the risks assumed by the
Company.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant, Principal Life Insurance Company
Separate Account B, certifies that it meets the requirements of Securities Act
Rule 485(b) for effectiveness of the Registration Statement and has duly caused
this Amendment to the Registration Statement to be signed on its behalf by the
undersigned thereto duly authorized in the City of Des Moines and State of Iowa,
on the 20th day of April, 2000
PRINCIPAL LIFE INSURANCE COMPANY
SEPARATE ACCOUNT B
(Registrant)
By: PRINCIPAL LIFE INSURANCE COMPANY
(Depositor)
/s/ David J. Drury
By ______________________________________________
David J. Drury
Chairman
Attest:
/s/ Joyce N. Hoffman
- -----------------------------------
Joyce N. Hoffman
Vice President and
Corporate Secretary
As required by the Securities Act of 1933, this Amendment to the Registration
Statement has been signed by the following persons in the capacities and on the
date indicated.
Signature Title Date
/s/ D. J. Drury Chairman and April 20, 2000
- -------------------- Director
D. J. Drury
/s/ D. C. Cunningham Vice President and April 20, 2000
- -------------------- Controller (Principal
D. C. Cunningham Accounting Officer)
/s/ M. H. Gersie Executive Vice President and April 20, 2000
- -------------------- Chief Financial Officer
M. H. Gersie (Principal Financial Officer)
(B. J. Bernard)* Director April 20, 2000
- --------------------
B. J. Bernard
(J. Carter-Miller)* Director April 20, 2000
- --------------------
J. Carter-Miller
(C. D. Gelatt, Jr.)* Director April 20, 2000
- --------------------
C. D. Gelatt, Jr.
(J. B. Griswell)* Director April 20, 2000
- --------------------
J. B. Griswell
(G. D. Hurd)* Director April 20, 2000
- --------------------
G. D. Hurd
(C. S. Johnson)* Director April 20, 2000
- --------------------
C. S. Johnson
(W. T. Kerr)* Director April 20, 2000
- --------------------
W. T. Kerr
(L. Liu)* Director April 20, 2000
- --------------------
L. Liu
(V. H. Loewenstein)* Director April 20, 2000
- --------------------
V. H. Loewenstein
(R. D. Pearson)* Director April 20, 2000
- --------------------
R. D. Pearson
(F. F. Pena)* Director April 20, 2000
- --------------------
F. F. Pena
(J. R. Price)* Director April 20, 2000
- --------------------
J. R. Price, Jr.
(D. M. Stewart)* Director April 20, 2000
- --------------------
D. M. Stewart
(E. E. Tallett)* Director April 20, 2000
- --------------------
E. E. Tallett
(F. W. Weitz)* Director April 20, 2000
- --------------------
F. W. Weitz
*By /s/ David J. Drury
------------------------------------
David J. Drury
Chairman
Pursuant to Powers of Attorney
Previously Filed or Included Herein
Consent of Independent Auditors
We consent to the reference to our firm under the captions "Independent
Auditors" and to the use of our reports dated January 31, 2000 with respect to
Principal Life Insurance Company Separate Account B and Principal Life Insurance
Company, in the Registration Statement (Post-Effective Amendment No. 15 to Form
N-4 No. 33-44670) and related Prospectus of Principal Life Insurance Company
Separate Account B Premier Variable (A Group Variable Annuity Contract for
Employer-Sponsored Qualified and Non-Qualified Retirement Plans).
/s/ Ernst & Young LLP
Des Moines, Iowa
April 19, 2000
