Registration No. 333-40254
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Pre-Effective Amendment No. _____ __2__
Post-Effective Amendment No. _____ _____
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. ___ _____
(Check appropriate box or boxes)
Principal Life Insurance Company Separate Account B
--------------------------------------------------------------------------------
(Exact Name of Registrant)
Principal Life Insurance Company
--------------------------------------------------------------------------------
(Name of Depositor)
The Principal Financial Group, Des Moines, Iowa 50392
--------------------------------------------------------------------------------
(Address of Depositor's Principal Executive Offices) (Zip Code)
Depositor's Telephone Number, including Area Code (515) 248-3842
M. D. Roughton, The Principal Financial Group, Des Moines, Iowa 50392
--------------------------------------------------------------------------------
(Name and Address of Agent for Service)
Approximate Date of Proposed Public Offering: As soon as practicable
after the effective date of the Registration Statement
Title of Securities Being Registered: Principal Flexible Variable Annuity
Contract with Purchase Payment Credit
<PAGE>
PRINCIPAL LIFE INSURANCE COMPANY SEPARATE ACCOUNT B
PRINCIPAL FLEXIBLE VARIABLE ANNUITY CONTRACT
WITH PURCHASE PAYMENT CREDIT
Registration Statement on Form N-4
Cross Reference Sheet
Form N-4 Item Caption in Prospectus
Part A
1. Cover Page Principal Flexible Variable
Annuity Contract with
Purchase Payment Credit
2. Definitions Glossary
3. Synopsis Summary of Expense Information
Summary
4. Condensed Financial Performance Calculation,
Information Independent Auditors,
Financial Statements
5. General Description of Summary, The Company, The
Registrant Separate Account, Fixed
Account and DCA Plus Accounts,
Voting Rights
6. Deductions Summary, Charges and
Deductions, Annual Fee,
Mortality and Expense Risks
Charge, Purchase Payment Credit
Rider Charge, Premium Taxes,
Surrender Charge,
Administrative Charge, Special
Provisions for Group or
Sponsored Arrangements,
Distribution of the
Contract
7. General Description of Summary, Investment Limita-
Variable Annuity Contract tions, Separate Account Invest-
ment Options, Transfers,
Surrenders, Charges and
Deductions, Annuity Payments,
Death Benefit, Free-Look
Period, The Separate Account,
The Contract,To Buy a Contract,
The Accumulation Period,
General Provisions, Rights
Reserved By The Company,
8. Annuity Period The Accumulation Period, The
Annuity Payment Period
9. Death Benefit Death Benefit, The
Accumulation Period, The
Annuity Payment Period,
Mortality and Expense Risks
Charge, Delay of Payments,
Non-Qualified Contracts,
Required Distributions for Non-
Qualified Contracts, IRA, SEP
and Simple-IRA, Rollover IRAs
10. Purchase and Contract Value Summary, Free-Look Period,
The Contract, To Buy a
Contract, The Accumulation
Period, The Annuity Payment
Period, Exchange Credit,
Purchase Payment Credit Rider,
Delay of Payments, Distribution
of the Contract
11. Redemptions Summary, Annuity Payments,
The Accumulation Period,
Charges and Deductions,
Annual Fee, Purchase Payment
Credit Rider Charge, Delay of
Payments, Contract Termination
12. Taxes Summary, Annuity Payments,
Federal Tax Matters,
Non-Qualified Contracts,
Required Distributions for
Non-Qualified Contracts, IRA,
SEP & Simple-IRA, Rollover
IRAs, Withholding, Mutual Fund
Diversification
13. Legal Proceedings Legal Proceedings
14. Table of Contents of the Table of Contents of the
Statement of Additional Statement of Additional
Information Information
Part B Statement of Additional
Information
Caption**
15. Cover Page Principal Flexible
Variable Annuity Contract with
Purchase Payment Credit
16. Table of Contents Table of Contents
17. General Information and General Information and
History History
18. Services Independent Auditors**,
Independent Auditors
19. Purchase of Securities Summary**, To Buy a Contract**
Being Offered Distribution of the Contract**
20. Underwriters Summary**, Distribution of the
Contract**
21. Calculation of Performance Calculation of Yield and
Data Total Return
22. Annuity Payments Annuity Payments**,
Delay of Payments**
23. Financial Statements Financial Statements
** Prospectus caption given where appropriate.
<PAGE>
SUPPLEMENT DATED NOVEMBER 15, 2000
TO THE PROSPECTUS FOR
PRINCIPAL FLEXIBLE VARIABLE ANNUITY
DATED NOVEMBER 15, 2000
This document is a supplement to the prospectus dated November 15, 2000 for the
Principal Flexible Variable Annuity. This supplement must be accompanied by the
prospectus.
As described in the prospectus, if you purchase the Contract with the purchase
payment credit rider, we will add a credit to each purchase payment that you
make during the first Contract year. We have sought an order from the Securities
and Exchange Commission (the "SEC") that will permit us, as described in the
prospectus, to take back all of the credit if you return your Contract during
the examination period. Once the SEC grants the order, we will take back the
credit as described in the prospectus. We expect that the SEC will grant the
order on November 28, 2000, although we cannot be sure that the SEC will do so.
Until the SEC grants the order, the special rules described below will apply
regarding the amount you will receive if you return the Contract with the
purchase payment credit rider during the examination period. These rules do not
apply to a Contract without the purchase payment credit rider.
If your Contract accumulated value has increased or stayed the same, we
will refund your Contract accumulated value minus any credit but plus
any purchase payment credit rider charge that we deducted on or before
the date we receive your Contract.
If your Contract accumulated value has decreased, we will refund your
Contract accumulated value minus any credit but plus any purchase
payment credit rider charge and plus any investment loss (including any
charges made by the Mutual Funds in which you have invested)
attributable to the credit as of the date we receive your Contract.
This means you receive any gains, and we bear any losses, attributable
to the credit during the examination period.
In those states that require it, we will refund the full amount of your
purchase payment if it is more than the amount specified above.
We will not assess a surrender charge or an annual Contract fee if you
return the Contract during the examination period.
<PAGE>
Flexible Variable Annuity
Issued by Principal Life Insurance Company (the "Company")
This prospectus is dated November 15, 2000.
The individual deferred annuity contract ("Contract") described in this
prospectus is funded with the Principal Life Insurance Company Separate Account
B ("Separate Account"), dollar cost averaging fixed accounts ("DCA Plus
Accounts") and a fixed account ("Fixed Account"). The assets of the Separate
Account Divisions ("Divisions") are invested in a corresponding Account of the
Principal Variable Contracts Fund, Inc., AIM V.I. Growth Fund, AIM V.I. Growth
and Income Fund, AIM V.I. Value Fund, Fidelity Variable Insurance Products Fund
II Contrafund Portfolio, Fidelity Variable Insurance Products Fund Growth
Portfolio and Janus Aspen Series - Service Shares Aggressive Growth Portfolio
(the "Funds"). The DCA Plus Accounts and the Fixed Account are a part of the
General Account of the Company.
This prospectus provides information about the Contract and the Separate Account
that you, as owner, should know before investing. It should be read and retained
for future reference. Additional information about the Contract is included in
the Statement of Additional Information ("SAI"), dated November 15, 2000, which
has been filed with the Securities and Exchange Commission (the "SEC"). The SAI
is a part of this prospectus. The table of contents of the SAI is on page 46 of
this prospectus. You may obtain a free copy of the SAI by writing or
telephoning:
Principal Flexible Variable Annuity
Principal Financial Group
P. O. Box 9382
Des Moines, Iowa 50306-9382
Telephone: 1-800-852-4450
An investment in the Contract is not a deposit or obligation of any bank and is
not insured or guaranteed by any bank, the Federal Deposit Insurance Corporation
or any other government agency.
As the owner of this Contract, you may elect a purchase payment credit rider
with an additional charge and an associated 9-year surrender charge period.
The purchase payment credit rider is only available when the Contract is
issued. The portions of this prospectus that specifically pertain to election
of the purchase payment credit rider are shown by gray boxes.
The charges used to recoup our expense of paying the purchase payment credit
include the surrender charge and the purchase payment credit rider charge.
The Contract is available with or without the purchase payment credit rider.
There may be circumstances where electing the purchase payment credit rider
is not to your advantage. In certain circumstances, the amount of the credit
may be more than offset by the charges associated with it. The Contract
without the purchase payment credit rider has surrender charges and total
Separate Account annual expenses that may be lower than the charges for the
Contract with the purchase payment credit rider. You should consult with your
sales representative to decide if the purchase payment credit rider is
suitable. In making this determination, you and your sales representative
should consider the following factors:
o the length of time you plan to own the Contract;
o the frequency, amount and timing of any partial surrenders; and
o the amount and timing of your purchase payment(s).
Additionally, if you decide to return the Contract during the examination
period, we will recover the original purchase payment credit amount. As a
result, if the value of the purchase payment credit has declined during the
examination period, then we still recover the full amount of the purchase
payment credit.
The Contract provides an exchange credit that is available to eligible
purchasers (see Replacement Contracts - Exchange Credit). The exchange credit is
paid for by a reduction in sales commissions for Contracts sold with the
exchange credit. Sales commissions are paid by Contract charges and deductions.
The charges and deductions are neither proportionally reduced nor increased for
Contracts sold with the exchange credit.
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 prospectuses for
the Funds. These prospectuses should be kept for future reference.
TABLE OF CONTENTS
GLOSSARY .................................................... 4
SUMMARY OF EXPENSE INFORMATION............................... 6
SUMMARY .................................................... 10
Investment Limitations................................... 10
Separate Account Investment Options...................... 10
Transfers................................................ 11
Surrenders............................................... 11
Charges and Deductions................................... 11
Annuity Payments......................................... 12
Death Benefit............................................ 12
Examination Period (Free-Look)........................... 12
CONDENSED FINANCIAL INFORMATION.............................. 13
THE PRINCIPAL FLEXIBLE VARIABLE ANNUITY...................... 16
THE COMPANY.................................................. 16
THE SEPARATE ACCOUNT......................................... 16
THE UNDERLYING MUTUAL FUNDS.................................. 16
SURPLUS DISTRIBUTIONS........................................ 21
THE CONTRACT................................................. 21
To Buy a Contract........................................ 21
Purchase Payments............................................ 21
Right to Examine the Contract (Free-Look)................ 22
Replacement Contracts.................................... 22
Purchase Payment Credit Rider............................ 23
The Accumulation Period.................................. 25
Automatic Portfolio Rebalancing (APR).................... 27
Telephone Services....................................... 27
Direct Dial.............................................. 27
Internet................................................. 28
Surrenders............................................... 28
Death Benefit............................................ 29
The Annuity Payment Period............................... 30
CHARGES AND DEDUCTIONS....................................... 32
Annual Fee............................................... 32
Mortality and Expense Risks Charge....................... 33
Purchase Payment Credit.................................. 33
Transaction Fee.......................................... 33
Premium Taxes............................................ 33
Surrender Charge......................................... 34
Free Surrender Privilege................................. 35
Administration Charge.................................... 36
Special Provisions for Group or Sponsored Arrangements... 36
FIXED ACCOUNT AND DCA PLUS ACCOUNTS.......................... 36
Fixed Account............................................ 36
Fixed Account Accumulated Value.............................. 37
Fixed Account Transfers, Total and Partial Surrenders.... 37
Dollar Cost Averaging Plus Program (DCA Plus Program).... 38
GENERAL PROVISIONS........................................... 39
The Contract............................................. 39
Delay of Payments........................................ 39
Misstatement of Age or Gender............................ 39
Assignment............................................... 39
Change of Owner.......................................... 39
Beneficiary.............................................. 40
Contract Termination..................................... 40
Reinstatement............................................ 40
Reports.................................................. 40
RIGHTS RESERVED BY THE COMPANY............................... 40
DISTRIBUTION OF THE CONTRACT................................. 41
PERFORMANCE CALCULATION...................................... 41
VOTING RIGHTS................................................ 41
FEDERAL TAX MATTERS.......................................... 42
Non-Qualified Contracts.................................. 42
Required Distributions for Non-Qualified Contracts....... 43
IRA, SEP and SIMPLE-IRA.................................. 43
Rollover IRAs............................................ 44
Withholding.............................................. 44
MUTUAL FUND DIVERSIFICATION.................................. 44
STATE REGULATION............................................. 45
LEGAL OPINIONS............................................... 45
LEGAL PROCEEDINGS............................................ 45
REGISTRATION STATEMENT....................................... 45
OTHER VARIABLE ANNUITY CONTRACTS............................. 45
INDEPENDENT AUDITORS......................................... 45
FINANCIAL STATEMENTS......................................... 45
CUSTOMER INQUIRIES........................................... 46
TABLE OF CONTENTS OF THE STATEMENT OF ADDITIONAL INFORMATION. 46
The Contract offered by this prospectus may not be available in
all states. This prospectus is not an offer to sell, or
solicitation of an offer to buy, the Contract in states in which
the offer or solicitation may not be lawfully made. No person is
authorized to give any information or to make any representation
in connection with this Contract other than those contained in
this prospectus.
GLOSSARY
Accumulated value - an amount equal to the DCA Plus Account(s) value plus the
Fixed Account value plus the Separate Account value.
Anniversary - the same date and month of each year following the Contract date.
Annuitant - the person, including any joint annuitant, on whose life the annuity
payment is based. This person may or may not be the owner.
Annuity payment date - the date the owner's accumulated value is applied, under
an annuity payment option, to make income payments. (Referred to in the Contract
as "Retirement Date.")
Contract date - the date that the Contract is issued and which is used to
determine Contract years.
Contract year - the one-year period beginning on the Contract date and ending
one day before the Contract anniversary and any subsequent one-year period
beginning on a Contract anniversary. (e.g. If the contract date is June 5, 2000,
the first Contract year ends on June 4, 2001, and the first Contract anniversary
falls on June 5, 2001.)
Dollar Cost Averaging Plus (DCA Plus) Account - an account which earns
guaranteed interest for a specific amount of time. (Referred to in the Contract
as "Fixed DCA Account.")
Dollar Cost Averaging Plus (DCA Plus) accumulated value - the amount of your
accumulated value which is in the DCA Plus Account(s).
Dollar Cost Averaging Plus (DCA Plus) Program - a program through which purchase
payments are transferred from a DCA Plus Account to the Divisions and/or the
Fixed Account over a specified period of time. (Referred to in the Contract as
"Fixed DCA Account.")
Fixed Account - an account which earns guaranteed interest.
Fixed Account accumulated value - the amount of your accumulated value which is
in the Fixed Account.
Investment Options - the DCA Plus Accounts, Fixed Account and Separate Account
Divisions.
Joint annuitant - additional annuitant. Joint annuitants must be husband and
wife and must be named as owner and joint owner.
Joint owner - an owner who has an undivided interest with the right of
survivorship in this Contract with another owner. Joint owners must be husband
and wife and must be named as annuitant and joint annuitant.
Mutual Fund - a registered open-end investment company, including a series or
portfolio thereof, in which a Division invests.
Non-Qualified Contract - a Contract which does not qualify for favorable tax
treatment as a Qualified Plan, Individual Retirement Annuity, Roth IRA, SEP IRA,
Simple-IRA or Tax Sheltered Annuity.
Notice - any form of written communication received by us, at the annuity
service office, P.O. Box 9382, Des Moines, Iowa 50306-9382, or in another form
approved by us in advance.
Owner - the person, including joint owner, who owns all the rights and
privileges of this Contract.
Purchase payments - the gross amount contributed to the Contract.
Qualified Plans - retirement plans which receive favorable tax treatment under
Section 401 or 403(a) of the Internal Revenue Code (the "Code").
Separate Account Division (Division(s) )- a part of the Separate Account which
invests in shares of a Mutual Fund. (Referred to in the marketing materials as
"sub-accounts.")
Separate Account accumulated value - the amount of your accumulated value in all
Divisions.
Surrender charge - the charge deducted upon certain partial or total surrender
of the Contract before the annuity payment date.
Surrender value - accumulated value less any applicable surrender charge, annual
fee, transaction fee and any premium or other taxes.
Unit - the accounting measure used to calculate the value of a Division prior to
annuity payment date.
Unit value - a measure used to determine the value of an investment in a
Division.
Valuation date - each day the New York Stock Exchange ("NYSE") is open.
Valuation period - the period of time from one determination of the value of a
unit of a Division to the next. Each valuation period begins at the close of
normal trading on the NYSE, generally 4:00 p.m. E.T. (3:00 p.m. C.T.) on each
valuation date and ends at the close of normal trading of the NYSE on the next
valuation date.
You, Your - the owner of this Contract, including any joint owner.
SUMMARY OF EXPENSE INFORMATION
The purpose of these tables is to assist you in understanding the various costs
and expenses of the Contract. This information includes expenses of the Contract
as well as the Mutual Funds but does not include any premium taxes that may
apply. For a more complete description of the Contract expenses see CHARGES AND
DEDUCTIONS.
Contract owner transaction expenses:
o There is no sales charge imposed on purchase payments.
o Surrender charge without the purchase payment credit rider (as a
percentage of amounts surrendered):
Table of surrender charges without the purchase payment credit rider
Number of completed Contract years Surrender charge applied to all
since each purchase payment purchase payments received in
was made that Contract year
0 (year of purchase payment) 6%
1 6%
2 6%
3 5%
4 4%
5 3%
6 2%
7 and later 0%
o Surrender charge with the purchase payment credit rider (as a
percentage of amounts surrendered):
Table of surrender charges with the purchase payment credit rider
Number of completed Contract years Surrender charge applied to all
since each purchase payment purchase payments received in
was made that Contract year
0 (year of purchase payment) 8%
1 8%
2 8%
3 8%
4 7%
5 6%
6 5%
7 4%
8 3%
9 and later 0%
o Annual Contract fee-- the lesser of $30 or 2% of the accumulated
value.
o Transaction fee (currently not assessed) -- a $30 fee for each
unscheduled partial surrender after the 12th unscheduled partial
surrender in a Contract year.
o Transaction fee (currently not assessed) -- a $30 fee for each
unscheduled transfer after the 12th unscheduled transfer in a Contract
year.
Separate Account annual expenses (as a percentage of average account value)
mortality and expense risks charge 1.25%
other Separate Account expenses .00
total Separate Account annual expenses 1.25%*
optional purchase payment credit rider charge 0.60%
total Separate Account annual expenses
with the purchase payment credit rider 1.85%*
* Currently, the administrative charge is not assessed.
However, if the entire administrative charge were imposed,
then the total Separate Account expenses would increase by
0.15% (1.40% and 2.00%, respectively).
Annual expenses of the Mutual Funds (as a percentage of average net assets) as
of December 31, 1999:
<TABLE>
<CAPTION>
Management Other Rule 12(b)1 Total Annual Expenses
Mutual Fund Fees Expenses Fees After Reimbursement
<S> <C> <C> <C> <C> <C>
Principal Variable Contracts Fund, Inc.
<S> <C> <C> <C> <C>
Aggressive Growth 0.75% 0.02% N/A 0.77%
Asset Allocation 0.80 0.05 N/A 0.85
Balanced 0.57 0.01 N/A 0.58
Bond 0.49 0.01 N/A 0.50
Capital Value 0.43(1) 0.00 N/A 0.43
Government Securities 0.49 0.01 N/A 0.50
Growth 0.45(1) 0.00 N/A 0.45
International 0.73(1) 0.05 N/A 0.78
International Emerging Markets 0.97 0.38 N/A 1.35(2)
International SmallCap 1.20 0.12 N/A 1.32
LargeCap Growth 1.07 0.13 N/A 1.20(2)
LargeCap Growth Equity 0.78 0.32 N/A 1.10(2)
LargeCap Stock Index 0.35 0.14 N/A 0.40(2)
MicroCap 1.00 0.28 N/A 1.06(2)
MidCap 0.61 0.00 N/A 0.61
MidCap Growth 0.90 0.19 N/A 0.96(2)
MidCap Growth Equity 0.78 0.32 N/A 1.10(2)
Money Market 0.50 0.02 N/A 0.52
Real Estate 0.90 0.09 N/A 0.99
SmallCap 0.85 0.06 N/A 0.91
SmallCap Growth 1.00 0.07 N/A 1.06(2)
SmallCap Value 1.10 0.34 N/A 1.16(2)
Utilities 0.60 0.04 N/A 0.64
AIM V.I. Growth Fund 0.63 0.10 N/A 0.73
AIM V.I. Growth and Income Fund 0.61 0.16 N/A 0.77
AIM V.I. Value Fund 0.61 0.15 N/A 0.76
Fidelity Variable Insurance Products Fund II
Fidelity VIP II Contrafund Portfolio-Service Class 0.58 0.10 0.10%(3) 0.78(4)
Fidelity Variable Insurance Products Fund
Fidelity VIP Growth Portfolio-Service Class 0.58 0.09 0.10(3) 0.77(4)
Janus Aspen Series - Service Shares Aggressive
Growth Portfolio 0.65 0.02 0.25(3) 0.92
<FN>
(1) As a result of a shareholder meeting the Account's management fee
was modified effective 1/1/2000.
(2) If total annual expenses exceed the amount stated on the chart,
then the Manager has voluntarily agreed to reimburse expenses.
Without the reimbursement, the total annual expenses for 2000
would be:
International Emerging Markets 1.63%
LargeCap Growth 1.23%
LargeCap Growth Equity 1.32%
LargeCap Stock Index 0.49%
MicroCap 1.28%
MidCap Growth Equity 1.32%
MidCap Growth 1.09%
SmallCap Growth 1.07%
SmallCap Value 1.44%
(3) The Company and Princor Financial Services Corporation may
receive a portion of the Mutual Fund Annual Expenses for
recordkeeping, marketing and distribution services.
(4) Without third party payments or reductions the Total Annual
Expenses would have been:
Fidelity VIP II Contrafund Portfolio-Service Class 0.81%
Fidelity VIP Growth Portfolio-Service Class 0.79%
</FN>
</TABLE>
Example:
The purpose of the following examples is to assist you in understanding the
various costs and expenses that you, as a Contract owner, bear directly or
indirectly. They reflect expenses of the Division as well as the expenses of the
Mutual Fund in which the Division invests. In certain circumstances, state
premium taxes also apply.
The examples should not be considered representations of past or future
expenses. Actual expenses may be more or less than those shown.
If you surrender your Contract at the end of the applicable time period, you
would pay the following expenses on a $1,000 investment. The examples assume
that your investment has a 5% return each year and that current expense levels
(and waivers and reimbursements, if any) continue.
<TABLE>
<CAPTION>
Separate Account Division 1 Year 1 Year 3 Years 3 Years 5 Years 5 Years 10 years 10 Years
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Aggressive Growth $83 $109 $119 $168 $145 $208 $238 $299
Asset Allocation 83 109 121 170 149 212 247 307
Balanced 81 107 113 163 136 199 218 280
Bond 80 106 111 161 132 196 210 272
Capital Value 79 106 109 159 128 192 202 265
Government Securities 80 106 111 161 132 196 210 272
Growth 80 106 110 159 129 193 205 267
International 83 109 119 169 146 209 239 300
International Emerging Markets 91 117 143 191 187 247 324 379
International SmallCap 88 114 135 183 172 233 294 351
LargeCap Growth 87 113 132 181 168 229 285 342
LargeCap Growth Equity 88 114 135 183 172 233 294 351
LargeCap Stock Index* 85 111 125 174 156 218 261 320
MicroCap* 87 113 134 182 170 231 290 347
MidCap 81 107 114 164 137 201 222 283
MidCap Growth* 86 112 128 177 161 223 271 329
MidCap Growth Equity 88 114 135 183 172 233 294 351
Money Market 80 106 112 161 133 196 212 274
Real Estate 85 111 125 174 156 218 261 320
SmallCap 84 110 123 172 152 215 253 312
SmallCap Growth* 85 111 128 176 160 222 269 328
SmallCap Value* 89 115 138 186 178 239 306 362
Utilities 81 108 115 165 139 202 225 286
AIM V.I. Growth 82 108 118 167 143 206 234 295
AIM V.I. Growth and Income 83 109 119 168 145 208 238 299
AIM V.I. Value 83 109 119 168 145 208 237 298
Fidelity VIP II Contrafund 83 109 119 169 146 209 239 300
Fidelity VIP Growth 83 109 119 168 145 208 238 299
Janus Aspen Aggressive Growth 84 110 123 172 153 215 254 313
<FN>
* After expense reimbursement
</FN>
</TABLE>
If you elect to receive payments under an annuity payment option (referred to in
the Contract as "Benefit Option") at the end of the applicable time period or do
not surrender your Contract, you would pay the following expenses on a $1,000
investment. The examples assume that your investment has a 5% annual return each
year and that current expense levels (and waivers and reimbursements, if any)
continue.
<TABLE>
<CAPTION>
Separate Account Division 1 Year 1 Year 3 Years 3 Years 5 Years 5 Years 10 years 10 Years
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Aggressive Growth $21 $27 $64 $82 $111 $141 $238 $299
Asset Allocation 22 28 67 85 115 145 247 307
Balanced 19 25 59 77 101 131 218 280
Bond 18 24 56 74 97 127 210 272
Capital Value 17 23 54 72 93 124 202 265
Government Securities 18 24 56 74 97 127 210 272
Growth 18 24 55 73 94 125 205 267
International 21 27 65 83 111 141 239 300
International Emerging Markets 29 35 90 108 154 182 324 379
International SmallCap 26 32 81 99 138 168 294 351
LargeCap Growth 25 31 78 96 134 163 285 342
LargeCap Growth Equity 26 32 81 99 138 168 294 351
LargeCap Stock Index* 23 29 71 89 122 152 261 320
MicroCap* 26 32 80 98 136 166 290 347
MidCap 19 25 60 78 102 133 222 283
MidCap Growth* 24 30 74 92 127 156 271 329
MidCap Growth Equity 26 32 81 99 138 168 294 351
Money Market 18 24 57 75 98 128 212 274
Real Estate 23 29 71 89 122 152 261 320
SmallCap 22 28 69 87 118 148 253 312
SmallCap Growth* 24 30 73 91 126 155 269 328
SmallCap Value* 28 34 85 102 144 173 306 362
Utilities 20 26 60 79 104 134 225 286
AIM V.I. Growth 20 26 63 81 109 139 234 295
AIM V.I. Growth and Income 21 27 64 82 111 141 238 299
AIM V.I. Value 21 27 64 82 110 140 237 298
Fidelity VIP II Contrafund 21 27 65 83 111 141 239 300
Fidelity VIP Growth 21 27 64 82 111 141 238 299
Janus Aspen Aggressive Growth 22 28 69 87 118 148 254 313
<FN>
* After expense reimbursement
</FN>
</TABLE>
SUMMARY
This prospectus describes a flexible variable annuity offered by the Company.
The Contract is designed to provide individuals with retirement benefits,
including (1) Individual Retirement Annuity plans ("IRA Plans"), Simplified
Employee Pension plans ("SEPs") and Savings Incentive Match Plan for Employees
("SIMPLE") IRAs adopted according to Section 408 of the Internal Revenue Code
(the "Code") and (2) non-qualified retirement programs.
This is a brief summary of the Contract's features. More detailed information
follows later in this prospectus.
Investment Limitations
o Initial purchase payment must be $2,500 or more for non-qualified
retirement programs.
o Initial purchase payment must be $1,000 for all other contracts.
o Each subsequent payment must be at least $100.
o If you are a member of a retirement plan covering three or more persons and
payments are made through an automatic investment program, then the initial
and subsequent purchase payments for the Contract must average at least
$100 and not be less than $50.
If purchase payments are not paid during two consecutive calendar years and the
accumulated value or total purchase payments less partial surrenders and
applicable surrender charges is less than $2,000, then we reserve the right to
terminate a Contract and distribute the accumulated value, less any applicable
charges.
Separate Account Investment Options (see THE UNDERLYING MUTUAL FUNDS):
<TABLE>
<CAPTION>
Division invests in:
<S> <C> <C>
Principal Variable Contracts Fund, Inc.
Aggressive Growth Aggressive Growth Account
Asset Allocation Asset Allocation Account
Balanced Balanced Account
Bond Bond Account
Capital Value Capital Value Account
Government Securities Government Securities Account
Growth Growth Account
International International Account
International Emerging Markets International Emerging Markets Account
International SmallCap International SmallCap Account
LargeCap Growth LargeCap Growth Account
LargeCap Growth Equity LargeCap Growth Equity Account
LargeCap Stock Index LargeCap Stock Index Account
MicroCap MicroCap Account
MidCap MidCap Account
MidCap Growth MidCap Growth Account
MidCap Growth Equity MidCap Growth Equity Account
Money Market Money Market Account
Real Estate Real Estate Account
SmallCap SmallCap Account
SmallCap Growth SmallCap Growth Account
SmallCap Value SmallCap Value Account
Utilities Utilities Account
AIM V.I. Growth AIM V.I. Growth Fund
AIM V.I. Growth and Income AIM V.I. Growth and Income Fund
AIM V.I. Value AIM V.I. Value Fund
Fidelity Variable Insurance Products Fund II
Fidelity VIP II Contrafund Fidelity VIP II Contrafund Portfolio Service Class
Fidelity Variable Insurance Products Fund
Fidelity VIP Growth Fidelity VIP Growth Portfolio Service Class
Janus Aspen Series -
Janus Aspen Aggressive Growth Service Shares Aggressive Growth Portfolio
</TABLE>
You may allocate your net premium payments to Divisions, the DCA Plus Accounts
and/or the Fixed Account. Not all Divisions or the DCA Plus Accounts are
available in all states. A current list of Divisions available in your state may
be obtained from a sales representative or our annuity service office.
Each Division invests in shares of an underlying Mutual Fund. More detailed
information about the underlying Mutual Funds may be found in the current
prospectus for each underlying Mutual Fund.
The underlying Mutual Funds are NOT available to the general public directly.
The underlying Mutual Funds are available only as investment options in variable
life insurance policies or variable annuity contracts issued by life insurance
companies. Some of the underlying Mutual Funds have been established by
investment advisers that manage publicly traded mutual funds having similar
names and investment objectives. While some of the underlying Mutual Funds may
be similar to, and may in fact be modeled after publicly traded mutual funds,
you should understand that the underlying Mutual Funds are not otherwise
directly related to any publicly traded mutual fund. Consequently, the
investment performance of publicly traded mutual funds and of any underlying
Mutual Fund may differ substantially.
Transfers (See SEPARATE ACCOUNT DIVISION TRANSFERS and FIXED ACCOUNT TRANSFERS,
TOTAL AND PARTIAL SURRENDERS for additional restrictions.) This section does not
apply to transfers under the DCA Plus Program (see SCHEDULED DCA PLUS TRANSFERS
and UNSCHEDULED DCA PLUS TRANSFERS).
During the accumulation period:
o a dollar amount or percentage of transfer must be specified;
o a transfer may occur on a scheduled or unscheduled basis; and
o transfers into DCA Plus Accounts are not permitted.
During the annuity payment period, transfers are not permitted (no transfers
once payments have begun).
Surrenders (see SURRENDERS and FIXED ACCOUNT TRANSFERS, TOTAL AND PARTIAL
SURRENDERS and DCA PLUS SURRENDERS)
During the accumulation period:
o a dollar amount must be specified;
o surrendered amounts may be subject to surrender charge;
o total surrenders may be subject to an annual Contract fee;
o during a Contract year, partial surrenders less than the Contract's
earnings or 10% of purchase payments are not subject to a surrender charge;
and
o withdrawals before age 59 1/2 may involve an income tax penalty (see
FEDERAL TAX MATTERS).
Charges and Deductions
o No sales charge on purchase payments.
o A contingent deferred surrender charge is imposed on certain total or
partial surrenders.
o A mortality and expense risks daily charge equal to 1.25% per year applies
to amounts in the Separate Account.
o If elected, a purchase payment credit rider daily charge equal to 0.60% per
year applies to amounts in the Separate Account. The purchase payment
credit rider charge terminates upon completion of your 8th Contract year.
o Daily Separate Account administration charge is currently zero but we
reserve the right to assess a charge not to exceed 0.15% annually.
o Contracts with an accumulated value of less than $30,000 are subject to an
annual Contract fee of the lesser of $30 or 2% of the accumulated value.
Currently we do not charge the annual fee if your accumulated value is
$30,000 or more. If you own more than one Contract, then all the Contracts
you own or jointly own are aggregated, on each Contract's anniversary, to
determine if the $30,000 minimum has been met.
o Certain states and local governments impose a premium tax. The Company
reserves the right to deduct the amount of the tax from purchase payments
or accumulated values.
Annuity Payments
o You may choose from several fixed annuity payment options which start on
your selected annuity payment date.
o Payments are made to the owner (or beneficiary depending on the annuity
payment option selected). You should carefully consider the tax
implications of each annuity payment option (see ANNUITY PAYMENT OPTIONS
and FEDERAL TAX MATTERS).
o Your Contract refers to annuity payments as "retirement benefit" payments.
Death Benefit
o If the annuitant or owner dies before the annuity payment date, then a
death benefit is payable to the beneficiary of the Contract.
o The death benefit may be paid as either a single sum cash benefit or under
an annuity payment option (see DEATH BENEFIT).
o If the annuitant dies on or after the annuity payment date, then the
beneficiary will receive only any continuing payments which may be provided
by the annuity payment option in effect.
Examination Period (Free-Look)
o You may return the Contract during the examination period which is
generally 10 days from the date you receive the Contract. The examination
period may be longer in certain states.
o We return all purchase payments if required by state law. Otherwise we
return accumulated value.
o We recover the full amount of any purchase payment credit.
CONDENSED FINANCIAL INFORMATION
Financial statements are included in the Statement of Additional Information.
Following are unit values for the Contract for the periods ended December 31.
<TABLE>
<CAPTION>
Number of
Accumulation Unit Value Accumulation Units
Outstanding
Beginning End of Percentage of Change End of Period
of Period Period from Prior Period (in thousands)
Aggressive Growth Division
Year Ended December 31
<S> <C> <C> <C> <C> <C>
1999 $27.815 $38.363 37.92% 9,018
1998 23.689 27.815 17.42 7,486
1997 18.340 23.689 29.17 6,077
1996 14.503 18.340 26.46 3,971
1995 10.184 14.503 42.41 1,324
Period Ended December 31, 1994(1) 10.075 10.184 1.08 362
Asset Allocation Division
Year Ended December 31
1999 16.690 19.696 18.01 3,913
1998 15.478 16.690 7.83 3,762
1997 13.260 15.478 16.73 3,134
1996 11.891 13.260 11.51 2,264
1995 9.978 11.891 19.17 912
Period Ended December 31, 1994(1) 10.075 9.978 -0.96 303
Balanced Division
Year Ended December 31
1999 17.647 17.846 1.13 9,103
1998 15.966 17.647 10.53 8,903
1997 13.708 15.966 16.47 6,717
1996 12.270 13.708 11.72 4,661
1995 9.972 12.270 23.04 1,373
Period Ended December 31, 1994(1) 10.266 9.972 -2.86 370
Bond Division
Year Ended December 31
1999 14.260 13.718 -3.80 7,677
1998 13.408 14.260 6.35 7,499
1997 12.275 13.408 9.23 5,017
1996 12.143 12.275 1.09 3,872
1995 10.064 12.143 20.66 1,401
Period Ended December 31, 1994(1) 10.050 10.064 0.14 301
Capital Value Division
Year Ended December 31
1999 23.156 21.888 -5.48 11,634
1998 20.642 23.156 12.18 11,720
1997 16.261 20.642 26.94 9,320
1996 13.333 16.261 21.96 6,267
1995 10.234 13.333 30.28 2,232
Period Ended December 31, 1994(1) 10.328 10.234 -0.91 699
Government Securities Division
Year Ended December 31
1999 13.954 13.741 -1.53 8,554
1998 13.049 13.954 6.94 8,554
1997 11.969 13.049 9.02 5,946
1996 11.728 11.969 2.06 5,443
1995 9.973 11.728 17.60 2,023
Period Ended December 31, 1994(1) 10.133 9.973 -1.93 572
Growth Division
Year Ended December 31
1999 $21.657 $24.904 14.99% 10,999
1998 18.070 21.657 19.85 9,863
1997 14.411 18.070 25.39 7,898
1996 12.970 14.411 11.11 6,089
1995 10.454 12.970 24.07 2,619
Period Ended December 31, 1994(1) 10.336 10.454 1.14 764
International Division
Year Ended December 31
1999 16.071 19.987 24.37 7,799
1998 14.795 16.071 8.62 7,866
1997 13.347 14.795 10.85 7,316
1996 10.804 13.347 23.54 4,797
1995 9.582 10.804 12.75 2,146
Period Ended December 31, 1994(1) 9.624 9.582 -0.43 936
International SmallCap Division
Year Ended December 31
1999 8.978 17.184 91.40 1,246
Period Ended December 31, 1998(2) 10.000 8.978 -10.22 419
LargeCap Stock Index Division(3)
Period Ended December 31, 1999(4) 10.000 10.956 9.56 2,314
MicroCap Division
Year Ended December 31
1999 8.106 7.920 -2.30 244
Period Ended December 31, 1998(2) 10.000 8.106 -18.94 141
MidCap Division
Year Ended December 31
1999 19.125 21.351 11.64 9,229
1998 18.676 19.125 2.40 10,738
1997 15.405 18.676 21.23 9,820
1996 12.880 15.405 19.60 7,285
1995 10.108 12.880 27.42 3,059
Period Ended December 31, 1994(1) 10.157 10.108 -0.48 973
MidCap Growth Division
Year Ended December 31
1999 9.607 10.522 9.52 746
Period Ended December 31, 1998(2) 10.000 9.607 -3.93 352
Money Market Division
Year Ended December 31
1999 11.913 12.306 3.30 7,145
1998 11.463 11.913 3.93 4,905
1997 11.027 11.463 3.95 2,752
1996 10.628 11.027 3.75 2,929
1995 10.194 10.628 4.26 1,370
Period Ended December 31, 1994(1) 10.027 10.194 1.67 702
Real Estate Division
Year Ended December 31
1999 $ 9.275 $ 8.750 -5.66% 261
Period Ended December 31, 1998(2) 10.000 9.275 -7.25 195
SmallCap Division
Year Ended December 31
1999 7.928 11.242 41.80 1,208
Period Ended December 31, 1998(2) 10.000 7.928 -20.72 459
SmallCap Growth Division
Year Ended December 31
1999 10.179 19.672 93.26 1,388
Period Ended December 31, 1998(2) 10.000 10.179 1.79 314
SmallCap Value Division
Year Ended December 31
1999 8.440 10.123 19.94 536
Period Ended December 31, 1998(2) 10.000 8.440 -15.60 306
Utilities Division
Year Ended December 31
1999 11.464 11.581 1.02 1,670
Period Ended December 31, 1998(2) 10.000 11.464 14.64 639
AIM V.I. Growth Division
Period Ended December 31, 1999(4) 10.000 12.256 22.56 968
AIM V.I. Growth and Income Division
Period Ended December 31, 1999(4) 10.000 12.101 21.01 1,494
AIM V.I. Value Division
Period Ended December 31, 1999(4) 10.000 11.553 15.53 1,149
Fidelity VIP II Contrafund Division
Period Ended December 31, 1999(4) 10.000 11.294 12.94 1,436
Fidelity VIP Growth Division
Period Ended December 31, 1999(4) 10.000 12.108 21.08 1,441
<FN>
(1) Commenced operations on June 16, 1994.
(2) Commenced operations on May 1, 1998.
(3) Formerly known as Stock Index 500 Division.
(4) Commenced operations on July 30, 1999.
</FN>
</TABLE>
THE PRINCIPAL FLEXIBLE VARIABLE ANNUITY
The Principal Flexible Variable Annuity is significantly different from a fixed
annuity. As the owner of a variable annuity, you assume the risk of investment
gain or loss (as to amounts in the Divisions) rather than the insurance company.
The Separate Account value under a variable annuity is not guaranteed and varies
with the investment performance of the underlying Mutual Funds.
Based on your investment objectives, you direct the allocation of purchase
payments and accumulated values. There can be no assurance that your investment
objectives will be achieved.
THE COMPANY
The Company is a stock life insurance company with its home office at: Principal
Financial Group, Des Moines, Iowa 50306. It is authorized to transact life and
annuity business in all of the United States and the District of Columbia. The
Company is a wholly owned subsidiary of Principal Financial Services, Inc.
In 1879, the Company was incorporated under Iowa law as a mutual life insurance
company named Bankers Life Association. It changed its name to Bankers Life
Company in 1911 and then to Principal Mutual Life Insurance Company in 1986. The
name change to Principal Life Insurance Company and reorganization into a mutual
holding company structure took place in 1998.
THE SEPARATE ACCOUNT
Separate Account B was established under Iowa law on January 12, 1970. It was
registered as a unit investment trust with the SEC on July 17, 1970. This
registration does not involve SEC supervision of the investments or investment
policies of the Separate Account.
The income, gains, and losses, whether or not realized, of the Separate Account
are credited to or charged against the Separate Account without regard to other
income, gains, or losses of the Company. Obligations arising from the Contract,
including the promise to make annuity payments, are general corporate
obligations of the Company. However, the Contract provides that the portion of
the Separate Account's assets equal to the reserves and other liabilities under
the Contract are not charged with any liabilities arising out of any other
business of the Company.
The assets of each Division invest in a corresponding Mutual Fund. New Divisions
may be added and made available. Divisions may also be eliminated from the
Separate Account.
THE UNDERLYING MUTUAL FUNDS
The Principal Variable Contracts Fund, Inc., AIM V.I. Growth Fund, AIM V.I.
Growth and Income Fund, AIM V.I. Value Fund, Fidelity Variable Insurance Product
Fund, Fidelity Variable Insurance Product Fund II and Janus Aspen Series are
Mutual Funds registered under the Investment Company Act of 1940 as open-end
investment management companies. The Mutual Funds provide the investment
vehicles for the Separate Account. A full description of the Mutual Funds, the
investment objectives, policies and restrictions, charges and expenses and other
operational information are contained in the accompanying prospectuses (which
should be read carefully before investing) and the Statement of Additional
Information ("SAI"). Additional copies of these documents are available from a
sales representative or our annuity service office.
Principal Management Corporation (the "Manager") serves as the manager for the
Principal Variable Contracts Fund. The Manager is a subsidiary of Princor
Financial Services Corporation. It has managed mutual funds since 1969. As of
June 30, 2000, the funds it managed had assets of approximately $6.6 billion.
The Manager's address is Principal Financial Group, Des Moines, Iowa 50392-0200.
Some of the Principal Variable Contracts Fund's Accounts are used to fund the
Company's variable life insurance contracts. The Board of Directors (the
"Board") monitors events in order to identify any material irreconcilable
conflicts between the interests of the variable annuity contract owners and
variable life insurance policyowners. The Board determines any responsive action
which may need to be taken. If it becomes necessary for any Separate Account to
replace shares of any Division with an alternate investment, then the Division
may have to liquidate securities on a disadvantageous basis.
AIM Advisors, Inc. (the advisor) serves as the investment advisor for the AIM
V.I. Growth Fund, AIM V.I. Growth and Income Fund and the AIM V.I. Value Fund.
The advisor is located at 11 Greenway Plaza, Suite 100, Houston, Texas
77046-1173. The advisor supervises all aspects of the funds' operations and
provides investment advisory services to the funds, including obtaining and
evaluating economic, statistical and financial information to formulate and
implement investment programs for the funds.
Fidelity Investments Institutional Services, Inc. is the manager for the
Fidelity Insurance Products Fund and Fidelity Insurance Products Fund II. As of
December 31, 1999, Fidelity had approximately $863 billion in discretionary
assets under management. The manager is located at 82 Devonshire Street, Boston,
Massachusetts 02109. As the manager, Fidelity is responsible for choosing the
account investments and handling their business affairs.
Janus Capital ("Janus") is the investment advisor for the Janus Aspen Series.
Janus is located at 100 Fillmore Street, Denver, Colorado 80206-4928. Janus is
responsible for the day-to-day management of investment portfolio and other
business affairs of the portfolio.
The Company purchases and sells Mutual Fund shares for the Separate Account at
their net asset value without any sales or redemption charge. Shares represent
interests in the Mutual Fund available for investment by the Separate Account.
Each Mutual Fund corresponds to one of the Divisions. The assets of each
Division are separate from the others. A Division's performance has no effect on
the investment performance of any other Division.
The following is a brief summary of the investment objectives of each Division:
<TABLE>
<CAPTION>
Division Division Invests In Investment Advisor* Investment Objective
-------- ------------------- ------------------ --------------------
<S> <C> <C> <C>
Aggressive Growth Principal Variable Contracts Morgan Stanley Asset to provide long-term capital appreciation
Fund, Inc. - Aggressive Growth Management through a by investing primarily in growth-oriented
Account sub-advisory agreement common stocks of medium and large
capitalization U.S. corporations and, to a
limited extent, foreign corporations.
Asset Allocation Principal Variable Contracts Morgan Stanley Asset to generate a total investment return
Fund, Inc. - Asset Allocation Management through a consistent with the preservation of capital.
Account sub-advisory agreement The Account intends to pursue a flexible
investment policy in seeking to achieve
this investment objective.
Balanced Principal Variable Contracts Invista Capital Management, LLC to generate a total return consisting of
Fund, Inc. - Balanced Account through a sub-advisory agreement current income and capital appreciation
(equity securities portion) while assuming reasonable risks in
Balanced Account (fixed Principal Capital Income furtherance of this objective.
securities portion) Investors, LLC through a
sub-advisory agreement
Bond Principal Variable Contracts Principal Management Corporation to provide as high a level of income as is
Fund, Inc. - Bond Account consistent with preservation of capital and
prudent investment risk.
Capital Value Principal Variable Contracts Invista Capital Management, LLC to provide long-term capital appreciation
Fund, Inc. - Capital Value through a sub-advisory agreement and secondarily growth of investment
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 Principal Capital Income to seek a high level of current income,
Fund, Inc. - Government Investors, LLC through a liquidity and safety of principal. The
Securities Account sub-advisory agreement 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. - Growth Account through a sub-advisory agreement seeks to achieve its objective through the
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. - International through a sub-advisory agreement investing in a portfolio of equity
Account securities domiciled in any of the nations
of the world.
International Principal Variable Contracts Invista Capital Management, LLC seeks to achieve long-term growth of capital
Emerging Markets Fund, Inc. - International through a sub-advisory agreement by investing primarily in equity securities
Emerging Account of issuers in emerging market countries.
International Principal Variable Contracts Invista Capital Management, LLC seeks long-term growth of capital. The
SmallCap Fund, Inc. - International through a sub-advisory agreement Account will attempt to achieve its
SmallCap Account objective by investing primarily in equity
securities of non-United States companies
with comparatively smaller market
capitalizations.
LargeCap Growth Principal Variable Contracts Janus Capital Management, LLC seeks long-term growth of capital by
Fund, Inc. - LargeCap Growth through a sub-advisory agreement investing in equity securities of growth
Account companies with market capitalization of
greater than $10 billion.
LargeCap Growth Principal Variable Contracts Duncan-Hurst Capital seeks to achieve long-term growth of capital
Equity Fund, Inc. - LargeCap Growth Management, Inc. investing primarily in common stocks
Equity Account through a sub-advisory agreement of larger capitalization domestic companies.
LargeCap Stock Index Principal Variable Contracts Invista Capital Management, LLC The Account attempts to mirror the
Fund, Inc. - LargeCap Stock through a sub-advisory agreement investment results of the Standard &
Index Account Poor's 500 Stock Index.
MicroCap Principal Variable Contracts Goldman Sachs Asset Management seeks long-term growth of capital. The
Fund, Inc. - MicroCap Account through a sub-advisory agreement Account will attempt to achieve its
objective by investing primarily in value
and growth oriented companies with
small market capitalizations, generally
less than $700 million.
MidCap Principal Variable Contracts Invista Capital Management, LLC to achieve capital appreciation by
Fund, Inc. - MidCap Account through a sub-advisory agreement investing primarily in securities of
emerging and other growth-oriented
companies.
MidCap Growth Principal Variable Contracts Dreyfus Corporation through seeks long-term growth of capital. The
Fund, Inc. - MidCap Growth a sub-advisory agreement Account will attempt to achieve its
Account objective by investing primarily in growth
stocks of companies with market
capitalizations in the $1 billion to $10
billion range.
MidCap Growth Principal Variable Contracts Turner Investment Partners, Inc. seeks to achieve long-term growth of
Equity Fund, Inc. - MidCap Growth through a sub-advisory agreement capital by investing primarily in medium
Equity Account capitalization of U.S. companies with
strong earnings growth potential.
Money Market Principal Variable Contracts Principal Management Corporation to seek as high a level of current income
Fund, Inc. - Money Market available from short-term securities as is
Account considered consistent with preservation of
principal and maintenance of liquidity by
investing all of its assets in a portfolio
of money market instruments.
Real Estate Principal Variable Contracts Principal Management Corporation seeks to generate a high total return. The
Fund, Inc. - Real Estate Account will attempt to achieve its
Account objective by investing primarily in equity
securities of companies principally
engaged in the real estate industry.
SmallCap Principal Variable Contracts Invista Capital Management, LLC seeks long-term growth of capital. The
Fund, Inc. - SmallCap Account through a sub-advisory agreement Account will attempt to achieve its
objective by investing primarily in equity
securities of both growth and value
oriented companies with comparatively
smaller market capitalizations.
SmallCap Growth Principal Variable Contracts Berger LLC through seeks long-term growth of capital. The
Fund, Inc. - SmallCap a sub-advisory agreement Account will attempt to achieve its
Growth Account objective by investing primarily in equity
securities of small growth companies with
market capitalization of less than
$1 billion.
SmallCap Value Principal Variable Contracts J.P. Morgan Investment seeks long-term growth of capital. The
Fund, Inc. - SmallCap Value Management Inc. through a Account will attempt to achieve its
Account sub-advisory agreement objective by investing primarily in equity
securities of small companies with value
characteristics and market capitalizations
of less than $1 billion.
Utilities Principal Variable Contracts Invista Capital Management, LLC seeks to provide current income and long-
Fund, Inc. - Utilities Account through a sub-advisory agreement term growth of income and capital. The
Account will attempt to achieve its
objective by investing primarily in equity
and fixed-income securities of companies
in the public utilities industry.
AIM V.I. Growth AIM V.I. Growth Fund AIM Advisors, Inc. seeks growth of capital primarily by
investing in seasoned and better capitalized
companies considered to have strong earnings
momentum.
AIM V.I. Growth AIM V.I. Growth AIM Advisors, Inc. seeks growth of capital with a secondary
and Income and Income Fund objective of current income.
AIM V.I. Value AIM V.I. Value Fund AIM Advisors, Inc. seeks long-term growth of capital by
investing primarily in equity securities
judged by the fund's investment advisor to
be undervalued relative to the investment
advisor's appraisal of the current or
projected earnings of the companies
issuing the securities, or relative to
current market values of assets owned by the
companies issuing the securities or relative
to the equity market generally. Income is a
secondary objective.
Fidelity VIP II Fidelity Variable Insurance Fidelity Management seeks long-term capital appreciation.
Contrafund Products Fund II and Research Company
Fidelity VIP II
Contrafund Portfolio
Service Class
Fidelity VIP Growth Fidelity Variable Insurance Fidelity Management seeks to maximize total return by allocating
Products Fund and Research Company its assets among stocks, bonds, short-term
Fidelity VIP Growth instruments, and other investments.
Portfolio Service Class
Janus Aspen Janus Aspen Series - Janus Capital Corporation seeks long-term growth of capital. It
Aggressive Growth Service Shares pursues its objective by investing primarily
Aggressive Growth in common stocks selected for their growth
Portfolio potential, and normally invests at least 50%
of its equity assets in medium-sized
companies. Medium-sized companies are those
whose market capitalization falls within
the range of companies in the S&P MidCap
400 Index.
<FN>
* An Investment Advisor agrees to provide investment advisory services for a
specific underlying Mutual Fund or underlying Mutual Fund Account. For
these services, each Investment Advisor is paid a fee.
</FN>
</TABLE>
SURPLUS DISTRIBUTIONS
Divisible surplus distributions are not anticipated because the Contracts are
not expected to result in a contribution to the divisible surplus of the
Company. However, if any divisible surplus distribution is made, then it will be
made to the owners in the form of cash.
THE CONTRACT
The following descriptions are based on provisions of the Contract offered by
this prospectus. You should refer to the actual Contract and the terms and
limitations of any qualified plan which is to be funded by the Contract.
Qualified plans are subject to several requirements and limitations which may
affect the terms of any particular Contract or the advisability of taking
certain action permitted by the Contract.
To Buy a Contract
If you want to buy a Contract, you must submit an application and make an
initial purchase payment. If you are buying the Contract to fund a SIMPLE-IRA or
SEP, an initial purchase payment is not required at the time you send in the
application. If the application is complete and the Contract applied for is
suitable, the Contract is issued subject to underwriting. If the completed
application is received in proper order, the initial purchase payment is
credited within two valuation days after the later of receipt of the application
or receipt of the initial purchase payment at the annuity service office. If the
initial purchase payment is not credited within five valuation days, it is
refunded unless we have received your permission to retain the purchase payment
until we receive the information necessary to issue the Contract.
The date the Contract is issued is the Contract date. The Contract date is the
date used to determine Contract years, regardless of when the Contract is
delivered.
Purchase Payments
o The initial purchase payment must be at least $2,500 for non-qualified
retirement programs.
o All other initial purchase payments must be at least $1,000.
o If you are making purchase payments through a payroll deduction plan or
through a bank account (or similar financial institution) under an
automated investment program, then your initial and subsequent purchase
payments must be at least $100.
o You may elect a purchase payment credit rider with an additional charge and
an associated 9-year surrender charge period.
o All purchase payments are subject to a surrender charge period that begins
from the Contract year each payment is received.
o If you do not elect the purchase payment credit rider, each purchase
payment is subject to a 7 year surrender charge period.
o If you elect the purchase payment credit rider, each purchase payment
is subject to a 9 year surrender charge period.
o Subsequent payments must be at least $100 and can be made until the annuity
payment date.
o If you are a member of a retirement plan covering three or more persons,
then the initial and subsequent purchase payments for the Contract must
average at least $100 and cannot be less than $50.
o The total of all purchase payments may not be greater than $2,000,000
without our prior approval.
o In New Jersey after the first Contract year, purchase payments cannot
exceed $100,000 per Contract year.
The Company reserves the right to:
o increase the minimum amount for each purchase payment to not more than
$1,000; and
o terminate* a Contract and send you the accumulated value if no premiums are
paid during two consecutive calendar years and the accumulated value (or
total purchase payments less partial surrenders and applicable surrender
charges) is less than $2,000.
* The Company will first notify you of its intent to exercise this right
and give you 60 days to increase the accumulated value to at least
$2,000.
Right to Examine the Contract (Free-Look)
Under state law, you have the right to return the Contract for any reason during
the examination period. The examination period is 10 days after the Contract is
delivered to you in all states, unless your Contract is issued in:
a. California and you are age 60 and over (30 day examination period);
b. Colorado (15 day examination period); or
c. Idaho or North Dakota (20 day examination period).
Some states require us to return the initial purchase payment. If your Contract
is issued in one of those states, your initial purchase payments are allocated
to the Money Market Division for 15 days (20 days for Contracts issued in Idaho)
after the Contract date. After the 15-day period (20 days in Idaho), the then
current value of the Money Market Division is reallocated according to your
allocation instructions. The states in which purchase payments are returned are:
Colorado Kentucky North Carolina
Connecticut* Louisiana Oklahoma
Georgia Maryland Rhode Island
Hawaii Michigan South Carolina
Idaho Missouri Utah
Indiana Nebraska Washington
* Purchase payments are refunded if the Contract is canceled prior to
its delivery, otherwise the accumulated value is refunded.
If your Contract is issued in a state not listed above and if you return the
Contract during the examination period, you will receive the accumulated value.
Additionally, if you decide to return the Contract during the examination
period, the amount returned is reduced by any credits. If the value of the
purchase payment credit declines during the examination period, we recover the
full amount of the purchase payment credit.
If you are purchasing this Contract to fund an IRA, Roth IRA, Simple-IRA or SEP
IRA and you return it on or before the seventh day of the free-look period, then
we will return the greater of:
o total purchase payments; or
o Contract accumulated value.
To return a Contract you must send it and a written request to the annuity
service office or to the sales representative who sold it to you before the
close of business on the last day of the examination period. If you send the
request (properly addressed and postage prepaid) to the annuity service office,
the date of the postmark is used to determine if the examination period has
expired.
Replacement Contracts
If the purchase of this Contract is a replacement for another annuity contract
or a life insurance policy, different examination periods may apply. The Company
reserves the right to keep the initial purchase payment in the Money Market
Division longer than 15 days to correspond to the examination periods of a
particular state's replacement requirements.
Exchange Credit
If you own a Single Premium Deferred Annuity ("SPDA") or a Single Premium
Deferred Annuity Plus ("SPDA+") issued by us and are within at least 8
months of the 8th Contract year, then you may transfer the accumulated
value, without charge, to the Contract described in this prospectus.
Additionally, we will add 1% of the current SPDA/SPDA+ surrender value to
the purchase payment. We reserve the right to change or terminate this
program. Any changes or termination will follow at least 1 year notice.
Both SPDA and SPDA+ are annuities which provide a fixed rate of
accumulation. This Contract varies with the investment experience and
objectives of the various Divisions. Thus, the value of your Contract may
increase or decrease with the investment holdings of the Divisions.
When making an exchange decision, the owner should carefully review the
SPDA or SPDA+ contract and this prospectus because the charges and
provisions of the contracts differ. An existing SPDA or SPDA+ contract may
be currently eligible for waiver of surrender charge due to critical need,
while similar riders may not be available under this Contract. Electing the
exchange credit does not result in additional charges or deductions. The
charges and deductions associated with your Contract and any riders still
apply.
To complete a transfer to this Contract, send
1) a Contract application,
2) a SPDA/SPDA+ surrender form,
3) a replacement form (based on state written), and
4) an Annuity Exchange Request and Release Form.
The exchange is effective when we receive the completed forms and accept the
application. The transaction is valued at the end of the valuation period in
which we receive the necessary documents.
(This "exchange credit" is not available in New York and may not be
available in other states as well. Specific information is available from
your registered representative or the annuity service office
(1-800-852-4450)).
The Exchange Credit is allocated among the Separate Account Divisions, the
DCA Plus Account(s) or the Fixed Account in the same ratio as the allocation
of the purchase payment. The credit is treated as earnings. The 1% credit is
subject to a vesting period. Therefore, the 1% credit is not credited to
your Contract until the examination period has expired. If you exercise your
right to return the Contract during the examination period, then the amount
returned is the original amount invested (see RIGHT TO EXAMINE THE
CONTRACT).
Purchase Payment Credit Rider
You may elect a purchase payment credit rider at the time the Contract is issued
(may not be available in all states; consult your sales representative or the
annuity service office for availability). If the purchase payment credit rider
is elected, then the following provisions apply to the Contract:
o A credit of 5% will be applied to purchase payments received during your
first Contract year. For example, if you make purchase payments totaling
$10,000 in your first Contract year, a credit amount of $500 will be added
to your Contract (5% x $10,000). If an additional purchase payment of
$5,000 is made in your second Contract year, then a credit is not added as
a result of the $5,000 purchase payment.
o The credit is allocated among the Fixed Account and the Divisions according
to your then current purchase payment allocations.
o If you exercise your right to return the Contract during the examination
period, the amount returned to you is reduced by any credits.
o Credits are considered earnings under the Contract.
o All purchase payments are subject to the 9-year surrender charge table (see
Surrender Charge).
o The purchase payment credit rider may not be cancelled and the associated
9-year surrender charge period cannot be changed.
o You may not participate in the DCA Plus Program.
The 0.60% purchase payment credit rider charge is assessed against the entire
Separate Account accumulated value for the first eight Contract years. If you
anticipate making additional purchase payments after the first Contract year you
should carefully examine the purchase payment credit rider and consult your
sales representative regarding its desirability.
The following tables demonstrate hypothetical values. The first tables shows
Contract accumulated values. The second table shows surrender values. The tables
are based on:
o a $100,000 initial purchase payment and no additional purchase payments;
o the deduction of total Separate Account annual expenses of 1.85% (for the
first eight Contract years) annually for Contracts with the purchase payment
credit rider and 1.25% annually for Contracts without the rider;
o the deduction of Mutual Fund expenses equal to those calculated as of December
31, 1999;
o purchase payment allocation among the Divisions proportionally equal to the
allocation of the company's total Separate Account assets as of April 30,
2000; and
o 5% and 10% annual rates of return before charges.
<TABLE>
<CAPTION>
5% Annual Return 10% Annual Return
Contract Contract Contract Contract
accumulated value accumulated value accumulated value accumulated value
without with without with
purchase payment purchase payment purchase payment purchase payment
Contract Year credit rider credit rider credit rider credit rider
<S> <C> <C> <C> <C>
1 $103,138 $107,648 $108,410 $113,151
2 $106,383 $110,371 $117,553 $121,960
3 $109,731 $113,164 $127,468 $131,455
4 $113,185 $116,027 $138,219 $141,691
5 $116,747 $118,964 $149,878 $152,723
6 $120,423 $121,975 $162,521 $164,616
7 $124,214 $125,062 $176,232 $177,435
8 $128,126 $128,229 $191,099 $191,253
9 $132,161 $132,265 $207,222 $207,385
10 $136,323 $136,431 $224,705 $224,882
15 $159,196 $159,322 $336,921 $337,186
20 $185,924 $186,070 $505,220 $505,617
</TABLE>
<TABLE>
<CAPTION>
5% Annual Return 10% Annual Return
Surrender value Surrender value Surrender value Surrender value
without with without with
purchase payment purchase payment purchase payment purchase payment
Contract Year credit rider credit rider credit rider credit rider
<S> <C> <C> <C> <C>
1 $97,550 $99,836 $102,505 $105,151
2 $100,600 $102,371 $111,553 $113,960
3 $103,747 $105,164 $121,468 $123,455
4 $108,185 $108,027 $133,219 $133,691
5 $112,747 $111,964 $145,878 $145,723
6 $117,423 $115,975 $159,521 $158,616
7 $122,214 $120,062 $174,232 $172,435
8 $128,126 $124,229 $191,099 $187,253
9 $132,161 $129,265 $207,222 $204,385
10 $136,323 $136,431 $224,705 $224,882
15 $159,196 $159,322 $336,921 $337,186
20 $185,924 $186,070 $505,220 $505,617
</TABLE>
Based on the assumptions stated above, Contract accumulated value will generally
be higher for Contracts with the purchase payment credit rider than without,
regardless of the rate of return. In addition, the higher the rate of return,
the more advantageous the purchase payment credit rider becomes. However,
Contracts with the purchase payment credit rider are subject to both a greater
surrender charge and a longer surrender charge period than Contracts issued
without the purchase payment credit rider. If you surrender your Contract with
the purchase payment credit rider while subject to a surrender charge, your
Contract surrender value may be less than a Contract without the purchase
payment credit rider.
The Accumulation Period
The Value of Your Contract
The value of your Contract is the total of the Separate Account value plus
the DCA Plus Account(s) value plus the Fixed Account value. The DCA Plus
Accounts and Fixed Account are described in the section titled FIXED
ACCOUNT AND DCA PLUS ACCOUNTS.
There is no guaranteed minimum Separate Account value. Its value reflects
the investment experience of the Divisions that you choose. It also
reflects your purchase payments, partial surrenders, surrender charges and
the Contract expenses deducted from the Separate Account.
The Separate Account value changes from day to day. To the extent the
accumulated value is allocated to the Separate Account, you bear the
investment risk. At the end of any valuation period, your Contract's value
in a Division is:
o the number of units you have in a Division multiplied by
o the value of a unit in the Division.
The number of units is the total of units purchased by allocations to the
Division from:
o your initial purchase payment;
o an exchange credit (if applicable);
o subsequent investments;
o purchase payment credits; and
o transfers from another Division, a DCA Plus Account or the Fixed
Account.
minus units sold:
o for partial surrenders from the Division;
o as part of a transfer to another Division or the Fixed Account; and
o to pay contract charges and fees.
Unit values are calculated each valuation date at the close of normal trading of
the NYSE (generally 3:00 p.m. Central Time). To calculate the unit value of a
Division, the unit value from the previous valuation date is multiplied by the
Division's net investment factor for the current valuation period. The number of
units does not change due to a change in unit value.
The net investment factor measures the performance of each Division. The net
investment factor for a valuation period is calculated as follows:
[{share price (net asset value) of the underlying Mutual Fund at the
end of the valuation period
plus
per share amount of any dividend* (or other distribution) made by the
Mutual Fund during the valuation period}
divided by
share price (net asset value) of the underlying Mutual Fund at the end
of the previous valuation period]
minus
{total Separate Account annual expenses}
* When an investment owned by a Mutual Fund pays a dividend,
the dividend increases the net asset value of a share of
the Mutual Fund as of the date the dividend is recorded.
As the net asset value of a share of a Mutual Fund
increases, the unit value of the corresponding Division
also reflects an increase. Payment of a dividend under
these circumstances does not increase the number of units
you own in the Division.
The Separate Account charges are calculated by dividing the annual amount of the
charge by 365 and multiplying by the number of days in the valuation period.
The Separate Account charges and any taxes (currently none) are accrued daily
and are transferred from the Separate Account at the Company's discretion.
Purchase Payments
o On your application, you direct your purchase payments to be allocated
to the Investment Options.
o Allocations may be in percentages.
o Percentages must be in whole numbers and total 100%.
o Subsequent purchase payments are allocated according to your current
allocation instructions.
o Changes to the allocation instructions may be made without charge.
o A change is effective on the next valuation period after we
receive your new instructions.
o You can change the allocations and allocation instructions by:
1) mailing your instructions to us;
2) calling us at 1-800-852-4450 (if telephone privileges apply);
3) faxing your instructions to us at 1-515-248-9800; or
4) visting www.principal.com.
o Changes to purchase payment allocations do not transfer any existing
Investment Option accumulated values.
o Purchase payments are credited on the basis of unit value next
determined after we receive a purchase payment.
Separate Account Division Transfers
o You may request an unscheduled transfer or set up a scheduled transfer
by sending us a written request, by telephoning if you have telephone
privileges (1-800-852-4450) or sending us a fax (1-515-248-9800).
o You must specify the dollar amount or percentage to transfer from each
Division.
o The minimum amount is $100 or if the Division's value is less than
$100, then 100% of the Division from which the transfer is being made.
o In states where allowed, we reserve the right to reject transfer
instructions from someone providing them for multiple Contracts for
which he or she is not the owner.
You may not make a transfer to the Fixed Account if:
o a transfer has been made from the Fixed Account to a Division within
six months; or
o following the transfer, the Fixed Account value would be greater than
$1,000,000 (without our prior approval).
Unscheduled Transfers
o You may make unscheduled Division transfers from a Division to another
Division or to the Fixed Account by:
1) mailing your instructions to us;
2) calling us at 1-800-852-4450 (if telephone privileges apply);
3) faxing your instructions to us at 1-515-248-9800; or
4) visting www.principal.com.
o Transfers are not permitted into DCA Plus Accounts.
o The transfer is made, and values determined, as of the end of the
valuation period in which we receive your request.
Scheduled Transfers (Dollar Cost Averaging)
o You may elect to have transfers made on a scheduled basis.
o You must specify the dollar amount of the transfer.
o You select the transfer date (other than the 29th, 30th or 31st) and
the transfer period (monthly, quarterly, semi-annually or annually).
o If the selected date is not a valuation date, the transfer is
completed on the next valuation date.
o Transfers are not permitted into DCA Plus Accounts.
o If you want to stop a scheduled transfer, then you must provide us
notice prior to the date of the scheduled transfer.
o Transfers continue until your value in the Division is zero or we
receive notice to stop them.
o We reserve the right to limit the number of Divisions from which
simultaneous transfers are made. In no event will it ever be less than
two.
Automatic Portfolio Rebalancing (APR)
o APR allows you to maintain a specific percentage of your Separate Account
accumulated value in specified Divisions over time.
o You may elect APR at any time.
o APR is not available for values in the Fixed Account or the DCA Plus
Accounts.
o APR is not available if you have arranged scheduled transfers from the same
Division.
o APR will not begin until the examination period has expired.
o There is no charge for APR transfers.
o APR can be selected for quarterly, semi-annual or annual rebalancing.
o You may rebalance by completing and submitting a form to us, by telephoning
if you have telephone privileges (1-800-852-4450) or faxing your
instructions to us (1-515-248-9800). (Divisions are rebalanced at the end
of the next valuation period following your request.)
Example:
You elect APR to maintain your Separate Account accumulated value with 50%
in the A Division and 50% in the B Division. At the end of the specified
period, 60% of the values are in the A Division, with the remaining 40% in
the B Division. By rebalancing, units from the A Division are sold and
applied to the B Division so that 50% of the Separate Account accumulated
value is once again in each Division.
Telephone Services* Telephone services are permitted for:
o purchase payment allocation changes;
o transfers; and
o changes to APR.
Telephone services are available for both you and your sales representative.
Telephone services may be declined on the application or at any later date by
providing us with written notice. Telephone services are used by calling us at
1-800-852-4450.
Telephone instructions must be made while we are open for business. They are
effective when received by us before the close of normal trading of the NYSE
(generally 3 p.m. Central Time). Requests received when we are not open for
business or after the NYSE closes its normal trading will be effective on the
next valuation date.
Direct Dial*
You may obtain Contract information from our direct dial system between 7:00
a.m. and 9:00 p.m., Central Time, Sunday through Friday, and between 7:00 a.m.
and 4:00 p.m., Central Time, on Saturday. The telephone number is
1-800-852-4450.
Internet*
Internet access is available for both you and your sales representative at
www.principal.com. Internet access may be declined on the application or at a
later date by providing us with written notice.
* Instructions received via our telephone services, direct dial system
and internet are binding on both owners if the Contract is jointly
owned. Neither the Company nor the Separate Account are responsible
for the authenticity of telephone service, direct dial or internet
transaction requests. We reserve the right to refuse telephone
service, direct dial or internet transaction requests. You assume the
risk of loss caused by fraudulent telephone service, direct dial or
internet transactions we reasonably believe to be genuine. We follow
procedures in an attempt to assure genuine telephone service, direct
dial or internet transactions. If these procedures are not followed,
then we may be liable for loss caused by unauthorized or fraudulent
transactions. The procedures may include recording telephone service
transactions, recording direct dial transactions, requesting personal
identification (name, daytime telephone number, social security number
and/or birth date) and sending written confirmation to your address of
record.
We reserve the right to modify or terminate telephone service, direct dial or
internet transaction procedures at any time.
Surrenders
Surrenders result in the cancellation of units and your receipt of the canceled
unit values minus any applicable fee and surrender charge. Surrenders from the
Separate Account are generally paid within seven days of the effective date of
the request for surrender (or earlier if required by law). However, certain
delays in payment are permitted (see DELAY OF PAYMENTS). Surrenders before age
59 1/2 may involve an income tax penalty (see FEDERAL TAX MATTERS). You must
send us a written request for any surrender.
You may specify surrender allocation percentages with each partial surrender
request. If you don't provide us with specific percentages, we will use your
purchase payment allocation percentages for the partial surrender. Surrenders
may be subject to a surrender charge (see SURRENDER CHARGE).
Total Surrender
o You may surrender the Contract at any time before the annuity payment
date.
o You receive the cash surrender value at the end of the valuation
period during which we receive your surrender request.
o The cash surrender value is your accumulated value minus any
applicable fee and charge.
o The written consent of all collateral assignees and irrevocable
beneficiaries must be obtained prior to surrender.
o We reserve the right to require you to return the Contract to us prior
to making any payment though this does not affect the amount of the
cash surrender value.
Unscheduled Partial Surrender
o Prior to the annuity payment date and during the lifetime of the
Annuitant, you may surrender a part of the accumulated value by
sending us a written request.
o You must specify the dollar amount of the surrender (which must be at
least $100).
o The surrender is effective at the end of the valuation period during
which we receive your written request for surrender.
o The surrender is deducted from your Investment Options according to
the surrender allocation percentages you specify.
o If surrender allocation percentages are not specified, we use your
purchase payment allocation percentages.
o We surrender units from your Investment Options to equal the dollar
amount of the surrender request plus any applicable surrender charge
and fee.
o The accumulated value after the unscheduled partial surrender must be
equal to or greater than $5,000 (we reserve the right to change the
minimum remaining accumulated value but it will not be greater than
$10,000).
Scheduled Partial Surrender
o You may elect partial surrenders from any of the Investment Options on
a scheduled basis by sending us written notice.
o Your accumulated value must be at least $5,000 when the scheduled
surrenders begin.
o You may specify monthly, quarterly, semi-annually or annually and
choose a surrender date (other than the 29th, 30th or 31st).
o If the selected date is not a valuation date, the surrender is
completed on the next valuation date. o The surrenders continue until
your value in the Division is zero or we receive written notice to
stop them.
Death Benefit
If you or the annuitant die before the annuity payment date, then we will pay a
death benefit. In the case of joint annuitants, the death benefit is paid upon
death of the first annuitant. If the owner is not a natural person, death
benefits are paid to the beneficiary(ies) upon the death of the annuitant.
Before the annuity payment date, you may give us written instructions for
payment under a death benefit option. If we do not receive your instructions,
the death benefit is paid according to instructions from the beneficiary(ies).
You name the beneficiary or beneficiaries in your application. The
beneficiary(ies) receives benefits upon your death. Generally, unless the
beneficiary(ies) elects otherwise we pay the death benefit in a single sum,
subject to proof of your death.
Unless you have named an irrevocable beneficiary(ies), you may change your
beneficiary by providing us with written notice. If a beneficiary dies before
you, on your death we will make equal payments to the surviving beneficiaries
unless you had provided us with other written instructions. If none of your
beneficiaries survive you, we will pay the death benefit to your estate in a
lump sum.
Upon death of the annuitant, your beneficiary may elect to:
o apply the death benefit under an annuity payment option; or
o receive the death benefit as a single payment.
No surrender charge applies when a death benefit is paid.
If you die before the annuitant and your beneficiary is your spouse, we will
continue the Contract with your spouse as the new owner unless your spouse
elects to receive the death benefit.
If the owner or annuitant of a Contract, not issued as an IRA, Roth IRA, SEP IRA
or Simple-IRA, dies before the annuitant and before the annuity payment date,
written notice of the death must be sent to us promptly so distribution
arrangements can be made to avoid adverse tax consequences.
Standard Death Benefit
The amount of the standard death benefit is the greatest of:
o your accumulated value on the date we receive proof of death and all
required documents;
o the total of purchase payments minus any partial surrenders, fees and
charges as of the date we receive all required documents and notice
(including proof) of death; or
o the highest accumulated value on any prior Contract anniversary that
is divisible equally by seven, plus any purchase payments and less any
partial surrenders (and surrender charges incurred) made after that
Contract anniversary.
Annual Enhanced Death Benefit
This is an optional death benefit rider. Under this rider, if the original
annuitant or owner dies before the annuity payment date, then the death
benefit payable to the beneficiary is the greatest of:
1) the standard death benefit;
2) the annual increasing death benefit, based on purchase payments
(accumulated at 5% annually) minus any surrenders and surrender
charges (accumulated at 5% annually) until the later of the
Contract anniversary after the original owner's or original
annuitant's 75th birthday or five years from the effective date
of the rider; or
3) the highest accumulated value on a Contract anniversary, plus any
subsequent purchase payments minus any surrenders and surrender
charges, until the Contract anniversary following the original
owner's or original annuitant's 75th birthday or five years from
the effective date of the rider, whichever comes last.
For Contracts issued in New York - under this rider, if the original
annuitant or owner dies before the annuity payment date, then the death
benefit payable to the beneficiary is the greater of:
1) the standard death benefit; or
2) the highest accumulated value on a Contract anniversary until the
Contract anniversary following the original owner's or original
annuitant's 75th birthday or five years from the effective date
of the rider, whichever comes last.
Lock-In Feature
At the later of the Contract anniversary following the original
owner's or original annuitant's 75th birthday ("lock-in date"), the
death benefit amount is locked-in. After the lock-in date, the death
benefit increases by purchase payments (subject to applicable
restrictions) made after the lock-in date, minus any surrenders and
surrender charges. However, because the death benefit is locked-in, it
will only decrease by surrenders and surrender charges. Once the
standard death benefit equals the annual enhanced death benefit, then
the annual enhanced death benefit and any associated charge terminate.
The standard death benefit then applies.
Termination
You may terminate the annual enhanced death benefit at anytime. Once
the annual enhanced death benefit is terminated, it cannot be
reinstated (except in Florida).
The annual cost of the rider is 0.20% of the annual accumulated value
(0.15% in New York). The charge is equal to 0.05% (0.0375% in New
York) of the average accumulated value during the calendar quarter.
The cost will be deducted throughout the redemption of units from your
Contract's accumulated value in the same proportion as the purchase
payment allocations among the DCA Plus Accounts, Fixed Account and
Separate Account Divisions. If the rider is purchased after the
beginning of a quarter, then the charge is prorated according to the
number of days it is in effect during the quarter. Upon termination of
the rider or upon death, you will be charged based on the number of
days it is in effect during the quarter. The enhanced death benefit
rider is only available at the time the Contract is issued. Thus, once
a Contract has been purchased without the rider, it may not be added
at a later date.
Payment of Death Benefit
The death benefit is usually paid within seven days of our receiving all
documents (including proof of death) that we require to process the claim.
Payment is made according to benefit instructions provided by you. Some
states require this payment to be made in less than seven days. Under
certain circumstances, this payment may be delayed (see DELAY OF PAYMENTS).
We pay interest (at least 3% or as required by state law) on the death
benefit from the date we receive all required documents until payment is
made or until the death benefit is applied under an annuity payment option.
NOTE:Proof of death includes: a certified copy of a death
certificate; a certified copy of a court order; a written
statement by a medical doctor; or other proof satisfactory to us.
The Annuity Payment Period
Annuity Payment Date
You may specify an annuity payment date in your application. You may elect
to receive payments under an annuity payment option at any time. If you do
not specify an annuity payment date, then the annuity payment date is the
later of the older annuitant's 85th birthday or 10 years after issuance. If
the annuitant is living and the Contract is in force on that date, we will
notify you to begin taking payments under the Contract. You may not select
an annuity payment date which is on or after the older annuitant's 85th
birthday or 10 years after the Contract date, whichever is the later. (No
later than age 88 in Pennsylvania or age 90 in New York.)
Depending on the type of annuity payment option selected, payments that are
initiated either before or after the annuity payment date may be subject to
penalty taxes (see FEDERAL TAX MATTERS). You should consider this carefully
when you select or change the annuity payment date.
You may change the annuity payment date with our prior approval. The
request must be in writing and approved before we issue a supplementary
Contract which provides an annuity payment option.
Annuity Payment Options
We offer fixed annuity payments. If, however, the accumulated value on the
annuity payment date is less than $5,000 or if the amount applied under an
annuity payment option is less than the minimum requirement we may pay out
the entire amount. No surrender charge would be imposed. The Contract would
then be canceled.
You may choose from several fixed annuity payment options. Payments will be
made on the frequency you choose. You may elect to have your annuity
payments made on a monthly, quarterly, semiannual or annual basis. The
dollar amount of the payments is specified for the entire payment period
according to the option selected. There is no right to make any total or
partial surrender after the annuity payments start.
The amount of the annuity payment depends on:
o amount of accumulated value;
o annuity payment option selected; and
o age and gender of annuitant (unless fixed income option is selected).
Annuity payments generally are higher for male annuitants than for female
annuitants with an otherwise identical Contract. This is because
statistically females have longer life expectancies than males. In certain
states, this difference may not be taken into consideration in fixing the
payment amount. Additionally, Contracts with no gender distinctions are
made available for certain employer-sponsored plans because under most such
plans, such Contract provisions are prohibited by law.
You may select an annuity payment option or change a previous selection by
written request. We must receive the request on or before the annuity
payment date. If an annuity payment option is not selected, then we will
automatically apply the Life Income with Payments Guaranteed for a Period
of 10 Years (see below). If you designate joint annuitants, then payment
will be made pursuant to a Joint and Full Survivor Life Income for a Period
of 10 Years (see below). Tax laws and regulations may impose further
restrictions on annuity payment options.
Payments under the annuity payment options are made as of the first day of
each payment period beginning with the annuity payment date. The available
annuity payment options are:
Fixed Income. Payments of a fixed amount or payments for a fixed
period of at least five years but not more than 30 years. Payments
stop after all guaranteed payments are made.
Life Income. Payments are made as of the first day of each payment
period during the annuitant's life, starting with the annuity payment
date. No payments are made after the annuitant dies. It is possible
that you would only receive one payment under this option if the
annuitant dies before the second payment is due.
Life Income with Payments Guaranteed for a Period of 5 to 20 Years.
Payments are made on the first day of each payment period beginning on
the annuity payment date. Payments will continue until the annuitant
dies. If the annuitant dies before all of the guaranteed payments have
been made, then we will continue the guaranteed payments to the
beneficiary.
Joint and Full Survivor Life Income with Payments Guaranteed for a
Period of 10 Years. Payments continue as long as either the annuitant
or the joint annuitant is alive. If both die before all guaranteed
payments have been made, the guaranteed remaining payments are made to
the beneficiary.
Joint and Two-thirds Survivor Life Income. Payments continue as long
as either the annuitant or the joint annuitant is alive. If either the
annuitant or joint annuitant dies, payments continue to the survivor
at two-thirds the original amount. Payments stop when both the
annuitant and joint annuitant have died. It is possible that only one
payment is made under this option if both annuitants die before the
second payment is due.
Other annuity payment options may be available with our approval.
Death of Annuitant
If the owner or annuitant dies during the annuity payment period, remaining
payments are made to the beneficiary throughout the guarantee period, if
any, or for the life of any joint annuitant, if any. In all cases the
person entitled to receive payments also receives any rights and privileges
under the annuity payment option.
The mortality risk assumed by the Company is to make annuity payments for
the full life of all annuitants regardless of how long they, or any
individual annuitant, might live. Mortality risk does not apply to the
Fixed Income option. Annuity payments are determined in accordance with
annuity tables and other provisions contained in the Contract. This assures
neither an annuitant's own longevity, nor an improvement in life
expectancy, will have an adverse effect on the annuity payments received
under this Contract. The annuity payment tables contained in this Contract
are based on the Annuity Mortality 1983 Table a. These tables are
guaranteed for the life of the Contract.
If you own one or more qualified annuity contracts, in order to avoid tax
penalties, payments from at least one of your qualified contracts must
start no later than April 1 following the calendar year in which you turn
age 70 1/2. The required minimum payment is a distribution in equal (or
substantially equal) amounts over your life or over the joint lives of you
and your designated beneficiary. In addition, payments must be made at
least once a year. Tax penalties may also apply at your death on certain
excess accumulations. You should consider potential tax penalties with your
tax advisor when selecting an annuity payment option or taking other
distributions from the Contract.
Additional rules apply to distributions under non-qualified contracts (see
REQUIRED DISTRIBUTIONS FOR NON-QUALIFIED CONTRACTS). However, the rules do
not apply to contracts issued in connection with IRAs, SEPs or SIMPLE-IRAs.
CHARGES AND DEDUCTIONS
An annual fee, a mortality and expense risks charge and in some circumstances a
purchase credit rider charge are deducted under the Contract. A surrender charge
may also be deducted from certain surrenders made before the annuity payment
date. We reserve the right to assess a transaction fee, state premium taxes and
a daily administration charge. There are also deductions from and expenses paid
out of the assets of the Mutual Funds which are described in the Mutual Funds'
prospectuses.
Annual Fee
An annual fee exists which is the lesser of $30 or 2% of your accumulated value
(subject to any applicable state law limitations). The fee is deducted from the
DCA Plus Accounts, Fixed Account or your interest in a Division, whichever has
the greatest value. The fee is deducted on each contract anniversary and upon
total surrender of the Contract. This fee is currently waived for Contracts
having an accumulated value on the last day of the Contract year of $30,000 or
more. The aggregate value of multiple Contracts owned, or jointly owned, by you
is used to attain the $30,000 accumulated value. Aggregation occurs on each
Contract's anniversary. The fee assists in covering administrative costs. The
Company does not anticipate any profit from this fee.
The administrative costs include costs associated with:
o issuing Contracts;
o establishing and maintaining the records which relate to Contracts;
o making regulatory filings and furnishing confirmation notices;
o preparing, distributing and tabulating voting materials and other
communications;
o providing computer, actuarial and accounting services; and
o processing Contract transactions.
Mortality and Expense Risks Charge
We assess each Division with a daily charge for mortality and expense risks. The
annual rate of the charge is 1.25% of the average daily net assets of the
Separate Account. We agree not to increase this charge for the duration of the
Contract. This charge is assessed only prior to the annuity payment date. This
charge is assessed daily when the value of a unit is calculated.
We have a mortality risk in that we guarantee payment of a death benefit in a
single sum or under an annuity payment option. No surrender charge is imposed on
a death benefit payment which gives us an additional mortality risk.
The expense risk that we assume is that the actual expenses incurred in issuing
and administering the Contract exceed the Contract limits on administrative
charges.
If the mortality and expense risks charge is not enough to cover the costs, we
bear the loss. If the amount of mortality and expense risks charge deducted is
more than our costs, the excess is profit to the Company. We expect a profit
from the mortality and expense risks charge.
Purchase Payment Credit
If you elect the purchase payment credit rider we assess each Division with an
additional daily charge. The annual rate of the charge is 0.60% of the average
daily net assets of the Separate Account. We agree not to increase this charge
for the duration of the Contract. This charge is assessed until completion of
your 8th Contract year and only prior to the annuity payment date. This charge
is assessed daily when the value of a unit is calculated.
If the purchase payment credit rider charge is not enough to cover the cost of
the credit, we bear the loss. If the amount of the purchase payment credit rider
charge deducted is more than our costs, the excess is profit to the Company. We
expect a profit from the purchase payment credit rider charge.
Transaction Fee
We reserve the right to charge a transaction fee of $30 that applies to each
unscheduled partial surrender after the 12th unscheduled partial surrender in a
Contract year. We also reserve the right to charge a $30 transaction fee on each
unscheduled transfer after the 12th such transfer in a Contract year. The
transaction fee would be deducted from the DCA Plus Accounts, Fixed Account
and/or your interest in a Division from which the amount is surrendered or
transferred, on a pro rata basis.
Premium Taxes
We reserve the right to deduct an amount to cover any premium taxes imposed by
states or other jurisdictions. Any deduction is made from either a purchase
payment when we receive it, or the accumulated value when you request a
surrender (total or partial) or it is applied under an annuity payment option.
Premium taxes range from 0% in most states to as high as 3.50%.
Surrender Charge
No sales charge is collected or deducted when purchase payments are applied
under the Contract. A surrender charge is assessed on certain total or partial
surrenders. The amounts we receive from the surrender charge are used to cover
some of the expenses of the sale of the Contract (commissions and other
promotional or distribution expenses). If the surrender charge collected is not
enough to cover the actual costs of distribution, the costs are paid from the
company's General Account assets which includes profit, if any, from the
mortality and expense risks charge.
The surrender charge for any total or partial surrender is a percentage of the
purchase payments surrendered which were received by us during the Contract
years prior to the surrender. The applicable percentage which is applied to the
sum of the purchase payments paid during each Contract year is determined by the
following tables.
Surrender Charge without the purchase payment credit rider (as a percentage of
amounts surrendered)
Table of surrender charges without the purchase payment credit rider
Number of completed Contract years Surrender charge applied to all
since each purchase payment purchase payments received in
was made that Contract year
0 (year of purchase payment)* 6%
1 6%
2 6%
3 5%
4 4%
5 3%
6 2%
7 and later 0%
Surrender Charge with the purchase payment credit rider (as a percentage of
amounts surrendered)
Table of surrender charges with the purchase payment credit rider
Number of completed Contract years Surrender charge applied to all
since each purchase payment purchase payments received in
was made that Contract year
0 (year of purchase payment)* 8%
1 8%
2 8%
3 8%
4 7%
5 6%
6 5%
7 4%
8 3%
9 and later 0%
* Each purchase payment begins in year 0 for purposes of calculating the
percentage applied to that payment. However, purchase payments are
added together by Contract year for purposes of determining the
applicable surrender charge percentage. If your Contract year begins
April 1 and ends March 31 the following year, then all purchase
payments received during that period are considered to have been made
in that Contract year.
For purpose of calculating surrender charges, we assume that surrenders and
transfers are made in the following order:
o first from purchase payments no longer subject to a surrender charge;
o then from the free surrender privilege (first from the earnings, then from
the oldest purchase payments (first-in, first-out)) described below; and
o then from purchase payments subject to a surrender charge on a first-in,
first-out basis.
A surrender charge is not imposed in states where it is prohibited, including:
o New Jersey- no surrender charge for total surrender on or after the later
of the annuitant's 64th birthday or 4 years after the Contract date.
o Washington- no surrender charge for total surrender on or after the later
of the annuitant's 70th birthday or 10 years after the Contract date.
Free Surrender Privilege
The free surrender privilege is an amount normally subject to a surrender charge
that may be surrendered without a charge. The free surrender privilege is the
greater of:
o earnings in the Contract (earnings = accumulated value less unsurrendered
purchase payments as of the surrender date); or
o 10% of the purchase payments still subject to the surrender charge,
decreased by any partial surrenders since the last Contract anniversary.
The free surrender privilege not used in a Contract year is not added to the
free surrender privilege for any following Contract year(s).
Unscheduled partial surrenders of the free surrender privilege may be subject to
the transaction fee described above.
Waiver of Surrender Charge
The surrender charge does not apply to:
o amounts applied under an annuity payment option; or
o payment of any death benefit, however, the surrender charge does apply
to purchase payments made by a surviving spouse after an owner's
death; or
o amounts distributed to satisfy the minimum distribution requirement of
Section 401(a)9 of the Code provided that the amount surrendered does
not exceed the minimum distribution amount which would have been
calculated based on the value of this Contract alone; or
o an amount transferred from the Contract to a single premium immediate
annuity issued by the Company after the surrender charge period has
expired; or
o an amount transferred from a Contract used to fund an IRA to another
annuity contract issued by the Company to fund an IRA of the
participant's spouse when the distribution is made pursuant to a
divorce decree; or
o if permitted by state law, withdrawals made after the first Contract
anniversary if the original owner or original annuitant has a critical
need.
Waiver of the surrender charge is available for critical need if the
following conditions are met:
o original owner or original annuitant has a critical need; and
o the critical need did not exist before the Contract date.
For the purposes of this section, the following definitions apply:
o critical need - owner's or annuitant's confinement to a health care
facility, terminal illness diagnosis or total and permanent disability. If
the critical need is confinement to a health care facility, the confinement
must continue for at least 60 consecutive days after the Contract date and
the surrender must occur within 90 days of the confinement's end.
o health care facility - a licensed hospital or inpatient nursing facility
providing daily medical treatment and keeping daily medical records for
each patient (not primarily providing just residency or retirement care).
This does not include a facility primarily providing drug or alcohol
treatment, or a facility owned or operated by the owner, annuitant or a
member of their immediate families.
o terminal illness - sickness or injury that results in the owner's or
annuitant's life expectancy being 12 months or less from the date notice to
receive a distribution from the Contract is received by the Company.
o total and permanent disability - a disability that occurs after the
Contract date but before the original owner or annuitant reaches age 65 and
qualifies to receive social security disability benefits. In New York and
West Virginia, different definitions of total and permanent disability
apply. Contact us at 1-800-852-4450 for additional information.
This waiver of surrender charge rider is not available in Massachusetts, New
Jersey or Pennsylvania. In New York, the rider only applies if the original
owner or original annuitant suffers a total and permanent disability. Specific
information is available from your sales representative or the annuity service
office (1-800-852-4450).
Administration Charge
We reserve the right to assess each Division with a daily charge at the annual
rate of 0.15% of the average daily net assets of the Division. This charge would
only be imposed before the annuity payment date. This charge would be assessed
to help cover administrative expenses. Administrative expenses include the cost
of issuing the Contract, clerical, recordkeeping and bookkeeping services,
keeping the required financial and accounting records, communicating with
Contract owners and making regulatory filings.
Special Provisions for Group or Sponsored Arrangements
Wherepermitted by state law, Contracts may be purchased under group or sponsored
arrangements as well as on an individual basis.
Group Arrangement - program under which a trustee, employer or similar
entity purchases Contracts covering a group of individuals on a group
basis.
Sponsored Arrangement - program under which an employer permits group
solicitation of its employees or an association permits group solicitation
of its members for the purchase of Contracts on an individual basis.
The charges and deductions described above may be reduced or eliminated for
Contracts issued in connection with group or sponsored arrangements. The rules
in effect at the time the application is approved will determine if reductions
apply. Reductions may include but are not limited to sales of Contracts without,
or with reduced, mortality and expense risks charges, annual fees or surrender
charges.
Availability of the reduction and the size of the reduction (if any) is based on
certain criteria.
Eligibility for and the amount of these reductions are determined by a number of
factors, including the number of individuals in the group, the amount of
expected purchase payments, total assets under management for the Contract
owner, the relationship among the group's members, the purpose for which the
Contract is being purchased, the expected persistency of the Contract, and any
other circumstances which, in our opinion are rationally related to the expected
reduction in expenses. Reductions reflect the reduced sales efforts and
administrative costs resulting from these arrangements. We may modify the
criteria for and the amount of the reduction in the future. Modifications will
not unfairly discriminate against any person, including affected Contract owners
and other contract owners with contracts funded by the Separate Account.
FIXED ACCOUNT AND DCA PLUS ACCOUNTS
This prospectus is intended to serve as a disclosure document only for the
Contract as it relates to the Separate Account. It only contains selected
information regarding the Fixed Account and DCA Plus Accounts. Assets in the
Fixed Account and DCA Plus Accounts are held in the General Account of the
Company.
The General Account is the assets of the Company other than those allocated to
any of the Company's Separate Accounts. Subject to applicable law, the Company
has sole discretion over the assets in the General Account. Because of exemptive
and exclusionary provisions, interests in the Fixed Account and DCA Plus
Accounts are not registered under the Securities Act of 1933 and the General
Account is not registered as an investment company under the Investment Company
Act of 1940. The Fixed Account and DCA Plus Accounts are not subject to these
Acts. The staff of the SEC does not review the prospectus disclosures relating
to the Fixed Account or DCA Plus Accounts. However, these disclosures are
subject to certain generally applicable provisions of the federal securities
laws relating to the accuracy and completeness of statements made in the
prospectus. Separate Account expenses are not assessed against any Fixed Account
or DCA Plus Account values. More information concerning the Fixed Account and
DCA Plus Accounts is available from our annuity service office or from a sales
representative.
Fixed Account
The Company guarantees that purchase payments allocated to the Fixed Account
earn interest at a guaranteed interest rate. In no event will the guaranteed
interest rate be less than 3% compounded annually.
Each purchase payment allocated or amount transferred to the Fixed Account earns
interest at the guaranteed rate in effect on the date it is received or
transferred. This rate applies to each purchase payment or amount transferred
through the end of the Contract year.
Each Contract anniversary, we declare a renewal interest rate that is guaranteed
and applies to the Fixed Account value in existence at that time. This rate
applies until the end of the Contract year. Interest is earned daily and
compounded annually at the end of each Contract year. Once credited, the
interest is guaranteed and becomes part of the Fixed Account accumulated value
from which deductions for fees and charges may be made.
Fixed Account Accumulated Value
Your Fixed Account value on any valuation date is equal to:
o purchase payments allocated to the Fixed Account;
o plus any transfers to the Fixed Account from the Separate Account and DCA
Plus Accounts;
o plus interest credited to the Fixed Account;
o minus any surrenders or applicable surrender charges from the Fixed
Account;
o minus any transfers to the Separate Account.
Fixed Account Transfers, Total and Partial Surrenders
Transfers and surrenders from the Fixed Account are subject to certain
limitations. In addition, surrenders from the Fixed Account may be subject to a
charge (see SURRENDER CHARGE).
You may transfer amounts from the Fixed Account to the Divisions before the
annuity payment date and as provided below. The transfer is effective on the
valuation date following our receiving your instructions. You may transfer
amounts on either a scheduled or unscheduled basis. You may not make both
scheduled and unscheduled Fixed Account transfers in the same Contract year.
Unscheduled Fixed Account Transfers
The minimum transfer amount is $100 (or entire Fixed Account accumulated
value if less than $100). Once per Contract year, within the 30 days
following the Contract anniversary date, you can:
1) transfer an amount not to exceed 25% of your Fixed Account accumulated
value; or
2) transfer up to 100% of your Fixed Account accumulated value if:
o your Fixed Account value is less than $1,000; o
o the renewal interest rate for your Fixed Account accumulated
value for the current Contract year is more than one percentage
point lower than the weighted average of your Fixed Account
interest rates for the preceding Contract year. We will inform
you if the renewal interest rate falls to that level.
Scheduled Fixed Account Transfers
Fixed Account Dollar Cost Averaging
You may make scheduled transfers on a monthly basis from the Fixed Account
to the Separate Account as follows:
o You may establish scheduled transfers by sending a written request or
by telephoning the annuity service office at 1-800-852-4450.
o Transfers occur on a date you specify (other than the 29th, 30th or
31st of any month).
o If the selected date is not a valuation date, the transfer is
completed on the next valuation date.
o Scheduled transfers are only available if the Fixed Account
accumulated value is $5,000 or more at the time the scheduled
transfers begin.
o Scheduled monthly transfers of an amount not to exceed 2% of your
Fixed Account accumulated value at the beginning of the Contract year
or the current Fixed Account value will continue until the Fixed
Account value is zero or until you notify us to discontinue them.
o The minimum transfer amount is $100.
o If the Fixed Account accumulated value is less than $100 at the time
of transfer, then the entire Fixed Account accumulated value will be
transferred.
o If you stop the transfers, you may not start them again without our
prior approval.
Dollar Cost Averaging Plus Program (DCA Plus Program)
Purchase payments allocated to the DCA Plus Accounts earn a guaranteed interest
rate. A portion of your DCA Plus Account accumulated value is periodically
transferred (on the 28th of each month) to Divisions or to the Fixed Account. If
the 28th is not a valuation date, then the transfer occurs on the next valuation
date. The transfers are allocated according to your DCA Plus allocation
instructions. Transfers into a DCA Plus Account are not permitted. If you elect
the purchase payment credit rider, you may not participate in the DCA Plus
Program.
DCA Plus Purchase Payments
You may enroll in the DCA Plus program by allocating a minimum purchase
payment of $1,000 into a DCA Plus Account and selecting Divisions and/or
the Fixed Account into which transfers will be made. Subsequent purchase
payments of at least $1,000 are permitted. You can change your DCA Plus
allocation instructions during the transfer period. Automatic portfolio
rebalancing does not apply to DCA Plus Accounts.
DCA Plus purchase payments receive the fixed rate of return in effect on
the date each purchase payment is received by us. The rate of return
remains in effect for the remainder of the 6-month or 12-month DCA Plus
transfer program.
Selecting A DCA Plus Account
DCA Plus Accounts are available in either a 6-month transfer program or a
12-month transfer program. The 6-month transfer program and the 12-month
transfer program generally will have different credited interest rates. You
may enroll in both a 6-month and 12-month DCA Plus program. However, you
may only participate in one 6-month and one 12-month DCA Plus program at a
time. Under the 6-month transfer program, all payments and accrued interest
must be transferred from the DCA Plus Account to the selected Divisions
and/or Fixed Account in no more than 6 months. Under the 12-month transfer
program, all payments and accrued interest must be transferred to the
selected Divisions and/or Fixed Account in no more than 12 months.
We will transfer an amount each month which is equal to your DCA Plus
Account value divided by the number of months remaining in your transfer
program. For example, if 4 scheduled transfers remain in your 6-month
transfer program and you had a $4,000 DCA Plus Account accumulated value,
the transfer amount would be $1,000 ($4,000 / 4).
Scheduled DCA Plus Transfers
Transfers are made from DCA Plus Accounts to Divisions and the Fixed
Account according to your allocation instructions. The transfers begin
after we receive your purchase payment and completed enrollment
instructions. Transfers occur on the 28th of the month and continue until
your entire DCA Plus Account accumulated value is transferred.
Unscheduled DCA Plus Transfers
You may make unscheduled transfers from DCA Plus Accounts to Divisions
and/or the Fixed Account. A transfer is made, and values determined, as of
the end of the valuation period in which we receive your request.
DCA Plus Surrenders
You may make scheduled or unscheduled surrenders from DCA Plus Accounts.
Purchase payments earn interest according to the corresponding rate until
the surrender date. Surrenders are subject to any applicable surrender
charge.
GENERAL PROVISIONS
The Contract
The entire Contract is made up of: the Contract, copies of any applications,
amendments, riders and endorsements attached to the Contract; current data
pages; copies of any supplemental applications, amendments, endorsements and
revised Contract pages or data pages which are mailed to you. Only our corporate
officers can agree to change or waive any provisions of a Contract. Any change
or waiver must be in writing and signed by an officer of the Company.
Delay of Payments
Surrenders are generally made within seven days after we receive your
instruction for a surrender in a form acceptable to us. This period may be
shorter where required by law. However, payment of any amount upon total or
partial surrender, death or the transfer to or from a Division may be deferred
during any period when the right to sell Mutual Fund shares is suspended as
permitted under provisions of the Investment Company Act of 1940 (as amended).
The right to sell shares may be suspended during any period when:
o trading on the NYSE is restricted as determined by the SEC or when the NYSE
is closed for other than weekends and holidays; or
o an emergency exists, as determined by the SEC, as a result of which:
o disposal by a Mutual Fund of securities owned by it is not reasonably
practicable;
o it is not reasonably practicable for a Mutual Fund to fairly determine
the value of its net assets; or
o the SEC permits suspension for the protection of security holders.
If payments are delayed and your surrender or transfer is not canceled by your
written instruction, the amount to be surrendered or transferred will be
determined the first valuation date following the expiration of the permitted
delay. The surrender or transfer will be made within seven days thereafter.
In addition, payments on surrenders attributable to a purchase payment made by
check may be delayed up to 15 days. This permits payment to be collected on the
check. We may also defer payment of surrender proceeds payable out of the Fixed
Account for a period of up to six months.
Misstatement of Age or Gender
If the age or, where applicable, gender of the annuitant has been misstated, we
adjust the annuity payment under your Contract to reflect the amount that would
have been payable at the correct age and gender. If we make any overpayment
because of incorrect information about age or gender, or any error or
miscalculation, we deduct the overpayment from the next payment or payments due.
Underpayments are added to the next payment.
Assignment
You may assign ownership of your non-qualified Contract. Each assignment is
subject to any payments made or action taken by the Company prior to our
notification of the assignment. We assume no responsibility for the validity of
any assignment. An assignment or pledge of a Contract may have adverse tax
consequences.
An assignment must be made in writing and filed with us at the annuity service
office. The irrevocable beneficiary(ies), if any, must authorize any assignment
in writing. Your rights, as well as those of the annuitant and beneficiary, are
subject to any assignment on file with us. Any amount paid to an assignee is
treated as a partial surrender and is paid in a single lump sum.
Change of Owner
You may change your non-qualified Contract ownership designation at any time.
Your request must be in writing and approved by us. After approval, the change
is effective as of the date you signed the request for change. If ownership is
changed, then the waiver of the surrender charge for surrenders made because of
critical need of the owner is not available. We reserve the right to require
that you send us the Contract so that we can record the change.
Beneficiary
Before the annuity payment date and while the annuitant is alive, you have the
right to name or change a beneficiary. This may be done as part of the
application process or by sending us a written request. Under certain retirement
programs, however, spousal consent may be required to name or change a
beneficiary. Unless you have named an irrevocable beneficiary, you may change
your beneficiary designation by sending us a written request. If a beneficiary
has not been named at the time of the annuitant's death, then the benefit will
be paid to the owner, if living, otherwise, to the owner's estate. If the
beneficiary dies during the annuity payment period, and no other beneficiary is
alive, then any remaining benefits will be paid to the beneficiary's estate.
If there are joint annuitants on the Contract, the benefit is paid on the first
annuitant's death.
Contract Termination
We reserve the right to terminate the Contract and make a single sum payment
(without imposing any charges) to you if your accumulated value at the end of
the accumulation period is less than $2,000. Before the Contract is terminated,
we will send you a notice to increase the accumulated value to $2,000 within 60
days.
Reinstatement
If you have replaced this Contract with an annuity contract from another company
and want to reinstate this Contract, then the following apply:
o we reinstate the Contract effective on the original surrender date;
o if you elect the purchase payment credit rider on the reinstatement
Contract, then the 9-year surrender charge period will commence from the
date of reinstatement we calculate the purchase payment credit based on the
amount of the reinstatement;
o we apply the amount received from the other company and the amount of the
surrender charge you paid when you surrendered the Contract;
o these amounts are priced on the valuation day the money from the other
company is received by us;
o commissions are not paid on the reinstatement amounts; and
o new data pages are sent to your address of record.
Reports
We will mail to you a statement, along with any reports required by state law,
of your current accumulated value at least once per year prior to the annuity
payment date. After the annuity payment date, any reports will be mailed to the
person receiving the annuity payments.
Quarterly statements reflect purchases and surrenders occurring during the
quarter as well as the balance of units owned and accumulated values.
RIGHTS RESERVED BY THE COMPANY
We reserve the right to make certain changes if, in our judgment, they best
serve the interests of you and the annuitant or are appropriate in carrying out
the purpose of the Contract. Any changes will be made only to the extent and in
the manner permitted by applicable laws. Also, when required by law, we will
obtain your approval of the changes and approval from any appropriate regulatory
authority. Approvals may not be required in all cases. Examples of the changes
the Company may make include:
o transfer assets in any Division to another Division or to the Fixed
Account;
o add, combine or eliminate a Division(s);
o substitute the units of a Division for the units of another Division;
o if units of a Division are no longer available for investment; or
o if in our judgment, investment in a Division becomes inappropriate
considering the purposes of the Separate Account.
DISTRIBUTION OF THE CONTRACT
The individuals who sell the Contract are authorized to sell life and other
forms of personal insurance and variable annuities. These people will usually be
representatives of Princor Financial Services Corporation ("Princor"), Principal
Financial Group, Des Moines, Iowa 50392-0200 which is a broker-dealer registered
under the Securities Exchange Act of 1934 and a member of the National
Association of Securities Dealers, Inc. As the principal underwriter, Princor is
paid 6.5% of purchase payments by the Company for the distribution of the
Contract. The Company and Princor may receive a portion of the Fidelity Variable
Insurance Products and Janus Aspen Series Funds' expenses for recordkeeping,
marketing and distribution services. The Contract may also be sold through other
selected broker-dealers registered under the Securities and Exchange Act of 1933
or firms that are exempt from such registration. Princor is also the principal
underwriter for various registered investment companies organized by the
Company. Princor is a subsidiary of Principal Financial Services, Inc.
PERFORMANCE CALCULATION
The Separate Account may publish advertisements containing information
(including graphs, charts, tables and examples) about the hypothetical
performance of its Divisions for this Contract as if the Contract had been
issued on or after the date the Mutual Fund in which the Division invests was
first offered. The hypothetical performance from the date of the inception of
the Mutual Fund in which the Division invests is calculated by reducing the
actual performance of the underlying Mutual Fund by the fees and charges of this
Contract as if it had been in existence.
The yield and total return figures described below vary depending upon market
conditions, composition of the underlying Mutual Fund's portfolios and operating
expenses. These factors and possible differences in the methods used in
calculating yield and total return should be considered when comparing the
Separate Account performance figures to performance figures published for other
investment vehicles. The Separate Account may also quote rankings, yields or
returns as published by independent statistical services or publishers and
information regarding performance of certain market indices. Any performance
data quoted for the Separate Account represents only historical performance and
is not intended to indicate future performance. For further information on how
the Separate Account calculates yield and total return figures, see the SAI.
From time to time the Separate Account advertises its Money Market Division's
"yield" and "effective yield" for these Contracts. Both yield figures are based
on historical earnings and are not intended to indicate future performance. The
"yield" of the Division refers to the income generated by an investment in the
division over a 7-day period (which period is stated in the advertisement). This
income is then "annualized." That is, the amount of income generated by the
investment during that week is assumed to be generated each week over a 52-week
period and is shown as a percentage of the investment. The "effective yield" is
calculated similarly but, when annualized, the income earned by an investment in
the Division is assumed to be reinvested. The "effective yield" is slightly
higher than the "yield" because of the compounding effect of the assumed
reinvestment.
In addition, the Separate Account advertises the "yield" for other Divisions for
the Contract. The "yield" of a Division is determined by annualizing the net
investment income per unit for a specific, historical 30-day period and dividing
the result by the ending maximum offering price of the unit for the same period.
The Separate Account also advertises the average annual total return of its
various Divisions. The average annual total return for any of the Divisions is
computed by calculating the average annual compounded rate of return over the
stated period that would equate an initial $1,000 investment to the ending
redeemable accumulated value.
VOTING RIGHTS
The Company votes shares of the Principal Variable Contracts Fund, Inc., AIM
V.I. Growth Fund, AIM V.I. Growth and Income Fund, AIM V.I. Value Fund, Fidelity
Variable Insurance Products Fund, Fidelity Variable Insurance Products Fund II
and Janus Aspen Series - Service Shares Aggressive Growth Portfolio held in the
Separate Account at meetings of shareholders of those Mutual Funds. It follows
your voting instructions if you have an investment in the corresponding
Division.
The number of Mutual Fund shares in which you have a voting interest is
determined by your investments in a Mutual Fund as of a "record date." The
record date is set by the Mutual Fund within the requirements of the laws of the
state which govern the various Mutual Funds. The number of Mutual Fund shares
held in the Separate Account attributable to your interest in each Division is
determined by dividing the value of your interest in that Division by the net
asset value of one share of the Mutual Fund. Shares for which owners are
entitled to give voting instructions, but for which none are received, and
shares of the Mutual Fund owned by the Company are voted in the same proportion
as the total shares for which voting instructions have been received.
Voting materials are provided to you along with an appropriate form that may be
used to give voting instructions to the Company.
If the Company determines pursuant to applicable law, that Mutual Fund shares
held in Separate Account B need not be voted pursuant to instructions received
from owners, then the Company may vote Mutual Fund shares held in the Separate
Account in its own right.
FEDERAL TAX MATTERS
The following description is a general summary of the tax rules, primarily
related to federal income taxes, which in our opinion are currently in effect.
These rules are based on laws, regulations and interpretations which are subject
to change at any time. This summary is not comprehensive and is not intended as
tax advice. Federal estate and gift tax considerations, as well as state and
local taxes, may also be material. You should consult a qualified tax adviser
about the tax implications of taking action under a Contract or related
retirement plan.
Non-Qualified Contracts
Section 72 of the Code governs the income taxation of annuities in general.
o Purchase payments made under non-qualified Contracts are not excludable or
deductible from your gross income or any other person's gross income.
o An increase in the accumulated value of a non-qualified Contract owned by a
natural person resulting from the investment performance of the Separate
Account or interest credited to the DCA Plus Accounts and the Fixed Account
is generally not taxable until paid out as surrender proceeds, death
benefit proceeds, or otherwise.
o Generally, owners who are not natural persons are immediately taxed on any
increase in the accumulated value.
The following discussion applies generally to Contracts owned by natural
persons.
o Surrenders or partial surrenders are taxed as ordinary income to the extent
of the accumulated income or gain under the Contract.
o The value of the Contract pledged or assigned is taxed as ordinary income
to the same extent as a partial surrender.
o Annuity payments:
o The investment in the Contract is generally the total of the purchase
payments made.
o The portion of the annuity payment that represents the amount by which
the accumulated value exceeds purchase payments is taxed as ordinary
income. The remainder of each annuity payment is not taxed.
o After the purchase payment(s) in the Contract is paid out, the full
amount of any annuity payment is taxable.
For purposes of determining the amount of taxable income resulting from
distributions, all Contracts and other annuity contracts issued by us or our
affiliates to the same owner within the same calendar year are treated as if
they are a single contract.
A transfer of ownership of a Contract, or designation of an annuitant or other
payee who is not also the owner, may result in a certain income or gift tax
consequences to the owner. If you are contemplating any transfer or assignment
of a Contract, you should contact a competent tax advisor with respect to the
potential tax effects of such transactions.
Required Distributions for Non-Qualified Contracts
In order for a non-qualified Contract to be treated as an annuity contract for
federal income tax purposes, the Code requires:
o If the person receiving payments dies on or after the annuity payment date
but prior to the time the entire interest in the Contract has been
distributed, the remaining portion of the interest is distributed at least
as rapidly as under the method of distribution being used as of the date of
that person's death.
o If you die prior to the annuity payment date, the entire interest in the
Contract will be distributed:
o within five years after the date of your death; or
o as annuity payments which begin within one year of your death and
which are made over the life of your designated beneficiary or over a
period not extending beyond the life expectancy of that beneficiary.
o If you take a distribution from the Contract before you are 59 1/2, you may
incur an income tax penalty.
Generally, unless the beneficiary elects otherwise, the above requirements are
satisfied prior to the annuity payment date by paying the death benefit in a
single sum, subject to proof of your death. The beneficiary may elect by written
request to receive an annuity payment option instead of a lump sum payment.
If your designated beneficiary is your surviving spouse, the Contract may be
continued with your spouse deemed to be the new owner for purposes of the Code.
Where the owner or other person receiving payments is not a natural person, the
required distributions provided for in the Code apply upon the death of the
annuitant.
IRA, SEP, and SIMPLE-IRA
The Contract may be used to fund IRAs, SEPs, and SIMPLE-IRAs.
o IRA - An Individual Retirement Annuity (IRA) is a retirement savings
annuity. Contributions grow tax deferred.
o SEP-IRA - A SEP is a form of IRA. A SEP allows you, as an employer, to
provide retirement benefits for your employees by contributing to their
IRAs.
o SIMPLE-IRA - SIMPLE stands for Savings Incentive Match Plan for Employers.
A SIMPLE-IRA allows employees to save for retirement by deferring salary on
a pre-tax basis and receiving predetermined company contributions.
The tax rules applicable to owners, annuitants and other payees vary according
to the type of plan and the terms and conditions of the plan itself. In general,
purchase payments made under a retirement program recognized under the Code are
excluded from the participant's gross income for tax purposes prior to the
annuity payment date (subject to applicable state law). The portion, if any, of
any purchase payment made that is not excluded from their gross income is their
investment in the Contract. Aggregate deferrals under all plans at the
employee's option may be subject to limitations.
If you are purchasing this Contract to fund a tax qualified retirement plan, you
should be aware that the tax-deferred accrual feature is available with any
qualified investment vehicle within a qualified plan and is NOT unique to a
variable annuity. This Contract provides additional benefits such as lifetime
income options, death benefit protection and guaranteed expense levels.
The tax implications of these plans are further discussed in the SAI under the
heading Taxation Under Certain Retirement Plans. Check with your tax advisor for
the rules which apply to your specific situation.
With respect to IRAs, IRA rollovers and SIMPLE-IRAs there is a 10% penalty under
the Code on the taxable portion of a "premature distribution." The tax is
increased to 25% in the case of distributions from SIMPLE-IRAs during the first
two years of participation. Generally, an amount is a "premature distribution"
unless the distribution is:
o made on or after you reach age 59 1/2;
o made to a beneficiary on or after your death;
o made upon your disability;
o part of a series of substantially equal periodic payments for the life or
life expectancy of you or you and the beneficiary;
o made to pay medical expenses;
o for certain unemployment expenses;
o for first home purchases (up to $10,000); or
o for higher education expenses.
Rollover IRAs
If you receive a lump-sum distribution from a pension or profit sharing plan or
tax-sheltered annuity, you may maintain the tax-deferred status of the money by
rolling it into a "Rollover Individual Retirement Annuity." Generally,
distributions from a qualified plan are subject to mandatory income tax
withholding at a rate of 20%, unless the participant elects a direct rollover.
You have 60 days from receipt of the money to complete this transaction. If you
choose not to reinvest or go beyond the 60 day limit and are under age 59 1/2,
you will incur a 10% IRS penalty as well as income tax expenses.
Withholding
Annuity payments and other amounts received under the Contract are subject to
income tax withholding unless the recipient elects not to have taxes withheld.
The amounts withheld vary among recipients depending on the tax status of the
individual and the type of payments from which taxes are withheld.
Notwithstanding the recipient's election, withholding may be required on
payments delivered outside the United States. Moreover, special "backup
withholding" rules may require us to disregard the recipient's election if the
recipient fails to supply us with a "TIN" or taxpayer identification number
(social security number for individuals), or if the Internal Revenue Service
notifies us that the TIN provided by the recipient is incorrect.
Mutual Fund Diversification
The United States Treasury Department has adopted regulations under Section
817(h) of the Code which establishes standards of diversification for the
investments underlying the Contracts. Under this Code Section, Separate Account
investments must be adequately diversified in order for the increase in the
value of non-qualified Contracts to receive tax-deferred treatment. In order to
be adequately diversified, the portfolio of each underlying Mutual Fund must, as
of the end of each calendar quarter or within 30 days thereafter, have no more
than 55% of its assets invested in any one investment, 70% in any two
investments, 80% in any three investments and 90% in any four investments.
Failure of a Mutual Fund to meet the diversification requirements could result
in tax liability to non-qualified Contract holders.
The investment opportunities of the Mutual Funds could conceivably be limited by
adhering to the above diversification requirements. This would affect all
owners, including owners of Contracts for whom diversification is not a
requirement for tax-deferred treatment.
STATE REGULATION
The Company is subject to the laws of the State of Iowa governing insurance
companies and to regulation by the Insurance Department of the State of Iowa. An
annual statement in a prescribed form must be filed by March 1 in each year
covering our operations for the preceding year and our financial condition on
December 31 of the prior year. Our books and assets are subject to examination
by the Commissioner of Insurance of the State of Iowa or her representatives at
all times. A full examination of our operations is conducted periodically by the
National Association of Insurance Commissioners. Iowa law and regulations also
prescribe permissible investments, but this does not involve supervision of the
investment management or policy of the Company.
In addition, we are subject to the insurance laws and regulations of other
states and jurisdictions where we are licensed to operate. Generally, the
insurance departments of these states and jurisdictions apply the laws of the
state of domicile in determining the field of permissible investments.
LEGAL OPINIONS
Legal matters applicable to the issue and sale of the Contracts, including our
right to issue Contracts under Iowa Insurance Law, have been passed upon by
Karen Shaff, General Counsel and Senior Vice President.
LEGAL PROCEEDINGS
There are no legal proceedings pending to which Separate Account B is a party or
which would materially affect Separate Account B.
REGISTRATION STATEMENT
This prospectus omits some information contained in the SAI (Part B of the
registration statement) and Part C of the registration statement which the
Company has filed with the SEC. The SAI is hereby incorporated by reference into
this prospectus. You may request a free copy of the SAI by writing or
telephoning the annuity service office. You may obtain a copy of Part C of the
registration statement from the SEC, Washington, D.C. by paying the prescribed
fees.
OTHER VARIABLE ANNUITY CONTRACTS
The Company currently offers other variable annuity contracts that participate
in Separate Account B. In the future, we may designate additional group or
individual variable annuity contracts as participating in Separate Account B.
INDEPENDENT AUDITORS
The financial statements of Principal Life Insurance Company Separate Account B
and the consolidated financial statements of Principal Life Insurance Company
are included in the SAI. Those statements have been audited by Ernst & Young
LLP, independent auditors, for the periods indicated in their reports which also
appear in the SAI.
FINANCIAL STATEMENTS
The consolidated financial statements of Principal Life Insurance Company which
are included in the SAI should be considered only as they relate to our ability
to meet our obligations under the Contract. They do not relate to investment
performance of the assets held in the Separate Account.
CUSTOMER INQUIRIES
Your questions should be directed to: Principal Flexible Variable Annuity,
Principal Financial Group, P.O. Box 9382, Des Moines, Iowa 50306-9382,
1-800-852-4450.
TABLE OF CONTENTS OF THE STATEMENT OF ADDITIONAL INFORMATION
Independent Auditors ..................................................... 4
Calculation of Yield and Total Return .................................... 4
Taxation Under Certain Retirement Plans..................................... 8
Principal Life Insurance Company Separate Account B
Report of Independent Auditors ........................................ 9
Financial Statements................................................... 10
Principal Life Insurance Company
Report of Independent Auditors ........................................ 37
Consolidated Financial Statements...................................... 38
To obtain a free copy of the SAI write or telephone:
Principal Flexible Variable Annuity
Principal Financial Group
P.O. Box 9382
Des Moines, Iowa 50306-9382
Telephone: 1-800-852-4450
<PAGE>
PART B
PRINCIPAL LIFE INSURANCE COMPANY SEPARATE ACCOUNT B
FLEXIBLE VARIABLE ANNUITY ("FVA") CONTRACT
Statement of Additional Information
dated November 15, 2000
This Statement of Additional Information provides information about Principal
Life Insurance Company Separate Account B Flexible Variable Annuity (the
"Contract") in addition to the information that is contained in the Contract's
Prospectus, dated November 15, 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:
Variable Annuity
The Principal Financial Group
P.O. Box 9382
Des Moines Iowa 50306-9382
Telephone: 1-800-852-4450
TABLE OF CONTENTS
Independent Auditors .................................................. 4
Principal Underwriter.................................................. 4
Calculation of Yield and Total Return.................................. 4
Taxation Under Certain Retirement Plans................................ 8
Principal Life Insurance Company Separate Account B
Report of Independent Auditors................................. 9
Financial Statements........................................... 10
Principal Life Insurance Company
Report of Independent Auditors................................. 37
Consolidated Financial Statements.............................. 38
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.
PRINCIPAL UNDERWRITER
Princor Financial Services Corporation ("Princor") is the principal underwriter
of the Contract. Princor is a subsidiary of Principal Financial Services, Inc.
The Contract's offering to the public is continuous. As the principal
underwriter, Princor is paid for the distribution of the Contract. For the last
three fiscal years Princor has received and retained the following commissions:
1999 1998 1997
received/retained received/retained received/retained
----------------- ----------------- -----------------
$11,907,807/$0 $13,284,014/$0 $11,491,356/$0
CALCULATION OF YIELD AND TOTAL RETURN
The Separate Account may publish advertisements containing information
(including graphs, charts, tables and examples) about the performance of one or
more of its Divisions.
The Contract was not offered prior to June 16, 1994. However, the Divisions
invest in Accounts of the Principal Variable Contracts Fund, Inc., AIM V.I.
Growth Fund, AIM V.I. Growth and Income Fund, AIM V.I. Value Fund, Fidelity
Variable Insurance Products Fund, and Fidelity Variable Income Products Fund II.
Effective June 12, 2000 the Principal Variable Contracts Fund, Inc. Stock Index
500 Account changed its name to the LargeCap Stock Index Account. Effective
January 1, 1998 the Mutual Funds which correspond to Accounts of the Principal
Variable Contracts Fund, Inc. were reorganized as follows:
<TABLE>
<CAPTION>
Old Mutual Fund Name New Corresponding Name
-------------------- ----------------------
Principal Variable Contracts Fund, Inc.
<S> <C> <C>
Principal Aggressive Growth Fund, Inc. Aggressive Growth Account
Principal Asset Allocation Fund, Inc. Asset Allocation Account
Principal Balanced Fund, Inc. Balanced Account
Principal Bond Fund, Inc. Bond Account
Principal Capital Accumulation Fund, Inc. Capital 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
</TABLE>
These Accounts, along with AIM V.I. Growth Fund, AIM V.I. Growth and Income
Fund, AIM V.I. Value Fund and Fidelity VIP Growth Portfolio Service Class, were
offered prior to the date the Contract was available. Thus, the Separate Account
may publish advertisements containing information about the hypothetical
performance of one or more of its Divisions for this Contract had the Contract
been issued on or after the date the Mutual Fund in which such Division invests
was first offered. Because Service Class shares for the Fidelity VIP Growth
Division were not offered until November 3, 1997, performance shown for periods
prior to that date represent the historical results of Initial Class shares and
do not include the effects of the Service Class' higher annual fees and
expenses. Service Shares of the Janus Aspen Series were first offered on
December 31, 1999. Performance shown for periods prior to December 31, 1999,
reflects performance of a different class of shares (the Institutional Shares)
restated based on the Service Shares' estimated fees and expenses including the
Service Shares' .25% 12b-1 fee and ignoring any fee and expense limitations. The
hypothetical performance from the date of inception of the Mutual Fund in which
the Division invests is derived by reducing the actual performance of the
underlying Mutual Fund by the fees and charges of the Contract as if it had been
in existence. The yield and total return figures described below will vary
depending upon market conditions, the composition of the underlying Mutual
Fund's portfolios and operating expenses. These factors and possible differences
in the methods used in calculating yield and total return should be considered
when comparing the Separate Account performance figures to performance figures
published for other investment vehicles. The Separate Account may also quote
rankings, yields or returns 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 Separate Account advertises its Money Market Division's
"yield" and "effective yield" for these Contracts. Both yield figures are based
on historical earnings and are not intended to indicate future performance. The
"yield" of the Division refers to the income generated by an investment under
the Contract in the Division over a seven-day period (which period will be
stated in the advertisement). This income is then "annualized." That is, the
amount of income generated by the investment during that week is assumed to be
generated each week over a 52-week period and is shown as a percentage of the
investment. The "effective yield" is calculated similarly but, when annualized,
the income earned by an investment in the Division is assumed to be reinvested.
The "effective yield" will be slightly higher than the "yield" because of the
compounding effect of this assumed reinvestment. Neither yield quotation
reflects a sales load deducted from purchase payments which, if included, would
reduce the "yield" and "effective yield."
In addition, from time to time, the Separate Account will advertise the "yield"
for certain other Divisions for the Contract. The "yield" of a Division is
determined by annualizing the net investment income per unit for a specific,
historical 30-day period and dividing the result by the ending maximum offering
price of the unit for the same period. This yield quotation does not reflect a
surrender charge which, if included, would reduce the "yield."
Also, from time to time, the Separate Account will advertise the average annual
total return of its various Divisions. The average annual total return for any
of the Divisions is computed by calculating the average annual compounded rate
of return over the stated period that would equate an initial $1,000 investment
to the ending redeemable Contract value. In this calculation the ending value is
reduced by a surrender charge that decreases from 6% to 0% over a period of 7
years. The Separate Account may also advertise total return figures for its
Divisions for a specified period that does not take into account the surrender
charge in order to illustrate the change in the Division's unit value over time.
See "Charges and Deductions" in the Prospectus for a discussion of surrender
charges.
Following are the hypothetical average annual total returns for the period
ending December 31, 1999 assuming the Contract had been offered as of the
effective dates of the underlying Mutual Funds in which the Divisions invest:
<TABLE>
<CAPTION>
Contract without purchase payment credit rider
With Surrender Charge Without Surrender Charge
Division One Year Five Year Ten Year One Year Five Year Ten Year
-----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Aggressive Growth Division 31.74% 30.07% 27.01%(1) 37.74% 30.34% 27.19%(1)
Asset Allocation Division 11.98 14.06 12.56(1) 17.98 14.53 12.87(1)
Balanced Division (4.91) 11.80 9.94 1.09 12.31 9.94
Bond Division (9.83) 5.72 6.38 (3.83) 6.35 6.38
Capital Value Division (11.51) 15.95 11.48 (5.51) 16.39 11.48
Government Securities Division (7.56) 5.96 6.36 (1.56) 6.58 6.36
Growth Division 8.96 18.52 17.19(2) 14.96 18.92 17.44(2)
International Division 18.34 15.35 12.66(2) 24.34 15.80 12.96(2)
International Emerging Markets Division N/A N/A N/A N/A N/A N/A
International SmallCap Division 85.38 34.55(3) N/A 91.38 37.47(3) N/A
LargeCap Growth Division 25.34(4) N/A N/A 31.34(4) N/A N/A
LargeCap Growth Equity Division N/A N/A N/A N/A N/A N/A
LargeCap Stock Index Division 2.00(4) N/A N/A 8.00 (4) N/A N/A
MicroCap Division (8.33) (17.20) (3) N/A (2.33) (13.18) (3) N/A
MidCap Division 5.61 15.65 13.87 11.61 16.10 13.87
MidCap Growth Division 3.27 (0.82) (3) N/A 9.27 2.76(3) N/A
MidCap Growth Equity Division N/A N/A N/A N/A N/A N/A
Money Market Division (2.51) 3.32 3.63 3.49 3.84 3.63
Real Estate Division (11.69) (11.63) (3) N/A (5.69) (7.78) (3) N/A
SmallCap Division 35.77 3.38(3) N/A 41.77 6.86(3) N/A
SmallCap Growth Division 87.23 47.50(3) N/A 93.23 50.25(3) N/A
SmallCap Value Division 13.91 (3.05)(3) N/A 19.91 0.58(3) N/A
Utilities Division (5.01) 5.60(3) N/A 0.99 9.03(3) N/A
AIM V.I. Growth Division 27.54 27.79 21.37(5) 33.54 28.02 21.37(5)
AIM V.I. Growth and Income Division 26.57 26.34 22.79(2) 32.57 26.57 22.93(2)
AIM V.I. Value Division 22.27 25.39 21.51(5) 28.27 25.64 21.51(5)
Fidelity VIP II Contrafund Division 16.58 26.71(6) N/A 22.58 26.95(6) N/A
Fidelity VIP Growth Division 29.57 27.84 18.38 35.57 28.06 18.38
Janus Aspen Aggressive Growth Division 114.53 33.97 32.31(7) 120.53 34.15 32.31(7)
<FN>
(1) Partial period beginning June 1, 1994.
(2) Partial period beginning May 2, 1994.
(3) Partial period beginning May 1, 1998.
(4) Partial period beginning May 3, 1999.
(5) Partial period beginning May 5, 1993.
(6) Partial period beginning January 31, 1995.
(7) Partial period beginning September 13, 1993.
</FN>
</TABLE>
<TABLE>
<CAPTION>
Contract with purchase payment credit rider
With Surrender Charge Without Surrender Charge
Division One Year Five Year Ten Year One Year Five Year Ten Year
-----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Aggressive Growth Division 28.92% 29.14% 26.13%(1) 36.92 29.57% 26.43%(1)
Asset Allocation Division 9.27 13.12 11.66(1) 17.27 13.85 12.19(1)
Balanced Division (7.51) 10.85 9.28 0.49 11.64 9.28
Bond Division (12.41) 4.74 5.74 (4.41) 5.72 5.74
Capital Value Division (14.07) 15.01 10.81 (6.07) 15.69 10.81
Government Securities Division (10.15) 4.97 5.72 (2.15) 5.94 5.72
Growth Division 6.27 17.59 16.30(2) 14.27 18.21 16.74(2)
International Division 15.59 14.42 11.76(2) 23.59 15.11 12.28(2)
International Emerging Markets Division N/A N/A N/A N/A N/A N/A
International SmallCap Division 82.23 32.72(3) N/A 90.23 36.65(3) N/A
LargeCap Growth Division 22.82(4) N/A N/A 30.82(4) N/A N/A
LargeCap Growth Equity Division N/A N/A N/A N/A N/A N/A
LargeCap Stock Index Division (0.43) (4) N/A N/A 7.57(4) N/A N/A
MicroCap Division (10.92) (19.11) (3) N/A (2.92) (13.70) (3) N/A
MidCap Division 2.94 14.72 13.19 10.94 15.40 13.19
MidCap Growth Division 0.61 (2.66) (3) N/A 8.61 2.14(3) N/A
MidCap Growth Equity Division N/A N/A N/A N/A N/A N/A
Money Market Division (5.13) 2.14 3.01 2.87 3.22 3.01
Real Estate Division (14.26) (13.51) (3) N/A (6.26) (8.33) (3) N/A
SmallCap Division 32.92 1.55(3) N/A 40.92 6.22(3) N/A
SmallCap Growth Division 84.08 45.66(3) N/A 92.08 49.35(3) N/A
SmallCap Value Division 11.19 (4.90) (3) N/A 19.19 (0.02) (3) N/A
Utilities Division (7.61) 3.77(3) N/A 0.39 8.38(3) N/A
AIM V.I. Growth Division 24.75 26.80 20.44(5) 32.75 27.26 20.65(5)
AIM V.I. Growth and Income Division 23.78 25.34 21.85(2) 31.78 25.82 22.20(2)
AIM V.I. Value Division 19.51 24.39 20.59(5) 27.51 24.89 20.79(5)
Fidelity VIP II Contrafund Division 13.86 25.70(6) N/A 21.86 26.20(6) N/A
Fidelity VIP Growth Division 26.76 26.84 17.68 34.76 27.31 17.68
Janus Aspen Aggressive Growth Division 111.29 32.98 31.39(7) 119.29 33.37 31.58(7)
<FN>
(2) Partial period beginning May 2, 1994.
(3) Partial period beginning May 1, 1998.
(4) Partial period beginning May 3, 1999.
(5) Partial period beginning May 5, 1993.
(6) Partial period beginning January 31, 1995.
(7) Partial period beginning September 13, 1993.
</FN>
</TABLE>
TAXATION UNDER CERTAIN RETIREMENT PLANS
INDIVIDUAL RETIREMENT ANNUITIES
Purchase Payments. Individuals may make contributions for individual retirement
annuity ("IRA") Contracts. Deductible contributions for any year may be made up
to the lesser of $2,000 or 100% of compensation for individuals who (1) are not
active participants in another retirement plan, (2) are unmarried and have
adjusted gross income of $40,000 or less, or (3) are married and have adjusted
gross income of $60,000 or less. Such individuals may establish an IRA for a
spouse who makes no contribution to an IRA for the tax year. The annual purchase
payments for both spouses' Contracts cannot exceed the lesser of $4,000 or 100%
of the working spouse's earned income, and no more than $2,000 may be
contributed to either spouse's IRA for any year. Individuals who are active
participants in other retirement plans and whose adjusted gross income (with
certain special adjustments) exceeds the cut-off point ($40,000 for unmarried,
$60,000 for married persons filing jointly, and $0 for married persons filing a
separate return) by less than $10,000 are entitled to make deductible IRA
contributions in proportionately reduced amounts. For example, a married
individual who is an active participant in another retirement plan and files a
separate tax return is entitled to a partial IRA deduction if the individual's
adjusted gross income is less than $10,000, and no IRA deduction if his or her
adjusted gross income is equal to or greater than $10,000. Individuals whose
spouse is an active participant in other retirement plans and whose combined
adjusted gross income exceeds the cutoff point of $150,000 by less than $10,000
are entitled to make deductible IRA contributions in proportionately reduced
amounts.
An individual may make non-deductible IRA contributions to the extent of the
excess of (1) the lesser of $2,000 ($4,000 in the case of a spousal IRA) or 100%
of compensation over (2) the IRA deductible contributions made with respect to
the individual.
An individual may not make any contribution to his/her own IRA for the year in
which he/she reaches age 70 1/2 or for any year thereafter.
Taxation of Distributions. Distributions from IRA Contracts are taxed as
ordinary income to the recipient, although special rules exist for the tax-free
return of non-deductible contributions. In addition, taxable distributions
received under an IRA Contract prior to age 59 1/2 are subject to a 10% penalty
tax in addition to regular income tax. Certain distributions are exempted from
this penalty tax, including distributions following the owner's death or
disability if the distribution is paid as part of a series of substantially
equal periodic payments made for the life (or life expectancy) of the Owner or
the joint lives (or joint life expectancies) of Owner and the Owner's designated
Beneficiary; distributions to pay medical expenses; distributions for certain
unemployment expenses; distributions for first home purchases (up to $10,000)
and distributions for higher education expenses.
Required Distributions. Generally, distributions from IRA Contracts must
commence not later than April 1 of the calendar year following the calendar year
in which the owner attains age 70 1/2, and such distributions must be made over
a period that does not exceed the life expectancy of the owner (or the owner and
beneficiary). A penalty tax of 50% would be imposed on any amount by which the
minimum required distribution in any year exceeded the amount actually
distributed in that year. In addition, in the event that the owner dies before
his or her entire interest in the Contract has been distributed, the owner's
entire interest must be distributed in accordance with rules similar to those
applicable upon the death of the Contract Owner in the case of a non-qualified
Contract, as described in the Prospectus.
Tax-Free Rollovers. The Internal Revenue Code (the "Code") permits the taxable
portion of funds to be transferred in a tax-free rollover from a qualified
employer pension, profit-sharing, annuity, bond purchase or tax-deferred annuity
plan to an IRA Contract if certain conditions are met, and if the rollover of
assets is completed within 60 days after the distribution from the qualified
plan is received. A direct rollover of funds may avoid a 20% federal tax
withholding generally applicable to qualified plans or tax-deferred annuity plan
distributions. In addition, not more frequently than once every twelve months,
amounts may be rolled over tax-free from one IRA to another, subject to the
60-day limitation and other requirements. The once-per-year limitation on
rollovers does not apply to direct transfers of funds between IRA custodians or
trustees.
SIMPLIFIED EMPLOYEE PENSION PLANS AND SALARY REDUCTION SIMPLIFIED EMPLOYEE
PENSION PLANS
Purchase Payments. Under Section 408(k) of the Code, employers may establish a
type of IRA plan referred to as a simplified employee pension plan (SEP).
Employer contributions to a SEP cannot exceed the lesser of $24,000 or 15% or
the employee's earned income. Employees of certain small employers may have
contributions made to the salary reduction simplified employee pension plan
("SAR/SEP") on their behalf on a salary reduction basis. These salary reduction
contributions may not exceed $10,000 in 2000, which is indexed for inflation.
Employees of tax-exempt organizations and state and local government agencies
are not eligible for SAR/SEPs.
Taxation of Distributions. Generally, distribution payments from SEPs and
SAR/SEPs are subject to the same distribution rules described above for IRAs.
Required Distributions. SEPs and SAR/SEPs are subject to the same minimum
required distribution rules described above for IRAs.
Tax-Free Rollovers. Generally, rollovers and direct transfers may be made to and
from SEPs and SAR/SEPs in the same manner as described above for IRAs, subject
to the same conditions and limitations.
SAVINGS INCENTIVE MATCH PLANS FOR EMPLOYEES (SIMPLE IRA)
Purchase Payments. Under Section 408(p) of the Code, employers may establish a
type of IRA plan known as a Simple IRA. Employees may have contributions made to
the SIMPLE IRA on a salary reduction basis. These salary reduction contributions
may not exceed $6,000 in 2000, which is indexed for inflation. Total salary
reduction contributions are limited to $10,000 per year for any employee who
makes salary reduction contributions to more than one plan. Employers are
required to contribute to the SIMPLE IRA, which contributions may not exceed the
lesser of: (1) The amount of salary deferred by the employee, (2) 3% of the
employee's compensation, or (3) $6,000, if the employer contributes on a
matching basis; or the lesser of: (1) 2% of the employee's compensation, or (2)
$3,200, if the employer makes non-elective contributions. An employer may not
make contributions to both a SIMPLE IRA and another retirement plan for the same
calendar year.
Taxation of Distributions. Generally, distribution payments from SIMPLE IRAs are
subject to the same distribution rules described above for IRAs, except that
distributions made within two years of the date of an employee's first
participation in a SIMPLE IRA of an employer are subject to a 25% penalty tax
instead of the 10% penalty tax discussed previously.
Required Distributions. SIMPLE IRAs are subject to the same minimum required
distribution rules described above for IRAs.
Tax-Free Rollovers. Direct transfers may be made among SIMPLE IRAs in the same
manner as described above for IRAs, subject to the same conditions and
limitations. Rollovers from SIMPLE IRAs are permitted after two years have
elapsed from the date of an employee's first participation in a SIMPLE IRA of
the employer. Rollovers to SIMPLE IRAs from other plans are not permitted.
ROTH INDIVIDUAL RETIREMENT ANNUITIES (ROTH IRA)
Purchase Payments. Under Section 408A of the Code, Individuals may make
nondeductible contributions to Roth IRA contracts up to $2,000. This
contribution amount must be reduced by the amount of any contributions made to
other IRAs for the benefit of the Roth IRA owner. The maximum $2,000
contribution is phased out for single taxpayers with adjusted gross income
between $95,000 and $110,000 and for joint filers with adjusted gross income
between $150,000 and $160,000. If taxable income is recognized on the regular
IRA, an IRA owner with adjusted gross income of less than $100,000 may convert a
regular IRA into a Roth IRA. If the conversion is made in 1999, IRA income
recognized may be spread over four years. Otherwise, all IRA income will need to
be recognized in the year of conversion. No IRS 10% tax penalty will apply to
the conversion.
Taxation of Distribution. Qualified distributions are received income-tax free
by the Roth IRA owner, or beneficiary in case of the Roth IRA owner's death. A
qualified distribution is any distribution made after five years if the IRA
owner is over age 59 1/2, dies, becomes disabled, or uses the funds for
first-time home buyer expenses at the time of distribution. The five-year period
for converted amounts begins from the year of the conversion.
Report of Independent Auditors
Board of Directors and Participants
Principal Life Insurance Company
We have audited the accompanying individual and combined statements of net
assets of Principal Life Insurance Company Separate Account B (comprised of the
Aggressive Growth, AIM V.I. Growth, AIM V.I. Growth and Income, AIM V.I. Value,
American Century VP Growth & Income, Asset Allocation, Balanced, Blue Chip,
Bond, Capital Value, Fidelity VIP II Contrafund, Fidelity VIP Growth, Government
Securities, Growth, International, International SmallCap, LargeCap Growth,
MicroCap, MidCap, MidCap Growth, MidCap Value, Money Market, Real Estate,
SmallCap, Small Cap Growth, SmallCap Value, Stock Index 500, Templeton VP Stock,
and Utilities Divisions) as of December 31, 1999, and the related statements of
operations for the year then ended, and changes in net assets for each of the
two years in the period then ended, except for those divisions operating for
portions of such periods as disclosed in the financial statements. These
financial statements are the responsibility of the management of Principal Life
Insurance Company. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. Our
procedures included confirmation of securities owned as of December 31, 1999, by
correspondence with the transfer agents. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the individual and combined financial position of the
respective divisions of Principal Life Insurance Company Separate Account B at
December 31, 1999, and the individual and combined results of their operations
and the changes in their net assets for the periods described above, in
conformity with accounting principles generally accepted in the United States.
/s/ Ernst & Young LLP
Des Moines, Iowa
January 31, 2000
<PAGE>
Principal Life Insurance Company
Separate Account B
Statements of Net Assets
December 31, 1999
<TABLE>
<CAPTION>
<S> <C>
Assets
Investments:
Aggressive Growth Division:
Aggressive Growth Account - 14,480,324 shares at net asset value of $23.89
per share (cost - $247,636,940) $ 345,934,950
AIM V.I. Growth Division:
AIM V.I. Growth Fund - 367,954 shares at net asset value of
$32.25 per share (cost - $10,843,312) 11,866,523
AIM V.I. Growth and Income Division:
AIM V.I. Growth and Income Fund - 572,233 shares at net asset value
of $31.59 per share (cost - $15,842,561) 18,076,830
AIM V.I. Value Division:
AIM V.I. Value Fund - 396,108 shares at net asset value of
$33.50 per share (cost - $12,184,028) 13,269,626
American Century VP Growth & Income Division:
American Century Variable Portfolios Inc.: VP Income & Growth - 59,948
shares at net asset value of $8.00 per share (cost - $452,533) 479,584
Asset Allocation Division:
Asset Allocation Account - 5,825,489 shares at net asset value of
$13.23 per share (cost - $69,961,149) 77,071,217
Balanced Division:
Balanced Account - 12,810,215 shares at net asset value
of $15.41 per share (cost - $195,788,197) 197,405,415
Blue Chip Division:
Blue Chip Account - 121,699 shares at net asset value of
$10.38 per share (cost - $1,209,626) 1,263,239
Bond Division:
Bond Account - 10,877,467 shares at net asset value of
$10.89 per share (cost - $127,987,262) 118,455,611
Capital Value Division:
Capital Value Account - 10,954,082 shares at net asset value of
$30.74 per share (cost - $347,959,367) 336,728,479
Fidelity VIP II Contrafund Division:
Fidelity Variable Insurance Products Fund II: Fidelity VIP II Contrafund Portfolio
-557,500 shares at net asset value of $29.10 per share (cost - $14,465,592) 16,223,239
Fidelity VIP Growth Division:
Fidelity Variable Insurance Products Fund: Fidelity VIP Growth Portfolio -
318,430 shares at net asset value of $54.80 per share (cost - $15,490,259) 17,449,942
Government Securities Division:
Government Securities Account - 13,106,099 shares at
net asset value of $10.26 per share (cost - $140,102,412) 134,468,582
Growth Division:
Growth Account - 14,144,733 shares at net asset value of
$23.56 per share (cost - $225,380,262) 333,249,917
See accompanying notes.
Assets (continued)
International Division:
International Account - 11,452,229 shares at net asset value of
$15.95 per share (cost - $152,867,356) $ 182,663,050
International SmallCap Division:
International SmallCap Account - 1,285,315 shares at net asset
value of $16.66 per share (cost - $15,116,129) 21,413,344
LargeCap Growth Division:
LargeCap Growth Account - 31,315 shares at net asset value of
$13.26 per share (cost - $348,017) 415,243
MicroCap Division:
MicroCap Account - 239,140 shares at net asset value of
$8.07 per share (cost - $2,025,966) 1,929,858
MidCap Division:
MidCap Account - 6,237,946 shares at net asset value of
$36.90 per share (cost - $185,823,068) 230,180,208
MidCap Growth Division:
MidCap Growth Account - 746,126 shares at net asset value
of $10.66 per share (cost - $6,962,670) 7,953,706
MidCap Value Division:
MidCap Value Account - 18,033 shares at net asset value of
$11.11 per share (cost - $182,264) 200,351
Money Market Division:
Money Market Account - 105,970,695 shares at net asset value of $1.00 per share 105,970,695
Real Estate Division:
Real Estate Account - 278,645 shares at net asset value of $8.20
per share (cost - $2,533,981) 2,284,887
SmallCap Division:
SmallCap Account - 1,328,035 shares at net asset value of $10.74
per share (cost - $12,087,261) 14,263,092
SmallCap Growth Division:
SmallCap Growth Account - 1,417,579 shares at net asset value of
$19.56 per share (cost - $18,398,605) 27,727,835
SmallCap Value Division:
SmallCap Value Account - 539,656 shares at net asset value
of $10.06 per share (cost - $4,578,677) 5,428,934
Stock Index 500 Division:
Stock Index 500 Account - 2,676,801 shares at net asset value of
$10.71 per share (cost - $26,690,451) 28,668,536
Templeton VP Stock Division:
Templeton Variable Products Series Fund: Templeton Stock Fund Class 2 -
9,444 shares at net asset value of $24.29 per share (cost - $206,732) 229,397
Utilities Division:
Utilities Account - 1,774,898 shares at net asset value of $10.90 per share
(cost - $18,915,925) 19,346,388
Combined net assets $2,270,618,678
</TABLE>
<PAGE>
Principal Life Insurance Company
Separate Account B
Statements of Net Assets (continued)
December 31, 1999
<TABLE>
<CAPTION>
Units Unit
Value
<S> <C> <C> <C>
Net assets are represented by:
Aggressive Growth Division:
Contracts in accumulation period:
The Principal Variable Annuity 9,017,582 $38.36 $345,934,950
AIM V.I. Growth Division:
Contracts in accumulation period:
The Principal Variable Annuity 968,222 12.26 11,866,523
AIM V.I. Growth and Income Division:
Contracts in accumulation period:
The Principal Variable Annuity 1,493,915 12.10 18,076,830
AIM V.I. Value Division:
Contracts in accumulation period:
The Principal Variable Annuity 1,148,659 11.55 13,269,626
American Century VP Growth & Income Division:
Contracts in accumulation period:
Principal Freedom Variable Annuity 43,170 11.11 479,584
Asset Allocation Division:
Contracts in accumulation period:
The Principal Variable Annuity 3,913,104 19.70 77,071,217
Balanced Division:
Contracts in accumulation period:
Personal Variable 2,848,631 1.80 5,131,683
Premier Variable 16,370,101 1.82 29,830,647
The Principal Variable Annuity 9,102,804 17.85 162,443,085
197,405,415
Blue Chip Division:
Contracts in accumulation period:
Principal Freedom Variable Annuity 123,177 10.26 1,263,239
Bond Division:
Contracts in accumulation period:
Personal Variable 998,334 1.42 1,421,734
Premier Variable 7,414,544 1.44 10,676,104
Principal Freedom Variable Annuity 107,056 9.71 1,039,234
The Principal Variable Annuity 7,677,363 13.72 105,318,539
118,455,611
See accompanying notes.
Units Unit
Value
Net assets are represented by (continued):
Capital Value Division:
Currently payable annuity contracts:
Bankers Flexible Annuity 3,544 30.01 $ 106,344
Pension Builder Plus - Rollover IRA 50,709 6.17 313,027
Premier Variable 135,307 2.56 346,812
766,183
Contracts in accumulation period:
Bankers Flexible Annuity 199,132 $30.01 5,976,135
Pension Builder Plus 1,091,155 5.54 6,047,096
Pension Builder Plus - Rollover IRA 167,496 6.17 1,033,755
Personal Variable 4,014,371 2.52 10,123,021
Premier Variable 22,330,793 2.56 57,237,192
Principal Freedom Variable Annuity 103,107 8.87 914,718
Principal Variable Annuity 11,633,608 21.89 254,630,379
335,962,296
336,728,479
Fidelity VIP II Contrafund Division:
Contracts in accumulation period:
The Principal Variable Annuity 1,436,477 11.29 16,223,239
Fidelity VIP Growth Division:
Contracts in accumulation period:
The Principal Variable Annuity 1,441,196 12.11 17,449,942
Government Securities Division:
Contracts in accumulation period:
Pension Builder Plus 356,199 2.14 760,507
Pension Builder Plus - Rollover IRA 30,817 2.28 70,140
Personal Variable 2,110,735 1.51 3,182,014
Premier Variable 8,431,716 1.53 12,921,136
The Principal Variable Annuity 8,553,790 13.74 117,534,785
134,468,582
Growth Division:
Contracts in accumulation period:
Personal Variable 3,115,301 2.46 7,664,116
Premier Variable 20,774,213 2.49 51,676,583
The Principal Variable Annuity 10,998,654 24.90 273,909,218
333,249,917
International Division:
Contracts in accumulation period:
Personal Variable 1,754,632 2.06 3,619,950
Premier Variable 10,814,176 2.09 22,547,859
Principal Freedom Variable Annuity 53,300 11.68 622,564
The Principal Variable Annuity 7,798,860 19.99 155,872,677
182,663,050
International SmallCap Division:
Contracts in accumulation period:
The Principal Variable Annuity 1,246,116 17.18 21,413,344
<PAGE>
Principal Life Insurance Company
Separate Account B
Statements of Net Assets (continued)
December 31, 1999
Units Unit
Value
Net assets are represented by (continued):
LargeCap Growth Division:
Contracts in accumulation period:
Principal Freedom Variable Annuity 31,275 $13.28 $ 415,243
MicroCap Division:
Contracts in accumulation period:
The Principal Variable Annuity 243,675 7.92 1,929,858
MidCap Division:
Contracts in accumulation period:
Personal Variable 2,156,005 2.16 4,654,699
Premier Variable 12,882,746 2.18 28,134,044
Principal Freedom Variable Annuity 32,346 10.94 353,982
The Principal Variable Annuity 9,229,032 21.35 197,037,483
230,180,208
MidCap Growth Division:
Contracts in accumulation period:
Principal Freedom Variable Annuity 9,046 11.28 102,078
The Principal Variable Annuity 746,186 10.52 7,851,628
7,953,706
MidCap Value Division:
Contracts in accumulation period:
Principal Freedom Variable Annuity 17,888 11.20 200,351
Money Market Division:
Contracts in accumulation period:
Pension Builder Plus 338,145 2.01 680,364
Pension Builder Plus - Rollover IRA 10,610 2.12 22,536
Personal Variable 1,512,864 1.33 2,009,728
Premier Variable 10,632,065 1.35 14,359,351
Principal Freedom Variable Annuity 94,450 10.25 968,430
The Principal Variable Annuity 7,145,096 12.31 87,930,286
105,970,695
Real Estate Division:
Contracts in accumulation period:
The Principal Variable Annuity 261,126 8.75 2,284,887
SmallCap Division:
Contracts in accumulation period:
Principal Freedom Variable Annuity 49,733 13.79 685,747
The Principal Variable Annuity 1,207,717 11.24 13,577,345
14,263,092
See accompanying notes.
Units Unit
Value
Net assets are represented by (continued):
SmallCap Growth Division:
Contracts in accumulation period:
Principal Freedom Variable Annuity 24,440 $17.18 $ 419,827
The Principal Variable Annuity 1,388,214 19.67 27,308,008
27,727,835
SmallCap Value Division:
Contracts in accumulation period:
The Principal Variable Annuity 536,295 10.12 5,428,934
Stock Index 500 Division:
Contracts in accumulation period:
Principal Freedom Variable Annuity 301,818 10.98 3,315,448
The Principal Variable Annuity 2,314,127 10.96 25,353,088
28,668,536
Templeton VP Stock Division:
Contracts in accumulation period:
Principal Freedom Variable Annuity 19,975 11.48 229,397
Utilities Division:
Contracts in accumulation period:
The Principal Variable Annuity 1,670,481 11.58 19,346,388
Combined net assets $2,270,618,678
</TABLE>
<PAGE>
Principal Life Insurance Company
Separate Account B
Statements of Operations
Year ended December 31, 1999
<TABLE>
<CAPTION>
AIM V.I.
Aggressive AIM V.I. Growth and
Growth Growth Income
Combined Division Division (2) Division (2)
<S> <C> <C> <C> <C>
Investment income
Income:
Dividends $ 45,282,090 $ - $ 17,806 $ 77,291
Capital gains distributions 105,806,830 21,397,989 312,127 53,367
Total income 151,088,920 21,397,989 329,933 130,658
Expenses:
Mortality and expense risks 22,763,225 3,276,716 20,980 34,219
Administration charges 742,370 194,565 456 385
Contingent sales charges 3,165,426 457,098 3,214 4,269
26,671,021 3,928,379 24,650 38,873
Net investment income (loss) 124,417,899 17,469,610 305,283 91,785
Realized and unrealized gains (losses)
on investments
Net realized gains (losses) on investments 22,090,229 3,196,766 6,593 573
Change in net unrealized appreciation or
depreciation of investments 63,116,910 68,126,668 1,023,211 2,234,269
Net increase (decrease) in net assets resulting
from operations $209,625,038 $88,793,044 $1,335,087 $2,326,627
<FN>
(1) Commenced operations April 30, 1999.
(2) Commenced operations July 30, 1999.
</FN>
</TABLE>
See accompanying notes.
<TABLE>
<CAPTION>
American
Century VP
AIM V.I. Growth & Asset
Value Income Allocation Balanced Blue Chip
Division (2) Division (1) Division Division Division (1) Bond Division
<S> <C> <C> <C> <C> <C>
$ 29,001 $ - $ 1,831,944 $ 6,834,925 $10,146 $ 8,279,063
151,654 - 5,618,939 7,645,759 - -
180,655 7,450,883 14,480,684 10,146 8,279,063
26,428 1,079 854,745 2,242,611 2,912 1,408,549
430 - 13,026 58,446 - 24,428
1,915 2 91,473 294,250 4 186,790
28,773 1,081 959,244 2,595,307 2,916 1,619,767
151,882 (1,081) 6,491,639 11,885,377 7,230 6,659,296
891 (497) 481,462 1,484,227 2,512 (108,685)
1,085,598 27,051 4,561,739 (11,427,368) 53,613 (11,364,679)
$1,238,371 $25,473 $11,534,840 $ 1,942,236 $63,355 $ (4,814,068)
</TABLE>
<PAGE>
Principal Life Insurance Company
Separate Account B
Statements of Operations (continued)
Year ended December 31, 1999
<TABLE>
<CAPTION>
Fidelity VIP II Fidelity VIP Government
Capital Value Contrafund Growth Securities
Division Division (2) Division (2) Division
<S> <C> <C> <C> <C>
Investment income
Income:
Dividends $ 7,693,507 $ - $ - $ 8,714,628
Capital gains distributions 38,733,240 - - -
Total income 46,426,747 - - 8,714,628
Expenses:
Mortality and expense risks 4,005,315 34,580 31,417 1,602,756
Administration charges 156,269 665 492 43,008
Contingent sales charges 498,264 1,863 3,790 242,416
4,659,848 37,108 35,699 1,888,180
Net investment income (loss) 41,766,899 (37,108) (35,699) 6,826,448
Realized and unrealized gains
(losses) on investments
Net realized gains (losses) on
investments 4,658,058 1,648 5,275 484,422
Change in net unrealized appreciation
or depreciation of investments (67,359,377) 1,757,647 1,959,683 (9,574,634)
Net increase (decrease) in net asset
resulting from operations $(20,934,420) $1,722,187 $1,929,259 $(2,263,764)
<FN>
(1) Commenced operations April 30, 1999.
(2) Commenced operations July 30, 1999.
</FN>
</TABLE>
See accompanying notes.
<TABLE>
<CAPTION>
International LargeCap
Growth International SmallCap Growth MicroCap MidCap
Division Division Division Division(1) Division Division
<S> <C> <C> <C> <C> <C>
$ 1,947,097 $ 4,726,274 $ - $ - $ 2,813 $ 703,317
1,329,905 17,318,991 862,692 - - 10,660,187
3,277,002 22,045,265 862,692 - 2,813 11,363,504
3,297,312 1,777,625 105,356 782 19,385 2,532,895
123,956 33,015 2,741 - 495 51,070
372,883 228,462 5,566 4 1,058 372,706
3,794,151 2,039,102 113,663 786 20,938 2,956,671
(517,149) 20,006,163 749,029 (786) (18,125) 8,406,833
4,769,748 1,999,070 155,306 (259) (21,284) 4,548,722
37,519,367 13,548,007 6,340,627 67,226 (16,637) 10,460,479
$41,771,966 $35,553,240 $7,244,962 $66,181 $(56,046) $23,416,034
</TABLE>
<PAGE>
Principal Life Insurance Company
Separate Account B
Statements of Operations (continued)
Year ended December 31, 1999
<TABLE>
<CAPTION>
MidCap MidCap Money
Growth Value Market Real Estate
Division Division (1) Division Division
<S> <C> <C> <C> <C>
Investment income
Income:
Dividends $ 13,485 $ 303 $3,691,350 $ 117,060
Capital gains distributions - 3,640 - -
Total income 13,485 3,943 3,691,350 117,060
Expenses:
Mortality and expense risks 64,265 494 869,510 27,254
Administration charges 1,602 - 23,537 383
Contingent sales charges 3,790 - 357,209 1,571
69,657 494 1,250,256 29,208
Net investment income (loss) (56,172) 3,449 2,441,094 87,852
Realized and unrealized gains
(losses) on investments
Net realized gains (losses) on
investments 29,979 (55) - (22,348)
Change in net unrealized appreciation
or depreciation of investments 706,786 18,087 - (203,890)
Net increase (decrease) in net assets
resulting from operations $680,593 $21,481 $2,441,094 $(138,386)
<FN>
(1) Commenced operations April 30, 1999.
</FN>
</TABLE>
See accompanying notes.
<TABLE>
<CAPTION>
SmallCap Stock Templeton
SmallCap Growth SmallCap Index 500 VP Stock Utilities
Division Division Value Division Division (1) Division (1) Division
<S> <C> <C> <C> <C> <C>
$ 4,386 $ - $ 34,529 $ 160,270 $ - $392,895
1,164,756 260,578 - 207,423 - 85,583
1,169,142 260,578 34,529 367,693 - 478,478
95,691 104,663 48,384 106,102 537 170,663
2,565 3,410 893 1,910 - 4,623
5,893 6,248 2,023 10,768 2 11,895
104,149 114,321 51,300 118,780 539 187,181
1,064,993 146,257 (16,771) 248,913 (539) 291,297
181,690 159,077 28,958 4,053 (696) 45,023
2,055,517 8,873,343 830,881 1,978,085 22,665 (187,054)
$3,302,200 $9,178,677 $843,068 $2,231,051 $21,430 $149,266
</TABLE>
<PAGE>
Principal Life Insurance Company
Separate Account B
Statements of Changes in Net Assets
Years ended December 31, 1999 and 1998
<TABLE>
<CAPTION>
AIM V.I.
Aggrewssive AIM V.I. Growth and
Growth Growth Income
Combined Division Division (3) Division (3)
<S> <C> <C> <C> <C>
Net assets at January 1, 1998 $1,288,183,210 $143,957,816$ - $ -
Increase (decrease) in net assets
Operations:
Net investment income (loss) 65,953,139 7,934,103 - -
Net realized gains (losses) on investments 12,416,637 2,390,605 - -
Change in net unrealized appreciation or
depreciation of investments 69,585,710 16,690,371 - -
Net increase (decrease) in net assets resulting from
operations 147,955,486 27,015,079 - -
Changes from principal transactions:
Purchase payments, less sales charges, per
payment fees and applicable premium taxes 880,179,184 89,426,487 - -
Contract terminations (82,987,332) (7,493,332) - -
Death benefit payments (6,720,662) (574,590) - -
Flexible withdrawal option payments (13,530,855) (1,052,669) - -
Transfer payments to other contracts (410,965,015) (42,840,180) - -
Annuity payments (47,900) - - -
Increase in net assets from principal transactions 365,927,420 37,465,716 - -
Total increase 513,882,906 64,480,795 - -
Net assets at December 31, 1998 1,802,066,116 208,438,611 - -
Increase (decrease) in net assets
Operations:
Net investment income (loss) 124,417,899 17,469,610 305,283 91,785
Net realized gains (losses) on investments 22,090,229 3,196,766 6,593 573
Change in net unrealized appreciation or
depreciation of investments 63,116,910 68,126,668 1,023,211 2,234,269
Net increase (decrease) in net assets resulting from
operations 209,625,038 88,793,044 1,335,087 2,326,627
Changes from principal transactions:
Purchase payments, less sales charges, per
payment fees and applicable premium taxes 910,344,713 101,064,152 11,334,680 16,624,717
Contract terminations (141,526,084) (15,104,428) (106,201) (141,058)
Death benefit payments (10,198,348) (983,013) - -
Flexible withdrawal option payments (21,852,225) (1,779,766) (15,533) (59,632)
Transfer payments to other contracts (477,791,128) (34,493,650) (681,510) (673,824)
Annuity payments (49,404) - - -
Increase (decrease) in net assets from principal
transactions 258,927,524 48,703,295 10,531,436 15,750,203
Total increase (decrease) 468,552,562 137,496,339 11,866,523 18,076,830
Net assets at December 31, 1999 $2,270,618,678 $345,934,950 $11,866,523 $18,076,830
<FN>
(1) Commenced operations May 1, 1998.
(2) Commenced operations April 30, 1999.
(3) Commenced operations July 30, 1999.
</FN>
</TABLE>
See accompanying notes.
<TABLE>
<CAPTION>
American
Century VP
AIM V.I. Growth & Asset Capital
Value Income Allocation Balanced Blue Chip Value
Division (3) Division (2) Division Division Division (2) Bond Division Division
<S> <C> <C> <C> <C> <C> <C>
$ - $ - $48,511,958 $127,099,255 $ - $ 73,489,868 $269,251,746
- - 2,564,027 9,165,298 - 4,819,740 14,865,520
- - 109,943 612,459 - 256,093 3,370,612
- - 1,193,914 5,916,307 - 403,378 16,709,725
- - 3,867,884 15,694,064 - 5,479,211 34,945,857
- - 20,700,753 75,135,480 - 58,231,814 104,873,017
- - (2,607,601) (7,275,303) - (4,182,861) (20,291,443)
- - (356,750) (782,491) - (501,389) (1,069,753)
- - (647,508) (2,009,052) - (1,522,331) (2,067,909)
- - (6,686,437) (20,238,081) - (14,012,541) (27,234,001)
- - - - - - (47,900)
- - 10,402,457 44,830,553 - 38,012,692 54,162,011
- - 14,270,341 60,524,617 - 43,491,903 89,107,868
- - 62,782,299 187,623,872 - 116,981,771 358,359,614
151,882 (1,081) 6,491,639 11,885,377 7,230 6,659,296 41,766,899
891 (497) 481,462 1,484,227 2,512 (108,685) 4,658,058
1,085,598 27,051 4,561,739 (11,427,368) 53,613 (11,364,679) (67,359,377)
1,238,371 25,473 11,534,840 1,942,236 63,355 (4,814,068) (20,934,420)
13,050,220 524,993 14,766,942 53,940,183 1,333,008 42,269,162 78,514,936
(63,264) (1,423) (3,022,661) (14,926,025) (3,596) (7,755,652) (27,487,047)
- - (516,925) (1,306,378) - (1,261,033) (1,652,461)
(34,809) (2,610) (881,819) (2,961,604) (51,191) (2,492,384) (3,352,498)
(920,892) (66,849) (7,591,459) (26,906,869) (78,337) (24,472,185) (46,670,241)
- - - - - - (49,404)
12,031,255 454,111 2,754,078 7,839,307 1,199,884 6,287,908 (696,715)
13,269,626 479,584 14,288,918 9,781,543 1,263,239 1,473,840 (21,631,135)
$13,269,626 $479,584 $77,071,217 $197,405,415 $1,263,239 $118,455,611 $336,728,479
</TABLE>
<PAGE>
Principal Life Insurance Company
Separate Account B
Statements of Changes in Net Assets (continued)
Years ended December 31, 1999 and 1998
<TABLE>
<CAPTION>
Fidelity VIP II Fidelity VIP Government
Contrafund Growth Securities Growth
Division (3) Division (3) Division Division
<S> <C> <C> <C> <C>
Net assets at January 1, 1998 $ - $ - $ 92,854,016 $165,813,925
Increase (decrease) in net assets
Operations:
Net investment income (loss) - - 5,457,597 2,355,086
Net realized gains (losses) on investments - - 519,217 2,312,393
Change in net unrealized appreciation or
depreciation of investments - - 1,581,620 32,170,680
Net increase (decrease) in net assets resulting from
operations - - 7,558,434 36,838,159
Changes from principal transactions:
Purchase payments, less sales charges, per
payment fees and applicable premium taxes - - 63,571,935 84,755,953
Contract terminations - - (6,906,897) (9,260,589)
Death benefit payments - - (712,491) (806,053)
Flexible withdrawal option payments - - (1,740,621) (1,381,999)
Transfer payments to other contracts - - (17,983,933) (22,495,558)
Annuity payments - - - -
Increase in net assets from principal transactions - - 36,227,993 50,811,754
Total increase - - 43,786,427 87,649,913
Net assets at December 31, 1998 - - 136,640,443 253,463,838
Increase (decrease) in net assets
Operations:
Net investment income (loss) (37,108) (35,699) 6,826,448 (517,149)
Net realized gains (losses) on investments 1,648 5,275 484,422 4,769,748
Change in net unrealized appreciation or
depreciation of investments 1,757,647 1,959,683 (9,574,634) 37,519,367
Net increase (decrease) in net assets resulting from
operations 1,722,187 1,929,259 (2,263,764) 41,771,966
Changes from principal transactions:
Purchase payments, less sales charges, per
payment fees and applicable premium taxes 14,931,250 16,698,633 47,743,208 91,335,475
Contract terminations (61,565) (125,229) (10,465,377) (19,217,469)
Death benefit payments - - (1,341,588) (1,006,757)
Flexible withdrawal option payments (24,879) (26,375) (2,664,620) (2,479,569)
Transfer payments to other contracts (343,754) (1,026,346) (33,179,720) (30,617,567)
Annuity payments - - - -
Increase (decrease) in net assets from principal
transactions 14,501,052 15,520,683 91,903 38,014,113
Total increase (decrease) 16,223,239 17,449,942 (2,171,861) 79,786,079
Net assets at December 31, 1999 $16,223,239 $17,449,942 $134,468,582 $333,249,917
<FN>
(1) Commenced operations May 1, 1998.
(2) Commenced operations April 30, 1999.
(3) Commenced operations July 30, 1999.
</FN>
</TABLE>
See accompanying notes.
<TABLE>
<CAPTION>
International LargeCap
International SmallCap Growth MicroCap MidCap
Division Division (1) Division (2) Division (1) Division
<S> <C> <C> <C> <C>
$121,436,154 $ - $ - $ - $204,088,063
5,420,947 (7,494) - (1,807) 11,348,399
1,240,861 (34,310) - (30,669) 1,666,097
3,163,616 (43,412) - (79,471) (9,573,159)
9,825,424 (85,216) - (111,947) 3,441,337
43,354,442 4,389,570 - 1,525,355 66,169,872
(6,288,874) (3,166) - (13,672) (11,333,222)
(361,156) - - - (893,824)
(842,431) (8,380) - (764) (1,395,916)
(22,528,113) (534,238) (252,998) (27,342,936)
- - - - -
13,333,868 3,843,786 - 1,257,921 25,203,974
23,159,292 3,758,570 - 1,145,974 28,645,311
144,595,446 3,758,570 - 1,145,974 232,733,374
20,006,163 749,029 (786) (18,125) 8,406,833
1,999,070 155,306 (259) (21,284) 4,548,722
13,548,007 6,340,627 67,226 (16,637) 10,460,479
35,553,240 7,244,962 66,181 (56,046) 23,416,034
34,132,051 13,166,004 375,030 1,266,131 35,597,163
(10,091,869) (183,916) (3,596) (34,951) (16,031,613)
(525,124) (45,140) - (1,942) (831,361)
(1,246,885) (74,313) (687) (3,256) (1,703,550)
(19,753,809) (2,452,823) (21,685) (386,052) (42,999,839)
- - - - -
2,514,364 10,409,812 349,062 839,930 (25,969,200)
38,067,604 17,654,774 415,243 783,884 (2,553,166)
$182,663,050 $21,413,344 $415,243 $1,929,858 $230,180,208
</TABLE>
<PAGE>
Principal Life Insurance Company
Separate Account B
Statements of Changes in Net Assets (continued)
Years ended December 31, 1999 and 1998
<TABLE>
<CAPTION>
MidCap MidCap Money
Growth Value Market Real Estate
Division (1) Division (2) Division Division (1)
<S> <C> <C> <C> <C>
Net assets at January 1, 1998 $ - $ - $ 41,680,409 $ -
Increase (decrease) in net assets
Operations:
Net investment income (loss) (13,725) - 1,944,535 44,944
Net realized gains (losses) on investments (8,805) - - (1,854)
Change in net unrealized appreciation or
depreciation of investments 284,250 - - (45,204)
Net increase (decrease) in net assets resulting from
operations 261,720 - 1,944,535 (2,114)
Changes from principal transactions:
Purchase payments, less sales charges, per
payment fees and applicable premium taxes 3,381,739 - 245,196,048 1,979,207
Contract terminations (46,096) - (7,232,550) (6,972)
Death benefit payments - - (658,257) -
Flexible withdrawal option payments (5,134) - (797,929) (4,598)
Transfer payments to other contracts (203,258) - (206,535,244) (152,812)
Annuity payments - - - -
Increase in net assets from principal transactions 3,127,251 - 29,972,068 1,814,825
Total increase 3,388,971 - 31,916,603 1,812,711
Net assets at December 31, 1998 3,388,971 - 73,597,012 1,812,711
Increase (decrease) in net assets
Operations:
Net investment income (loss) (56,172) 3,449 2,441,094 87,852
Net realized gains (losses) on investments 29,979 (55) - (22,348)
Change in net unrealized appreciation or
depreciation of investments 706,786 18,087 - (203,890)
Net increase (decrease) in net assets resulting from
operations 680,593 21,481 2,441,094 (138,386)
Changes from principal transactions:
Purchase payments, less sales charges, per
payment fees and applicable premium taxes 5,299,244 199,655 238,793,125 1,050,155
Contract terminations (125,252) - (15,296,261) (51,913)
Death benefit payments (60,684) - (340,462) (1,942)
Flexible withdrawal option payments (41,920) (1,137) (1,358,192) (39,089)
Transfer payments to other contracts (1,187,246) (19,648) (191,865,621) (346,649)
Annuity payments - - - -
Increase (decrease) in net assets from principal
transactions 3,884,142 178,870 29,932,589 610,562
Total increase (decrease) 4,564,735 200,351 32,373,683 472,176
Net assets at December 31, 1999 $7,953,706 $200,351 $105,970,695 $2,284,887
<FN>
(1) Commenced operations May 1, 1998.
(2) Commenced operations April 30, 1999.
(3) Commenced operations July 30, 1999.
</FN>
</TABLE>
See accompanying notes.
<TABLE>
<CAPTION>
SmallCap SmallCap Stock Templeton
SmallCap Growth Value Index 500 VP Stock Utilities
Division (1) Division (1) Division (1) Division (2) Division (2) Division (1)
<S> <C> <C> <C> <C> <C>
$ - $ - $ - $ - $ - $ -
(13,548) (11,681) (737) - - 81,935
(4,971) 1,417 (6,817) - - 24,366
120,314 455,888 19,376 - - 617,517
101,795 445,624 11,822 - - 723,818
3,787,231 3,229,155 2,802,830 - - 7,668,296
(3,155) (12,246) (10,976) - - (18,377)
- (3,908) - - - -
(9,905) (1,997) (9,311) - - (32,401)
(240,611) (456,290) (215,381) - - (1,012,403)
- - - - - -
3,533,560 2,754,714 2,567,162 - - 6,605,115
3,635,355 3,200,338 2,578,984 - - 7,328,933
3,635,355 3,200,338 2,578,984 - - 7,328,933
1,064,993 146,257 (16,771) 248,913 (539) 291,297
181,690 159,077 28,958 4,053 (696) 45,023
2,055,517 8,873,343 830,881 1,978,085 22,665 (187,054)
3,302,200 9,178,677 843,068 2,231,051 21,430 149,266
10,140,290 19,156,102 2,804,702 28,866,212 233,152 15,134,138
(194,731) (206,447) (66,861) (363,196) (1,423) (393,060)
(72,373) (142,968) - - - (108,197)
(55,329) (61,773) (31,699) (160,894) (687) (245,525)
(2,492,320) (3,396,094) (699,260) (1,904,637) (23,075) (2,519,167)
- - - - - -
7,325,537 15,348,820 2,006,882 26,437,485 207,967 11,868,189
10,627,737 24,527,497 2,849,950 28,668,536 229,397 12,017,455
$14,263,092 $27,727,835 $5,428,934 $28,668,536 $229,397 $19,346,388
</TABLE>
<PAGE>
Principal Life Insurance Company
Separate Account B
Notes to Financial Statements
December 31, 1999
1. Investment and Accounting Policies
Principal Life Insurance Company Separate Account B (Separate Account B) is a
segregated investment account of Principal Life Insurance Company (Principal
Life) and is registered under the Investment Company Act of 1940 as a unit
investment trust, with no stated limitations on the number of authorized units.
As directed by eligible contractholders, each division of Separate Account B
invests exclusively in shares representing interests in a corresponding
investment option. As of December 31, 1999, contractholder investment options
include the following open-end management investment companies:
<TABLE>
<S> <C>
Principal Variable Contracts Fund, Inc. (4) Principal Variable Contracts Fund, Inc. (4)
Aggressive Growth Account (continued):
Asset Allocation Account SmallCap Account (1)
Balanced Account Small Cap Growth Account (1)
Blue Chip Account (2) SmallCap Value Account (1)
Bond Account Stock Index 500 Account (2)
Capital Value Account Utilities Account (1)
Government Securities Account AIM V.I. Growth Fund (3)
Growth Account AIM V.I. Growth & Income Fund (3)
International Account AIM V.I. Value Fund (3)
International SmallCap Account (1) American Century Variable Portfolios Inc.
LargeCap Growth Account (2) VP Income & Growth (2)
MicroCap Account (1) Fidelity Variable Insurance Products Fund
MidCap Account II: Fidelity VIP II Contrafund Portfolio (3)
MidCap Growth Account (1) Fidelity Variable Insurance Products Fund:
MidCap Value Account (2) Fidelity VIP Growth Portfolio (3)
Money Market Account Templeton Variable Products Series Fund:
Real Estate Account (1) Templeton Stock Fund Class 2 (2)
<FN>
(1) Additional investment option available to contractholders as of May 1,
1998.
(2) Additional investment option available to contractholders as of April 30,
1999.
(3) Additional investment option available to contractholders as of July 30,
1999.
(4) Organized by Principal Life Insurance Company.
</FN>
</TABLE>
Investments are stated at the closing net asset values per share on December 31,
1999.
The average cost method is used to determine realized gains and losses on
investments. Dividends are taken into income on an accrual basis as of the
ex-dividend date.
<PAGE>
Principal Life Insurance Company
Separate Account B
Notes to Financial Statements (continued)
1. Investment and Accounting Policies (continued)
Separate Account B supports the following variable annuity contracts of
Principal Life: Bankers Flexible Annuity Contracts; Pension Builder Plus
Contracts; Pension Builder Plus - Rollover IRA Contracts; Personal Variable
Contracts; Premier Variable Contracts; and The Principal Variable Annuity. On
April 30, 1999, Principal Life introduced a new product, Principal Freedom
Variable Annuity, which invests in Separate Account B. Contributions to the
Personal Variable contracts are no longer accepted from new customers, only from
existing customers beginning January 1, 1998.
Use of Estimates in the Preparation of Financial Statements
The preparation of Separate Account B's financial statements and accompanying
notes requires management to make estimates and assumptions that affect the
amounts reported and disclosed. These estimates and assumptions could change in
the future as more information becomes known, which could impact the amounts
reported and disclosed in the financial statements and accompanying notes.
2. Expenses
Principal Life is compensated for the following expenses:
Bankers Flexible Annuity Contracts - Mortality and expense risks assumed by
Principal Life are compensated for by a charge equivalent to an annual rate of
0.48% of the asset value of each contract. An annual administration charge of $7
for each participant's account is deducted as compensation for administrative
expenses. The mortality and expense risk and annual administration charges
amounted to $32,392 and $917, respectively, during the year ended December 31,
1999.
Pension Builder Plus and Pension Builder Plus - Rollover IRA Contracts -
Mortality and expense risks assumed by Principal Life are compensated for by a
charge equivalent to an annual rate of 1.4965% (1.0001% for a Rollover
Individual Retirement Annuity) of the asset value of each contract. A contingent
sales charge of up to 7% may be deducted from withdrawals made during the first
10 years of a contract, except for death or permanent disability. An annual
administration charge will be deducted ranging from a minimum of $25 to a
maximum of $275 depending upon a participant's investment account values and the
number of participants under the retirement plan and their participant
investment account value. The charges for mortality and expense risks,
contingent sales, and annual administration amounted to $145,840, $14, and
$38,283, respectively, during the year ended December 31, 1999.
<PAGE>
Principal Life Insurance Company
Separate Account B
Notes to Financial Statements (continued)
2. Expenses (continued)
Personal Variable Contracts - Mortality and expense risks assumed by Principal
Life are compensated for by a charge equivalent to an annual rate of 0.64% of
the asset value of each contract. A contingent sales charge of up to 5% may be
deducted from withdrawals from an investment account during the first seven
years from the date the first contribution which relates to such participant is
accepted by Principal Life. This charge does not apply to withdrawals made from
investment accounts which correlate to a plan participant as a result of the
plan participant's death or permanent disability. An annual administration
charge of $34 for each participant's account plus 0.35% of the annual average
balance of investment account values which correlate to a plan participant will
be deducted on a quarterly basis. The charges for mortality and expense risks,
contingent sales and annual administration amounted to $219,455, $46,869, and
$71,216, respectively, during the year ended December 31, 1999.
Premier Variable Contracts - Mortality and expense risks assumed by Principal
Life are compensated for by a charge equivalent to an annual rate of 0.42% of
the asset value of each contract. A fixed contract administration charge ranging
from $163 to $250 depending on plan type, plus a variable charge ranging from
.06% to .3% of quarterly assets (with a minimum charge of $188) is billed to the
contractholder each quarter. Additional quarterly administration charges for
recordkeeping services are based on the number of plan participants and can
range from a minimum of $512 to $22,579, plus $3.25 for each participant over
5,000. The charges for mortality expense risks and annual administration
amounted to $891,515 and $19,221, respectively, during the year ended December
31, 1999.
There were no contingent sales charges provided for in these contracts.
The Principal Variable Annuity - Mortality and expense risks assumed by
Principal Life are compensated for by a charge equivalent to an annual rate of
1.25% of the asset value of each contract. A contingent sales charge of up to 6%
may be deducted from the withdrawals made during the first six years of a
contract, except for death, annuitization, permanent disability, confinement in
a health care facility, or terminal illness. An annual administration charge of
the lessor of two percent of the accumulated value or $30 is deducted at the end
of the contract year. Principal Life reserves the right to charge an additional
administrative fee of up to 0.15% of the asset value of each Division. This fee
is currently being waived. The mortality expense risks, contingent sales, and
annual administration amounted to $21,448,417, $3,118,480, and $612,733,
respectively, during the year ended December 31, 1999.
Principal Freedom Variable Annuity (beginning in 1999) - Mortality and expenses
risk assumed by Principal Life are compensated for by a charge equivalent to an
annual rate of 0.85% of the asset value of each contract. A contingent sales
charge up to 6% may be deducted from the withdrawals made during the first six
years of a contract, except for death, annuitization, permanent disability,
confinement in a health facility, or terminal illness. Principal Life reserves
the right to charge an additional administrative fee of up to 0.15% of the asset
value of each Division. The mortality expense risk and contingent sales charges
amounted to $25,606 and $62, respectively, during the year ended December 31,
1999.
<PAGE>
Principal Life Insurance Company
Separate Account B
Notes to Financial Statements (continued)
3. Federal Income Taxes
The operations of Separate Account B are a part of the operations of Principal
Life. Under current practice, no federal income taxes are allocated by Principal
Life to the operations of Separate Account B.
4. Purchases and Sales of Investment Securities
The aggregate units and cost of purchases and proceeds from sales of investments
were as follows:
<TABLE>
<CAPTION>
Year ended December 31, 1999
Units Amount Units Amount
Purchased Purchased Redeemed Redeemed
<S> <C> <C> <C> <C>
Aggressive Growth Division:
The Principal Variable Annuity 3,214,960 $122,462,141 1,683,015 $ 56,289,236
AIM V.I. Growth Division:
The Principal Variable Annuity 1,043,639 11,664,612 75,317 827,893
AIM V.I. Growth and Income Division:
The Principal Variable Annuity 1,576,345 16,755,376 82,430 913,388
AIM V.I. Value Division:
The Principal Variable Annuity 1,243,905 13,230,876 95,246 1,047,739
American Century VP Growth &
Income Division:
Principal Freedom Variable Annuity 50,412 524,993 7,242 71,963
Asset Allocation Division:
The Principal Variable Annuity 834,729 22,217,825 683,360 12,972,108
Balanced Division:
Personal Variable 886,567 1,955,537 359,165 673,706
Premier Variable 6,339,318 13,629,736 4,740,045 8,750,890
The Principal Variable Annuity 2,284,756 52,835,595 2,085,229 39,271,588
9,510,641 68,420,868 7,184,439 48,696,184
Blue Chip Division:
Principal Freedom Variable Annuity 136,422 1,343,154 13,245 136,040
Bond Division:
Personal Variable 418,281 704,639 185,727 277,590
Premier Variable 4,132,232 6,826,337 2,731,487 4,028,982
Principal Freedom Variable Annuity 111,634 1,149,316 4,578 47,159
The Principal Variable Annuity 2,468,514 41,867,932 2,289,764 33,247,289
7,130,661 50,548,224 5,211,556 37,601,020
</TABLE>
<PAGE>
Principal Life Insurance Company
Separate Account B
Notes to Financial Statements (continued)
4. Purchases and Sales of Investment Securities (continued)
<TABLE>
Year ended December 31, 1999
<CAPTION>
Units Amount Units Amount
Purchased Purchased Redeemed Redeemed
<S> <C> <C> <C> <C>
Capital Value Division:
Bankers Flexible Annuity - $ 841,253 22,885 $ 766,530
Pension Builder Plus 7,017 888,413 204,326 1,317,343
Pension Builder - Rollover 769 200,803 130,658 853,075
Personal Variable 967,223 3,979,495 717,700 1,970,499
Premier Variable 5,573,357 22,944,583 5,435,276 14,926,095
Principal Freedom Variable Annuity 103,693 1,078,445 586 7,725
The Principal Variable Annuity 2,548,728 95,008,690 2,635,305 64,030,231
9,200,787 124,941,682 9,146,736 83,871,498
Fidelity VIP II Contrafund Division:
The Principal Variable Annuity 1,478,491 14,931,250 42,014 467,306
Fidelity VIP Growth Division:
The Principal Variable Annuity 1,551,497 16,698,632 110,301 1,213,648
Government Securities Division:
Pension Builder Plus 3,243 57,016 135,077 304,315
Pension Builder - Rollover 2,725 10,957 123,261 281,975
Personal Variable 559,774 1,055,722 402,979 629,754
Premier Variable 3,747,210 6,587,956 3,673,738 5,697,825
The Principal Variable Annuity 2,981,151 48,746,184 2,981,307 42,625,616
7,294,103 56,457,835 7,316,362 49,539,485
Growth Division:
Personal Variable 1,269,770 2,904,572 386,799 896,579
Premier Variable 9,481,990 21,824,588 5,078,610 11,584,283
The Principal Variable Annuity 2,961,592 69,883,318 1,825,509 44,634,652
13,713,352 94,612,478 7,290,918 57,115,514
International Division:
Personal Variable 582,324 1,455,068 338,607 600,098
Premier Variable 3,664,161 9,217,380 2,292,432 4,103,134
Principal Freedom Variable Annuity 54,996 630,306 1,696 19,226
The Principal Variable Annuity 1,517,640 44,874,562 1,584,525 28,934,331
5,819,121 56,177,316 4,217,260 33,656,789
International SmallCap Division:
The Principal Variable Annuity 1,049,723 14,028,696 222,261 2,869,855
LargeCap Growth Division:
Principal Freedom Variable Annuity 33,844 375,030 2,569 26,754
MicroCap Division:
The Principal Variable Annuity 156,137 1,268,945 53,831 447,140
</TABLE>
<PAGE>
Principal Life Insurance Company
Separate Account B
Notes to Financial Statements (continued)
4. Purchases and Sales of Investment Securities (continued)
<TABLE>
Year ended December 31, 1999
<CAPTION>
Units Amount Units Amount
Purchased Purchased Redeemed Redeemed
<S> <C> <C> <C> <C>
MidCap Division:
Personal Variable 731,578 $ 1,597,024 493,072 $ 956,950
Premier Variable 4,873,689 10,698,589 4,195,358 8,136,930
Principal Freedom Variable Annuity 34,298 347,942 1,952 19,145
The Principal Variable Annuity 1,298,049 34,317,113 2,807,445 55,410,009
6,937,614 46,960,668 7,497,827 64,523,034
MidCap Growth Division:
Principal Freedom Variable Annuity 9,110 96,654 64 834
The Principal Variable Annuity 542,934 5,216,076 148,770 1,483,926
552,044 5,312,730 148,834 1,484,760
MidCap Value Division:
Principal Freedom Variable Annuity 20,181 203,598 2,293 21,279
Money Market Division:
Pension Builder Plus 1,340 32,651 32,978 75,711
Pension Builder - Rollover 668 2,380 725 1,672
Personal Variable 4,953,979 6,553,954 4,771,035 6,240,201
Premier Variable 35,455,605 47,466,345 34,692,221 45,871,646
Principal Freedom Variable Annuity 306,893 3,135,144 212,443 2,166,714
The Principal Variable Annuity 15,033,975 185,294,000 12,793,632 155,754,849
55,752,460 242,484,474 52,503,034 210,110,793
Real Estate Division:
The Principal Variable Annuity 115,608 1,167,215 49,917 468,801
SmallCap Division:
Principal Freedom Variable Annuity 49,860 662,386 127 2,684
The Principal Variable Annuity 1,050,452 10,647,045 301,274 2,916,217
1,100,312 11,309,431 301,401 2,918,901
SmallCap Growth Division:
Principal Freedom Variable Annuity 28,563 318,177 4,123 56,732
The Principal Variable Annuity 1,353,563 19,098,502 279,769 3,864,869
1,382,126 19,416,679 283,892 3,921,601
SmallCap Value Division:
The Principal Variable Annuity 320,599 2,839,231 89,876 849,120
Stock Index 500 Division:
Principal Freedom Variable Annuity 321,884 3,278,717 20,066 209,923
The Principal Variable Annuity 2,535,758 25,955,190 221,631 2,337,587
2,857,642 29,233,907 241,697 2,547,510
Templeton VP Stock Division:
Principal Freedom Variable Annuity 22,553 233,152 2,578 25,724
Utilities Division:
The Principal Variable Annuity 1,317,255 15,612,615 286,073 3,453,129
135,417,163 $1,061,433,633 104,845,624 $678,088,212
</TABLE>
<PAGE>
Principal Life Insurance Company
Separate Account B
Notes to Financial Statements (continued)
4. Purchases and Sales of Investment Securities (continued)
<TABLE>
Year ended December 31, 1998
<CAPTION>
Units Amount Units Amount
Purchased Purchased Redeemed Redeemed
<S> <C> <C> <C> <C>
Aggressive Growth Division:
The Principal Variable Annuity 3,499,221 $ 99,901,754 2,090,432 $ 54,501,935
Asset Allocation Division:
The Principal Variable Annuity 1,282,525 24,046,561 654,896 11,080,077
Balanced Division:
Personal Variable 1,004,328 1,912,930 457,683 780,708
Premier Variable 10,422,806 19,013,537 6,268,556 10,551,964
The Principal Variable Annuity 3,344,124 65,310,536 1,158,043 20,908,480
14,771,258 86,237,003 7,884,282 32,241,152
Bond Division:
Personal Variable 483,609 749,413 204,963 298,308
Premier Variable 3,340,901 5,252,870 1,335,734 1,947,955
The Principal Variable Annuity 3,782,130 58,262,756 1,300,729 19,186,344
7,606,640 64,265,039 2,841,426 21,432,607
Capital Value Division:
Bankers Flexible Annuity - 378,745 33,142 1,019,158
Pension Builder Plus 12,400 489,669 347,496 2,079,127
Pension Builder - Rollover 13,394 206,030 61,664 413,253
Personal Variable 1,028,159 3,098,635 706,659 1,805,819
Premier Variable 6,692,409 20,064,223 5,703,586 14,753,134
The Principal Variable Annuity 3,851,690 99,320,683 1,451,484 34,459,963
11,598,052 123,557,985 8,304,031 54,530,454
Government Securities Division:
Pension Builder Plus 2,440 59,890 144,796 323,157
Pension Builder - Rollover 6,075 31,150 46,361 105,763
Personal Variable 533,981 932,430 395,901 592,463
Premier Variable 3,808,301 6,299,202 3,136,542 4,703,918
The Principal Variable Annuity 4,224,663 63,176,336 1,616,290 23,088,117
8,575,460 70,499,008 5,339,890 28,813,418
Growth Division:
Personal Variable 1,056,605 2,120,837 399,346 785,794
Premier Variable 9,492,310 19,278,673 4,562,959 9,075,786
The Principal Variable Annuity 3,220,065 68,289,943 1,255,802 26,661,033
13,768,980 89,689,453 6,218,107 36,522,613
International Division:
Personal Variable 805,432 1,415,902 308,660 500,015
Premier Variable 4,733,201 8,515,990 2,974,704 4,950,251
The Principal Variable Annuity 2,153,106 40,571,261 1,603,148 26,298,072
7,691,739 50,503,153 4,886,512 31,748,338
</TABLE>
<PAGE>
Principal Life Insurance Company
Separate Account B
Notes to Financial Statements (continued)
4. Purchases and Sales of Investment Securities (continued)
<TABLE>
Year ended December 31, 1998
<CAPTION>
Units Amount Units Amount
Purchased Purchased Redeemed Redeemed
<S> <C> <C> <C> <C>
International SmallCap Division:
The Principal Variable Annuity 483,237 $ 4,399,364 64,583 $ 563,072
MicroCap Division:
The Principal Variable Annuity 175,619 1,530,140 34,250 274,026
MidCap Division:
Personal Variable 879,026 1,880,837 439,232 851,883
Premier Variable 5,642,259 12,250,222 2,973,492 5,798,868
The Principal Variable Annuity 2,793,284 66,291,200 1,875,347 37,219,135
9,314,569 80,422,259 5,288,071 43,869,886
MidCap Growth Division:
The Principal Variable Annuity 381,976 3,381,739 29,954 268,213
Money Market Division:
Pension Builder Plus 53,479 135,725 102,745 203,381
Pension Builder - Rollover 1,336 3,925 6,405 13,015
Personal Variable 3,575,718 4,528,715 3,302,133 4,121,381
Premier Variable 48,477,115 61,598,188 45,123,308 56,876,964
The Principal Variable Annuity 15,337,299 181,640,592 13,184,712 154,775,801
67,444,947 247,907,145 61,719,303 215,990,542
Real Estate Division:
The Principal Variable Annuity 213,750 2,032,472 18,315 172,703
SmallCap Division:
The Principal Variable Annuity 492,217 3,787,569 33,678 267,557
SmallCap Growth Division:
The Principal Variable Annuity 368,419 3,229,155 53,999 486,122
SmallCap Value Division:
The Principal Variable Annuity 334,867 2,812,751 29,295 246,326
Utilities Division:
The Principal Variable Annuity 741,204 7,775,696 101,905 1,088,646
148,744,680 $965,978,246 105,592,929 $534,097,687
</TABLE>
<PAGE>
Principal Life Insurance Company
Separate Account B
Notes to Financial Statements (continued)
4. Purchases and Sales of Investment Securities (continued)
Purchases include reinvested dividends and capital gains. Mortality adjustments
are included in purchases and redemptions, as applicable.
Money Market purchases include transactions where investment allocations are not
known at the time of the deposit. Redemptions reflect subsequent allocations to
directed investment divisions.
5. Year 2000 Issues (Unaudited)
As of January 31, 2000, virtually all of the major technology systems, processes
and infrastructure, including those which rely on third party vendors used by
Principal Life and other service providers of Separate Account B appear to be
operating smoothly following the rollover to the Year 2000. Principal Life has
experienced no significant interruptions to normal business operations,
including the processing of customer account data and transactions. Principal
Life will continue its Year 2000 vigilance into early 2001.
Based on the performance of its major technology systems to date, ongoing plans
to deal with external relationships, and contingency plans, Principal Life
believes that in the worst case scenario it will experience, at most, isolated
and insignificant disruptions of business processes as a result of Year 2000
issues. Such disruptions are not expected to have a material effect on Separate
Account B's future results of operations, liquidity, or financial condition.
<PAGE>
Report of Independent Auditors
The Board of Directors
Principal Life Insurance Company
We have audited the accompanying consolidated statements of financial position
of Principal Life Insurance Company (the Company, an indirect wholly-owned
subsidiary of Principal Mutual Holding Company) as of December 31, 1999 and
1998, and the related consolidated statements of operations, stockholder's
equity and cash flows for each of the three years in the period ended December
31, 1999. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Principal Life
Insurance Company at December 31, 1999 and 1998, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1999, in conformity with accounting principles generally
accepted in the United States.
/s/Ernst & Young LLP
Des Moines, Iowa
January 31, 2000
Principal Life Insurance Company
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Year ended December 31
1999 1998 1997
------------------------------------------
(In Millions)
<S> <C> <C> <C>
Revenues
Premiums and other considerations $3,152 $3,409 $4,668
Fees and other revenue 1,125 992 881
Net investment income 2,777 2,806 2,937
Net realized capital gains 459 466 176
Contribution from closed block 11 13 -
------------------------------------------
Total revenues 7,524 7,686 8,662
Expenses
Policy and contract benefits 4,210 4,500 5,271
Change in future policy benefits and
contractholder funds 415 277 361
Dividends to policyholders 9 155 299
Operating expenses 1,757 2,015 2,036
------------------------------------------
------------------------------------------
Total expenses 6,391 6,947 7,967
------------------------------------------
Income before income taxes 1,133 739 695
Income taxes 323 44 241
------------------------------------------
==========================================
Net income $ 810 $ 695 $ 454
==========================================
</TABLE>
See accompanying notes.
Principal Life Insurance Company
Consolidated Statements of Financial Position
<TABLE>
<CAPTION>
December 31
1999 1998
---------------------------
---------------------------
(In Millions)
<S> <C> <C>
Assets
Fixed maturities, available-for-sale $21,660 $21,006
Equity securities, available-for-sale 864 1,102
Mortgage loans 12,296 12,091
Real estate 2,212 2,585
Policy loans 28 25
Other investments 637 349
---------------------------
Total investments 37,697 37,158
Cash and cash equivalents 362 461
Accrued investment income 408 375
Deferred policy acquisition costs 792 456
Property and equipment 458 451
Goodwill and other intangibles 152 161
Premiums due and other receivables 284 261
Mortgage loan servicing rights 1,081 778
Closed block assets 4,318 4,251
Separate account assets 33,307 29,009
Other assets 451 582
---------------------------
===========================
Total assets $79,310 $73,943
===========================
===========================
Liabilities
Contractholder funds $24,523 $23,339
Future policy benefits and claims 7,623 7,082
Other policyholder funds 271 293
Short-term debt - 200
Long-term debt 834 671
Income taxes currently payable 15 27
Deferred income taxes 159 497
Closed block liabilities 5,395 5,299
Separate account liabilities 33,307 29,009
Other liabilities 2,232 2,057
---------------------------
---------------------------
Total liabilities 74,359 68,474
Stockholder's equity
Common stock, par value $1 per share - authorized 5,000,000 shares, issued and
outstanding 2,500,000 shares (wholly owned indirectly by Principal Mutual
Holding Company) 3 3
Retained earnings 5,110 4,749
Accumulated other comprehensive income (loss):
Net unrealized gains (losses) on available-for-sale securities (102) 746
Net foreign currency translation adjustment (60) (29)
---------------------------
---------------------------
Total stockholder's equity 4,951 5,469
---------------------------
===========================
Total liabilities and stockholder's equity $79,310 $73,943
===========================
</TABLE>
See accompanying notes.
Principal Life Insurance Company
Consolidated Statements of Stockholder's Equity
<TABLE>
<CAPTION>
Net Unrealized
Gains (Losses) on Net Foreign
Available-for-Sale Currency Total
Common Retained Securities Translation Stockholder's
Stock Earnings Adjustment Equity
-------------------------------------------------------------------------------
(In Millions)
<S> <C> <C> <C> <C> <C>
Balances at January 1, 1997 $- $3,803 $ 860 $ (9) $4,654
Comprehensive income:
Net income - 454 - - 454
Net change in unrealized
gains and losses on fixed
maturities, - - 197 - 197
available-for-sale
Net change in unrealized
gains and losses on
equity securities, - - 118 - 118
available-for-sale
Adjustments for assumed
changes in amortization
patterns:
Deferred policy
acquisition costs - - (44) - (44)
Unearned revenue reserves - - 4 - 4
Provision for deferred
income taxes - - (97) - (97)
Change in net foreign
currency translation - - - (2) (2)
adjustment
----------------
Comprehensive income 630
-------------------------------------------------------------------------------
Balances at December 31, 1997 - 4,257 1,038 (11) 5,284
Issuance of 2,500,000 shares
of common stock to parent
holding company 3 (3) - - -
Dividend to parent holding - (200) - - (200)
company
Comprehensive income:
Net income - 695 - - 695
Net change in unrealized
gains and losses on fixed
maturities, - - (203) - (203)
available-for-sale
Net change in unrealized
gains and losses on
equity securities,
available-for-sale, - - (292) - (292)
including seed money in
separate accounts
Adjustments for assumed
changes in amortization
patterns:
Deferred policy
acquisition costs - - 37 - 37
Unearned revenue reserves - - (4) - (4)
Provision for deferred
income tax benefit - - 170 - 170
Change in net foreign
currency translation - - - (18) (18)
adjustment
----------------
Comprehensive income 385
-------------------------------------------------------------------------------
Balances at December 31, 1998 3 4,749 746 (29) 5,469
</TABLE>
Principal Life Insurance Company
Consolidated Statements of Stockholder's Equity (continued)
<TABLE>
<CAPTION>
Net Unrealized
Gains (Losses) on Net Foreign
Available-for-Sale Currency Total
Common Retained Securities Translation Stockholder's
Stock Earnings Adjustment Equity
-------------------------------------------------------------------------------
(In Millions)
<S> <C> <C> <C> <C> <C>
Balances at January 1, 1999 $3 $4,749 $ 746 $ (29) $5,469
Dividend to parent holding - (449) - - (449)
company
Comprehensive loss:
Net income - 810 - - 810
Net change in unrealized
gains and losses on fixed
maturities, - - (1,375) - (1,375)
available-for-sale
Net change in unrealized
gains and losses on
equity securities,
available-for-sale, - - (142) - (142)
including seed money in
separate accounts
Adjustments for assumed
changes in amortization
patterns:
Deferred policy
acquisition costs - 246 - 246
Unearned revenue reserves - (30) - (30)
Provision for deferred
income tax benefit - 453 - 453
Change in net foreign
currency translation - - (31) (31)
adjustment
----------------
Comprehensive loss (69)
===============================================================================
Balances at December 31, 1999 $3 $5,110 $ (102) $(60) $4,951
===============================================================================
</TABLE>
See accompanying notes.
Principal Life Insurance Company
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Year ended December 31
1999 1998 1997
---------------------------------------
(In Millions)
<S> <C> <C> <C>
Operating activities
Net income $ 810 $ 695 $ 454
Adjustments to reconcile net income to net cash provided by
operating activities:
Amortization of deferred policy acquisition costs 76 170 170
Additions to deferred policy acquisition costs (254) (229) (213)
Gain on sales of subsidiaries (11) (6) (14)
Accrued investment income (33) 24 7
Premiums due and other receivables (21) 87 (78)
Contractholder and policyholder liabilities and dividends
1,430 1,489 1,396
Current and deferred income taxes 103 (265) 96
Net realized capital gains (459) (466) (176)
Depreciation and amortization expense 72 100 117
Change in closed block operating assets and
liabilities, net 174 230 -
Other 163 115 (185)
---------------------------------------
Net adjustments 1,240 1,249 1,120
---------------------------------------
Net cash provided by operating activities 2,050 1,944 1,574
Investing activities Available-for-sale securities:
Purchases (10,956) (7,141) (7,478)
Sales 6,852 5,684 7,475
Maturities 2,500 1,377 1,204
Mortgage loans acquired or originated (16,503) (14,162) (9,925)
Mortgage loans sold or repaid 16,242 14,414 8,977
Net change in mortgage servicing rights (307) (387) (144)
Real estate acquired (449) (436) (309)
Real estate sold 870 662 198
Net change in property and equipment (20) (20) -
Change in closed block investments, net (169) (201) -
Proceeds from sales of subsidiaries 42 96 35
Purchases of interest in subsidiaries, net of cash acquired (13) (218) (99)
Net change in other investments (260) (249) (83)
---------------------------------------
Net cash used in investing activities (2,171) (581) (149)
</TABLE>
Principal Life Insurance Company
Consolidated Statements of Cash Flows (continued)
<TABLE>
<CAPTION>
Year ended December 31
1999 1998 1997
---------------------------------------
(In Millions)
<S> <C> <C> <C>
Financing activities
Issuance of debt $ 203 $ 243 $ 75
Principal repayments of debt (40) (51) (28)
Proceeds of short-term borrowings 4,952 8,628 5,089
Repayment of short-term borrowings (4,896) (8,924) (4,974)
Dividend paid to parent holding company (441) (140) -
Investment contract deposits 5,325 5,854 4,134
Investment contract withdrawals (5,081) (7,058) (5,446)
---------------------------------------
Net cash provided by (used in) financing activities 22 (1,448) (1,150)
---------------------------------------
Net increase (decrease) in cash and cash equivalents (99) (85) 275
Cash and cash equivalents at beginning of year 461 546 271
=======================================
Cash and cash equivalents at end of year $ 362 $ 461 $ 546
=======================================
Schedule of noncash operating and investing activities
Dividend of net noncash assets and liabilities of Princor Financial
Services Corporation to Principal Financial Services, Inc. on
April 1, 1999 $ 12
=============
Thefollowing noncash assets and liabilities were transferred to the Closed
Block as a result of the July 1, 1998 mutual holding company formation:
Operating activities:
Accrued investment income $ 59
Deferred policy acquisition costs 697
Other assets 12
Future policy benefits and claims (4,545)
Other policyholder funds (7)
Policyholder dividends payable (388)
Other liabilities (173)
-------------
Total noncash operating activities (4,345) Investing activities:
Fixed maturities, available-for-sale 1,562
Mortgage loans 1,027
Policy loans 736
Other investments 1
-------------
Total noncash investing activities 3,326
=============
Total noncash operating and investing activities $(1,019)
=============
Net transfer of noncash assets and liabilities of Principal Health
Care Inc. on April 1, 1998 in exchange for common shares of
Coventry Health Care, Inc. $ (160)
=============
See accompanying notes.
</TABLE>
Principal Life Insurance Company
Notes to Consolidated Financial Statements
December 31, 1999
1. Nature of Operations and Significant Accounting Policies
Reorganization
Effective July 1, 1998, Principal Mutual Life Insurance Company formed a mutual
insurance holding company ("Principal Mutual Holding Company") and converted to
a stock life insurance company ("Principal Life Insurance Company"). All of the
shares of Principal Life Insurance Company were issued to Principal Mutual
Holding Company through two newly formed intermediate holding companies,
Principal Financial Group, Inc. and Principal Financial Services, Inc. The
reorganization itself did not have a material financial impact on Principal Life
Insurance Company and its consolidated subsidiaries, as the net assets so
transferred to achieve the change in legal organization were accounted for at
historical carrying amounts in a manner similar to that in pooling-of-interests
accounting.
Description of Business
Principal Life Insurance Company and its consolidated subsidiaries ("the
Company") is a diversified financial services organization engaged in the
marketing and management of life insurance, annuity, health, pension and other
financial products and services, primarily in the United States.
Basis of Presentation
The accompanying consolidated financial statements of the Company and its
majority-owned subsidiaries have been prepared in conformity with accounting
principles generally accepted in the United States ("GAAP"). Less than
majority-owned entities in which the Company has at least a 20% interest are
reported on the equity basis in the consolidated statements of financial
position as other investments. All significant intercompany accounts and
transactions have been eliminated.
Total assets of the unconsolidated entities amounted to $2.3 billion at December
31, 1999 and $2.2 billion at December 31, 1998. Total revenues of the
unconsolidated entities were $2.0 billion in 1999, $1.8 billion in 1998 and $294
million in 1997. During 1999, 1998 and 1997, the Company included $108 million,
$18 million and $19 million, respectively, in net investment income representing
the Company's share of current year net income of the unconsolidated entities.
Closed Block
In conjunction with the formation of the mutual insurance holding company, the
Company established a Closed Block for the benefit of certain classes of
individual participating and dividend-paying policies in force on that date. The
Closed Block was designed to provide reasonable assurance to policyholders
included therein that, after
Principal Life Insurance Company
Notes to Consolidated Financial Statements (continued)
1. Nature of Operations and Significant Accounting Policies (continued)
the Reorganization, assets would be available to maintain the aggregate dividend
scales in effect for 1997 if the experience underlying such scales continued.
Assets were allocated to the Closed Block in amounts such that their cash flows
together with anticipated revenues from policies included in the Closed Block,
were reasonably expected to be sufficient to support such policies, including
provisions for payment of claims, certain expenses, charges and taxes, and to
provide for the continuation of aggregate dividend scales in accordance with the
1997 policy dividend scales if the experience underlying such scales continued,
and to allow for appropriate adjustments in such scales if the experience
changes.
Assets allocated to the Closed Block inure to the benefits of the holders of
policies included in the Closed Block. Closed Block assets and liabilities are
carried on the same basis as similar assets and liabilities held by the Company.
The Company will continue to pay guaranteed benefits under all policies,
including the policies included in the Closed Block, in accordance with their
terms. If the assets allocated to the Closed Block, the investment cash flows
from those assets and the revenues from the policies included in the Closed
Block, including investment income thereon, prove to be insufficient to pay the
benefits guaranteed under the policies included in the Closed Block, the Company
will be required to make such payments from its general funds.
The contribution to the operating income of the Company from the Closed Block is
reported as a single line item in the statement of operations. Accordingly,
premiums, net investment income, realized capital gains (losses), policyholder
benefits and dividends attributable to the Closed Block, less certain expenses
and charges and the amortization of deferred policy acquisition costs, are shown
as a net number under the caption "Contribution from the Closed Block." This
results in material reductions in the respective line items in the statement of
operations while having no effect on net income. All assets allocated to the
Closed Block are grouped together and shown as a separate item entitled "Closed
Block assets"; and all liabilities attributable to the Closed Block are combined
and disclosed as the "Closed Block liabilities". The excess of Closed Block
liabilities over Closed Block assets represents the expected future post-tax
contribution from the Closed Block which would be recognized in operating income
or other comprehensive income over the period the policies and contracts in the
Closed Block remain in force.
The Contribution from the Closed Block does not represent the total
profitability attributable to the policies included in the Closed Block. Certain
expenses attributable to the policies included in the Closed Block and
commissions on these policies are not included in the reported Contribution from
the Closed Block, but rather are included in operating expenses consistent with
the initial regulatory funding of the Closed Block. Consequently, the assets
needed to fund the Closed Block are less than the total accumulated assets
attributable to the policies included in the Closed Block. Income on the assets
held outside of the Closed Block is included in net investment income and not
included in the Contribution from the Closed Block.
Principal Life Insurance Company
Notes to Consolidated Financial Statements (continued)
1. Nature of Operations and Significant Accounting Policies (continued)
Use of Estimates in the Preparation of Financial Statements
The preparation of the Company's consolidated financial statements and
accompanying notes requires management to make estimates and assumptions that
affect the amounts reported and disclosed. These estimates and assumptions could
change in the future as more information becomes known, which could impact the
amounts reported and disclosed in the consolidated financial statements and
accompanying notes.
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand, money market instruments and
other debt issues with a maturity date of three months or less when purchased.
Investments
Investments in fixed maturities and equity securities are classified as
available-for-sale and, accordingly, are carried at fair value. (See Note 12 for
policies related to the determination of fair value.) The cost of fixed
maturities is adjusted for amortization of premiums and accrual of discounts,
both computed using the interest method. The cost of fixed maturities and equity
securities is adjusted for declines in value that are other than temporary. For
the loan-backed and structured securities included in the bond portfolio, the
Company recognizes income using a constant effective yield based on currently
anticipated prepayments as determined by broker-dealer surveys or internal
estimates and the estimated lives of the securities.
Real estate investments are reported at cost less accumulated depreciation. The
initial cost bases of properties acquired through loan foreclosures are the
lower of the loan balances or fair market values of the properties at the time
of foreclosure. Buildings and land improvements are generally depreciated on the
straight-line method over the estimated useful life of improvements, and tenant
improvement costs are depreciated on the straight-line method over the term of
the related lease. The Company recognizes impairment losses for its properties
when indicators of impairment are present and a property's expected undiscounted
cash flows are not sufficient to recover the property's carrying value. In such
cases, the cost bases of the properties are reduced accordingly. Real estate
expected to be disposed is carried at the lower of cost or fair value, less cost
to sell, with valuation allowances established accordingly and depreciation no
longer recognized. Any impairment losses and any changes in valuation allowances
are reported as net realized capital losses.
Principal Life Insurance Company
Notes to Consolidated Financial Statements (continued)
1. Nature of Operations and Significant Accounting Policies (continued)
Commercial and residential mortgage loans are reported at cost adjusted for
amortization of premiums and accrual of discounts, computed using the interest
method, and net of valuation allowances. Any changes in the valuation allowances
are reported as net realized capital gains (losses). The Company measures
impairment based upon the present value of expected cash flows discounted at the
loan's effective interest rate. If foreclosure is probable, the measurement of
any valuation allowance is based upon the fair value of the collateral. The
Company includes residential mortgage loans held for sale in the amount of $432
million and $743 million and commercial mortgage loans held for sale in the
amount of $280 million and $22 million at December 31, 1999 and 1998,
respectively, which are carried at lower of cost or fair value and reported as
mortgage loans in the statements of financial position.
Net realized capital gains and losses on investments are determined using the
specific identification basis.
Policy loans and other investments, excluding investments in unconsolidated
entities, are primarily reported at cost.
Derivatives
Derivatives are generally held for purposes other than trading and are primarily
used to hedge or reduce exposure to interest rate and foreign currency risks
associated with assets held or expected to be purchased or sold, and liabilities
incurred or expected to be incurred. Additionally, derivatives are used to
change the characteristics of the Company's asset/liability mix consistent with
the Company's risk management activities.
The Company's risk of loss is typically limited to the fair value of its
derivative instruments and not to the notional or contractual amounts of these
derivatives. Risk arises from changes in the fair value of the underlying
instruments. The Company is also exposed to credit losses in the event of
nonperformance of the counterparties. This credit risk is minimized by
purchasing such agreements from financial institutions with high credit ratings
and by establishing and monitoring exposure limits.
The Company's use of derivatives is further described in Note 4. The net
interest effect of interest rate and currency swap transactions is recorded as
an adjustment to net investment income or interest expense, as appropriate, over
the periods covered by the agreements. The cost of other derivative contracts is
amortized over the life of the contracts and classified with the results of the
underlying hedged item. Certain contracts are designated as hedges of specific
assets and, to the extent those assets are marked to market, the hedge contracts
are also marked to market and included as an adjustment of the underlying asset
value. Other contracts are designated and accounted for as hedges of certain
liabilities and are not marked to market.
Principal Life Insurance Company
Notes to Consolidated Financial Statements (continued)
1. Nature of Operations and Significant Accounting Policies (continued)
Hedge accounting is used for derivatives that are specifically designated in
advance as hedges and that reduce the Company's exposure to an indicated risk by
having a high correlation between changes in the value of the derivatives and
the items being hedged at both the inception of the hedge and throughout the
hedge period. Should such criteria not be met or if the hedged items are sold,
terminated or matured, the changes in value of the derivatives are included in
net income.
Contractholder and Policyholder Liabilities
Contractholder and policyholder liabilities (contractholder funds, future policy
benefits and claims, and other policyholder funds) include reserves for
investment contracts and reserves for universal life, limited payment,
participating and traditional life insurance policies. Investment contracts are
contractholders' funds on deposit with the Company and generally include
reserves for pension and annuity contracts. Reserves on investment contracts are
equal to the cumulative deposits less any applicable charges plus credited
interest.
Reserves for universal life insurance contracts are equal to cumulative premiums
less charges plus credited interest which represents the account balances that
accrue to the benefit of the policyholders. Reserves for non-participating term
life insurance contracts are computed on a basis of assumed investment yield,
mortality, morbidity and expenses, including a provision for adverse deviation,
which generally vary by plan, year of issue and policy duration. Investment
yield is based on the Company's experience. Mortality, morbidity and withdrawal
rate assumptions are based on experience of the Company and are periodically
reviewed against both industry standards and experience.
Reserves for participating life insurance contracts are based on the net level
premium reserve for death and endowment policy benefits. This net level premium
reserve is calculated based on dividend fund interest rate and mortality rates
guaranteed in calculating the cash surrender values described in the contract.
Some of the Company's policies and contracts require payment of fees in advance
for services that will be rendered over the estimated lives of the policies and
contracts. These payments are established as unearned revenue reserves upon
receipt and included in other policyholder funds in the consolidated statements
of financial position. These unearned revenue reserves are amortized to
operations over the estimated lives of these policies and contracts.
The liability for unpaid accident and health claims is an estimate of the
ultimate net cost of reported and unreported losses not yet settled. This
liability is estimated using actuarial analyses and case basis evaluations.
Although considerable variability is inherent in such estimates, the Company
believes that the liability for unpaid claims is adequate. These estimates are
continually reviewed and, as adjustments to this liability become necessary,
such adjustments are reflected in current operations.
Principal Life Insurance Company
Notes to Consolidated Financial Statements (continued)
1. Nature of Operations and Significant Accounting Policies (continued)
Recognition of Premiums, Fees and Benefits
Traditional individual life and health insurance products include those products
with fixed and guaranteed premiums and benefits, and consist principally of
whole life and term life insurance policies and certain immediate annuities with
life contingencies. Premiums from these products are recognized as premium
revenue when due.
Group life and health insurance premiums are generally recorded as premium
revenue over the term of the coverage. Some group contracts allow for premiums
to be adjusted to reflect emerging experience. Such adjusted premiums are
recognized in the period that the related experience emerges. Fees for contracts
providing claim processing or other administrative services are recorded over
the period the service is provided.
Related policy benefits and expenses for individual and group life and health
insurance products are associated with earned premiums and result in the
recognition of profits over the expected lives of the policies and contracts.
Universal life-type policies are insurance contracts with terms that are not
fixed and guaranteed. Amounts received as payments for such contracts are not
reported as premium revenues. Revenues for universal life-type insurance
contracts consist of policy charges for the cost of insurance, policy initiation
and administration, surrender charges and other fees that have been assessed
against policy account values. Policy benefits and claims that are charged to
expense include interest credited to contracts and benefit claims incurred in
the period in excess of related policy account balances.
Investment contracts do not subject the Company to risks arising from
policyholder mortality or morbidity, and consist primarily of Guaranteed
Investment Contracts ("GICs") and certain deferred annuities. Amounts received
as payments for investment contracts are established as investment contract
liability balances and are not reported as premium revenues. Revenues for
investment contracts consist of investment income and policy administration
charges. Investment contract benefits that are charged to expense include
benefit claims incurred in the period in excess of related investment contract
liability balances and interest credited to investment contract liability
balances.
Deferred Policy Acquisition Costs
Commissions and other costs (underwriting, issuance and agency expenses) that
vary with and are primarily related to the acquisition of new and renewal
insurance policies and investment contract business are capitalized to the
extent recoverable. Acquisition costs that are not deferrable and maintenance
costs are charged to operations as incurred.
Principal Life Insurance Company
Notes to Consolidated Financial Statements (continued)
1. Nature of Operations and Significant Accounting Policies (continued)
Deferred policy acquisition costs for universal life-type insurance contracts
and participating life insurance policies and investment contracts are being
amortized over the lives of the policies and contracts in relation to the
emergence of estimated gross profit margins. This amortization is adjusted
retrospectively when estimates of current or future gross profits and margins to
be realized from a group of products and contracts are revised. The deferred
policy acquisition costs of non-participating term life insurance policies are
being amortized over the premium-paying period of the related policies using
assumptions consistent with those used in computing policyholder liabilities.
Deferred policy acquisition costs are subject to recoverability testing at the
time of policy issue and loss recognition testing at the end of each accounting
period. Deferred policy acquisition costs would be written off to the extent
that it is determined that future policy premiums and investment income or gross
profit margins would not be adequate to cover related losses and expenses.
Reinsurance
The Company enters into reinsurance agreements with other companies in the
normal course of business. The Company may assume reinsurance from or cede
reinsurance to other companies. Premiums and expenses are reported net of
reinsurance ceded. The Company is contingently liable with respect to
reinsurance ceded to other companies in the event the reinsurer is unable to
meet the obligations it has assumed. To minimize the possibility of losses, the
Company evaluates the financial condition of its reinsurers and continually
monitors concentrations of credit risk.
The effect of reinsurance on premiums and other considerations and policy and
contract benefits and changes in reserves is as follows (in millions):
<TABLE>
<CAPTION>
Year ended December 31
1999 1998 1997
------------------------------------------
<S> <C> <C> <C>
Premiums and other considerations:
Direct $3,187 $3,390 $4,601
Assumed 4 59 106
Ceded (39) (40) (39)
==========================================
Net premiums and other considerations $3,152 $3,409 $4,668
==========================================
Policy and contract benefits and changes in reserves:
Direct $4,656 $4,739 $5,596
Assumed (1) 66 102
Ceded (30) (28) (66)
------------------------------------------
Net policy and contract benefits and changes in reserves
$4,625 $4,777 $5,632
==========================================
</TABLE>
Principal Life Insurance Company
Notes to Consolidated Financial Statements (continued)
1. Nature of Operations and Significant Accounting Policies (continued)
Effective July 1, 1998, the Company no longer participates in reinsurance pools
related to the Federal Employee Group Life Insurance and Service Group Life
Insurance programs. In 1997, the premium assumed from these arrangements was
approximately $85 million.
Guaranty-fund Assessments
Guaranty-fund assessments are accrued for anticipated assessments, which are
estimated using data available from various industry sources that monitor the
current status of open and closed insolvencies. The Company has also established
an other asset for assessments expected to be recovered through future premium
tax offsets.
Separate Accounts
The separate account assets and liabilities presented in the consolidated
financial statements represent the fair market value of funds that are
separately administered by the Company for contracts with equity, real estate
and fixed-income investments. Generally, the separate account contract owner,
rather than the Company, bears the investment risk of these funds. The separate
account assets are legally segregated and are not subject to claims that arise
out of any other business of the Company. The Company receives a fee for
administrative, maintenance and investment advisory services that is included in
the consolidated statements of operations. Deposits, net investment income and
realized and unrealized capital gains and losses on the separate accounts are
not reflected in the consolidated statements of operations.
Income Taxes
Principal Mutual Holding Company files a consolidated income tax return that
includes the Company and all of its qualifying subsidiaries and has a policy of
allocating income tax expenses and benefits to companies in the group based upon
pro rata contribution of taxable income or operating losses. The Company is
taxed at corporate rates on taxable income based on existing tax laws. Current
income taxes are charged or credited to operations based upon amounts estimated
to be payable or recoverable as a result of taxable operations for the current
year. Deferred income taxes are provided for the tax effect of temporary
differences in the financial reporting and income tax bases of assets and
liabilities and net operating losses using enacted income tax rates and laws.
The effect on deferred tax assets and deferred tax liabilities of a change in
tax rates is recognized in operations in the period in which the change is
enacted.
Foreign Exchange
The Company's foreign subsidiaries' statements of financial position and
operations are translated at the current exchange rates and average exchange
rates for the year, respectively. Resulting translation adjustments for foreign
subsidiaries and certain other transactions are reported as a component of
equity. Other translation adjustments for foreign currency transactions that
affect cash flows are reported in current operations.
Principal Life Insurance Company
Notes to Consolidated Financial Statements (continued)
1. Nature of Operations and Significant Accounting Policies (continued)
Pension and Postretirement Benefits
The Company accounts for its pension benefits and postretirement benefits other
than pension (medical, life insurance and long-term care) using the full accrual
method.
Property and Equipment
Property and equipment includes home office properties, related leasehold
improvements, purchased and internally developed software and other fixed
assets. Property and equipment use is shown in the consolidated statements of
financial position at cost less allowances for accumulated depreciation.
Provisions for depreciation of property and equipment are computed principally
on the straight-line method over the estimated useful lives of the assets.
Property and equipment and related accumulated depreciation are as follows (in
millions):
December 31
1999 1998
-----------------------------
Property and equipment $777 $730
Accumulated depreciation (319) (279)
=============================
Property and equipment, net $458 $451
=============================
Goodwill and Other Intangibles
Goodwill and other intangibles include the cost of acquired subsidiaries in
excess of the fair value of the net assets (i.e., goodwill) and other intangible
assets which have been recorded in connection with acquisitions. These assets
are amortized on a straight-line basis generally over 10 to 15 years. The
carrying amount of goodwill and other intangibles is reviewed periodically for
indicators of impairment in value, which in the view of management are other
than temporary, including unexpected or adverse changes in the economic or
competitive environments in which the Company operates, profitability analyses
and the fair value of the relevant subsidiary. If facts and circumstances
suggest that a subsidiary's goodwill is impaired, the Company assesses the fair
value of the underlying business and reduces the goodwill to an amount that
results in the book value of the subsidiary approximating fair value.
Principal Life Insurance Company
Notes to Consolidated Financial Statements (continued)
1. Nature of Operations and Significant Accounting Policies (continued)
Goodwill and other intangibles, and related accumulated amortization, are as
follows (in millions):
<TABLE>
<CAPTION>
December 31
1999 1998
-----------------------------
<S> <C> <C>
Goodwill $176 $185
Other intangibles 21 16
-----------------------------
197 201
Accumulated amortization (45) (40)
=============================
Total goodwill and other intangibles, net $152 $161
=============================
</TABLE>
Premiums Due and Other Receivables
Premiums due and other receivables include life and health insurance premiums
due, reinsurance recoveries, guaranty funds receivable or on deposit,
receivables from the sale of securities and other receivables.
Mortgage Loan Servicing Rights
Mortgage loan servicing rights represent the cost of purchasing or originating
the right to service mortgage loans. These costs are capitalized and amortized
to operations over the estimated remaining lives of the underlying loans using
the interest method and taking into account appropriate prepayment assumptions.
Capitalized mortgage loan servicing rights are periodically assessed for
impairment, which is recognized in the consolidated statements of operations
during the period in which impairment occurs by establishing a corresponding
valuation allowance.
Other Assets
Included in other assets are certain assets pending transfer or novation that
are carried at fair value (see Note 2). The remainder of other assets are
reported primarily at cost.
Comprehensive Income (Loss)
Comprehensive income (loss) includes all changes in stockholder's equity during
a period except those resulting from investments by shareholders and
distributions to shareholders.
Principal Life Insurance Company
Notes to Consolidated Financial Statements (continued)
1. Nature of Operations and Significant Accounting Policies (continued)
The following table sets forth the adjustments necessary to avoid duplication of
items that are included as part of net income for a year that had been part of
other comprehensive income in prior years (in millions):
<TABLE>
<CAPTION>
December 31
1999 1998 1997
------------------------------------------
<S> <C> <C> <C>
Unrealized gains (losses) on available-for-sale securities
arising during the year $(1,039) $(530) $106
Adjustment for realized gains on available-for-sale
securities included in net income 191 238 72
==========================================
Unrealized gains (losses) on available-for-sale securities,
as adjusted $ (848) $(292) $178
==========================================
</TABLE>
The above adjustment for net realized gains on available-for-sale securities
included in net income is presented net of tax, related changes in the
amortization patterns of deferred policy acquisition costs and unearned revenue
reserves.
Reclassifications
Certain reclassifications have been made to the 1997 and 1998 consolidated
financial statements to conform to the 1999 presentation.
Accounting Changes
In June 1998, the Financial Accounting Standards Board ("the FASB") issued
Statement No. 133, Accounting for Derivative Instruments and Hedging Activities
("SFAS 133"). In June 1999, Statement No. 137, Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective Date of FASB
Statement No. 133, ("SFAS 137") was issued deferring the effective date of SFAS
133 by one year. The new effective date for the Company to adopt SFAS 133 is
January 1, 2001. SFAS 133 will require the Company to include all derivatives in
the consolidated statement of financial position at fair value. Changes in
derivative fair values will either be recognized in earnings as offsets to the
changes in fair value of related hedged assets, liabilities and firm commitments
or, for forecasted transactions, deferred and recorded as a component of equity
until the hedged transactions occur and are recognized in earnings. The
ineffective portion of a hedging derivative's change in fair value will be
immediately recognized in earnings. The impact of SFAS 133 on the Company's
financial statements will depend on a variety of factors, including future
interpretive guidance from the FASB, the future level of forecasted and actual
foreign currency transactions, the extent of the Company's hedging activities,
the types of hedging instruments used and the effectiveness of such instruments.
However, the Company does not believe the effect of adopting SFAS 133 will be
material to its consolidated financial position.
Principal Life Insurance Company
Notes to Consolidated Financial Statements (continued)
1. Nature of Operations and Significant Accounting Policies (continued)
On January 1, 1999, the Company implemented the Statement of Position ("SOP")
98-1, Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use. SOP 98-1 defines internal use software and when the costs
associated with internal use should be capitalized. The implementation did not
have a material impact on the Company's consolidated financial statements.
2. Mergers, Acquisitions and Divestitures
During 1999, various acquisitions were made by the Company's subsidiaries at
purchase prices aggregating $13 million. The acquisitions were all accounted for
using the purchase method and the results of operations of the acquired
businesses have been included in the financial statements of the subsidiaries
from the dates of acquisition. Such acquired companies had total assets at
December 31, 1999 and total 1999 revenue of $17 million and $12 million,
respectively.
Effective April 1, 1998, the Company merged substantially all of its managed
care operations with Coventry Corporation in exchange for a non-majority
ownership position in the resulting entity, Coventry Health Care, Inc. The
Company's investment in Coventry Health Care, Inc. is accounted for using the
equity method. Net equity of the transferred business on April 1, 1998 was $170
million. Consolidated financial results for 1997 included total assets at
December 31, 1997, and total revenues and pretax loss for the year then ended of
approximately $419 million, $883 million and $(26) million, respectively, for
the transferred business.
During 1998, various acquisitions were made by the Company's subsidiaries at
purchase prices aggregating $224 million. The acquisitions were all accounted
for using the purchase method and the results of operations of the acquired
businesses have been included in the financial statements of the subsidiaries
from the dates of acquisition. Such acquired companies had total assets at
December 31, 1998 and total 1998 revenue of $459 million and $58 million,
respectively.
During 1998, various divestitures were made by certain of the Company's
subsidiaries at selling prices aggregating $118 million and $15 million in net
realized capital gains were realized as a result of these divestitures. In 1997,
the financial statements included $152 million in assets, $206 million in
revenues and $20 million of pretax losses related to these subsidiaries.
During 1997, various acquisitions were made by certain of the Company's
subsidiaries at purchase prices aggregating $101 million. The acquisitions were
all accounted for using the purchase method and the results of operations of the
acquired businesses have been included in the financial statements of the
subsidiaries from the dates of acquisition. Such acquired companies had total
assets at December 31, 1997 and total 1997 revenue of $459 million and $86
million, respectively.
Principal Life Insurance Company
Notes to Consolidated Financial Statements (continued)
3. Investments
Under SFAS No. 115, Accounting for Certain Investments in Debt and Equity
Securities, securities are generally classified as available-for-sale,
held-to-maturity, or trading. The Company has classified its entire fixed
maturities portfolio as available-for-sale, although it is generally the
Company's intent to hold these securities to maturity. The Company has also
classified all equity securities as available-for-sale. Securities classified as
available-for-sale are reported at fair value in the consolidated statements of
financial position with the related unrealized holding gains and losses on such
available-for-sale securities reported as a separate component of equity after
adjustments for related changes in deferred policy acquisition costs, unearned
revenue reserves and deferred income taxes.
The cost, gross unrealized gains and losses and fair value of fixed maturities
and equity securities available-for-sale as of December 31, 1999 and 1998, are
as follows (in millions):
<TABLE>
<CAPTION>
Gross Gross
Unrealized Unrealized Fair
Cost Gains Losses Value
---------------------------------------------------------------
---------------------------------------------------------------
<S> <C> <C> <C> <C>
December 31, 1999 Fixed maturities:
United States Government and agencies
$ 163 $ - $ 2 $ 161
Foreign governments 808 18 15 811
States and political subdivisions 139 1 9 131
Corporate - public 5,187 73 137 5,123
Corporate - private 10,300 95 332 10,063
Mortgage-backed and other asset-backed
securities 5,486 12 127 5,371
---------------------------------------------------------------
Total fixed maturities $22,083 $199 $622 $21,660
===============================================================
Total equity securities $ 721 $176 $ 33 $ 864
===============================================================
December 31, 1998 Fixed maturities:
United States Government and agencies
$ 615 $ - $ 10 $ 605
Foreign governments 340 29 5 364
States and political subdivisions 137 10 - 147
Corporate - public 3,841 249 84 4,006
Corporate - private 10,570 623 95 11,098
Mortgage-backed and other asset-backed
securities 4,659 138 11 4,786
---------------------------------------------------------------
===============================================================
Total fixed maturities $20,162 $1,049 $205 $21,006
===============================================================
Total equity securities $ 760 $ 395 $ 53 $ 1,102
===============================================================
</TABLE>
Principal Life Insurance Company
Notes to Consolidated Financial Statements (continued)
3. Investments (continued)
The cost and fair value of fixed maturities available-for-sale at December 31,
1999, by expected maturity, are as follows (in millions):
<TABLE>
<CAPTION>
Cost Fair Value
------------------------------
------------------------------
<S> <C> <C>
Due in one year or less $ 1,261 $ 1,260
Due after one year through five years 7,784 7,654
Due after five years through ten years 4,342 4,281
Due after ten years 3,210 3,094
------------------------------
------------------------------
16,597 16,289
Mortgage-backed and other asset-backed securities 5,486 5,371
------------------------------
==============================
Total $22,083 $21,660
==============================
</TABLE>
The above summarized activity is based on expected maturities. Actual maturities
may differ because borrowers may have the right to call or pre-pay obligations.
Major categories of net investment income are summarized as follows (in
millions):
<TABLE>
<CAPTION>
Year ended December 31
1999 1998 1997
------------------------------------------
<S> <C> <C> <C>
Fixed maturities, available-for-sale $1,578 $1,525 $1,620
Equity securities, available-for-sale 46 32 39
Mortgage loans 1,025 1,100 1,084
Real estate 188 143 107
Policy loans 2 27 50
Cash and cash equivalents 19 9 9
Other 43 58 92
------------------------------------------
------------------------------------------
2,901 2,894 3,001
Less investment expenses (124) (88) (64)
------------------------------------------
==========================================
Net investment income $2,777 $2,806 $2,937
==========================================
</TABLE>
Principal Life Insurance Company
Notes to Consolidated Financial Statements (continued)
3. Investments (continued)
The major components of net realized capital gains on investments are summarized
as follows (in millions):
<TABLE>
<CAPTION>
Year ended December 31
1999 1998 1997
-------------------------------------------
<S> <C> <C> <C>
Fixed maturities, available-for-sale:
Gross gains $ 31 $ 67 $ 51
Gross losses (123) (31) (43)
Equity securities, available-for-sale:
Gross gains 409 329 132
Gross losses (26) (40) (26)
Mortgage loans (8) 8 (6)
Real estate 56 126 64
Other 120 7 4
===========================================
Net realized capital gains $459 $466 $176
===========================================
</TABLE>
Proceeds from sales of investments (excluding call and maturity proceeds) in
fixed maturities were $5.3 billion, $2.8 billion and $5.0 billion in 1999, 1998
and 1997 respectively. Of the 1999, 1998 and 1997 proceeds, $3.6 billion, $2.2
billion and $4.0 billion, respectively, relates to sales of mortgage-backed
securities. The Company actively manages its mortgage-backed securities
portfolio to control prepayment risk. Gross gains of $2 million, $23 million and
$29 million and gross losses of $57 million, $7 million and $10 million in 1999,
1998 and 1997, respectively, were realized on sales of mortgage-backed
securities. At December 31, 1999, the Company had security purchases payable
totaling $910 million relating to the purchases of mortgage-backed securities at
forward dates.
The net unrealized gains and losses on investments in fixed maturities and
equity securities available-for-sale is reported as a separate component of
equity, reduced by adjustments to deferred policy acquisition costs and unearned
revenue reserves that would have been required as a charge or credit to
operations had such amounts been realized and a provision for deferred income
taxes. The cumulative amount of net unrealized gains and losses on
available-for-sale securities, including the net unrealized gains and losses on
the Closed Block available-for-sale securities, is as follows (in millions):
Principal Life Insurance Company
Notes to Consolidated Financial Statements (continued)
3. Investments (continued)
<TABLE>
<CAPTION>
December 31
1999 1998
-----------------------------
<S> <C> <C>
Net unrealized gains and losses on fixed maturities, available-for-sale
$(436) $939
Net unrealized gains and losses on equity securities, available-for-sale,
including seed money in separate accounts 205 347
Adjustments for assumed changes in amortization patterns:
Deferred policy acquisition costs 79 (167)
Unearned revenue reserves (13) 17
Provision for deferred income (taxes) tax benefit 63 (390)
=============================
Net unrealized gains and losses on available-for-sale securities $(102) $746
=============================
</TABLE>
During 1998, the net change in unrealized gains and losses on fixed maturities,
available-for-sale, appearing in the consolidated statements of equity includes
the effect of a change in the method of estimating the fair value of certain
corporate bonds, net of related adjustments for assumed changes in amortization
patterns and deferred income taxes, of $116 million.
The corporate private placement bond portfolio is diversified by issuer and
industry. Restrictive bond covenants are monitored by the Company to regulate
the activities of issuers and control their leveraging capabilities.
Commercial mortgage loans and corporate private placement bonds originated or
acquired by the Company represent its primary areas of credit risk exposure. At
December 31, 1999 and 1998, the commercial mortgage portfolio is diversified by
geographic region and specific collateral property type as follows:
<TABLE>
<CAPTION>
Geographic Distribution Property Type Distribution
------------------------------------------------------ --------------------------------------------------
December 31 December 31
1999 1998 1999 1998
----------------------- -----------------------
----------------------- -----------------------
<S> <C> <C> <C> <C>
New England 5% 5% Office 30% 29%
Middle Atlantic 14 14 Retail 33 33
East North Central 10 10 Hotel 1 1
West North Central 4 5 Mixed use/other 2 2
South Atlantic 25 25 Industrial 32 33
East South Central 3 3 Apartments 3 3
West South Central 7 7 Valuation allowance (1) (1)
Mountain 5 4
Pacific 28 28
Valuation allowance (1) (1)
</TABLE>
Principal Life Insurance Company
Notes to Consolidated Financial Statements (continued)
3. Investments (continued)
Mortgage loans on real estate are considered impaired when, based on current
information and events, it is probable that the Company will be unable to
collect all amounts due according to contractual terms of the loan agreement.
When the Company determines that a loan is impaired, a provision for loss is
established for the difference between the carrying amount of the mortgage loan
and the estimated value. Estimated value is based on either the present value of
the expected future cash flows discounted at the loan's effective interest rate,
the loan's observable market price or fair value of the collateral. The
provision for losses is reported as a net realized capital loss.
Mortgage loans deemed to be uncollectible are charged against the allowance for
losses and subsequent recoveries are credited to the allowance for losses. The
allowance for losses is maintained at a level believed adequate by management to
absorb estimated probable credit losses. Management's periodic evaluation of the
adequacy of the allowance for losses is based on the Company's past loan loss
experience, known and inherent risks in the portfolio, adverse situations that
may affect the borrower's ability to repay, the estimated value of the
underlying collateral, composition of the loan portfolio, current economic
conditions and other relevant factors. The evaluation is inherently subjective
as it requires estimating the amounts and timing of future cash flows expected
to be received on impaired loans that may change.
A summary of the changes in the mortgage loan allowance for losses is as follows
(in millions):
<TABLE>
<CAPTION>
December 31
1999 1998 1997
------------------------------------
<S> <C> <C> <C>
Balance at beginning of year $104 $121 $121
Establishment of closed block (see Note 5) - (9) -
Provision for losses 5 4 8
Releases due to write-downs, sales and foreclosures (1) (12) (8)
====================================
Balance at end of year $108 $104 $121
====================================
</TABLE>
The Company was servicing approximately 555,000 and 484,000 residential mortgage
loans with aggregate principal balances of approximately $51.9 billion and $42.1
billion at December 31, 1999 and 1998, respectively. In connection with these
mortgage servicing activities, the Company held funds in trust for others
totaling approximately $334 million and $284 million at December 31, 1999 and
1998, respectively. In connection with its loan administration activities, the
Company advances payments of property taxes and insurance premiums and also
advances principal and interest payments to investors in advance of collecting
funds from specific mortgagors. In addition, the Company makes certain payments
of attorney fees and other costs related to loans in foreclosure. These amounts
receivable are recorded, at cost, as advances on serviced loans. Amounts
advanced are considered in management's evaluation of the adequacy of the
mortgage loan allowance for losses.
Principal Life Insurance Company
Notes to Consolidated Financial Statements (continued)
3. Investments (continued)
Real estate holdings and related accumulated depreciation are as follows (in
millions):
December 31
1999 1998
-----------------------------
Investment real estate $1,461 $1,890
Accumulated depreciation (161) (183)
-----------------------------
1,300 1,707
Properties held for sale 912 878
=============================
Real estate, net $2,212 $2,585
=============================
Other investments include a temporarily controlled subsidiary. Also included in
other investments are properties owned jointly with venture partners and
operated by the partners. Joint ventures in which the Company has an interest
have mortgage loans with the Company of $760 million and $876 million at
December 31, 1999 and 1998, respectively. The Company is committed to providing
additional mortgage financing for such joint ventures aggregating $77 million at
December 31, 1999.
4. Derivatives Held or Issued for Purposes Other Than Trading
The Company uses exchange-traded interest rate futures and mortgage-backed
securities forwards to hedge against interest rate risks. The Company attempts
to match the timing of when interest rates are committed on insurance products
and on new investments. However, timing differences do occur and can expose the
Company to fluctuating interest rates. Interest rate futures and mortgage-backed
securities forwards are used to minimize these risks. In these contracts, the
Company is subject to the risk that the counterparties will fail to perform and
to the risks associated with changes in the value of the underlying securities;
however, such changes in value generally are offset by opposite changes in the
value of the hedged items. Futures contracts are marked to market and settled
daily, which minimizes the counterparty risk. The notional amounts of futures
contracts ($76 million at December 31, 1999, and $855 million at December 31,
1998) represent the extent of the Company's involvement. The Company had
outstanding mortgage-backed securities forwards of $149 million and $55 million
at December 31, 1999 and 1998, respectively.
The Company uses interest rate swaps to more closely match the interest rate
characteristics of its assets with those of its liabilities. Swaps are used in
asset and liability management to modify duration and match cash flows.
Occasionally, the Company will sell a callable investment-type contract and may
use interest rate swaptions or similar instruments to transform the callable
liability into a fixed term liability. In addition, the Company may sell an
investment-type contract with attributes tied to market indices in which case
the Company uses a call option to transform the liability into a
Principal Life Insurance Company
Notes to Consolidated Financial Statements (continued)
4. Derivatives Held or Issued for Purposes Other Than Trading (continued)
fixed rate liability. The notional principal amounts of the interest rate swaps
outstanding at December 31, 1999 and 1998 were $1,211 million and $1,533
million, respectively, and the credit exposure at December 31, 1999 and 1998 was
$19 million for both years. The notional principal amounts of the swaptions
outstanding at December 31, 1999 and 1998 were $470 million and $259 million,
respectively, and the credit exposure at December 31, 1999 and 1998 was $9
million and $6 million, respectively. The notional amounts of call options were
$30 million at both December 31, 1999 and 1998, and the credit exposure was $19
million and $6 million at December 31, 1999 and 1998, respectively. The
Company's current credit exposure on swaps is limited to the value of interest
rate swaps that have become favorable to the Company. The average unexpired
terms of the swaps were approximately five years at December 31, 1999 and six
years at December 31, 1998. The net amount payable or receivable from interest
rate swaps is accrued as an adjustment to interest income. The Company's
interest rate swap agreements include cross-default provisions when two or more
swaps are transacted with a given counterparty.
The Company enters into currency exchange swap agreements to convert certain
foreign denominated fixed rate assets and liabilities into U. S. dollar
denominated instruments to eliminate the exposure to future currency volatility
on those items. At December 31, 1999, the Company had various foreign currency
exchange agreements with maturities ranging from 2000 to 2018, with an aggregate
notional amount of approximately $1,571 million and a credit exposure of $69
million. At December 31, 1998, such maturities ranged from 1999 to 2018 with an
aggregate notional amount of approximately $486 million and a credit exposure of
$35 million. The average unexpired term of the swaps was approximately six years
at December 31, 1999 and seven years at December 31, 1998.
With regard to its foreign operations, the Company attempts to conduct much of
its business in the functional currency of the country of operation. At times,
the Company is unable to do so, and beginning in 1999 for these cases, it uses
foreign exchange derivatives to hedge the resulting currency risk. At December
31, 1999, the Company had foreign currency swaps with a notional amount of $5
million outstanding.
The Company manages the risk on its commercial mortgage loan pipeline by buying
and selling mortgage-backed securities in the forward markets, interest rate
swaps, and interest rate futures. The Company entered into mortgage-backed
forwards totaling $87 million and $27 million at December 31, 1999 and 1998,
respectively, and interest rate swaps with notional amounts of $88 million with
a credit exposure totaling $2 million at December 31, 1999. In addition, the
Company entered into interest rate futures contracts with notional amounts of
$211 million and $58 million at December 31, 1999 and 1998, respectively. Such
futures contracts are marked to market and settled daily.
Principal Life Insurance Company
Notes to Consolidated Financial Statements (continued)
4. Derivatives Held or Issued for Purposes Other Than Trading (continued)
The Company manages risk on its residential mortgage loan pipeline by buying and
selling mortgage-backed securities in the forward markets, over-the-counter
options on mortgage-backed securities, U.S. Treasury futures contracts and
options on Treasury futures contracts. The Company entered into mandatory
forward, option and futures contracts totaling approximately $1,080 million and
$2,369 million at December 31, 1999 and 1998, respectively, to reduce interest
rate risk on certain mortgage loans held for sale and other commitments. The
forward contracts provide for the delivery of securities at a specified future
date at a specified price or yield. In the event the counterparty is unable to
meet its contractual obligations, the Company may be exposed to the risk of
selling mortgage loans at prevailing market prices. The effect of these
contracts was considered in the lower of cost or market calculation of mortgage
loans held for sale.
The Company has committed to originate approximately $372 million and $1,100
million of mortgage loans at December 31, 1999 and 1998, respectively, subject
to borrowers meeting the Company's underwriting guidelines. These commitments
call for the Company to fund such loans at a future date with a specified rate
at a specified price. Because the borrowers are not obligated to close the
loans, the Company is exposed to risks that it may not have sufficient mortgage
loans to deliver to its mandatory forward contracts and, thus, would be
obligated to purchase mortgage loans at prevailing market rates to meet such
commitments. Conversely, the Company is exposed to the risk that more loans than
expected will close, and the loans would then be sold at current market prices.
The Company uses interest rate floors and options on futures contracts in
hedging a portion of its portfolio of mortgage servicing rights from prepayment
risk associated with changes in interest rates. The Company had entered into
interest rate floor and option contracts with a notional value of $5,550 million
and $6,314 million at December 31, 1999 and 1998, respectively. The floors and
contracts provide for the receipt of payments when interest rates are below
predetermined interest rate levels. The premiums paid for floors are included in
other assets in the Company's consolidated statements of financial position.
Principal Life Insurance Company
Notes to Consolidated Financial Statements (continued)
5. Closed Block
Summarized financial information of the Closed Block is as follows (in
millions):
<TABLE>
<CAPTION>
December 31
1999 1998
-----------------------------
<S> <C> <C>
Assets
Fixed maturities available-for-sale $1,782 $1,722
Mortgage loans 1,036 1,063
Policy loans 752 741
Other investments 1 1
-----------------------------
Total investments 3,571 3,527
Cash and cash equivalents 24 -
Accrued investment income 63 60
Deferred policy acquisition costs 639 649
Premiums due and other receivables 21 15
=============================
$4,318 $4,251
=============================
Liabilities
Future policy benefits and claims $4,864 $4,668
Other policyholder funds 406 399
Other liabilities 125 232
-----------------------------
$5,395 $5,299
=============================
</TABLE>
<TABLE>
<CAPTION>
For the six-month
For the year ended period from formation
December 31, 1999 to December 31, 1998
----------------------------------------------
<S> <C> <C>
Revenues and expenses
Premiums and other considerations $764 $390
Net investment income 269 127
Other income (expense) (2) 1
Policy and contract benefits (438) (196)
Change in future policy benefits and contractholder funds
(176) (110)
Dividends to policyholders (296) (143)
Operating expenses (110) (56)
==============================================
Contribution from Closed Block (before income taxes)
$ 11 $ 13
==============================================
</TABLE>
Principal Life Insurance Company
Notes to Consolidated Financial Statements (continued)
6. Deferred Policy Acquisition Costs
Policy acquisition costs deferred and amortized in 1999, 1998 and 1997 are as
follows (in millions):
<TABLE>
<CAPTION>
December 31
1999 1998 1997
------------------------------------------
<S> <C> <C> <C>
Balance at beginning of year $456 $1,057 $1,058
Balance transferred to the Closed Block - (697) -
Cost deferred during the year 254 229 213
Amortized to expense during the year (76) (170) (170)
Effect of unrealized (gains) losses 158 37 (44)
==========================================
Balance at end of year $792 $ 456 $1,057
==========================================
</TABLE>
7. Insurance Liabilities
Major components of contractholder funds in the consolidated statements of
financial position, are summarized as follows (in millions):
<TABLE>
<CAPTION>
December 31
1999 1998
-----------------------------
<S> <C> <C>
Liabilities for investment-type contracts:
Guaranteed investment contracts $15,941 $15,211
Domestic funding agreements 743 653
International funding agreements backing
medium-term notes 1,139 -
Other investment-type contracts 3,115 3,806
-----------------------------
Total liabilities for investment-type contracts 20,938 19,670
Liabilities for individual annuities 2,522 2,685
Universal life and other reserves 1,063 984
=============================
Total contractholder funds $24,523 $23,339
=============================
</TABLE>
The Company's contractholder funds, excluding universal life reserves, include
surrender and withdrawal provisions which mitigate the risk of losses due to
early withdrawals. Approximately 90% of such contractholder funds, include
surrender or market value adjustment provisions, or are not subject to
discretionary withdrawal. The remainder is subject to discretionary withdrawal
at book value with minimal or no surrender charge.
Approximately 3.0% of the Company's investment contract portfolio includes
puttable funding agreements, representing 1.3% of general account assets.
Approximately 2.5% of the portfolio includes contracts which require the
contractholder to give the Company a minimum of 90 days notice before contract
termination payment.
Principal Life Insurance Company
Notes to Consolidated Financial Statements (continued)
7. Insurance Liabilities (continued)
Funding agreements are issued to non-qualified institutional investors both in
domestic and international markets. In late 1998, the Company established a $2
billion program under which an offshore special purpose entity was created to
issue nonrecourse medium-term notes. Under the program, the proceeds of each
note series issuance are used to purchase a funding agreement from the Company,
with the funding agreement so purchased then used to secure that particular
series of notes. In general, the payment terms of any particular series of notes
match the payment terms of the funding agreement that secures that series.
Claims for principal and interest under those international funding agreements
are afforded equal priority to claims of life insurance and annuity
policyholders under insolvency provisions of Iowa Insurance Laws. During 1999,
the Company began issuing international funding agreements to the offshore
special purpose vehicle under that program. The offshore special purpose vehicle
issued medium-term notes to investors in Europe, Asia and Australia. In general,
the medium-term note funding agreements do not give the contractholder the right
to terminate prior to contractually stated maturity dates, absent the existence
of certain circumstances which are largely within the Company's control. At
December 31, 1999, the contractual maturities were 2002 - $180 million; 2004 -
$358 million; 2008 - $36 million; and 2009 - $565 million.
Activity in the liability for unpaid accident and health claims, which is
included with future policy benefits and claims in the consolidated statements
of financial position, is summarized as follows (in millions):
<TABLE>
<CAPTION>
December 31
1999 1998 1997
------------------------------------------
<S> <C> <C> <C>
Balance at beginning of year $ 641 $ 770 $ 800
Incurred:
Current year 1,831 1,922 2,723
Prior years 32 (14) (21)
------------------------------------------
------------------------------------------
Total incurred 1,863 1,908 2,702
Reclassification for subsidiary merger
(see Note 2) - 155 -
Payments:
Current year 1,380 1,523 2,235
Prior years 405 359 497
------------------------------------------
Total payments 1,785 2,037 2,732
------------------------------------------
Balance at end of year:
Current year 451 349 476
Prior years 268 292 294
------------------------------------------
==========================================
Total balance at end of year $ 719 $ 641 $ 770
==========================================
</TABLE>
Principal Life Insurance Company
Notes to Consolidated Financial Statements (continued)
7. Insurance Liabilities (continued)
The activity summary in the liability for unpaid accident and health claims
shows an increase of $32 million, a decrease of $14 million and a decrease of
$21 million to the December 31, 1998, 1997 and 1996 liability for unpaid
accident and health claims, respectively, arising in prior years. Such liability
adjustments, which affected current operations during 1999, 1998 and 1997,
respectively, resulted from developed claims for prior years being different
than were anticipated when the liabilities for unpaid accident and health claims
were originally estimated. These trends have been considered in establishing the
current year liability for unpaid accident and health claims.
8. Debt
Short-term debt
Short-term debt consists primarily of commercial paper and outstanding balances
on credit facilities with various banks. At December 31, 1999, the Company and
certain subsidiaries had credit facilities with various banks in an aggregate
amount of $1.5 billion. The credit facilities may be used for general corporate
purposes and also to provide backup for the Company's commercial paper programs.
Long-term debt
The components of debt as of December 31, 1999 and December 31, 1998 are as
follows (in millions):
<TABLE>
<CAPTION>
December 31
1999 1998
------------------------------
<S> <C> <C> <C> <C>
7.875% surplus notes payable, due 2024 $199 199
8% surplus notes payable, due 2044 99 99
Non-recourse mortgages and notes payable 335 214
Other mortgages and notes payable 201 159
==============================
Total long-term debt $834 $671
==============================
</TABLE>
The amounts included above are net of the discount and direct costs associated
with issuing these notes which are being amortized to expense over their
respective terms using the interest method.
Principal Life Insurance Company
Notes to Consolidated Financial Statements (continued)
8. Debt (continued)
On March 10, 1994, the Company issued $300 million of surplus notes, including
$200 million due March 1, 2024 at a 7.875% annual interest rate and the
remaining $100 million due March 1, 2044 at an 8% annual interest rate. No
affiliates of the Company hold any portion of the notes. Each payment of
interest and principal on the notes, however, may be made only with the prior
approval of the Commissioner of Insurance of the State of Iowa (the
"Commissioner") and only to the extent that the Company has sufficient surplus
earnings to make such payments. For each of the years ended December 31, 1999,
1998 and 1997, interest of $24 million was approved by the Commissioner, paid
and charged to expense.
Subject to Commissioner approval, the surplus notes due March 1, 2024 may be
redeemed at the Company's election on or after March 1, 2004 in whole or in part
at a redemption price of approximately 103.6% of par. The approximate 3.6%
premium is scheduled to gradually diminish over the following ten years. These
surplus notes may then be redeemed on or after March 1, 2014, at a redemption
price of 100% of the principal amount plus interest accrued to the date of
redemption.
In addition, subject to Commissioner approval, the notes due March 1, 2044 may
be redeemed at the Company's election on or after March 1, 2014, in whole or in
part at a redemption price of approximately 102.3% of par. The approximate 2.3%
premium is scheduled to gradually diminish over the following ten years. These
notes may be redeemed on or after March 1, 2024, at a redemption price of 100%
of the principal amount plus interest accrued to the date of redemption.
The mortgages and other notes payable are financings for real estate
developments. The Company has obtained loans with various lenders to finance
these developments. Outstanding principal balances as of December 31, 1999 range
from $1 million to $38 million per development with interest rates generally
ranging from 6.4% to 9.3%. Outstanding principal balances as of December 31,
1998 range from $1 million to $39 million per development with interest rates
generally ranging from 6.6% to 9.3%.
At December 31, 1999, future annual maturities of debt are as follows (in
millions):
2000 $124
2001 72
2002 19
2003 12
2004 12
Thereafter 595
----------
==========
Total future maturities of debt $834
==========
Cash paid for interest for 1999, 1998 and 1997 was $96 million, $97 million and
$67 million, respectively. These amounts include interest paid on taxes during
these years.
Principal Life Insurance Company
Notes to Consolidated Financial Statements (continued)
9. Income Taxes
The Company's income tax expense (benefit) is as follows (in millions):
<TABLE>
<CAPTION>
Year ended December 31
1999 1998 1997
------------------------------------------
<S> <C> <C> <C>
Current income taxes:
Federal $ 84 $ (80) $144
State and foreign 13 10 3
Net realized capital gains 162 107 11
------------------------------------------
Total current income taxes 259 37 158
Deferred income taxes 64 7 83
==========================================
Total income taxes $323 $44 $241
==========================================
</TABLE>
The Company's provision for income taxes may not have the customary relationship
of taxes to income. Differences between the prevailing corporate income tax rate
of 35% times the pre-tax income and the Company's effective tax rate on pre-tax
income are generally due to inherent differences between income for financial
reporting purposes and income for tax purposes, and the establishment of
adequate provisions for any challenges of the tax filings and tax payments to
the various taxing jurisdictions. A reconciliation between the corporate income
tax rate and the effective tax rate is as follows:
<TABLE>
<CAPTION>
Year ended December 31
1999 1998 1997
------------------------------------------
<S> <C> <C> <C>
Statutory corporate tax rate 35% 35% 35%
Dividends received deduction (3) (4) (2)
Interest exclusion from taxable income - (1) (1)
Resolution of prior year tax issues - (20) -
Other (3) (4) 3
------------------------------------------
Effective tax rate 29% 6% 35%
==========================================
</TABLE>
Significant components of the Company's net deferred income taxes are as follows
(in millions):
<TABLE>
<CAPTION>
December 31
1999 1998
-----------------------------
<S> <C> <C>
Deferred income tax assets (liabilities):
Insurance liabilities $ 138 $ 117
Deferred policy acquisition costs (149) (111)
Net unrealized losses (gains) on available for sale
securities 88 (381)
Mortgage loan servicing rights (210) (111)
Other (26) (11)
=============================
$(159) $(497)
=============================
</TABLE>
Principal Life Insurance Company
Notes to Consolidated Financial Statements (continued)
9. Income Taxes (continued)
The Internal Revenue Service ("the Service") has completed examination of the
consolidated federal income tax returns of the Company and affiliated companies
through 1992. The Service is completing their examination of the Company's
returns for 1993 and 1994. The Service has also begun to examine returns for
1995 and 1996. The Company believes that there are adequate defenses against or
sufficient provisions for any challenges.
Undistributed earnings of certain foreign subsidiaries are considered
indefinitely reinvested by the Company. A tax liability will be recognized when
the Company expects distribution of earnings in the form of dividends, sale of
the investment or otherwise.
Cash paid for income taxes was $270 million in 1999, $309 million in 1998 and
$143 million in 1997.
10. Employee and Agent Benefits
The Company has defined benefit pension plans covering substantially all of its
employees and certain agents. The employees and agents are generally first
eligible for the pension plans when they reach age 21. The pension benefits are
based on the years of service and generally the employee's or agent's average
annual compensation during the last five years of employment. Partial benefit
accrual of pension benefits is recognized from first eligibility until
retirement based on attained service divided by potential service to age 65 with
a minimum of 35 years of potential service. The Company's policy is to fund the
cost of providing pension benefits in the years that the employees and agents
are providing service to the Company. The Company's funding policy is to deposit
the actuarial normal cost and any change in unfunded accrued liability over a
30-year period as a percentage of compensation.
The Company also provides certain health care, life insurance and long-term care
benefits for retired employees. Substantially all employees are first eligible
for these postretirement benefits when they reach age 57 and have completed ten
years of service with the Company. Partial benefit accrual of these health, life
and long-term care benefits is recognized from the employee's date of hire until
retirement based on attained service divided by potential service to age 65 with
a minimum of 35 years of potential service. The Company's policy is to fund the
cost of providing retiree benefits in the years that the employees are providing
service to the Company. The Company's funding policy is to deposit the actuarial
normal cost and an accrued liability over a 30-year period as a percentage of
compensation.
Principal Life Insurance Company
Notes to Consolidated Financial Statements (continued)
10. Employee and Agent Benefits (continued)
The plans' combined funded status, reconciled to amounts recognized in the
consolidated statements of financial position and consolidated statements of
operations, is as follows (in millions):
<TABLE>
<CAPTION>
Other Postretirement
Pension Benefits Benefits
---------------------------------- ------------------------------
December 31 December 31
1999 1998 1997 1999 1998 1997
---------- ----------- ----------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Change in benefit obligation
Benefit obligation at beginning of $ (827) $(700) $(732) $(206) $(214) $(218)
year
Service cost (42) (34) (41) (11) (12) (12)
Interest cost (55) (50) (52) (14) (15) (16)
Actuarial gain (loss) 163 (79) 101 (3) 20 19
Curtailment adjustment - - 7 - - -
Benefits paid 29 36 17 6 15 13
========== =========== =========== ========= ========== =========
Benefit obligation at end of year $ (732) $(827) $(700) $(228) $(206) $(214)
========== =========== =========== ========= ========== =========
Change in plan assets
Fair value of plan assets at
beginning of year $ 993 $ 980 $ 841 $ 326 $ 300 $ 247
Actual return on plan assets 90 23 130 5 15 41
Employer contribution 6 26 26 21 26 25
Benefits paid (29) (36) (17) (6) (15) (13)
---------- ----------- ----------- --------- ---------- ---------
Fair value of plan assets at end of $1,060 $ 993 $ 980 $ 346 $ 326 $ 300
year
========== =========== =========== ========= ========== =========
Funded status $ 328 $ 166 $ 280 $ 118 $ 120 $ 86
Unrecognized net actuarial gain (216) (38) (182) (46) (71) (53)
Unrecognized prior service cost 11 12 14 - - -
Unamortized transition obligation (26) (37) (49) 4 8 12
(asset)
========== =========== =========== ========= ========== =========
Prepaid benefit cost $ 97 $ 103 $ 63 $ 76 $ 57 $ 45
========== =========== =========== ========= ========== =========
Weighted-average assumptions as of
December 31
Discount rate 8.00% 6.75% 7.25% 8.00% 6.75% 7.25%
</TABLE>
Principal Life Insurance Company
Notes to Consolidated Financial Statements (continued)
10. Employee and Agent Benefits (continued)
<TABLE>
<CAPTION>
Other Postretirement
Pension Benefits Benefits
---------------------------------- ------------------------------
December 31 December 31
1999 1998 1997 1999 1998 1997
---------- ----------- ----------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Components of net periodic benefit
cost
Service cost $ 42 $ 34 $ 41 $ 11 $ 12 $ 12
Interest cost 55 50 52 14 15 16
Expected return on plan assets (76) (75) (80) (24) (16) (16)
Amortization of prior service cost 1 1 1 - - -
Amortization of transition (asset)
obligation (11) (11) (11) 4 4 4
Recognized net actuarial loss (gain) - (8) 2 (2) (1) -
---------- ----------- ----------- --------- ---------- ---------
Net periodic benefit cost (income) $ 11 $ (9) $ 5 $ 3 $ 14 $ 16
========== =========== =========== ========= ========== =========
</TABLE>
For 1999, 1998 and 1997, the expected long-term rates of return on plan assets
for pension benefits were approximately 5% in each of these years (after
estimated income taxes) for those trusts subject to income taxes. For trusts not
subject to income taxes, the expected long-term rates of return on plan assets
were approximately 8.1% in each of the years 1999, 1998 and 1997. The assumed
rate of increase in future compensation levels varies by age for both the
qualified and non-qualified pension plans.
For 1999, 1998 and 1997, the expected long-term rates of return on plan assets
for other post-retirement benefits were approximately 5% in each of these years
(after estimated income taxes) for those trusts subject to income taxes. For
trusts not subject to income taxes, the expected long-term rates of return on
plan assets were approximately 8.0%, 8.1% and 8.2% for 1999, 1998 and 1997,
respectively. These rates of return on plan assets vary by benefit type and
employee group.
The assumed health care cost trend rate used in measuring the accumulated
postretirement benefit obligations starts at 14.1% in 1999 and declines to an
ultimate rate of 6% in 2009. Assumed health care cost trend rates have a
significant effect on the amounts reported for the health care plans. A
one-percentage-point change in assumed health care cost trend rates would have
the following effects (in millions):
<TABLE>
<CAPTION>
1-Percentage-Point 1-Percentage-Point
Increase Decrease
---------------------- ---------------------
<S> <C> <C>
Effect on total of service and interest cost components
$ 8 $ (6)
Effect on accumulated postretirement benefit obligation
41 (33)
</TABLE>
Principal Life Insurance Company
Notes to Consolidated Financial Statements (continued)
10. Employee and Agent Benefits (continued)
In addition, the Company has defined contribution plans that are generally
available to all employees and agents who are age 21 or older. Eligible
participants may contribute up to 20% of their compensation, to a maximum of
$10,000 annually, to the plans in 1999 and 1998. Eligible participants were able
to contribute up to 15% of their compensation, to a maximum of $9,500 annually,
to the plans in 1997. The Company matches the participant's contribution at a
50% contribution rate up to a maximum Company contribution of 2% of the
participant's compensation. The Company contributed $11 million in both 1999 and
1998, and $15 million in 1997 to these defined contribution plans.
11. Other Commitments and Contingencies
The Company, as a lessor, leases industrial, office, retail and other
wholly-owned investment real estate properties under various operating leases.
Rental income for all operating leases totaled $357 million in 1999, $362
million in 1998 and $344 million in 1997. At December 31, 1999, future minimum
annual rental commitments under these noncancelable operating leases are as
follows (in millions):
<TABLE>
<CAPTION>
Held for Sale Held for Total Rental
Investment Commitments
---------------------------------------------------
<S> <C> <C> <C>
2000 $ 96 $ 150 $ 246
2001 87 137 224
2002 67 127 194
2003 53 117 170
2004 41 105 146
Thereafter 180 796 976
===================================================
Total future minimum lease receipts $524 $1,432 $1,956
===================================================
</TABLE>
The Company, as a lessee, leases office space, data processing equipment,
corporate aircraft and office furniture and equipment under various operating
leases. Rental expense for all operating leases totaled $73 million in 1999, $60
million in 1998 and $84 million in 1997. At December 31, 1999, future minimum
annual rental commitments under these noncancelable operating leases are as
follows (in millions):
Principal Life Insurance Company
Notes to Consolidated Financial Statements (continued)
11. Other Commitments and Contingencies (continued)
<TABLE>
<S> <C>
2000 $ 43
2001 32
2002 23
2003 16
2004 9
Thereafter 9
-----------
132
Less future sublease rental income on these noncancelable leases 3
===========
Total future minimum lease payments $129
===========
</TABLE>
The Company is a plaintiff or defendant in actions arising out of its insurance
business and investment operations. The Company is, from time to time, also
involved in various governmental and administrative proceedings. While the
outcome of any pending or future litigation cannot be predicted, management does
not believe that any pending litigation will have a material adverse effect on
the Company's business, financial condition or results of operations. However,
no assurances can be given that such litigation would not materially and
adversely affect the Company's business, financial condition or results of
operations.
Other companies in the life insurance industry have historically been subject to
substantial litigation resulting from claims disputes and other matters. Most
recently, such companies have faced extensive claims, including class-action
lawsuits, alleging improper life insurance sales practices. Negotiated
settlements of such class-action lawsuits have had a material adverse effect on
the business, financial condition and results of operations of certain of these
companies. The Company is currently a defendant in two purported class-action
lawsuits which allege improper life insurance sales practices. The Company
believes the claims are without merit and intends to vigorously contest such
suits. However, there can be no assurance that such sales practice litigation or
any future similar litigation will not have a material adverse effect on the
Company's business, financial condition or results of operations.
The Company is also subject to insurance guaranty laws in the states in which it
writes business. These laws provide for assessments against insurance companies
for the benefit of policyholders and claimants in the event of insolvency of
other insurance companies. The assessments may be partially recovered through a
reduction in future premium taxes in some states. The Company believes such
assessments in excess of amounts accrued would not materially affect its
financial condition or results of operations.
Principal Life Insurance Company
Notes to Consolidated Financial Statements (continued)
12. Fair Value of Financial Instruments
The following discussion describes the methods and assumptions utilized by the
Company in estimating its fair value disclosures for financial instruments.
Certain financial instruments, particularly policyholder liabilities other than
investment contracts, are excluded from these fair value disclosure
requirements. The techniques utilized in estimating the fair values of financial
instruments are affected by the assumptions used, including discount rates and
estimates of the amount and timing of future cash flows. Care should be
exercised in deriving conclusions about the Company's business, its value or
financial position based on the fair value information of financial instruments
presented below. The estimates shown are not necessarily indicative of the
amounts that would be realized in a one-time, current market exchange of all of
the Company's financial instruments.
The Company defines fair value as the quoted market prices for those instruments
that are actively traded in financial markets. In cases where quoted market
prices are not available, fair values are estimated using present value or other
valuation techniques. The fair value estimates are made at a specific point in
time, based on available market information and judgments about the financial
instrument, including estimates of timing, amount of expected future cash flows
and the credit standing of counterparties. Such estimates do not consider the
tax impact of the realization of unrealized gains or losses. In many cases, the
fair value estimates cannot be substantiated by comparison to independent
markets. In addition, the disclosed fair value may not be realized in the
immediate settlement of the financial instrument.
Fair values of public debt and equity securities have been determined by the
Company from public quotations, when available. Private placement securities and
other fixed maturities and equity securities are valued by discounting the
expected total cash flows. Market rates used are applicable to the yield, credit
quality and average maturity of each security.
Fair values of commercial mortgage loans are determined by discounting the
expected total cash flows using market rates that are applicable to the yield,
credit quality and maturity of each loan. Fair values of residential mortgage
loans are determined by a pricing and servicing model using market rates that
are applicable to the yield, rate structure, credit quality, size and maturity
of each loan.
The fair values for assets classified as policy loans, other investments
excluding equity investments in subsidiaries, cash and cash equivalents and
accrued investment income in the accompanying consolidated statements of
financial position approximate their carrying amounts.
Mortgage servicing rights represent the present value of estimated future net
revenues from contractually specified servicing fees. The fair value was
estimated with a valuation model using current prepayment speeds and a market
discount rate.
Principal Life Insurance Company
Notes to Consolidated Financial Statements (continued)
12. Fair Value of Financial Instruments (continued)
The fair values of the Company's reserves and liabilities for investment-type
insurance contracts (insurance, annuity and other policy contracts that do not
involve significant mortality or morbidity risk and that are only a portion of
the policyholder liabilities appearing in the consolidated statements of
financial position) are estimated using discounted cash flow analyses (based on
current interest rates being offered for similar contracts with maturities
consistent with those remaining for the investment-type contracts being valued).
The fair values for the Company's insurance contracts (insurance, annuity and
other policy contracts that do involve significant mortality or morbidity risk),
other than investment-type contracts, are not required to be disclosed. The
Company does consider, however, the various insurance and investment risks in
choosing investments for both insurance and investment-type contracts.
Fair values for debt issues are estimated using discounted cash flow analysis
based on the Company's incremental borrowing rate for similar borrowing
arrangements.
The carrying amounts and estimated fair values of the Company's financial
instruments at December 31, 1999 and 1998, are as follows (in millions):
<TABLE>
<CAPTION>
1999 1998
--------------------------- ----------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
--------------------------- ----------------------------
<S> <C> <C> <C> <C>
Assets (liabilities)
Fixed maturities (see Note 3) $21,660 $21,660 $21,006 $21,006
Equity securities (see Note 3) 864 864 1,102 1,102
Mortgage loans 12,296 12,155 12,091 12,711
Policy loans 28 28 25 25
Other investments 465 465 198 198
Cash and cash equivalents 362 362 461 461
Accrued investment income 408 408 375 375
Financial instruments included in Closed
Block (see Note 5) 3,658 3,649 3,587 3,652
Mortgage servicing rights 1,081 1,288 778 821
Investment-type insurance contracts (23,563) (23,068) (22,127) (21,606)
Short-term debt - - (200) (200)
Long-term debt 834 790 (671) (708)
</TABLE>
Principal Life Insurance Company
Notes to Consolidated Financial Statements (continued)
13. Statutory Insurance Financial Information
The Company prepares statutory financial statements in accordance with the
accounting practices prescribed or permitted by the Insurance Division of the
Department of Commerce of the State of Iowa. Currently "prescribed" statutory
accounting practices include a variety of publications of the National
Association of Insurance Commissioners ("NAIC") as well as state laws,
regulations and general administrative rules. "Permitted" statutory accounting
practices encompass all accounting practices not so prescribed. The impact of
any permitted accounting practices on statutory surplus is not material. The
accounting practices used to prepare statutory financial statements for
regulatory filings differ in certain instances from GAAP. Prescribed or
permitted statutory accounting practices are used by state insurance departments
to regulate the Company.
The NAIC has adopted the Codification of Statutory Accounting Principles
("Codification"), the result of which is expected to constitute the primary
source of "prescribed" statutory accounting practices upon formal adoption by
Iowa regulatory authorities. If adopted as proposed effective January 1, 2001,
Codification will likely change, to some extent, prescribed statutory accounting
practices and may result in changes to the accounting practices that the Company
uses to prepare its statutory-basis financial statements. Codification will
require adoption by the various states before it becomes the prescribed
statutory basis of accounting for insurance companies domiciled within those
states. The impact on the Company's statutory financial statements has not been
determined at this time.
Life/Health insurance companies are subject to certain risk-based capital
("RBC") requirements as specified by the NAIC. Under those requirements, the
amount of capital and surplus maintained by a life/health insurance company is
to be determined based on the various risk factors related to it. At December
31, 1999, the Company meets the RBC requirements.
Under Iowa law, the Company may pay dividends only from the earned surplus
arising from its business and must receive the prior approval of the Iowa
Commissioner to pay a dividend if such a dividend would exceed certain statutory
limitations. The current statutory limitation is the greater of 10% of the
Company's policyholder surplus as of the preceding year end or the net gain from
operations from the previous calendar year. Based on this limitation and 1999
statutory results, the Company could pay approximately $539 million in dividends
in 2000 without exceeding the statutory limitation. In 1999, the Company
notified the Iowa Commissioner in advance of all dividend payments and received
approval for an extraordinary dividend of $250 million. Total dividends paid to
its parent company in 1999 were $509 million. Dividends were composed of cash,
other assets and the net assets of the Company's subsidiary, Princor Financial
Services Corporation. The distribution of the Company's investment in Princor
Financial Services Corporation was recorded at fair market value of $77 million
and resulted in a gain of $56 million for a subsidiary of the Company.
Principal Life Insurance Company
Notes to Consolidated Financial Statements (continued)
13. Statutory Insurance Financial Information (continued)
The following summary reconciles the assets and equity at December 31, 1999,
1998 and 1997, and net income for the years ended December 31, 1999, 1998 and
1997, in accordance with statutory reporting practices prescribed or permitted
by the Insurance Division of the Department of Commerce of the State of Iowa
with that reported in these consolidated GAAP financial statements (in
millions):
<TABLE>
<CAPTION>
Stockholder's Net
Assets Equity Income
------------------------------------------
------------------------------------------
<S> <C> <C> <C>
December 31, 1999
As reported in accordance with statutory accounting practices
- unconsolidated $76,018 $3,152 $714
Additions (deductions):
Unrealized loss on fixed maturities available-for-sale (357) (357) -
Other investment adjustments 2,088 995 10
Adjustments to insurance reserves and dividends (125) (236) 15
Deferral of policy acquisition costs 1,409 1,409 68
Surplus note reclassification as debt - (298) -
Provision for deferred federal income taxes and other tax
reclassifications - 33 18
Other - net 277 253 (15)
------------------------------------------
As reported in these consolidated GAAP financial statements $79,310 $4,951 $810
==========================================
December 31, 1998
As reported in accordance with statutory accounting practices
- unconsolidated $70,096 $3,032 $511
Additions (deductions):
Unrealized gain on fixed maturities available-for-sale 997 997 -
Other investment adjustments 1,620 1,081 176
Adjustments to insurance reserves and dividends (169) (192) (56)
Deferral of policy acquisition costs 1,105 1,105 -
Surplus note reclassification as debt - (298) -
Provision for deferred federal income taxes and other tax
reclassifications - (475) 165
Other - net 294 219 (101)
==========================================
As reported in these consolidated GAAP financial statements $73,943 $5,469 $695
==========================================
December 31, 1997
As reported in accordance with statutory accounting practices
- unconsolidated $63,957 $2,811 $432
Additions (deductions):
Unrealized gain on fixed maturities available-for-sale 1,176 1,176 -
Other investment adjustments 853 1,141 27
Adjustments to insurance reserves and dividends (173) (131) (41)
Deferral of policy acquisition costs 1,057 1,057 43
Surplus note reclassification as debt - (298) -
Provision for deferred federal income taxes and other tax
reclassifications - (643) 7
Other - net 184 171 (14)
==========================================
As reported in these consolidated GAAP financial statements $67,054 $5,284 $454
==========================================
</TABLE>
Principal Life Insurance Company
Notes to Consolidated Financial Statements (continued)
14. Non-domestic Operations
The Company's non-U.S. operations offer a variety of asset management and asset
accumulation products and services for businesses, groups and individuals, with
a focus on retirement savings.
The change in net foreign currency translation reflects decreases of $31
million, $18 million and $2 million for the years ended December 31, 1999, 1998
and 1997, respectively. Aggregate foreign exchange transaction gains and losses
were not material for the years ended December 31, 1999, 1998 and 1997. Total
revenues by geographic region are as follows (in millions):
<TABLE>
<CAPTION>
Year ended December 31
1999 1998 1997
------------------------------------------
<S> <C> <C> <C>
Domestic (United States) $7,252 $7,449 $8,547
Non-domestic 272 237 115
------------------------------------------
Total revenues $7,524 $7,686 $8,662
==========================================
</TABLE>
Total assets by geographic region are as follows (in millions):
<TABLE>
<CAPTION>
December 31
1999 1998
-----------------------------
<S> <C> <C>
Domestic (United States) $77,856 $72,704
Non-domestic 1,454 1,239
=============================
Total assets $79,310 $73,943
=============================
</TABLE>
15. Year 2000 (Unaudited)
As of January 31, 2000, virtually all of the Company's major technology systems,
processes, and infrastructure, including those which rely on third party
vendors, appear to be operating smoothly following the rollover to the Year
2000. The Company has experienced no significant interruptions to normal
business operations, including the processing of customer account data and
transactions. The Company will continue its Year 2000 vigilance into early 2001.
The total cost for the project was approximately $24 million through December
31, 1999, with the costs expensed as incurred. Any additional costs to complete
activities related to internal processes, external relationships, contingency
plans and to maintain Year 2000 readiness are not expected to be material.
<PAGE>
Principal Life Insurance Company
Notes to Consolidated Financial Statements (continued)
15. Year 2000 (Unaudited) (continued)
Based on the performance of its major technology systems to date, ongoing plans
to deal with external relationships and contingency plans, the Company believes
that in the worst case scenario it will experience, at most, isolated and
insignificant disruptions of business processes as a result of Year 2000 issues.
Such disruptions are not expected to have a material effect on the Company's
future results of operations, liquidity or financial condition.
PART C
OTHER INFORMATION
Item 24. Financial Statements and Exhibits
(a) Financial Statements included in the Registration Statement
(1) Part A:
None
(2) Part B:
None
(b) Exhibits
(1) Board Resolution of Registrant (filed 6/28/00)
(3a) Distribution Agreement*
(3b) Selling Agreement (filed 6/28/00)
(4a) Form of Variable Annuity Contract (filed 6/28/00)
(4b) Form of Variable Annuity Contract (filed 6/28/00)
(5) Form of Variable Annuity Application (filed 6/28/00)
(6a) Articles of Incorporation of the Depositor(filed 6/28/00)
(6b) Bylaws of Depositor (filed 6/28/00)
(9) Opinion of Counsel (filed 6/28/00)
(10a) Consent of E&Y LLP*
(10b) Powers of Attorney (filed 6/28/00)
(13a) Total Return Calculation**
(13b) Annualized Yield for Separate Account B**
* Filed herein
** To be filed by amendment
<PAGE>
Item 25. Officers and Directors of the Depositor
Principal Life Insurance Company is managed by a Board of
Directors which is elected by its policyowners. The directors and
executive officers of the Company, their positions with the Company,
including Board Committee memberships, and their principal business
address, are as follows:
DIRECTORS: Principal
Name, Positions and Offices Business Address
BETSY J. BERNARD U.S. West
Director 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 50392-0100
Chairman of the Board
Chair, Executive Committee
C. DANIEL GELATT, JR. NMT Corporation
Director P.O. Box 2287
Member, Executive Committee La Crosse, WI 54602-2287
Chair, Human Resources
Committee
J. BARRY GRISWELL The Principal Financial Group
Director, President Des Moines, IA 50392-0100
and Chief Executive Officer
Member, Executive Committee
CHARLES S. JOHNSON DuPont
Director 4935 Mesa Capella Drive
Member, Audit Committee Las Vegas, NV 89113-1441
WILLIAM T. KERR Meredith Corporation
Director 1716 Locust St.
Member, Executive Committee Des Moines, IA 50309-3023
and Chair, Nominating
Committee
LEE LIU Alliant Energy Corporation
Director Post Office Box 351
Member, Executive and Cedar Rapids, IA 52406
Human Resources Committees
VICTOR. H. LOEWENSTEIN Egon Zehnder International
Director Cours de Rive #10
Member, Nominating CH-1204 Geneva, Switzerland
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
Director 1225 17th Street, Ste 1660
Member, Audit Denver, CO 80202
Committee
JOHN R. PRICE The Chase Manhattan Corporation
Director 270 Park Avenue - 21st Floor
Member, Nominating Committee New York, NY 10169
DONALD M. STEWART The Chicago Community Trust
Director 222 North LaSalle Street,Suite 1400
Member, Human Resources Chicago, IL 60601-1009
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
MICHAEL T. DALEY Executive Vice President
MICHAEL H.GERSIE Executive Vice President and
Chief Financial Officer
RICHARD L. PREY 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
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
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 Registrant
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 stock
life insurance company engaged in the business of insurance and
retirement services.
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 Group (Mauritius) Ltd. a Mauritius holding
company.
e. Principal Pensions Co., Ltd. (Japan) a Japan company who engages
in the management, investment and administration of financial
assets and any services incident thereto.
f. Principal Financial Services (Australia), Inc. (an Iowa holding
company) formed to facilitate the acquisition of the Australian
business of BT Australia.
g. Principal Financial Services (NZ), Inc. (an Iowa holding company)
formed to facilitate the acquisition of the New Zealand business
of BT Australia.
h. Principal Capital Management (Singapore) Limited (a Singapore
corporation) a company engaging in funds management.
i. Principal Capital Management (Europe) Limited a United Kingdom
company that engages in European representation and distributor
of the Principal Investments Funds.
j. Principal Capital Management (Ireland) Limited an Ireland company
that engages in fund management.
k. Principal Financial Group Investments (Australia) Pty Limited an
Australia holding company.
Subsidiary wholly-owned by Princor Financial Services Corporation:
a. Principal Management Corporation (an Iowa Corporation) a
registered investment advisor.
Subsidiary 42% owned by PFG DO Brasil LTDA
a. Brasilprev Previdencia Privada S.A.(Brazil) a pension
fund company.
Subsidiary wholly-owned by Principal Financial Group (Mauritius) Ltd.
a. IDBI Principal Asset Management Company (India) a India asset
management 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. BT Financial Group Pty Ltd. an Australia holding company.
Subsidiary wholly-owned by BT Financial Group Pty Ltd:
a. BT Investments (Australia) Limited a Delaware holding
company.
Subsidiary wholly-owned by BT Investments (Australia) Limited:
a. BT Australia (Holdings) Ltd an Australia commercial and
investment banking and asset management company.
Subsidiary wholly-owned by BT Australia (Holdings) Ltd:
a. BT Australia Limited an Australia company engaged in asset
management and trustee/administrative activites.
Subsidiaries wholly-owned by BT Australia Limited:
a. BT Life Limited an Australia company engaged in commercial and
investment linked life insurance policies.
b. BT Funds Management Limited an Australia company engaged in
institutional and retail money management.
c. BT Funds Management (International) Limited an Australia company
who manages international funds (New Zealand, Singapore, Asia,
North America and United Kingdom).
d. BT Securities Limited an Australia company that engages in loan
finance secured against share and managed fund portfolios.
e. BT Portfolio Services Limited an Australia company that engages
in processing and transaction services for financial planners and
financial intermediaries.
f. BT Australia Corporate Services Pty Limited an Australia holding
company for internal service companies.
g. QV1 Pty Limited an Australia company.
Subsidiaries wholly-owned by BT Portfolio Services Limited:
a. BT Custodial Services Pty Ltd an Australia custodian nominee for
investment management activities.
b. National Registry Services Pty Ltd. an Australia company that
engages in registry services.
c. National Registry Services (WA) Pty Limited an Australia company
that engages in registry services.
d. BT Finance & Investments Pty Ltd an Australia trustee of
wholesale cash management trust.
Subsidiaries organized and wholly-owned by BT Australia Corporate
Services Pty Limited:
a. BT Finance Pty Limited an Australia provider of finance by loans
and leases.
b. Chifley Services Pty Limited an Australia company that engages in
staff car leasing management.
c. BT Nominees Pty Limited an Australia company that operates as a
trustee of staff superannuation fund (pension plan).
Subsidiary organized and wholly-owned by BT Funds Management Limited:
a. BT Tactical Asset Management Pty Limited an Australia company
that engages in management of futures positions.
b. Oniston Pty Ltd an Australia company that is a financial services
investment vehicle.
Subsidiary organized and wholly-owned by BT Securities Limited:
a. BT (Queensland) Pty Limited an Australia trustee company.
Subsidiary organized and wholly-owned by BT Custodial Services Pty
Ltd:
a. BT Hotel Group Pty Ltd an Australia corporation - an inactive
shelf corporation to be wound up.
b. BT Custodians Ltd an Australia manager and trustee of various
unit trusts.
c. Dellarak Pty Ltd an Australia trustee company.
Subsidiary organized and wholly-owned by Principal Financial Services
(NZ), Inc.
a. BT Financial Group (NZ) Limited a New Zealand holding company.
Subsidiary organized and wholly-owned by BT Financial Group (NZ)
Limited:
a. BT Portfolio Service (NZ) Limited a New Zealand company that
provides third party administration and registry services.
b. BT New Zealand Nominees Limited a New Zealand company who acts as
a custodian for local assets.
c. BT Funds Management (NZ) Limited a New Zealand funds manager.
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 an Australia corporation, which is the hotel
operating/managing company of the BT Hotel Group.
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) 0.06% of
shares outstanding owned by Principal Life Insurance Company
(including subsidiaries and affiliates) on September 13, 2000.
Principal Blue Chip Fund, Inc.(a Maryland Corporation) 0.03% of
shares outstanding owned by Principal Life Insurance Company
(including subsidiaries and affiliates) on September 13, 2000.
Principal Bond Fund, Inc.(a Maryland Corporation) 0.63% of shares
outstanding owned by Principal Life Insurance Company (including
subsidiaries and affiliates) on September 13, 2000.
Principal Capital Value Fund, Inc. (a Maryland Corporation)
27.47% of outstanding shares owned by Principal Life Insurance
Company (including subsidiaries and affiliates)on September
13,2000
Principal Cash Management Fund, Inc. (a Maryland Corporation)
13.63% of outstanding shares owned by Principal Life Insurance
Company (including subsidiaries and affiliates) on September
13,2000
Principal European Equity Fund, Inc. (a Maryland Corporation)
77.96% of outstanding shares owned by Principal Life Insurance
Company (including subsidiaries and affiliates) on September
13, 2000.
Principal Government Securities Income Fund, Inc. (a Maryland
Corporation) 0.04% of shares outstanding owned by Principal Life
Insurance Company (including subsidiaries and affiliates) on
September 13, 2000.
Principal Growth Fund, Inc. (a Maryland Corporation) 0.01% of
outstanding shares owned by Principal Life Insurance Company
(including subsidiaries and affiliates) on September 13, 2000.
Principal High Yield Fund, Inc. (a Maryland Corporation) 8.13%
of shares outstanding owned by Principal Life Insurance Company
(including subsidiaries and affiliates) on September 13, 2000.
Principal International Emerging Markets Fund, Inc. (a Maryland
Corporation) 29.86% of shares outstanding owned by Principal Life
Insurance Company (including subsidiaries and affiliates) on
September 13, 2000.
Principal International Fund, Inc. (a Maryland Corporation)
24.18% of shares outstanding owned by Principal Life Insurance
Company (including subsidiaries and affiliates) on September
13, 2000.
Principal International SmallCap Fund, Inc. (a Maryland
Corporation) 10.89% of shares outstanding owned by Principal Life
Insurance Company (including subsidiaries and affiliates) on
September 13, 2000.
Principal Limited Term Bond Fund, Inc. (a Maryland Corporation)
16.58% of shares outstanding owned by Principal Life Insurance
Company (including subsidiaries and affiliates) on September 13,
2000.
Principal LargeCap Stock Index Fund, Inc. (a Maryland
Corporation) 18.37% of shares outstanding owned by Principal
Life Insurance Company (including subsidiaries and affiliates) on
September 13, 2000.
Principal MidCap Fund, Inc. (a Maryland Corporation) 0.02% of
shares outstanding owned by Principal Life Insurance Company
(including subsidiaries and affiliates) on September 13, 2000
Principal Pacific Basin Fund, Inc. (a Maryland Corporation)
84.43% of outstanding shares owned by Principal Life Insurance
Company (including subsidiaries and affiliates) on September 13,
2000.
Principal Partners Aggressive Growth Fund, Inc.(a Maryland
Corporation) 4.75% of shares outstanding owned by Principal Life
Insurance Company (including subsidiaries and affiliates) on
September 13, 2000
Principal Partners LargeCap Growth Fund, Inc.(a Maryland
Corporation) 28.03% of shares outstanding owned by Principal
Life Insurance Company (including subsidiaries and affiliates) on
September 13, 2000
Principal Partners MidCap Growth Fund, Inc.(a Maryland
Corporation) 22.41% of shares outstanding owned by Principal
Life Insurance Company (including subsidiaries and affiliates) on
September 13, 2000
Principal Real Estate Fund, Inc. (a Maryland Corporation) 56.26%
of shares outstanding owned by Principal Life Insurance Company
(including subsidiaries and affiliates) on September 13, 2000
Principal SmallCap Fund, Inc.(a Maryland Corporation) 5.50% of
shares outstanding owned by Principal Life Insurance Company
(including subsidiaries and affiliates) on September 13, 2000.
Principal Special Markets Fund, Inc. (a Maryland Corporation)
83.56% of shares outstanding of the International Emerging
Markets Portfolio, 46.62% 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 September 13, 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 September 13,
2000.
Principal Utilities Fund, Inc. (a Maryland Corporation) 0.08% of
shares outstanding owned by Principal Life Insurance Company
(including subsidiaries and affiliates) on September 13, 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
September 13, 2000: Aggressive Growth, Asset Allocation,
Balanced, Blue Chip, Bond, Capital Value, Government Securities,
Growth, High Yield, International, International Emerging
Markets, International SmallCap, LargeCap Growth, LargeCap Growth
Equity, LargeCap Stock Index (f/k/a Stock Index 500), MicroCap,
MidCap, MidCap Growth, MidCap Growth Equity, MidCap Value, Money
Market, Real Estate, SmallCap, SmallCap Growth, SmallCap Value,
and Utilities.
Subsidiaries organized and wholly-owned by Principal Life Insurance
Company:
a. Principal Holding Company (an Iowa Corporation) a downstream
holding company for Principal Life Insurance Company.
b. Principal Development Investors, LLC (a Delaware Corporation) a
limited liability company engaged in acquiring and improving real
property through development and redevelopment.
c. Principal Capital Management, LLC (a Delaware Corporation) a
limited liability company that provides private mortgage, real
estate & fixed-income securities services to institutional
clients.
d. Principal Net Lease Investors, LLC (a Delaware Corporation) a
limited liability company which operates as a buyer and seller of
net leased investments.
Subsidiaries organized and 90% owned by Principal Life Insurance
Company:
a. PT Asuransi Jiwa Principal Indonesia (an Indonesia Corporation) a
life insuranced corporation which offers group and individual
products.
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 portfolio management on behalf of
institutional clients for structuring, underwriting and
management of entity-level investments in real estate operating
companies (REOCs).
c. Principal Commercial Acceptance, LLC (a Delaware Corporation) a
limited liability company that provides private market bridge
financing and other secondary market opportunities.
d. Principal Capital Real Estate Investors, LLC (a Delaware
Corporation) a registered investment advisor.
e. Principal Commercial Funding, LLC (a Delaware Corporation) a
limited liability company engaged in the structuring,
warehousing, securitization and sale of commercial
mortgage-backed securities.
f. Principal Generation Plant, LLC an inactive Delaware limited
liability company.
g. Principal Capital Income Investors, LLC a Delaware limited
liability company which provides investment and financial
services.
h. Principal Capital Futures Trading Advisor, LLC a Delaware funds
management limited liability company.
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 partnerships and limited
liability companies.
h. HealthRisk Resource Group, Inc. (an Iowa Corporation) a general
business corporation that engages in investment transactions,
including limited partnerships and limited liability companies
i. Invista Capital Management, LLC (an Delaware Corporation) a
limited liability company which is a registered investment
adviser.
j. Principal Residential Mortgage, Inc. (an Iowa Corporation) a full
service mortgage banking company that makes and services a wide
variety of loan types on a nationwide basis.
k. Principal Asset Markets, Inc. (an Iowa Corporation) a corporation
which is currently inactive.
l. Principal Portfolio Services, Inc. (an Iowa Corporation) a
corporation which is currently inactive.
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
corporation which is currently inactive.
o. Principal Product Network, Inc. (a Delaware corporation) an
insurance broker.
p. Principal Health Care, Inc. (an Iowa Corporation) a managed care
company.
q. Dental-Net, Inc. (an Arizona Corporation) 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 corporation that
administers individual and group retirement plans for stock
brokerage firm clients and mutual fund distributors.
t. Professional Pensions, Inc. (a Connecticut Corporation) a
corporation engaged in sales, marketing and administration of
group insurance plans and third-party administrator for defined
contribution plans.
u. Principal Investors Corporation (a New Jersey Corporation) a
corporation which is currently inactive.
v. Principal International, Inc. (an Iowa Corporation) a company
engaged in international business development.
Subsidiaries organized and wholly-owned by PT Asuransi Jiwa
Principal Indonesia:
a. PT Jasa Principal Indonesia an Indonesia pension company.
b. PT Principal Capital Management Indonesia an Indonesia funds
management company.
Subsidiary wholly-owned by Invista Capital Management, LLC:
a. Principal Capital 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 limited to the sale of open-end mutual
funds and variable insurance products.
c. Boston Insurance Trust, Inc. (a Massachusetts corporation) a
corporation which serves as a trustee and administrator of
insurance trusts and arrangements.
Subsidiaries wholly-owned by Principal International, Inc.:
a. Principal International Espana, S.A. de Seguros de Vida (Spain) a
life insurance, annuity, and accident and health company.
b. Zao Principal International (a Russia Corporation) inactive.
c. Principal International Argentina, S.A. (an Argentina
corporation) a holding company that owns Argentina corporations
offering annuities, group and individual insurance policies.
d. Principal Asset Management Company (Asia) Ltd. (Hong Kong) an
asset management company.
e. Principal International (Asia) Limited (Hong Kong) a corporation
operating as a regional headquarters for Asia.
f. Principal Trust Company (Asia) Limited (Hong Kong) (an Asia trust
company).
g. Principal International de Chile, S.A. (Chile) a holding company.
h. Principal Mexico Compania de Seguros, S.A. de C.V. (Mexico) a
life insurance company.
i. Principal Pensiones, S.A. de C.V. (Mexico) a pension company.
j. Principal Afore, S.A. de C.V. (Mexico), a pension company.
k. Principal Consulting (India) Private Limited (an India
corporation) an India consulting company.
Subsidiaries 88% owned by Principal International, Inc.:
a. Principal Insurance Company (Hong Kong) Limited (a Hong Kong
Corporation) a company that sells insurance and pension products.
Subsidiary wholly-owned by Principal International Espana, S.A. de
Seguros de Vida (Spain):
a. Princor International Espana S.A. de Agencia de Seguros (Spain)
an insurance agency.
Subsidiary wholly-owned by Principal International (Asia) Limited
(Hong Kong):
a. Principal Capital Management (Asia) Limited (Hong Kong) Asian
representative and distributor for the Principal Investment
Funds.
Subsidiaries wholly-owned by Principal International Argentina, S.A.
(Argentina):
a. Principal Retiro Compania de Seguros de Retiro, S.A. (Argentina)
an annuity company.
b. Principal Life Compania de Seguros, S.A. (Argentina) a life
insurance company.
Subsidiary wholly-owned by Principal International de Chile, S.A.:
a. Principal Compania de Seguros de Vida Chile S.A. (Chile) life
insurance company.
Subsidiary 60% owned by Principal Compania de Seguros de Vida Chile
S.A. (Chile):
a. Andueza & Principal Creditos Hipotecarios S.A. (Chile) a
residential mortgage company.
Subsidiary wholly-owned by Principal Afore, S.A. de C.V.:
a. Siefore Principal, S.A. de C.V. (Mexico) an investment fund
company.
Item 27. Number of Contractowners - As of: September 30, 2000
(1) (2) (3)
Number of Plan Number of
Title of Class Participants Contractowners
-------------- -------------- --------------
BFA Variable Annuity Contracts 69 8
Pension Builder Contracts 485 284
Personal Variable Contracts 3,485 62
Premier Variable Contracts 13,668 165
Flexible Variable Annuity Contract 42,714 42,714
Principal Freedom Variable Annuity Contract 341 341
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 Investors Fund, Inc. (f/k/a
Principal Special Markets 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 Blend Fund, Inc., Principal Partners LargeCap
Growth Fund, Inc., Principal Partners LargeCap Value Fund, Inc., Principal
Partners MidCap Growth Fund, Inc., Principal Partners SmallCap Growth Fund, Inc.
Principal Real Estate Fund, Inc., Principal SmallCap 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
Thomas E. Ackerman Regional Vice President -
The Principal Variable Annuities
Financial Group
Des Moines, IA 50392
Lindsay L. Amadeo Assistant Director -
The Principal Marketing Services
Financial Group
Des Moines, IA 50392
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
Patricia A. Barry Assistant Corporate Secretary
The Principal
Financial Group
Des Moines, IA 50392
Craig L. Bassett Treasurer
The Principal
Financial Group
Des Moines, IA 50392
David J. Brown Vice President
The Principal
Financial Group
Des Moines, IA 50392
Michael T. Daley Director
The Principal
Financial Group
Des Moines, IA 50392
Ronald L. Danilson Executive Vice President and
The Principal Chief Operating Officer
Financial Group
Des Moines, IA 50392
Mark B. Davis Assistant Director - Compliance
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
The Principal President
Financial Group
Des Moines, IA 50392
Arthur S. Filean Senior 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 Product Development
Financial Group
Des Moines, IA 50392
Thomas D. Gualdoni Vice President - National Sales
The Principal Manager/Variable Annuities
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
Jeffrey L. Kane Marketing Officer
The Principal
Financial Group
Des Moines, IA 50392
Peter R. Kornweiss Vice President
The Principal
Financial Group
Des Moines, IA 50392
Kraig L. Kuhlers Regional Sales 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 Assistant Vice President -
The Principal Business Systems and Technology
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
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
James F. Sager Vice President
The Principal
Financial Group
Des Moines, IA 50392
Kyle R. Selberg Vice President-Marketing
The Principal
Financial Group
Des Moines, IA 50392
Karen E. Shaff Director
The Principal
Financial Group
Des Moines, IA 50392
Minoo Spellerberg Assistant Vice President and
The Principal Compliance Officer
Financial Group
Des Moines, IA 50392
Paul D. Steingreaber Director of National Sales
The Principal
Financial Group
Des Moines, IA 50392
Kirk L. Tibbetts Senior Vice President and
The Principal Chief Financial Officer
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 to file a post-effective amendment to this
registration statement as frequently as is necessary to ensure that
the audited financial statements in the registration statement are
never more than 16 months old for so long as payments under the
variable annuity contracts may be accepted.
The Registrant undertakes to include either (1) as part of any
application to purchase a contract offered by the prospectus, a space
that an applicant can check to request a Statement of Additional
Information, or (2) a post card or similar written communication
affixed to or included in the prospectus that the applicant can remove
to send for a Statement of Additional Information.
The Registrant undertakes to deliver any Statement of Additional
Information and any financial statements required to be made available
under this Form promptly upon written or oral request.
REPRESENTATION PURSUANT TO SECTION 26 OF THE INVESTMENT COMPANY ACT OF 1940
Principal Life Insurance Company represents the fees and charges deducted under
the Policy, in the aggregate, are reasonable in relation to the services
rendered, the expenses expected to be incurred, and the risks assumed by the
Company.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant, Principal Life Insurance Company
Separate Account B, has duly caused this Amendment to the Registration Statement
to be signed on its behalf by the undersigned thereto duly authorized in the
City of Des Moines and State of Iowa, on the 15th day of November, 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 November 15, 2000
-------------------- Director
D. J. Drury
/s/ D. C. Cunningham Vice President and November 15, 2000
-------------------- Controller (Principal
D. C. Cunningham Accounting Officer)
/s/ M. H. Gersie Executive Vice President and November 15, 2000
-------------------- Chief Financial Officer
M. H. Gersie (Principal Financial Officer)
(B. J. Bernard)* Director November 15, 2000
--------------------
B. J. Bernard
(J. Carter-Miller)* Director November 15, 2000
--------------------
J. Carter-Miller
(C. D. Gelatt, Jr.)* Director November 15, 2000
--------------------
C. D. Gelatt, Jr.
(J. B. Griswell)* Director November 15, 2000
--------------------
J. B. Griswell
(C. S. Johnson)* Director November 15, 2000
--------------------
C. S. Johnson
(W. T. Kerr)* Director November 15, 2000
--------------------
W. T. Kerr
(L. Liu)* Director November 15, 2000
--------------------
L. Liu
(V. H. Loewenstein)* Director November 15, 2000
--------------------
V. H. Loewenstein
(R. D. Pearson)* Director November 15, 2000
--------------------
R. D. Pearson
(F. F. Pena)* Director November 15, 2000
--------------------
F. F. Pena
(J. R. Price)* Director November 15, 2000
--------------------
J. R. Price, Jr.
(D. M. Stewart)* Director November 15, 2000
--------------------
D. M. Stewart
(E. E. Tallett)* Director November 15, 2000
--------------------
E. E. Tallett
(F. W. Weitz)* Director November 15, 2000
--------------------
F. W. Weitz
*By /s/ David J. Drury
------------------------------------
David J. Drury
Chairman
Pursuant to Powers of Attorney
Previously Filed or Included Herein
