-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, RRwRzL5qsuoaJsp3PytnabjAwoCnrvTSZxj56glIARgjTtvvV0QlDlpnFHa+7lEi zSx+ltJw+UItfU6flzYzoQ== 0000009713-00-000035.txt : 20000424 0000009713-00-000035.hdr.sgml : 20000424 ACCESSION NUMBER: 0000009713-00-000035 CONFORMED SUBMISSION TYPE: 485BPOS PUBLIC DOCUMENT COUNT: 2 FILED AS OF DATE: 20000421 EFFECTIVENESS DATE: 20000421 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PRINCIPAL MUTUAL LIFE INSURANCE COMPANY SEPARATE ACCOUNT B CENTRAL INDEX KEY: 0000009713 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 420127290 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 485BPOS SEC ACT: SEC FILE NUMBER: 033-44670 FILM NUMBER: 606178 FILING VALUES: FORM TYPE: 485BPOS SEC ACT: SEC FILE NUMBER: 811-02091 FILM NUMBER: 606179 BUSINESS ADDRESS: STREET 1: THE PRINCIPAL FINANCIAL GROUP CITY: DES MOINES STATE: IA ZIP: 50392 BUSINESS PHONE: 5152475477 MAIL ADDRESS: STREET 1: THE PRINCIPAL FINANCIAL GROUP CITY: DES MOINES STATE: IA ZIP: 50392-0200 FORMER COMPANY: FORMER CONFORMED NAME: BANKERS LIFE CO SEPARATE ACCOUNT B DATE OF NAME CHANGE: 19870317 485BPOS 1 PREMIER VARIABLE CONTRACT Registration No. 33-44670 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM N-4 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 Pre-Effective Amendment No. _____ _____ Post-Effective Amendment No._15__ __X__ and/or REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 Amendment No._____ _____ (Check appropriate box or boxes) Principal Life Insurance Company Separate Account B - -------------------------------------------------------------------------------- (Exact Name of Registrant) Principal Life Insurance Company - -------------------------------------------------------------------------------- (Name of Depositor) The Principal Financial Group, Des Moines, Iowa 50392 - -------------------------------------------------------------------------------- (Address of Depositor's Principal Executive Offices) (Zip Code) Depositor's Telephone Number, including Area Code (515) 248-3842 M. D. Roughton, The Principal Financial Group, Des Moines, Iowa 50392 - -------------------------------------------------------------------------------- (Name and Address of Agent for Service) It is proposed that this filing will become effective (check appropriate box) ___ immediately upon filing pursuant to paragraph (b) of Rule 485 _X_ on May 1, 2000 pursuant to paragraph (b) of Rule 485 ___ 60 days after filing pursuant to paragraph (a)(1) of Rule 485 ___ on (date) pursuant to paragraph (a)(1) of Rule 485 ___ 75 days after filing pursuant to paragraph (a)(2) of Rule 485 ___ on (date) pursuant to paragraph (a)(2) of Rule 485 If appropriate, check the following box: ___ This post-effective amendment designates a new effective date for a previously filed post-effective amendment. PRINCIPAL LIFE INSURANCE COMPANY SEPARATE ACCOUNT B PREMIER VARIABLE - GROUP VARIABLE ANNUITY CONTRACTS Registration Statement on Form N-4 Cross Reference Sheet Form N-4 Item Caption in Prospectus Part A 1. Cover Page Principal Life Insurance Company Separate Account B Premier Variable (A Group Variable Annuity Contract for Employer- Sponsored Qualified and Non-Qualified Retirement Plans) 2. Definitions Glossary of Special Terms 3. Synopsis Expense Table and Example, Summary 4. Condensed Financial Condensed Financial Information, Information Independent Auditors 5. General Description Summary, Description of of Registrant Principal Life Insurance Company, Principal Life Insurance Company Separate Account B, Voting Rights 6. Deductions Expense Table and Example, Deductions Under the Contracts, Mortality and Expense Risks Charge, Other Expenses, Application Fee and Transfer Fee, Contract Administrative Expense, Recordkeeping Expense, Compensation to Sales, Representative, Distribution of the Contract 7. General Description of Summary, The Contract, Contract Values Variable Annuity Contract and Accounting Before Annuity Commencement Date, Income Benefits, Payment on Death of Plan Participant, Withdrawals and Transfers, Other Contractual Provisions, Contractholders' Inquiries 8. Annuity Period Income Benefits 9. Death Benefit Payment on Death of Plan Participant, Federal Tax Status 10. Purchases and Contract Summary, The Contract, Contract Values and Value Accounting Before Annuity Commencement Date, Other Contractual Provisions, Distribution of the Contract 11. Redemptions Summary, Income Benefits, Withdrawals and Transfers 12. Taxes Summary, Principal Life Insurance Company Separate Account B, Income Benefits, Federal Tax Status 13. Legal Proceedings Legal Proceedings 14. Table of Contents of Table of Contents of the Statement the Statement of of Additional Information Additional Information Part B Statement of Additional Information Caption** 15. Cover Page Principal Life Insurance Company Separate Account B Premier Variable - A Group Variable Annuity Contract for Employer Sponsored Qualified and Non-Qualified Retirement Plans Issued by Principal Life Insurance Company 16. Table of Contents Table of Contents 17. General Information None and History 18. Services Independent Auditors** 19. Purchase of Securities Summary**, Deductions Under Being Offered the Contracts**, Withdrawals and Transfers**, Distribution of the Contract** 20. Underwriters Summary**, Distribution of the Contract**, Underwriting Commissions 21. Calculation of Calculation of Yield and Total Return Performance Data 22. Annuity Payments Income Benefits** 23. Financial Statements Financial Statements ** Prospectus caption given where appropriate. PRINCIPAL LIFE INSURANCE COMPANY SEPARATE ACCOUNT B PREMIER VARIABLE (A Group Variable Annuity Contract For Employer- Sponsored Qualified And Non-Qualified Retirement Plans) Issued by Principal Life Insurance Company (the "Company") Prospectus dated May 1, 2000 This Prospectus concisely sets forth information about Principal Life Insurance Company Separate Account B, Premier Variable (a Group Variable Annuity Contract) (the "Contract") that an investor ought to know before investing. It should be read and retained for future reference. Additional information about the Contracts, including a Statement of Additional Information, dated May 1, 2000, has been filed with the Securities and Exchange Commission. The Statement of Additional Information is incorporated by reference into this Prospectus. The table of contents of the Statement of Additional Information appears on page 31 of this Prospectus. A copy of the Statement of Additional Information can be obtained, free of charge, upon request by writing or telephoning: Princor Financial Services Corporation a company of the Principal Financial Group Des Moines, IA 50392 Telephone: 1-800-633-1373 THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. This Prospectus is valid only when accompanied by the current prospectus for Principal Variable Contracts Fund, Inc. (the "Fund") which should be kept for future reference. TABLE OF CONTENTS Page Glossary of Special Terms .............................................. 3 Expense Table and Example .............................................. 5 Summary ............................................................... 7 Condensed Financial Information......................................... 9 Description of Principal Life Insurance Company ........................ 10 Principal Life Insurance Company Separate Account B .................... 10 Deductions Under the Contract .......................................... 12 Mortality and Expense Risks Charge ................................ 12 Other Expenses ........................................................ 12 Application Fee.................................................... 12 Contract Administration Expense.................................... 12 Recordkeeping Expense.............................................. 13 Location Fee ...................................................... 14 Flexible Income Option Charge...................................... 14 Documentation Expense.............................................. 14 Compensation to Sales Representative............................... 15 Special Services................................................... 15 Surplus Distribution at Sole Discretion of the Company ................. 15 The Contract .......................................................... 15 Contract Values and Accounting Before Annuity Commencement Date .................................. 15 Investment Accounts ........................................... 15 Unit Value .................................................... 16 Net Investment Factor ......................................... 16 Hypothetical Example of Calculation of Unit Value for All Divisions Except the Money Market Division..................................... 16 Hypothetical Example of Calculation of Unit Value for the Money Market Division............... 16 Income Benefits ................................................... 17 Variable Annuity Payments...................................... 17 Selecting a Variable Annuity ............................. 17 Forms of Variable Annuities .............................. 17 Basis of Annuity Conversion Rates ........................ 18 Determining the Amount of the First Variable Annuity Payment .................... 19 Determining the Amount of the Second and Subsequent Monthly Variable Annuity Payments ............................ 19 Hypothetical Example of Calculation of Variable Annuity Payments ............................. 19 Flexible Income Option......................................... 20 Payment on Death of Plan Participant............................... 20 Prior to Annuity Purchase Date ................................ 20 Subsequent to Annuity Purchase Date ........................... 21 Withdrawals and Transfers ......................................... 21 Cash Withdrawals .............................................. 21 Transfers Between Divisions ................................... 22 Transfers to the Contract ..................................... 22 Transfers to a Companion Contract ............................. 22 Special Situation Involving Alternate Funding Agents .......... 22 Postponement of Cash Withdrawal or Transfer ................... 22 Loans ......................................................... 23 Other Contractual Provisions ...................................... 23 Contribution Limits ........................................... 23 Assignment .................................................... 23 Cessation of Contributions .................................... 23 Substitution of Securities..................................... 23 Changes in the Contract ....................................... 23 Statement of Values..................................................... 24 Services Available by Telephone......................................... 24 Distribution of the Contract............................................ 24 Performance Calculation................................................. 24 Voting Rights .......................................................... 25 Federal Tax Status...................................................... 26 Taxes Payable by Owners of Benefits and Annuitants................. 26 Tax-Deferred Annuity Plans..................................... 26 Public Employee Deferred Compensation Plans.................... 27 401(a) Plans................................................... 27 Creditor-Exempt Non-Qualified Plans............................ 28 General Creditor Non-Qualified Plans........................... 29 Fund Diversification............................................... 29 State Regulation ....................................................... 29 Legal Opinions ........................................................ 30 Legal Proceedings ...................................................... 30 Registration Statement.................................................. 30 Independent Auditors.................................................... 30 Contractholders' Inquiries.............................................. 31 Table of Contents of the Statement of Additional Information............ 31 This Prospectus does not constitute an offer of, or solicitation of any offer to acquire, any interest or participation in the Contracts in any jurisdiction in which such an offer or solicitation may not lawfully be made. No person is authorized to give any information or to make any representations in connection with the Contracts other than those contained in this Prospectus. GLOSSARY OF SPECIAL TERMS Account -- Series or portfolio of a Mutual Fund in which a Separate Account Division invests. Aggregate Investment Account Value -- The sum of the Investment Account Values for Investment Accounts which correlate to a Plan Participant. Annual Average Balance -- The total value at the beginning of the Deposit Year of all Investment Accounts which correlate to a Plan Participant under the contract and other Plan assets which correlate to a Plan Participant that are not allocated to the contract or an Associated or Companion Contract but for which the Company provides recordkeeping services ("Outside Assets"), adjusted by the time weighted average of Contributions to, and withdrawals from, Investment Accounts and Outside Assets (if any) which correlate to the Plan Participant during the period. Annuity Change Factor -- The factor used to determine the change in value of a Variable Annuity in the course of payment. Annuity Commencement Date -- The beginning date for Annuity Payments. Annuity Premium -- The amount applied under the Contract to purchase an annuity. Annuity Purchase Date -- The date an Annuity Premium is applied to purchase an annuity. Associated Contract -- An annuity contract issued by the Company to the same Contractholder to fund the same or a comparable Plan as determined by the Company. Commuted Value -- The dollar value, as of a given date, of remaining Annuity Payments. It is determined by the Company using the interest rate assumed in determining the initial amount of monthly income and assuming no variation in the amount of monthly payments after the date of determination. Companion Contract -- An unregistered group annuity contract offering guaranteed interest crediting rates and which is issued by the Company to the Contractholder for the purpose of funding benefits under the Plan. The Company must agree in writing that a contract is a Companion Contract. Contract Date -- The date this contract is effective, as shown on the face page of the contract. Contract Year -- A period beginning on a Yearly Date and ending on the day before the next Yearly Date. Contractholder -- The entity to which the contract will be issued, which will normally be an Employer, an association, or a trust established for the benefit of Plan Participants and their beneficiaries. Contributions -- Amounts contributed under the contract which are accepted by the Company. Deposit Year -- The twelve-month period ending on a day selected by the Contractholder. Division -- The part of Separate Account B which is invested in shares of an Account of a Mutual Fund. Employer -- The corporation, sole proprietor, firm, organization, agency or political subdivision named as employer in the Plan and any successor. Flexible Income Option -- A periodic distribution from the contract in an amount equal to the minimum annual amount determined in accordance with the minimum distribution rules of the Internal Revenue Code, or a greater amount as requested by the Owner of Benefits. Funding Agent -- An insurance company, custodian or trustee designated by the Contractholder and authorized to receive any amount or amounts transferred from the contract described in this Prospectus. Funding Agent will also mean Principal Life Insurance Company where the Contractholder directs the Company to transfer such amounts from the contract described in this Prospectus to another group annuity contract issued by the Company to the Contractholder. Internal Revenue Code ("Code") -- The Internal Revenue Code of 1986, as amended, and the regulations thereunder. Reference to the Internal Revenue Code means such Code or the corresponding provisions of any subsequent revenue code and any regulations thereunder. Investment Account -- An account that correlates to a Plan Participant established under the contract for each type of Contribution and for each Division in which the Contribution is invested. Investment Account Value -- The value of an Investment Account for a Division which on any date will be equal to the number of units then credited to such account multiplied by the Unit Value of this series of contracts for that Division for the Valuation Period in which such date occurs. Mutual Fund -- A registered open-end investment company in which a Division of Separate Account B invests. Net Investment Factor -- The factor used to determine the change in Unit Value of a Division during a Valuation Period. Normal Income Form -- The form of benefit to be provided under the Plan if the Owner of Benefits does not elect some other form. If the Plan does not specify a Normal Income Form, the Normal Income Form shall be: (a) for an unmarried Plan Participant, the single life with ten years certain annuity option described in this Prospectus, or (b) for a married Plan Participant, the joint one-half survivor annuity option described in this Prospectus. Notification -- Any form of notice received by the Company at the Company's home office and approved in advance by the Company including written forms, electronic transmissions, telephone transmissions, facsimiles and photocopies. Owner of Benefits -- The entity or individual that has the exclusive right to be paid benefits and exercise rights and privileges pursuant to such benefits. The Owner of Benefits is the Plan Participant under all contracts except contracts used to fund General Creditor Non-Qualified Plans (see "Summary") wherein the Contractholder is the Owner of Benefits. Plan -- The plan established by the Employer in effect on the date the contract is executed and as amended from time to time, which the Employer has designated to the Company in writing as the Plan funded by the contract. Plan Participant -- A person who is (i) a participant under the Plan, (ii) a beneficiary of a deceased participant, or (iii) an alternate payee under a Qualified Domestic Relations Order in whose name an Investment Account has been established under this contract. Qualified Domestic Relations Order -- A Qualified Domestic Relations Order as defined in Internal Revenue Code Section 414 (p)(1)(A). Quarterly Date -- The last Valuation Date of the third, sixth, ninth and twelfth month of each Deposit Year. Separate Account B -- A separate account established by the Company under Iowa law to receive Contributions under the contract offered by this Prospectus and other contracts issued by the Company. It is divided into Divisions, each of which invest in a corresponding Account of the Principal Variable Contracts Fund, Inc. Termination of Employment -- A Plan Participant's termination of employment with the Employer, determined under the Plan and as reported to the Company. Total and Permanent Disability -- The condition of a Plan Participant when, as the result of sickness or injury, the Plan Participant is prevented from engaging in any substantial gainful activity and such total disability has been continuous for a period of at least six months. For contracts sold in the state of Pennsylvania, the term shall have the same meaning as defined in the Plan. The Plan Participant must submit due proof thereof which is acceptable to the Company. Unit Value -- The value of a unit of a Division of Separate Account B. Valuation Date -- The date as of which the net asset value of an Account is determined. Valuation Period -- The period between the time as of which the net asset value of an Account is determined on one Valuation Date and the time as of which such value is determined on the next following Valuation Date. Variable Annuity Payments -- A series of periodic payments, the amounts of which are not guaranteed but which will increase or decrease to reflect the investment experience of the Capital Value Division of Separate Account B. Periodic payments made pursuant to the Flexible Income Option are not Variable Annuity Payments. Variable Annuity Reserves -- The reserves held for annuities in the course of payment for the contract. Yearly Date -- The Contract Date and the same day of each year thereafter. EXPENSE TABLE AND EXAMPLE The following tables depict fees and expenses applicable to the aggregate of all Investment Accounts that correlate to a Plan Participant established under the contract. The purpose of the table is to assist the Owner of Benefits in understanding the various costs and expenses that an Owner of Benefits will bear directly or indirectly. The table reflects expenses of the Separate Account as well as the expenses of the Account in which the Separate Account invests and is based on expenses incurred during the fiscal year ended December 31, 1999. The Example below which includes only mortality and expense risks charges and expenses of the underlying Accounts, should not be considered a representation of past or future expenses; actual expenses may be greater or lesser than those shown. See "Deductions under the Contract." EXPENSE TABLE Transaction Expenses None Annual Contract Fee None Separate Account Annual Expenses (as a percentage of average account value) - ------------------------------------------------- Mortality and Expense Risk Fees .42% Annual Expenses of Accounts - -------------------------------- (as a percentage of average net assets of the following Accounts) Management Other Total Accounts Fees Expenses Annual Expenses Balanced Account .57% .01% .58% Bond Account .49 .01 .50 Capital Value Account .43* .00 .43 Government Securities Account .49 .01 .50 Growth Account .45* .00 .45 International Account .73* .05 .78 MidCap Account .61 .00 .61 Money Market Account .50 .02 .52 * Based on the management fee schedule in effect during the fiscal year. Modifications to the schedule were effective 1/1/2000. The Expense Table depicts fees and expenses applicable to the Aggregate Investment Account Values which correlate to a Plan Participant under the Contract. At the discretion of the Contractholder, these fees are paid by the Contractholder or assessed against Investment Accounts which correlate to Plan Participants. The Expense Table does not include expenses billed directly to and paid by the Contractholder pursuant to a separate service and expense agreement with the Contractholder. Except as noted below, the Contractholder must pay the following expenses (subject to certain adjustments; see "Deductions Under the Contract" and "Other Expenses"): Application Fee $925 Application Fee. Contract Administration Expenses* $650 for Standard Plans ($1,000 for custom or outside Plans) + the amount determined under the Annual Expense Table (minimum of $1,500). Recordkeeping Expenses* A graded scale starting at $34 per Plan Participant plus $1,366 (minimum of $2,250 per Plan) (This charge may be deducted from Investment Accounts of inactive Plan Participants.) (If the Company provides recordkeeping services for plan assets other than assets under this contract or an Associated or Companion Contract, the Contractholder must pay an outside asset recordkeeping charge that varies depending on the number of Plan Participants to which such Outside Assets correlate). Additional location charge. Location Fee (if applicable) $150 per quarter ($600 annually) for each additional employee group or location. Flexible Income Option Charge $25 for each Plan Participant receiving benefits under the Flexible Income Option (this charge may be deducted from Investment Accounts of inactive Plan Participants). Documentation Expenses $125 for initial setup or restatement. Additional costs apply for Custom-Written plans. (for Standard Plan) Compensation to Sales Either 4.5% of the first $5,000 of annual Contributions Representative grading down to .25% of contributions in excess of $500,000 or 3.0% of the first $50,000 of annual Contributions grading down to .25% of Contributions in excess of $3,000,000. * May be more or less depending on the number of Plan Participants and services performed by Company. See "Other Expenses."
EXAMPLE
Regardless of whether the Investment Accounts which correlate to a Plan Separate Account Participant are surrendered at the end Division 1 Year 3 Years 5 Years 10 Years of the applicable time period: ------------------ ------ ------- ------- -------- The Owner of Benefits would pay Balanced $10 $32 $55 $122 the following expenses on a $1,000 Bond $9 $29 $51 $113 investment, assuming a 5% annual Capital Value $9 $27 $47 $105 return on assets: Government Securities $9 $29 $51 $113 Growth $9 $28 $48 $107 International $12 $38 $66 $145 MidCap $11 $33 $57 $126 Money Market $10 $30 $52 $115
SUMMARY The following summary should be read in conjunction with the detailed information appearing elsewhere in this Prospectus. Contract Offered The group variable annuity contract offered by this Prospectus is issued by the Company and designed to aid in retirement planning. The contract provides for the accumulation of Contributions and the payment of Variable Annuity Payments on a completely variable basis. The contract is generally available to fund the following types of plans: 1. Tax Deferred Annuity Plans ("TDA Plan"). Annuity purchase plans adopted pursuant to Section 403(b) of the Code by certain organizations that qualify for tax-exempt status under Section 501(c)(3) of the Code or are eligible public schools or colleges. TDA Contracts are issued to Contractholders, which typically are such tax-exempt organizations or an association representing such organization or its employees. Plan Participants may obtain certain Federal income tax benefits provided under Section 403(b) of the Code (see "Federal Tax Status"). 2. Public Employee Deferred Compensation Plans ("PEDC Plan"). Public Employee Deferred Compensation plans or programs adopted by a unit of a state or local government and nonprofit organizations pursuant to Section 457 of the Code. (See "Federal Tax Status"). Note: The contract is not currently offered to fund governmental 457 Plans in the state of New York. 3. Qualified Pension or Profit-Sharing Plans ("401(a) Plans"). Plans adopted pursuant to Section 401(a) of the Code. Participants of 401(a) Plans obtain income tax benefits provided under the Code as qualified pension plans. 4. Creditor-Exempt or General Creditor Non-Qualified Plans ("Creditor-Exempt" or "General Creditor" Plan). Employer sponsored savings, compensation or other plans the contributions for which are made without Internal Revenue Code restrictions generally applicable to qualified retirement plans. (See "Federal Tax Status"). The contract will be sold primarily by persons who are insurance agents of or brokers for Principal Life Insurance Company. In addition, these persons will usually be registered representatives of Princor Financial Services Corporation, which acts as distributor for the Contract. See "Distribution of the Contract." Contributions The contract prescribes no limits on the minimum Contribution which may be made to an Investment Account. Plan Participant maximum Contributions are discussed under "Federal Tax Status." Contributions may also be limited by the Plan. The Company may also limit Contributions on 60-days notice. All Contributions made pursuant to the Contract are allocated to one or more Investment Accounts which correlate to a Plan Participant. An Investment Account is established for each type of Contribution for each Division of the Separate Account as directed by the Owner of Benefits. Currently, the Divisions available under the Contract are: Balanced, Bond, Capital Value, Government Securities, Growth, International, MidCap and Money Market. The Contractholder may choose to limit the number of Divisions available to the Owner of Benefits, but the Money Market Division may not be so restricted to the extent the Division is necessary to permit the Company to allocate initial Contributions and the Capital Value Division may not be so restricted to the extent the Division is necessary to permit the Company to pay Variable Annuity Payments. Additional Divisions may be added in the future. If no direction is provided for a particular Contribution, such Contribution will be allocated to an Investment Account which is invested in the Money Market Division. Separate Account B Each of the Divisions corresponds to one of the Accounts in which Contributions may be invested. The objective of the contract is to provide a return on amounts contributed that will reflect the investment experience of the Accounts in which the Divisions to which Contributions are directed are invested. The value of the Contributions accumulated in Separate Account B prior to the Annuity Commencement Date will vary with the investment experience of the Accounts. Each of the Divisions invests only in shares of Accounts of the Principal Variable Contracts Fund, Inc. as indicated in the table below. Division Account -------- ------- Balanced Division Balanced Account Bond Division Bond Account Capital Value Division Capital Value Account Government Securities Division Government Securities Account Growth Division Growth Account International Division International Account MidCap Division MidCap Account Money Market Division Money Market Account Distributions, Transfers, and Withdrawals Variable Annuity Payments will be made on and after a Plan Participant's Annuity Commencement Date. All Variable Annuity Payments will reflect the performance of the Account underlying the Capital Value Division and therefore the annuitant is subject to the risk that the amount of variable annuity payments may decline. (See "Income Benefits.") Generally, at any time prior to the Annuity Purchase Date, the Owner of Benefits may transfer all or any portion of an Investment Account which correlates to a Plan Participant to another available Investment Account correlating to such Plan Participant. If a Companion Contract has been issued to the Contractholder to fund the Plan, and if permitted by the Plan and Companion Contract, amounts transferred from such Companion Contract may be invested in this contract to establish Investment Accounts which correlate to a Plan Participant at any time at least one month before the Annuity Commencement Date. Similarly, if the Company has issued a Companion Contract to the Contractholder, and if permitted by the Plan and the Companion Contract, the Owner of Benefits, subject to certain limitations, may file a Notification with the Company to transfer all or a portion of the Investment Account values which correlate to a Plan Participant to the Companion Contract. (See "Withdrawals and Transfers.") In addition, subject to any Plan limitations or any reduction for vesting provided for in the Plan as to amounts available, the Owner of Benefits may withdraw cash from the Investment Accounts that correlate to the Plan Participant at any time prior to the Plan Participant's termination of employment, disability, retirement or the Annuity Purchase Date subject to any charges that may be applied. See "Withdrawals and Transfers." Note that withdrawals before age 59 1/2 may involve an income tax penalty. See "Federal Tax Status." No withdrawals are permitted after the Annuity Purchase Date. CONDENSED FINANCIAL INFORMATION Financial statements are included in the Statement of Additional Information. Following are Unit Values for the Premier Variable Annuity Contract for the periods ended December 31.
Number of Accumulation Unit Value Accumulation Units Outstanding Beginning End Percentage of Change End of Period of Period of Period from Prior Period (in thousands) Balanced Division Year Ended December 31 1999 $1.787 $1.822 1.96% 16,370 1998 1.604 1.787 11.41 14,770 1997 1.366 1.604 17.42 10,617 1996 1.212 1.366 12.71 7,467 1995 .976 1.212 24.18 3,317 Period Ended December 31, 1994(1) 1.000 .976 (2.40) 125 Bond Division Year Ended December 31 1999 1.484 1.440 (2.96) 7,415 1998 1.384 1.484 7.23 6,013 1997 1.257 1.384 10.10 4,009 1996 1.232 1.257 2.03 2,612 1995 1.012 1.232 21.74 1,208 Period Ended December 31, 1994(1) 1.000 1.012 1.20 31 Capital Value Division Year Ended December 31 1999 2.689 2.563 (4.69) 22,466 1998 2.378 2.689 13.08 22,328 1997 1.858 2.378 27.99 21,339 1996 1.510 1.858 23.05 17,962 1995 1.148 1.510 31.53 14,824 1994 1.147 1.148 0.09 13,967 1993 1.067 1.147 7.50 7,980 1992(2) 1.000 1.067 6.70 84 Government Securities Division Year Ended December 31 1999 1.543 1.532 (0.71) 8,432 1998 1.431 1.543 7.83 8,358 1997 1.302 1.431 9.91 7,686 1996 1.265 1.302 2.92 7,513 1995 1.066 1.265 18.67 7,159 1994 1.120 1.066 (4.82) 6,431 1993 1.021 1.120 9.70 2,553 1992(2) 1.000 1.021 2.10 40 Growth Division Year Ended December 31 1999 2.145 2.488 15.99 20,774 1998 1.775 2.145 20.85 16,370 1997 1.404 1.775 26.42 11,441 1996 1.253 1.404 12.05 6,802 1995 1.001 1.253 25.17 2,860 Period Ended December 31, 1994(1) 1.000 1.001 0.10 110 International Division Year Ended December 31 1999 1.663 2.085 25.38 10,814 1998 1.518 1.663 9.55 9,442 1997 1.358 1.518 11.78 7,684 1996 1.090 1.358 24.59 4,298 1995 .958 1.090 13.78 1,672 Period Ended December 31, 1994(1) 1.000 .958 (4.20) 137 MidCap Division Year Ended December 31 1999 1.940 2.184 12.58 12,883 1998 1.879 1.940 3.25 12,204 1997 1.537 1.879 22.25 9,536 1996 1.274 1.537 20.64 5,722 1995 .991 1.274 28.56 1,896 Period Ended December 31, 1994(1) 1.000 .991 (0.90) 119 Money Market Division Year Ended December 31 1999 1.296 1.354 4.48 10,632 1998 1.237 1.296 4.77 9,868 1997 1.181 1.237 4.74 6,515 1996 1.128 1.181 4.70 5,379 1995 1.072 1.128 5.22 2,959 1994 1.036 1.072 3.47 1,791 1993 1.013 1.036 2.27 901 1992(2) 1.000 1.013 1.30 2,969 (1) Commenced operations on October 3, 1994. (2) Commenced operations on July 15, 1992.
DESCRIPTION OF PRINCIPAL LIFE INSURANCE COMPANY (The "Company") Principal Life Insurance Company is a life insurance company with its home office at the Principal Financial Group, Des Moines, Iowa 50392, telephone number 515-247-5111. It was originally incorporated under the laws of the State of Iowa in 1879 as Bankers Life Association, changed its name to Bankers Life Company in 1911 and changed its name to Principal Mutual Life Insurance Company in 1986. The name change to Principal Life Insurance Company and reorganization into a mutual holding company structure took place in 1998. The Company is a company of the Principal Financial Group, a diversified family of insurance and financial services corporations. Principal Life Insurance Company is authorized to do business in the 50 states of the United States, the District of Columbia, the Commonwealth of Puerto Rico, and the Canadian Provinces of Alberta, British Columbia, Manitoba, Ontario and Quebec. The Company offers a full range of products and services for businesses, groups and individuals including individual insurance, pension plans and group/employee benefits. The Company has ranked in the upper one percent of life insurers in assets and premium income and has consistently received excellent ratings from the major rating firms based upon the Company's claims paying ability. The Company has $70.1 billion in assets under management and serves more than 10.1 million individuals and their families. PRINCIPAL LIFE INSURANCE COMPANY SEPARATE ACCOUNT B Separate Account B was established on January 12, 1970 pursuant to a resolution (as amended) of the Executive Committee of the Board of Directors of the Company. Under Iowa insurance laws and regulations the income, gains or losses, whether or not realized, of Separate Account B are credited to or charged against the assets of Separate Account B without regard to the other income, gains or losses of the Company. Although the assets of Separate Account B, equal to the reserves and other liabilities arising under the contract, will not be charged with any liabilities arising out of any other business conducted by the Company, the reverse is not true. Hence, all obligations arising under the contract, including the promise to make Variable Annuity Payments, are general corporate obligations of the Company. Separate Account B was registered on July 17, 1970 with the Securities and Exchange Commission as a unit investment trust under the Investment Company Act of 1940, as amended. Such registration does not involve supervision by the Commission of the investments or investment policies of Separate Account B. You may allocate your net premium payments to certain divisions of the Separate Account and/or the Fixed Account. Currently there are eight divisions available to you. Not all divisions are available in all states. A current list of divisions available in your state may be obtained from a sales representative or our home office. The underlying fund is a mutual fund registered under the Investment Company Act of 1940 as an open-end diversified management investment company. It provides the investment vehicle for the Separate Account. A full description of the Fund, its investment objectives, policies and restrictions, charges and expenses and other operational information is contained in the attached prospectus (which should be read carefully before investing) and the Statement of Additional Information. Additional copies of these documents are available from a sales representative or our home office. Each Division invests in shares of a corresponding Account of an underlying mutual fund. The underlying mutual fund is NOT available to the general public directly. The underlying mutual fund is available only to provide investment options in variable life insurance policies or variable annuity contracts issued by life insurance companies. Some of the underlying mutual fund Accounts have been established by investment advisers that manage publicly traded mutual funds having similar names and investment objectives. While some of the underlying mutual fund Accounts may be similar to, and may in fact be modeled after publicly traded mutual funds, you should understand that the underlying mutual fund Accounts are not otherwise directly related to any publicly traded mutual fund. Consequently, the investment performance of publicly traded mutual funds and of any underlying mutual fund Account may differ substantially.
Division Division Invests In Investment Advisor Investment Objective Balanced Principal Variable Contracts Invista Capital Management, LLC to generate a total return consisting of Fund, Inc. through a sub-advisory agreement current income and capital appreciation Balanced Account while assuming reasonable risks in furtherance of this objective. Bond Principal Variable Contracts Principal Management Corporation to provide as high a level of income as is Fund, Inc. consistent with preservation of capital Bond Account and prudent investment risk. Capital Value Principal Variable Contracts Invista Capital Management, LLC to provide long-term capital appreciation Fund, Inc. through a sub-advisory agreement and secondarily is growth of investment Capital Value Account income. The Account seeks to achieve its investment objectives through the purchase primarily of common stocks,but the Account may invest in other securities. Government Securities Principal Variable Contracts Invista Capital Management, LLC to seek a high level of current income, Fund, Inc. through a sub-advisory agreement liquidity and safety of principal. The Government Securities Account Account seeks to achieve its objective through the purchase of obligations issued or guaranteed by the United States Government or its agencies, with emphasis on Government National Mortgage Association Certificates ("GNMA Certificates"). Account shares are not guaranteed by the United States Government. Growth Principal Variable Contracts Invista Capital Management, LLC to seek growth of capital. The Account Fund, Inc. through a sub-advisory agreement seeks to achieve its objective through the Growth Account purchase primarily of common stocks, but the Account may invest in other securities. International Principal Variable Contracts Invista Capital Management, LLC to seek long-term growth of capital by Fund, Inc. through a sub-advisory agreement investing in a portfolio of equity International Account securities domiciled in any of the nations of the world. MidCap Principal Variable Contracts Invista Capital Management, LLC to achieve capital appreciation by Fund, Inc. through a sub-advisory agreement investing primarily in securities of MidCap Account emerging and other growth-oriented companies. Money Market Principal Variable Contracts Principal Management Corporation to seek as high a level of current income Fund, Inc. available from short-term securities as is Money Market Account considered consistent with preservation of principal and maintenance of liquidity by investing all of its assets in a portfolio of money market instruments.
Principal Management Corporation (the "Manager") has executed a sub-advisory agreement with Invista Capital Management LLC. Under that sub-advisory agreement, the sub-advisor agrees to assume the obligations of the Manager to provide investment advisory services for a specific Account. For these services, the sub-advisor is paid a fee by the Manager. Accounts: Balanced, Capital Value, Government Securities, Growth, International and MidCap Sub-Advisor: Invista Capital Management, LLC ("Invista"), an indirectly wholly-owned subsidiary of Principal Life Insurance Company and an affiliate of the Manger was founded in 1985. It manages investments for institutional investors, including Principal Life. Assets under management as of December 31, 1999 were approximately $35.3 billion. Invista's address is 1800 Hub Tower, 699 Walnut, Des Moines, Iowa 50309. Each Division purchases shares of an Account at net asset value. In addition, all distributions made by an Account with respect to shares held by Divisions of Separate Account B are reinvested at net asset value in additional shares of the same Account. Contract benefits are provided and charges are made in effect by redeeming Account shares at net asset value. Values under the Contract, both before and after the commencement of Variable Annuity Payments, will increase or decrease to reflect the investment performance of the Accounts and Owners of Benefits assume the risks of such change in values. The Company is taxed as a life insurance company under the Internal Revenue Code. The operations of Separate Account B are part of the total operations of the Company but are treated separately for accounting and financial statement purposes and are considered separately in computing the Company's tax liability. Separate Account B is not affected by federal income taxes paid by the Company with respect to its other operations, and under existing federal income tax law, investment income and capital gains attributable to Separate Account B are not taxed. The Company reserves the right to charge Separate Account B with, and to create a reserve for, any tax liability which the Company determines may result from maintenance of Separate Account B. To the best of the Company's knowledge, there is no current prospect of any such liability. DEDUCTIONS UNDER THE CONTRACT A mortality and expense risks charge is deducted under the contract. There are also deductions from and expenses paid out of the assets of the Accounts. These expenses are described in the Fund's prospectus. A. Mortality and Expense Risks Charge Variable Annuity Payments will not be affected by adverse mortality experience or by any excess in the actual sales and administrative expenses over the charges provided for in the contract. The Company assumes the risks that (i) Variable Annuity Payments will continue for a longer period than anticipated and (ii) the allowance for administration expenses in the annuity conversion rates will be insufficient to cover the actual costs of administration relating to Variable Annuity Payments. For assuming these risks, the Company, in determining Unit Values and Variable Annuity Payments, makes a charge as of the end of each Valuation Period against the assets of Separate Account B held with respect to the contract. The charge is equivalent to a simple annual rate of .42%. The Company does not believe that it is possible to specifically identify that portion of the .42% deduction applicable to the separate risks involved, but estimates that a reasonable approximate allocation would be .28% for the mortality risks and .14% for the expense risks. The mortality and expense risks charge may be changed by the Company at any time by giving not less than 60-days prior written notice to the Contractholder. However, the charge may not exceed 1.25% on an annual basis, and only one change may be made in any one-year period. If the charge is insufficient to cover the actual costs of the mortality and expense risk assumed, the financial loss will fall on the Company; conversely, if the charge proves more than sufficient, the excess will be a gain to the Company. OTHER EXPENSES The Contractholder is obligated to pay additional expenses associated with the acquisition and servicing of the contract in accordance with the terms of a Service and Expense Agreement between the Contractholder and the Company. At the discretion of the Contractholder these expenses may be paid all or in part by the Contractholder or the fees will be deducted from Investment Accounts which correlate to a Plan Participant. If deducted from Investment Accounts, the charges will be allocated among Investment Accounts which correlate to the Plan Participant in proportion to the relative value of such Accounts and will be effected by canceling a number of units in each such Investment Account equal to such Account's proportionate share of the deductions. The expenses which the Contractholder pays, if applicable, include an application fee, transfer fee, contract administration expense, recordkeeping expense, location fee, a Flexible Income Option charge, documentation expense and in some cases a sales charge. As part of the Company's policy of ensuring client satisfaction with the services it provides, the Company may agree to waive the assessment of all or a portion of these expenses or charges (except for the sales charge) in response to any reasonably-based complaint from the Contractholder as to the quality of the services covered by such expenses or charges that the Company is unable to rectify. These expenses are described below: A. Application Fee A $925 application fee is charged to the Contractholder in the first Contract Year. If a Companion Contract has been issued by the Company to the Contractholder to fund the Plan, the application fee will be assessed to the Companion Contract. The total application fee paid by the Contractholder to obtain both contracts will not exceed $925. If the Company has issued an Associated Contract to the Contractholder to fund an employee benefit plan administered by the Company, the application fee for the contract described in this prospectus will be waived by the Company. B. Contract Administration Expense The Contractholder must also pay a contract administration expense. The contract administration expense is charged quarterly and is equal to one-fourth of the amount derived by adding $650 ($1,000 for custom or outside plans) to the amount calculated by multiplying the Quarter end Balance at the end of each Deposit Year Quarter by the Annual Expense percentage below. Quarter end Balance is the total of all Investment Accounts under the contract and other Plan assets not allocated to the contract or an Associated or Companion Contract ("Outside Assets") at the end of each Deposit Year Quarter. Over But Not Over The Annual Expense Is: ----------- ----------- --------------------------------- $ 0 $ 262,500 $1,500 minimum 262,500 1,000,000 [.0020 x ending balance] + $225 1,000,000 5,000,000 [.0010 x ending balance] + $1,225 5,000,000 10,000,000 [.0005 x ending balance] + $3,725 10,000,000 30,000,000 [.0004 x ending balance] + $4,725 30,000,000 [.0003 x ending balance] + $7,725 Example: Assume a $8,500,000 Quarter-end Balance for a standard plan. The quarterly contract administration charge is $2,156.25 derived as follows: [.0005 x $8,500,000] + $3,725 = $7,975 + $650 = $8,625 / 4 = $2,156.25. The contract administration expense is also charged if all Investment Accounts which correlate to a Plan Participant are canceled during the Deposit Year as a result of a withdrawal. The amount attributable to such Investment Accounts is determined as described above but is pro-rated to the date of cancellation. The contract administration expense will be reduced by 10% if the Company has issued an Associated Contract to the Contractholder. The contract administration expense for an employer with both a non-qualified plan in the contract offered under this prospectus and a 401(k) Plan in a Flexible Investment Annuity ("FIA") Contract (and which meets our underwriting guidelines) will be calculated based on the quarter end value of the investment accounts under both contracts (plus $750 annually for general creditor non-qualified plans or $1,000 for creditor exempt plans) and the proportionate charge will be allocated to Plan Participants in each contract. C. Recordkeeping Expense The Contractholder must also pay a recordkeeping expense. The quarterly recordkeeping expense is one-fourth of the charge determined from the table below. The amount of the charge is determined at the end of each quarter based upon the number of Plan Participants, both active and inactive, for whom there are Investment Accounts under the contract at the end of the quarter. Annual Expense (Benefit Report Plan Participants Sent to the Contractholder) ----------------- ------------------------------------- 1-25 $2,250 26-49 $34 per Plan Participant + $ 1,366 50-99 $31 per Plan Participant + $ 1,516 100-299 $28 per Plan Participant + $ 1,816 300-499 $23 per Plan Participant + $ 3,316 500 - 999 $19 per Plan Participant + $ 5,316 1,000 - 2,499 $14 per Plan Participant + $ 10,316 2,500 - 4,999 $12 per Plan Participant + $ 15,316 5,000 and over $10 per Plan Participant + $ 25,316 Example: Assume 600 Plan Participants with Benefit Reports sent to the Contractholder: The expense is $16,716 [600 x $19 = $11,400 + $5,316 = $16,716] / 4 = $4,179. This would be $6.96 per Plan Participant, per quarter. The recordkeeping expense is increased by $3 per Plan Participant if benefit reports are mailed directly to Plan Participants' homes. If, instead of quarterly benefit reports, the Company provides such reports annually, the recordkeeping expense is reduced by 9%. Similarly, if such reports are provided semi-annually, the recordkeeping expense is reduced by 6%. If such reports are provided on a monthly basis, the recordkeeping expense is increased by 24%. If the Company performs more (or less) than one 401(k)/401(m) non-discrimination tests in a Deposit Year, the recordkeeping expense is increase (reduced) by 3% for each additional test performed (or test not performed). The recordkeeping expense is increased by 10% if Plan Contributions are not reported in the Company's standard format by modem. A charge of $15 is made to the account of plan participants who make investment changes/transfers using paper rather than our toll-free number (1-800-633-1373). The recordkeeping expense for an employer with both a non-qualified plan in the contract offered under this prospectus and a 401(k) plan in a FIA contract will be determined at the point in scale reached under the 401(k) plan. If the initial Deposit Year is less than twelve months, an adjustment will be made in the amount of the charge so that the full amount of the annual charge per Plan Participant will be assessed during the year. If all Investment Accounts attributable to a Plan Participant are canceled during the Deposit Year as a result of a withdrawal, the unassessed portion of the full annual charge attributable to the Plan Participant will be charged. If the Company provides recordkeeping services for Plan assets not allocated to the contract or an Associated or Companion Contract ("Outside Assets"), the Contractholder must pay an Outside Asset recordkeeping expense. The annual charge is calculated based upon the following table. Number of Plan Participants Outside Asset with Outside Accounts Annual Recordkeeping During the Quarter Expense --------------------------- --------------------------------- 1-25 $1,000 minimum 26-49 $15.30 per member + $614.70 50-99 $13.95 per member + $682.20 100-299 $12.60 per member + $817.20 300-499 $10.35 per member + $1,492.20 500-999 $8.55 per member + $2,392.20 1000-2499 $6.30 per member + $4,642.20 2500-4999 $5.40 per member + $6,892.20 5000 and over $4.50 per member + $11,392.20 The charge calculated in accordance with the above table will be increased by 15% for the second and each additional Outside Asset for which the Company provides recordkeeping services. One-fourth of the annual Outside Asset Recordkeeping Charge will be billed on a quarterly basis. This charge does not apply if the Outside Assets which correlate to the Plan Participant consist solely of shares of mutual funds for which a subsidiary of the Company serves as investment adviser. The Contractholder may elect to have the recordkeeping expense attributable to investments in this contract which correlate to inactive Plan Participants deducted from the Investment Account Values of such Plan Participants. The portion of the charge attributable to a Plan Participant will be allocated to his or her Investment Account in proportion to their relative value. D. Location Fee Contractholders may request the Company to provide services to groups of employees at multiple locations. If the Company agrees to provide such services, the Contractholder will be charged $150 on a quarterly basis for each additional employee group or location. E. Flexible Income Option Charge An additional charge of $25 annually will be made for any Plan Participant receiving benefits under the Flexible Income Option. The charge is added to the portion of the recordkeeping expense attributable to such Plan Participants. If a Plan Participant is receiving benefits under the Flexible Income Option from a Companion Contract to which a Flexible Income Option Charge applies, the charge will not apply to the contract described in this Prospectus. F. Documentation Expense The Company provides a sample Plan document and summary plan descriptions to the Contractholder. The Contractholder will pay $125 if the Contractholder uses a Principal Standard Plan. If the Company provides a sample custom-written Plan, the Contractholder will pay $700 for the initial Plan or for any restatement thereof, $300 for any amendments thereto, and $500 for standard summary plan description booklets. If the Contractholder adopts a Plan other than one provided by the Company, a $900 charge will be made for summary plan description booklets requested by the Contractholder, if any. G. Compensation to Sales Representative A charge will be paid by the Contractholder according to one of the following schedules: Schedule A ------------------------------------------- Amount of Plan Amount Payable as a Contributions Percent of Plan in Each Deposit Year Contributions --------------------- ------------------- The first $ 5,000 4.50% The next 5,000 3.00 The next 5,000 1.70 The next 35,000 1.40 The next 50,000 0.90 The next 400,000 0.60 Excess over 500,000 0.25 Schedule B ------------------------------------------- Amount of Plan Amount Payable as Contributions Percent of Plan In Each Deposit Year Contributions --------------------- ------------------- The first$ 50,000 3.00% The next 50,000 2.00 The next 400,000 1.00 The next 2,500,000 0.50 Excess over 3,000,000 0.25 The applicable sales charge will be determined by the Company. The sales charge described in Schedule B will apply for certain salary deferral Plans. The sales charge described in Schedule A will apply if the Plan is not a salary deferral Plan or if the Plan is a salary deferral Plan subject to reduced sales expenses. The Contractholder will be notified of the applicable sales charge prior to the issuance of the Contract. Contributions made by the Contractholder to the contract described in this prospectus, a Companion Contract or any Associated Contract will be combined for purposes of applying the above sales charge schedules. The Company will not charge a sales charge to Contractholders who acquire the contract either: (1) directly from the Company upon a recommendation of an independent pension consultant who charges a fee for its pension consulting services and who receives no remuneration from the Company in association with the sale of the contract; or (2) through registered representatives of the Principal Underwriter who are also Group Insurance Representative employees of the Company. H. Special Services If requested by the Contractholder, the Company may provide special services not provided as part of the contract administration and recordkeeping services. The Company will charge the Contractholder the cost of providing such services. SURPLUS DISTRIBUTION AT SOLE DISCRETION OF THE COMPANY It is not anticipated that any divisible surplus will ever be distributable to the contract in the future because the contract is not expected to result in a contribution to the divisible surplus of the Company. However, if any distribution of divisible surplus is made, it will be made to Investment Accounts in the form of additional units. THE CONTRACT The contract will normally be issued to an Employer or association or a trust established for the benefit of Plan Participants and their beneficiaries. The Company will issue a pre-retirement certificate describing the benefits under the contract to Plan Participants who reside in a state that requires the issuance of such certificates. The initial Contribution which correlates to a Plan Participant will be invested in the Division or Divisions that are chosen as of the end of the Valuation Period in which such Contribution is received by the Company at its home office in Des Moines, Iowa. If the allocation instructions are late, or not completed, the Company will invest such unallocated Contributions in the Money Market Division on the date such Contributions are received. Subsequently, the Company will transfer all or a portion of such Contributions as of the date complete allocation instructions are received by the Company in accordance with the allocation specified therein. After complete allocation instructions have been received by the Company, all current and future Contributions will be allocated to the chosen Divisions as of the end of the Valuation period in which such Contributions are received. If complete allocation instructions are not received by the Company within 105 days after the initial Contributions are allocated to the Money Market Division, the Company will remit the Contributions plus any earnings thereon to the Contractholder. The Contractholder may limit the number of Divisions available to the Owner of Benefits, but the Money Market Division may not be so restricted to the extent the Division is necessary to permit the Company to allocate initial Contributions as described above and the Capital Value Division may not be so restricted to the extent the Division is necessary to permit the Company to pay Variable Annuity Payments. A. Contract Values and Accounting Before Annuity Commencement Date 1. Investment Accounts An Investment Account or Accounts correlating to a Plan Participant will be established for each type of Contribution and for each Division of Separate Account B in which such Contribution is invested. Investment Accounts will be maintained until the Investment Account Values are either (a) applied to effect Variable Annuity benefits, (b) paid to the Owner of Benefits or the beneficiary, (c) transferred in accordance with the provisions of the contract or (d) cancelled to pay the recordkeeping expenses for a Plan Participant where Termination of Employment, retirement or death has occurred or for an alternate payee under a Qualified Domestic Relations Order. Each Contribution will be allocated to the Division or Divisions designated by the Notification on file with the Company and will result in a credit of units to the appropriate Investment Account. The number of units so credited will be determined by dividing the portion of the Contributions allocated to the Division by the Unit Value for such Division for the Valuation Period within which the Contribution was received by the Company at its home office in Des Moines, Iowa. 2. Unit Value The Unit Value for a Contract which participates in a Division of Separate Account B determines the value of an Investment Account consisting of contributions allocated to that Division. The Unit Value for each Division for the contract is determined on each day on which the net asset value of its underlying Account is determined. The Unit Value for a Valuation Period is determined as of the end of that period. The investment performance of the underlying Account and deducted expenses affect the Unit Value. For this series of contracts, the Unit Value for each Division will be fixed at $1.00 for the Valuation Period in which the first amount of money is credited to the Division. A Division's Unit Value for any later Valuation Period is equal to its Unit Value for the immediately preceding Valuation Period multiplied by the Net Investment Factor (see below) for that Division for this series of contracts for the later Valuation Period. 3. Net Investment Factor Each Net Investment Factor is the quantitative measure of the investment performance of each Division of Separate Account B. For any specified Valuation Period the Net Investment Factor for a Division for this series of contracts is equal to (a) the quotient obtained by dividing (i) the net asset value of a share of the underlying Account as of the end of the Valuation Period, plus the per share amount of any dividend or other distribution made by the Account during the Valuation Period (less an adjustment for taxes, if any) by (ii) the net asset value of a share of the Account as of the end of the immediately preceding Valuation Period, reduced by (b) a mortality and expense risks charge, equal to a simple interest rate for the number of days within the Valuation Period at an annual rate of 0.42%. The amounts derived from applying the rate specified in subparagraph (b) above and the amount of any taxes referred to in subparagraph (a) above will be accrued daily and will be transferred from Separate Account B at the discretion of the Company. 4. Hypothetical Example of Calculation of Unit Value for All Divisions Except the Money Market Division The computation of the Unit Value may be illustrated by the following hypothetical example. Assume that the current net asset value of an Account share is $14.8000; that there were no dividends or other distributions made by the Account and no adjustment for taxes since the last determination; that the net asset value of an Account share last determined was $14.7800; that the last Unit Value was $1.0185363; and that the Valuation Period was one day. To determine the current Net Investment Factor, divide $14.8000 by $14.7800 which produces 1.0013532 and deduct from this amount the mortality and expense risks charge of 0.0000090, which is the rate for one day that is equivalent to a simple annual rate of 0.33%. The result, 1.0013442, is the current Net Investment Factor. The last Unit Value ($1.0185363) is then multiplied by the current Net Investment Factor (1.0013442) which produces a current Unit Value of $1.0199054. 5. Hypothetical Example of Calculation of Unit Value for the Money Market Division The computation of the Unit Value may be illustrated by the following hypothetical example. Assume that the current net asset value of an Account share is $1.0000; that a dividend of .0328767 cents per share was declared by the Account prior to calculation of the net asset value of the Account share and that no other distributions and no adjustment for taxes were made since the last determination; that the net asset value of an Account share last determined was $1.0000; that the last Unit Value was $1.0162734; and that the Valuation Period was one day. To determine the current Net Investment Factor, add the current net asset value ($1.0000) to the amount of the dividend ($.000328767) and divide by the last net asset value ($1.0000), which when rounded to seven places equals 1.0003288. Deduct from this amount the mortality and expense risks charge of .0000090 (the proportionate rate for one day based on a simple annual rate of 0.33%). The result (1.0003198) is the current Net Investment Factor. The last Unit Value ($1.0162734) is then multiplied by the current Net Investment Factor (1.0003198), resulting in a current Unit Value of $1.0165984. B. Income Benefits Income Benefits consist of either monthly Variable Annuity Payments or periodic payments made on a monthly, quarterly, semi-annual or annual basis pursuant to the Flexible Income Option. 1. Variable Annuity Payments The amount applied to provide Variable Annuity Payments must be at least $1,750. Variable Annuity Payments will be provided by the Investment Accounts which correlate to the Plan Participant held under the Capital Value Division. Thus, if the Owner of Benefits elects Variable Annuity Payments, any amounts that are to be used to provide Variable Annuity Payments will be transferred to Investment Accounts held under the Capital Value Division as of the last Valuation Date in the month which begins two months before the Annuity Commencement Date. After any such transfer, the value of the Capital Value Division Investment Accounts will be applied on the Annuity Purchase Date to provide Variable Annuity Payments. The Annuity Commencement Date, which will be one month following the Annuity Purchase Date, will be the first day of a month. Thus, if the Annuity Commencement Date is August 1, the Annuity Purchase Date will be July 1, and the date of any transfers to a Capital Value Division Investment Account will be the Valuation Date immediately preceding July 1. The Annuity Commencement Date must be no later than April 1 of the calendar year following the calendar year in which the Plan Participant attains age 70 1/2. See "Federal Tax Status." a. Selecting a Variable Annuity Variable Annuity Payments will be made to an Owner of Benefits beginning on the Annuity Commencement Date and continuing thereafter on the first day of each month. An Owner of Benefits may select an Annuity Commencement Date by Notification to the Company. The date selected may be the first day of any month the Plan allows which is at least one month after the Notification. Generally, the Annuity Commencement Date cannot begin before the Plan Participant is age 59 1/2, separated from service, or is totally disabled. See "Federal Tax Status" for a discussion of required distributions and the federal income tax consequences of distributions. At any time not less than one month preceding the desired Annuity Commencement Date, an Owner of Benefits may, by Notification, select one of the annuity options described below (see "Forms of Variable Annuities"). If no annuity option has been selected at least one month before the Annuity Commencement Date, and if the Plan does not provide one, payments which correlate to an unmarried Plan Participant will be made under the annuity option providing Variable Life Annuity with Monthly Payments Certain for Ten Years. Payments to a married Plan Participant will be made under the annuity option providing a Variable Life Annuity with One-Half Survivorship. b. Forms of Variable Annuities Because of certain restrictions contained in the Internal Revenue Code and regulations thereunder, an annuity option is not available under a contract used to fund a TDA Plan, PEDC Plan or 401(a) Plan unless (i) the joint or contingent annuitant is the Plan Participant's spouse or (ii) on the Plan Participant's Annuity Commencement Date, the present value of the amount to be paid while the Plan Participant is living is greater than 50% of the present value of the total benefit to the Plan Participant and the Plan Participant's beneficiary (or contingent annuitant, if applicable). An Owner of Benefits may elect to have Investment Account Values applied under one of the following annuity options. However, if the monthly Variable Annuity Payment would be less than $20, the Company may, at its sole option, pay the Investment Account Values in full settlement of all benefits otherwise available. Variable Life Annuity with Monthly Payments Certain for Zero, Five, Ten, Fifteen or Twenty Years or Installment Refund Period -- a Variable Annuity which provides monthly payments during the Plan Participant's lifetime, and further provides that if, at the death of the Plan Participant, monthly payments have been made for less than a minimum period, e.g. five years, any remaining payments for the balance of such period shall be paid to the Owner of Benefits, if the Owner of Benefits is not the Plan Participant, or to a designated beneficiary unless the beneficiary requests in writing that the Commuted Value of the remaining payments be paid in a single sum. (Designated beneficiaries entitled to take the remaining payments or the Commuted Value thereof rather than continuing monthly payments should consult with their tax advisor to be made aware of the differences in tax treatment.) The minimum period may be either zero, five, ten, fifteen or twenty years or the period (called "installment refund period") consisting of the number of months determined by dividing the amount applied under the option by the initial payment. If, for example, $14,400 is applied under a life option with an installment refund period, and if the first monthly payment provided by that amount, as determined from the applicable annuity conversion rates, would be $100, the minimum period would be 144 months ($14,400 divided by $100 per month) or 12 years. A variable life annuity with an installment refund period guarantees a minimum number of payments, but not the amount of any monthly payment or the amount of aggregate monthly payments. The longer the minimum period selected, the smaller will be the amount of the first annuity payment. Under the Variable Life Annuity with Zero Years Certain, which provides monthly payments to the Owner of Benefits during the Plan Participant's lifetime, it would be possible for the Owner of Benefits to receive no annuity payments if the Plan Participant died prior to the due date of the first payment since payment is made only during the lifetime of the Plan Participant. Joint and Survivor Variable Life Annuity with Monthly Payments Certain for Ten Years -- a Variable Annuity which provides monthly payments for a minimum period of ten years and thereafter during the joint lifetimes of the Plan Participant on whose life the annuity is based and the contingent annuitant named at the time this option is elected, and continuing after the death of either of them for the amount that would have been payable while both were living during the remaining lifetime of the survivor. In the event the Plan Participant and the contingent annuitant do not survive beyond the minimum ten year period, any remaining payments for the balance of such period will be paid to the Owner of Benefits, if the owner of Benefits is not the Plan Participant, or to a designated beneficiary unless the beneficiary requests in writing that the Commuted Value of the remaining payments be paid in a single sum. (Designated beneficiaries entitled to take the remaining payments or the Commuted Value thereof rather than continuing monthly payments should consult with their tax advisor to be made aware of the differences in tax treatment.) Joint and Two-Thirds Survivor Variable Life Annuity -- a variable annuity which provides monthly payments during the joint lives of a Plan Participant and the person designated as contingent annuitant with two-thirds of the amount that would have been payable while both were living continuing until the death of the survivor. Variable Life Annuity with One-Half Survivorship -- a variable annuity which provides monthly payments during the life of the Plan Participant with one-half of the amount otherwise payable continuing so long as the contingent annuitant lives. Under the Joint and Two-thirds Survivor Variable Life Annuity and under the Variable Life Annuity with One-Half Survivorship, it would be possible for the Owner of Benefits and/or contingent annuitant to receive no annuity payments if the Plan Participant and contingent annuitant both died prior to the due date of the first payment since payment is made only during their lifetimes. Other Options -- Other Variable Annuity options permitted under the applicable Plan may be arranged by mutual agreement of the Owner of Benefits and the Company. c. Basis of Annuity Conversion Rates Because women as a class live longer than men, it has been common that retirement annuities of equal cost for women and men of the same age will provide women less periodic income at retirement. The Supreme Court of the United States ruled in Arizona Governing Committee vs. Norris that sex distinct annuity tables under an employer-sponsored benefit plan result in discrimination that is prohibited by Title VII of the Federal Civil Rights Act of 1964. The Court further ruled that sex distinct annuity tables will be deemed discriminatory only when used with values accumulated from employer contributions made after August 1, 1983, the date of the ruling. Title VII applies only to employers with 15 or more employees. However, certain State Fair Employment Laws and Equal Payment Laws may apply to employers with less than 15 employees. The contract described in this Prospectus offers both sex distinct and sex neutral annuity conversion rates. The annuity rates are used to convert a Plan Participant's pre-retirement Investment Account Values to a monthly lifetime income at retirement. Usage of either sex distinct or sex neutral annuity rates will be determined by the Contractholder. For each form of variable annuity, the annuity conversion rates determine how much the first monthly Variable Annuity Payment will be for each $1,000 of the Investment Account Value applied to effect the variable annuity. The conversion rates vary with the form of annuity, date of birth, and, if sex distinct rates are used, the sex of the Plan Participant and the contingent annuitant, if any. The sex neutral guaranteed annuity conversion rates are based upon (i) an interest rate of 2.5% per annum and (ii) mortality according to the "1983 Table a for Individual Annuity Valuation" projected with Scale G to the year 2001, set back five years in age. The sex distinct female rates are determined for all Plan Participants in the same way as neutral rates, as described above. The sex distinct male rates are determined for all Plan Participants in the same way as sex neutral rates, as described above, except mortality is not set back five years in age. The guaranteed annuity conversion rates may be changed, but no change which would be less favorable to the Owner of Benefits will take effect for a current Plan Participant. The contract provides that an interest rate of not less than 2.5% per annum will represent the assumed investment return. Currently the assumed investment return used in determining the amount of the first monthly payment is 4% per annum. This rate may be increased or decreased by the Company in the future but in no event will it be less than 2.5% per annum. If, under the contract, the actual investment return (as measured by an Annuity Change Factor, defined below) should always equal the assumed investment return, Variable Annuity Payments would remain level. If the actual investment return should always exceed the assumed investment return, Variable Annuity Payments would increase; conversely, if it should always be less than the assumed investment return, Variable Annuity Payments would decrease. The current 4% assumed investment return is higher than the 2.5% interest rate reflected in the annuity conversion rates contained in the contract. With a 4% assumption, Variable Annuity Payments will commence at a higher level, will increase less rapidly when actual investment return exceeds 4%, and will decrease more rapidly when actual investment return is less than 4%, than would occur with a lower assumption. d. Determining the Amount of the First Variable Annuity Payment The initial amount of monthly annuity income shall be based on the option selected, the age of the Plan Participant and contingent annuitant, if any, and the Investment Account Values applied as of the Annuity Purchase Date. The initial monthly income payment will be determined on the basis of the annuity conversion rates applicable on such date to such conversions under all contracts of this class issued by the Company. However, the basis for the annuity conversion rates will not produce payments less beneficial to the Owner of Benefits than the annuity conversion rate basis described above. e. Determining the Amount of the Second and Subsequent Monthly Variable Annuity Payments The second and subsequent monthly Variable Annuity Payments will increase or decrease in response to the investment experience of the Account underlying the Capital Value Division. The amount of each payment will be determined by multiplying the amount of the monthly Variable Annuity Payment due in the immediately preceding calendar month by the Annuity Change Factor for the Capital Value Division for the Contract for the calendar month in which the Variable Annuity Payment is due. Each Annuity Change Factor for the Capital Value Division for a calendar month is the quotient of (1) divided by (2), below: (1) The number which results from dividing (a) the Contract's Unit Value for the Capital Value Division for the first Valuation Date in the calendar month beginning one month before the given calendar month by (b) the Contract's Unit Value for such Division for the first Valuation Date in the calendar month beginning two months before the given calendar month. (2) An amount equal to one plus the effective interest rate for the number of days between the two Valuation Dates specified in subparagraph (1) above at the interest rate assumed to determine the initial payment of variable benefits to the Owner of Benefits. f. Hypothetical Example of Calculation of Variable Annuity Payments Assume that on the date one month before the Annuity Commencement Date the Investment Account Value that is invested in the Capital Value Division which correlates to a Plan Participant is $37,592. Using the appropriate annuity conversion factor (assuming $5.88 per $1,000 applied) the Investment Account Value provides a first monthly Variable Annuity Payment of $221.04. To determine the amount of the second monthly payment assume that the Capital Value Division Unit Value as of the first Valuation Date in the preceding calendar month was $1.3712044 and the Unit Value as of the first Valuation Date in the second preceding calendar month was $1.3273110. The Annuity Change Factor is determined by dividing $1.3712044 by $1.3273110, which equals 1.0330694, and dividing the result by an amount corresponding to the amount of one increased by an assumed investment return of 4% (which for a thirty day period is 1.0032288). 1.0330694 divided by 1.0032288 results in an Annuity Change Factor for the month of 1.0297446. Applying this factor to the amount of Variable Annuity Payment for the previous month results in a current monthly payment of $227.61 ($221.04 multiplied by 1.0297446 equals $227.61). 2. Flexible Income Option Instead of Variable Annuity Payments an Owner of Benefits may choose to receive Income Benefits under the Flexible Income Option. Unlike Variable Annuity Payments, payments under the Flexible Income Option may be made from any Division of the Separate Account. Under the Flexible Income Option, the Company will pay to the Owner of Benefits a portion of the Investment Accounts on a monthly, quarterly, semi-annual or annual basis on the date or dates requested each Year and continuing for a period not to exceed the life or life expectancy of the Plan Participant, or the joint lives or life expectancy of such Plan Participant and the contingent annuitant, if the contingent annuitant is the Plan Participant's spouse. If the Notification does not specify from which Investment Accounts payments are to be made, amounts will be withdrawn on a pro rata basis from all Investment Accounts which correlate to the Plan Participant. Payments will end, however, on the date no amounts remain in such Accounts or the date such Accounts are paid or applied in full as described below. Payments will be subject to the following: a. The life expectancy of the Plan Participant and the Plan Participant's spouse, if applicable, will be determined in accordance with the life expectancy tables contained in Internal Revenue Regulation Section 1.72-9. Life expectancy will be determined as of the date on which the first payment is made. Life expectancy will be redetermined annually thereafter. b. Payments may begin any time after the Flexible Income Option is requested. Payments must begin no later than the latest date permitted or required by the Plan or regulation to be the Owner of Benefit's Annuity Commencement Date. c. Payments will be made annually, semiannually, quarterly, or monthly as requested by the Owner of Benefits and agreed to by the Company. The annual amount payable will be the lesser of the Aggregate Investment Account Values which correlate to the Plan Participant or the minimum annual amount determined in accordance with the minimum distribution rules of the Internal Revenue Code. d. If the Plan Participant should die before the Aggregate Investment Account Value has been paid or applied in full, the remaining Investment Account Values will be treated as benefits payable at death as described in this Prospectus. e. Year for purposes of determining payments under the Flexible Income Option means the twelve month period starting on the installment payment starting date and each corresponding twelve month period thereafter. An Owner of Benefits may request a payment in excess of the minimum described above. Such payment may be equal to all or any portion of the Investment Accounts which correlate to the Plan Participant; provided, however, that if the requested payment would reduce the total value of such accounts to a total balance of less than $1,750 then such request will be a request for the total of such Investment Accounts. The Owner of Benefits may request termination of the Flexible Income Payments by giving the Company Notification (i) requesting an excess payment equal to the remaining balance of the Aggregate Investment Account Values which correlate to a Plan Participant, (ii) requesting that the remaining balance of the Aggregate Investment Account Values be applied to provide Variable Annuity Payments or (iii) a combination of (i) and (ii), as long as the amount applied to provide an annuity is at least $1,750. The Company will make such excess payment on the later of (i) the date requested, or (ii) the date seven (7) calendar days after the Company receives the Notification. The Annuity Commencement Date for amounts so applied will be one month after the Annuity Purchase Date. The Annuity Purchase Date for amounts so applied will be the first Valuation Date in the month following the Company's receipt of the Notification or the first Valuation Date of such subsequent month as requested. An additional annual charge of $25.00 will be made if an Owner of Benefits elects to receive benefits under the Flexible Income Option. The charge attributable to a Plan Participant will be allocated to his or her Investment Account in proportion to their relative values. C. Payment on Death of Plan Participant 1. Prior to Annuity Purchase Date If a Plan Participant dies prior to the Annuity Purchase Date, the Company, upon receipt of due proof of death and any waiver or consent required by applicable state law, will pay the death benefit in accordance with the provisions of the Plan. The amount of the death benefit is determined by the terms of the Plan. The Owner of Benefits may elect to either (1) leave the assets in the contract to the extent permitted by applicable law; (2) receive such value as a single sum benefit; or (3) apply the Investment Account Values which correlate to the Plan Participant to purchase Variable Annuity Payments for the beneficiary if the aggregate value of such Investment Accounts is at least $1,750. If the beneficiary does not provide Notification to the Company within 120 days of the date the Company receives due proof of death, (i.e. a certified copy of the death certificate, a certified copy of a decree of a court of competent jurisdiction as to the finding of death, a written statement by a medical doctor who attended the deceased during his last illness.), the beneficiary will be deemed a Plan Participant under the contract described in the Prospectus. A beneficiary may elect to have all or a part of the amount available under this contract transferred to any Companion Contract. Alternatively, this contract may accept all or part of the amount available under a Companion Contract to establish an Investment Account or Accounts for a beneficiary under this contract. If the aggregate value of such Investment Accounts is less than $1,750, the Company may at its option pay the beneficiary the value of such accounts in lieu of all other benefits. An election to receive Variable Annuity Payments must be made prior to the single sum payment to the beneficiary. Annuity income must be payable as lifetime annuity income with no benefits beyond the beneficiary's life or life expectancy. In addition, the amount of the monthly Variable Annuity Payments must be at least $20, or the Company may at its option pay the beneficiary the value of the Variable Annuity Reserves in lieu of all other benefits. The beneficiary's Annuity Purchase Date will be the first day of the calendar month specified in the election, but in no event prior to the first day of the calendar month following the date the Notification is received by the Company. The amount to be applied will be determined as of the Annuity Purchase Date. The beneficiary's Annuity Commencement Date will be the first day of the calendar month following the Annuity Purchase Date. The beneficiary must be a natural person in order to elect Variable Annuity Payments. The election must be in writing. The annuity conversion rates applicable to a beneficiary shall be the annuity conversion rates the Company makes available to all beneficiaries under this contract. The beneficiary will receive a written description of the options available. 2. Subsequent to Annuity Purchase Date Upon the death of a Plan Participant subsequent to the Annuity Purchase Date, no benefits will be available except as may be provided under the form of annuity selected. If provided for under the form of annuity, the Owner of Benefits or beneficiary will continue receiving any remaining payments unless the Owner of Benefits or the beneficiary requests in writing that the Commuted Value of the remaining payments be paid in a single sum. D. Withdrawals and Transfers 1. Cash Withdrawals The contract is designed for and intended to be used to fund retirement Plans. However, subject to any Plan limitations, any restrictions imposed by provisions of the Internal Revenue Code or any reduction for vesting provided for in the Plan as to amounts available, the Owner of Benefits may withdraw cash from the Investment Accounts which correlate to a Plan Participant at any time prior to the Annuity Purchase Date. The Internal Revenue Code generally provides that distributions from the contracts (except those used to fund Creditor Exempt or General Creditor Non-qualified Plans) may begin only after the Plan Participant attains age 59 1/2, terminates employment, dies or becomes disabled, or in the case of deemed hardship (or, for PEDC Plans, unforeseen emergencies). Withdrawals before age 59 1/2 may involve an income tax penalty. See "Federal Tax Status." The procedure with respect to cash withdrawals is as follows: (a) The Plan must allow for such withdrawal. (b) The Company must receive a Notification requesting a cash withdrawal from the Owner of Benefits on a form either furnished or approved by the Company. The Notification must specify the amount to be withdrawn for each Investment Account from which withdrawals are to be made. If no specification is made, withdrawals from Investment Accounts will be made on a pro rata basis. (c) If a certificate has been issued to the Owner of Benefits the Company may require that any requests be accompanied by such certificate. (d) If the Aggregate Investment Account Values are insufficient to satisfy the amount of the requested withdrawal and applicable charges, if any, the amount paid will be reduced to satisfy such charges. Any cash withdrawal will result in the cancellation of a number of units from each Investment Account from which values have been withdrawn. The number of units cancelled from an Investment Account will be equal to the amount withdrawn from that Account divided by the Unit Value for the Division of Separate Account B in which the Account is invested for the Valuation Period in which the cancellation is effective. (Special Note: Under the Texas Education Code, Plan Participants under contracts issued in connection with Optional Retirement Programs for certain employees of Texas institutions of higher education are prohibited from making withdrawals except in the event of termination of employment, retirement or death of the Plan Participant. Also, see "Federal Tax Status" for a description of further withdrawal restrictions.) 2. Transfers Between Divisions Upon Notification, all or a portion of the value of a Investment Account which correlates to a Plan Participant may be transferred to another available Investment Account correlating to such Plan Participant for the same type of Contribution. Transfers may be made at any time before the Annuity Purchase Date. A transfer will be effective as of the end of the Valuation Period in which the request is received. Any amount transferred will result in the cancellation of units in the Investment Account from which the transfer is made. The number of units cancelled will be equal to the amount transferred from that account divided by the Unit Value of the Division for the Valuation Period in which the transfer is effective. The transferred amount will result in the crediting of units in the Investment Account to which the transfer is made. The number of units credited will be equal to the amount transferred to that account divided by the Unit Value of the Division for the Valuation Period in which the transfer is effective. 3. Transfers to the Contract If a Companion Contract has been issued by the Company to fund the Plan, and except as otherwise provided by the applicable Plan, the contract described in this Prospectus may accept all or a portion of the proceeds available under the Companion Contract at any time at least one month before Annuity Commencement Date, subject to the terms of the Companion Contract. 4. Transfers to a Companion Contract If a Companion Contract has been issued by the Company to fund the Plan, except as otherwise provided by the applicable Plan and the provisions of the Companion Contract, an Owner of Benefits may by Notification transfer all or a portion of the Investment Account Values which correlate to a Plan Participant to the Companion Contract. If the Notification does not state otherwise, amounts will be transferred on a pro rata basis from the Investment Accounts which correlate to the Plan Participant. Transfers with respect to a Plan Participant from this contract to the Companion Contract will not be permitted if this contract has accepted, within the six-month period preceding the proposed transfer from this contract to the Companion Contract, a transfer from an unmatured Investment Account which correlates to the Plan Participant established under the Companion Contract. An unmatured Investment Account is an Investment Account which has not reached the end of its interest guarantee period. In all other respects, such transfers are subject to the same provisions regarding frequency of transfer, effective date of transfer and cancellation of units as described above in "Transfers Between Divisions." 5. Special Situation Involving Alternate Funding Agents The contract allows the Investment Account Values of all Plan Participants to be transferred to an alternate Funding Agent with or without the consent of the Plan Participants. Transfers to an alternate Funding Agent require Notification from the Contractholder. The amount to be transferred will be equal to the Investment Account Values determined as of the end of the Valuation Period in which the Notification is received. Such transfers will be subject to the contract administration expense and recordkeeping expense. 6. Postponement of Cash Withdrawal or Transfer Any cash withdrawal or transfer to be made from the contract or between Investment Accounts in accordance with the preceding paragraphs will be made (i) within seven calendar days after Notification for such payment or transfer is received by the Company at its Home Office or (ii) on the requested date of payment or transfer, if later. However, such withdrawal or transfer may be deferred during any period when the right to redeem Account shares is suspended as permitted under provisions of the Investment Company Act of 1940, as amended. The right to redeem shares may be suspended during any period when (a) trading on the New York Stock Exchange is restricted as determined by the Securities and Exchange Commission or such Exchange is closed for other than weekends and holidays; (b) an emergency exists, as determined by the Securities and Exchange Commission, as a result of which (i) disposal by the Account of securities owned by it is not reasonably practicable or (ii) it is not reasonably practicable for the Account fairly to determine the value of its net assets; or (c) the Commission by order so permits for the protection of security holders. If any deferment of transfer or withdrawal is in effect and has not been cancelled by Notification to the Company within the period of deferment, the amount to be transferred or withdrawn shall be determined as of the first Valuation Date following expiration of the permitted deferment, and transfer or withdrawal will be made within seven calendar days thereafter. The Company will notify the Contractholder of any deferment exceeding 30 days. 7. Loans. The Company will not make available a loan option for the contract described in this Prospectus. E. Other Contractual Provisions 1. Contribution Limits The contract prescribes no limits on the minimum Contribution which may be made to an Investment Account which correlates to a Plan Participant. Plan Participant maximum Contributions are discussed under "Federal Tax Status." Contributions may also be limited by the Plan. The Company may also limit Contributions on 60-days notice. 2. Assignment No benefits in the course of payment under a contract used to fund a TDA Plan, 401(a) Plan or Creditor-Exempt Non-Qualified Plan are assignable, by any Owner of Benefits, Plan Participant, beneficiary or contingent annuitant and all such benefits under such contracts, shall be exempt from the claims of creditors to the maximum extent permitted by law. Benefits in the course of payment for contracts used to fund PEDC plans and General Creditor Non-Qualified Plans are assignable only by the Contractholder and such benefits are subject to the claims of the Contractholder's general creditors. Investment Account Values which correlate to a Plan Participant are non-forfeitable by the Owner of Benefits; provided, however, if the Plan specifically so provides, Investment Account Values which correlate to a Plan Participant shall be reduced to the extent required by the vesting provisions of the Plan as of the date the Company receives Notification of the event requiring the reduction. 3. Cessation of Contributions A cessation of Contributions with respect to all Plan Participants shall occur at the election of the Contractholder upon Notification to the Company, on the date the Plan terminates or on the date no Investment Account Values remain under the contract or at the election of the Company upon 60-days notice to the Contractholder. Following a cessation of Contributions all terms of the contract will continue to apply except that no further Contributions may be made. 4. Substitution of Securities If shares of an Account are not available at some time in the future, or if in the judgment of the Company further investment in such shares would no longer be appropriate, there may be substituted therefor, or Contributions received after a date specified by the Company may be applied to purchase (i) shares of another account or another registered open-end investment company or (ii) securities or other property as the Company should in its discretion select. In the event of any investment pursuant to clause (ii) above, the Company can make such changes as in its judgment are necessary or appropriate in the frequency and methods of determination of Unit Values, Net Investment Factors, Annuity Change Factors, and Investment Account Values, including any changes in the foregoing which will provide for the payment of an investment advisory fee; provided, however, that any such changes shall be made only after approval by the Insurance Department of the State of Iowa. The Company will give written notice to each Owner of Benefits of any substitution or such change and any substitution will be subject to the rules and regulations of the Securities and Exchange Commission. 5. Changes in the Contract The terms of a contract may be changed at any time by written agreement between the Company and the Contractholder without the consent of any Plan Participant, Owner of Benefits, beneficiary, or contingent annuitant. However, except as required by law or regulation, no such change shall apply to variable annuities which were in the course of payment prior to the effective date of the change. The Company will notify any Contractholder affected by any change under this paragraph. The Company may unilaterally change the Contract at any time, including retroactive changes, in order to meet the requirements of any law or regulation issued by any governmental agency to which the Company is subject. The Company may add Divisions to Separate Account B at any time. In addition, the Company may, on 60-days prior notice to the Contractholder, unilaterally change the basis for determining Investment Account Values, the Net Investment Factor, the Annuity Purchase Rates and the Annuity Change Factor; the guaranteed annuity conversion rates; the Recordkeeping Expense and Contract Administration Charge; and the provisions with respect to transfers to or from a Companion Contract or between Investment Accounts. However, no amendment or change will apply to annuities in the course of payment except to the extent necessary to meet the requirements of any law or regulation issued by a governmental agency to which the Company is subject. In addition, no change in the guaranteed annuity conversion rates will take effect for a current Plan Participant if the effect of such amendment or change would be less favorable to the Owner of Benefits. Also, any change in the contract administration expense or recordkeeping expense will not take affect as to any Investment Accounts to be transferred to an Alternate Funding Agent if, prior to the date of the amendment or change is to take affect, the Company receives a written request from the Contractholder for payment of all such Investment Account Values to the Alternate Funding Agent and such request is not revoked. Furthermore, the Company may, on 60-days notice to the Contractholder affected by the change, unilaterally change the mortality and expense risks charge provided that (a) the charge shall in no event exceed 1.25%, (b) the charge shall not be changed more frequently than once in any one year period and (c) no change shall apply to annuities which were in the course of payment prior to the effective date of the change. STATEMENT OF VALUES The Company will furnish each Owner of Benefits at least once during each year a statement showing the number of units credited to the Investment Account or Accounts which correlate to the Plan Participant, Unit Values for such Investment Accounts and the resulting Investment Account Values. SERVICES AVAILABLE BY TELEPHONE Telephone Transactions The following transactions may be exercised by telephone by any Owner of Benefits: 1) transfers between Investment Accounts; and 2) changes in Contribution allocation percentages. The telephone transactions may be exercised by telephoning 1-800-633-1373. Telephone transfer requests must be received by the close of the New York Stock Exchange on a day when the Company is open for business to be effective that day. Requests made after that time or on a day when the Company is not open for business will be effective the next business day. Although neither the Separate Account nor the Company is responsible for the authenticity of telephone transaction requests, the right is reserved to refuse to accept telephone requests when in the opinion of the Company it seems prudent to do so. The Owner of Benefits bears the risk of loss caused by fraudulent telephone instructions the Company reasonably believes to be genuine. The Company will employ reasonable procedures to assure telephone instructions are genuine and if such procedures are not followed, the Company may be liable for losses due to unauthorized or fraudulent transactions. Such procedures include recording all telephone instructions, requesting personal identification information such as the caller's name, daytime telephone number, social security number and/or birthdate and sending a written confirmation of the transaction to the Owner of Benefits' address of record. Owners of Benefits may obtain additional information and assistance by telephoning the toll free number. TeleTouch(R) By calling TeleTouch at 1-800-547-7754 and inputting their personal identification number, Plan Participants may access daily account and investment information, counselor assistance and more. This service is available Sunday through Friday from 2 a.m. to midnight (CT) and Saturday from 2 a.m. to 9 p.m. Principal Retirement Service Center sm By visiting our internet site at www.principal.com and inputting your personal identification number, you can access a variety of information including investment account values, investment results and retirement planning tools. Plan Participants may also change investment directions, transfer money and rebalance their portfolios. DISTRIBUTION OF THE CONTRACT The contract, which is continuously offered, will be sold primarily by persons who are insurance agents of or brokers for the Company authorized by applicable law to sell life and other forms of personal insurance and variable annuities. In addition, these persons will usually be registered representatives of Princor Financial Services Corporation, a company of the Principal Financial Group, Des Moines, Iowa, 50392-0200, a broker-dealer registered under the Securities Exchange Act of 1934 and a member of the National Association of Securities Dealers, Inc. Princor Financial Services Corporation, the principal underwriter, is paid for the distribution of the Contract in accordance with two separate schedules one of which provides for payment of 4.5% of Contributions scaling down for Contributions in excess of $5,000 and one which provides for payments of 3.0% of Contributions scaling down for Contributions in excess of $50,000. The Contract may also be sold through other selected broker-dealers registered under the Securities Exchange Act of 1934. Princor Financial Services Corporation is also the principal underwriter for various registered investment companies organized by the Company. Princor Financial Services Corporation is a subsidiary of Principal Financial Services, Inc. PERFORMANCE CALCULATION The Separate Account may publish advertisements containing information (including graphs, charts, tables and examples) about the performance of one or more of its Divisions. The contract was not offered prior to July 15, 1992. However, the Divisions invest in Accounts of the Principal Variable Contract Fund, Inc. These Accounts correspond to open-end investment companies ("mutual funds") which, effective January 1, 1998, were reorganized into the Accounts of the Principal Variable Contracts Fund, Inc. as follows: Old Mutual Fund Name New Corresponding Account Name ----------------------------------------- ------------------------------ Principal Balanced Fund, Inc. Balanced Account Principal Bond Fund, Inc. Bond Account Principal Capital Accumulation Fund, Inc. Capital Value Account Principal Emerging Growth Fund, Inc. MidCap Account Principal Government Securities Fund, Inc. Government Securities Account Principal Growth Fund, Inc. Growth Account Principal Money Market Fund, Inc. Money Market Account Principal World Fund, Inc. International Account Some of the Accounts (under their former names) were offered prior to the date that the Contract was available. Thus, the Separate Account may publish advertisements containing information about the hypothetical performance of one or more of its Divisions for this contract had the contract been issued on or after the date the Account in which such Division invests was first offered. The hypothetical performance from the date of inception of the Account in which the Division invests is derived by reducing the actual performance of the underlying Account by the fees and charges of the Contract as if it had been in existence. The yield and total return figures described below will vary depending upon market conditions, the composition of the underlying Account's portfolios and operating expenses. These factors and possible differences in the methods used in calculating yield and total return should be considered when comparing the Separate Account performance figures to performance figures published for other investment vehicles. The Separate Account may also quote rankings, yields or returns as published by independent statistical services or publishers and information regarding performance of certain market indices. Any performance data quoted for the Separate Account represents only historical performance and is not intended to indicate future performance. For further information on how the Separate Account calculates yield and total return figures, see the Statement of Additional Information. From time to time the Separate Account advertises its Money Market Division's "yield" and "effective yield." Both yield figures are based on historical earnings and are not intended to indicate future performance. The "yield" of the division refers to the income generated by an investment in the division over a seven-day period (which period will be stated in the advertisement). This income is then "annualized." That is, the amount of income generated by the investment during that week is assumed to be generated each week over a 52-week period and is shown as a percentage of the investment. The "effective yield" is calculated similarly but, when annualized, the income earned by an investment in the division is assumed to be reinvested. The "effective yield" will be slightly higher than the "yield" because of the compounding effect of this assumed reinvestment. In addition, from time to time, the Separate Account may advertise its "yield" for the Bond Division and Government Securities Division for these contracts. The "yield" of the Divisions is determined by annualizing the net investment income per unit for a specific, historical 30-day period and dividing the result by the ending maximum offering price of the unit for the same period. Also, from time to time, the Separate Account will advertise the average annual total return of its various divisions. The average annual total return for any of the divisions is computed by calculating the average annual compounded rate of return over the stated period that would equate an initial $1,000 investment to the ending redeemable contract value. VOTING RIGHTS The Company shall vote Account shares held in Separate Account B at regular and special meetings of shareholders of each Account, but will follow voting instructions received from persons having the voting interest in the Account shares. The number of Account shares as to which a person has the voting interest will be determined by the Company as of a date which will not be more than ninety days prior to the meeting of the Account, and voting instructions will be solicited by written communication at least ten days prior to the meeting. During the accumulation period, the Owner of Benefits is the person having the voting interest in the Account shares attributable to the Investment Accounts which correlate to the Plan Participant. The number of Account shares held in Separate Account B which are attributable to each Investment Account is determined by dividing the Investment Account Value attributable to a Division of Separate Account B by the net asset value of one share of the underlying Account. During the annuity period, the person then entitled to Variable Annuity Payments has the voting interest in the Account shares attributable to the Variable Annuity. The number of Account shares held in Separate Account B which are attributable to each Variable Annuity is determined by dividing the reserve for the Variable Annuity by the net asset value of one Account share. The voting interest in the Account shares attributable to the Variable Annuity will ordinarily decrease during the annuity period since the reserve for the Variable Annuity decreases due to the reduction in the expected payment period. Account shares for which Owners of Benefits or payees of Variable Annuities are entitled to give voting instructions, but for which none are received, and shares of the Account owned by the Company will be voted in the same proportion as the aggregate shares for which voting instructions have been received. Proxy material will be provided to each person having a voting interest together with an appropriate form which may be used to give voting instructions to the Company. If the Company determines pursuant to applicable law that Account shares held in Separate Account B need not be voted pursuant to instructions received from persons otherwise having the voting interest as provided above, then the Company may vote Account shares held in Separate Account B in its own right. FEDERAL TAX STATUS It should be recognized that the descriptions below of the federal income tax status of amounts received under the contracts are not exhaustive and do not purport to cover all situations. A qualified tax advisor should be consulted for complete information. (For the federal tax status of the Company and Separate Account B, see "Principal Life Insurance Company Separate Account B".) A. Taxes Payable by Owners of Benefits and Annuitants The contract offered in connection with this Prospectus is used with retirement programs which receive favorable tax deferred treatment under Federal income tax law and deferred annuity contracts purchased with after tax dollars. Annuity payments or other amounts received under the contract are subject to income tax withholding. The amounts withheld will vary among recipients depending on the tax status of the individual and the type of payments from which taxes are withheld. Contributions to contracts used to fund Creditor-Exempt and General Creditor Non-Qualified Plans do not enjoy the advantages available to qualified retirement plans, but Contributions invested in contracts used to Fund Creditor-Exempt Non-qualified Retirement Plans may receive tax-deferred treatment of the earnings, until distributed from the contract as retirement benefits. 1. Tax-Deferred Annuity Plans-- (Section 403(b) Annuities for Employees of Certain Tax-Exempt Organizations or Public Educational Institutions) Contributions. Under section 403(b) of the Code, payments made by certain employers (i.e., tax-exempt organizations, meeting the requirements of section 501(c)(3) of the Code and public educational institutions) to purchase annuity contracts for their employees are excludable from the gross income of employees to the extent that the aggregate Purchase Payments do not exceed the limitations prescribed by section 402(g), section 403(b)(2), and section 415 of the Code. This gross income exclusion applies to employer contributions and voluntary salary reduction contributions. An individual's voluntary salary reduction contributions under section 403(b) are generally limited to the lesser of $9,500 or 25 percent of net salary (or 20 percent of gross salary); additional catch-up contributions are permitted under certain circumstances. Combined employer and salary reduction contributions are generally limited to approximately 25 percent of net salary. In addition, for plan years beginning after December 31, 1988, employer contributions must comply with various nondiscrimination rules; these rules may have the effect of further limiting the rate of employer contributions for highly compensated employees. Taxation of Distributions. Distributions are restricted. The restrictions apply to amounts accumulated after December 31, 1988 (including voluntary contributions after that date and earnings on prior and current voluntary contributions). These restrictions require that no distributions will be permitted prior to one of the following events: (1) attainment of age 59 1/2, (2) separation from service, (3) death, (4) disability, or (5) hardship (hardship distributions will be limited to the amount of salary reduction contributions exclusive of earnings thereon). All distributions from a section 403(b) Plan are taxed as ordinary income of the recipient in accordance with section 72 of the Code and are subject to 20% income tax withholding. Distributions received before the recipient attains age 59 1/2 generally are subject to a 10% penalty tax in addition to regular income tax. Certain distributions are excepted from this penalty tax, including distributions following (1) death, (2) disability, (3) separation from service during or after the year the Participant reaches age 55, (4) separation from service at any age if the distribution is in the form of payments over the life (or life expectancy) of the Plan Participant (or the Plan Participant and Beneficiary), and distributions (5) to alternate payee pursuant to a qualified domestic relations order, (6) made on account of certain levies on income or payments and (7) not in excess of tax deductible medical expenses. Required Distributions. Generally, distributions from section 403(b) Plans must commence no later than April 1 of the calendar year following the calendar year in which the Plan Participant attains age 70 1/2 and such distributions must be made over a period that does not exceed the life expectancy of the Plan Participant (or the Plan Participant and Beneficiary). Plan Participants employed by governmental entities and certain church organizations may delay the commencement of payments until April 1 of the calendar year following retirement if they remain employed after attaining age 70 1/2. However, upon the death of the Plan Participant prior to the commencement of annuity payments, the amount accumulated under the contract must be distributed within five years or, if distributions to a beneficiary designated under the contract commence within one year of the Plan Participant's death, distributions are permitted over the life of the beneficiary or over a period not extending beyond the beneficiary's life expectancy. If the Plan Participant has commenced receiving annuity distributions prior to the Plan Participant's death, distributions must continue at least as rapidly as under the method in effect at the date of death. Amounts accumulated under a contract on December 31, 1986, are not subject to these minimum distributions requirements. A penalty tax of 50% will be imposed on the amount by which the minimum required distribution in any year exceeds the amount actually distributed in that year. Tax-Free Transfers and Rollovers. The Code provides for the tax-free exchange of one annuity contract for another annuity contract, and the IRS has ruled that total or partial amounts transferred between section 403(b) annuity contracts and/or 403(b)(7) custodial accounts may qualify as tax-free exchanges under certain circumstances. In addition, section 403(b) of the Code permits tax-free rollovers of eligible rollover distributions from section 403(b) programs to Individual Retirement Accounts (IRAs) under certain circumstances. If an eligible rollover distribution is taken as a direct rollover to an IRA (or another 403(b) plan) the mandatory 20% income tax withholding does not apply. However, the 20% mandatory withholding requirement does apply to an eligible rollover distribution that is not made as a direct rollover. In addition, such a rollover must be completed within 60 days of receipt of the distribution. 2. Public Employee Deferred Compensation Plans-- (Section 457 Unfunded Deferred Compensation Plans of Public Employers and Tax-Exempt Organizations) Contributions. Under section 457 of the Code, individuals who perform services for a unit of a state or local government may participate in a deferred compensation program. Tax-exempt employers may establish deferred compensation plans under section 457 only for a select group of management or highly compensated employees and/or independent contractors. This type of program allows individuals to defer the receipt of compensation which would otherwise be presently payable and to therefore defer the payment of Federal income taxes on the amounts. Assuming that the program meets the requirements to be considered a Public Employee Deferred Compensation Plan (an "PEDC Plan"), an individual may contribute (and thereby defer from current income for tax purposes) the lesser of $7,500 or 331/3% of the individuals includible compensation. (Includible compensation means compensation from the employer which is current includible in gross income for Federal tax purposes.) During the last three years before an individual attains normal retirement age, additional catch-up deferrals are permitted. The amounts which are deferred may be used by the employer to purchase the contract offered by this Prospectus. The contract is owned by the employer and, in fact, is subject to the claims of the employer's creditors. The employee has no present rights or vested interest in the contract and is only entitled to payment in accordance with the PEDC Plan provisions. Taxation of Distributions. Amounts received by an individual from an PEDC Plan are includible in gross income for the taxable year in which such amounts are paid or otherwise made available. Distributions Before Separation from Service. Distributions generally are not permitted under an PEDC Plan prior to separation from service except for unforeseeable emergencies or upon reaching age 70 1/2. Emergency distributions are includible in the gross income of the individual in the year in which paid. Required Distributions. The minimum distribution requirements for PEDC Plans are generally the same as those for qualified plans and section 403(b) Plans Contracts, except that no amounts are exempted from minimum distribution requirements. Tax Free Transfers and Rollovers. Federal income tax law permits the tax free transfer of PEDC Plan amounts to another PEDC Plan, but not to an IRA or other type of plan. 3. 401(a) Plans Contributions. Under Section 401(a) of the Code, payments made by employers to purchase annuity Contracts for their employees are excludable from the gross income of employees to the extent that the aggregate Purchase Payments do not exceed the limitations prescribed by section 402(g), and section 415 of the Code. This gross income exclusion applies to employer contributions and voluntary salary reduction contributions. An individual's voluntary salary reduction contributions for a 401(k) plan are generally limited to $10,500 (2000 limit). For 401(a) qualified plans, the maximum annual contribution that a member can receive is limited to the lesser of 25% of includible compensation or $30,000. Taxation of Distributions. Distributions are restricted. These restrictions require that no distributions of employer contributions or salary deferrals will be permitted prior to one of the following events: (1) attainment of age 59 1/2, (2) separation from service, (3) death, (4) disability, or (5) for certain 401(a) Plans, hardship (hardship distributions will be limited to the amount of salary reduction contributions exclusive of earnings thereon). In-service distributions may be permitted under various circumstances in certain plans. All distributions from a section 401(a) Plan are taxed as ordinary income of the recipient in accordance with section 72 of the Code. Distributions received before the recipient attains age 59 1/2 generally are subject to a 10% penalty tax in addition to regular income tax. Certain distributions are excepted from this penalty tax, including distributions following (1) death, (2) disability, 3) separation from service during or after the year the Plan Participant reaches age 55, (4) separation from service at any age if the distribution is in the form of payments over the life (or life expectancy) of the Plan Participant (or the Plan Participant and Beneficiary), and (5) distributions not in excess of tax deductible medical expenses. Required Distributions. Generally, distributions from section 401(a) Plans must commence no later than April 1 of the calendar year following the calendar year in which the Participant attains age 70 1/2 and such distributions must be made over a period that does not exceed the life expectancy of the Plan Participant (or the Plan Participant and Beneficiary). Following the death of the Plan Participant, the distribution requirements are generally the same as those described with respect to 403(b) Plans. A penalty tax of 50% will be imposed on the amount by which the minimum required distribution in any year exceeds the amount actually distributed in that year. Tax-Free Transfers and Rollovers. The Code provides for the tax-free exchange of one annuity contract for another annuity contract. Distributions from a 401(a) Plan may also be transferred to a Rollover IRA. 4. Creditor-Exempt Non-Qualified Plans Certain employers may establish Creditor-Exempt Non-Qualified Plans. Under such Plans the employer formally funds the Plan either by purchasing an annuity contract or by transferring funds on behalf of Plan Participants to a trust established for the benefit of such Plan Participants with a direction to the trustee to use the funds to purchase an annuity contract. The Trustee is the Contractholder and is considered the nominal owner of the contract. Each Plan Participant as a Trust beneficiary, is an Owner of Benefits under the contract and is treated as the owner for income tax purposes. Taxation of Contract Earnings. Since each Plan Participant for income tax purposes is considered the owner of the Investment Account or Accounts which correlate to such Participant, any increase in a Participant's Investment Account Value resulting from the investment performance of the Contract is not taxable to the Plan Participant until received by such Plan Participant. Contributions. Payments made by the employer to the Trust on behalf of a Plan Participant are currently includible in the Plan Participant's gross income as additional compensation and, if such payments coupled with the Plan Participant's other compensation is reasonable in amount, such payments are currently deductible as compensation by the Employer. Taxation of Distributions. In general, partial redemptions from an Investment Account that are not received by a Plan Participant as an annuity under the contract allocated to post-August 13, 1982 Contributions under a preexisting contract are taxed as ordinary income to the extent of the accumulated income or gain under the contract. Partial redemptions from a contract that are allocated to pre-August 14, 1982 Contributions under a preexisting contract are taxed only after the Plan Participant has received all of the "investment in the contract" (Contributions less any amounts previously received and excluded from gross income). In the case of a complete redemption of an Investment Account under the contract (regardless of the date of purchase), the amount received will be taxed as ordinary income to the extent that it exceeds the Plan Participant's investment in the contract. If a Plan Participant purchases two or more contracts from the Company (or an affiliated company) within any twelve month period after October 21, 1988, those contracts are treated as a single contract for purposes of measuring the income on a partial redemption or complete surrender. When payments are received as an annuity, the Plan Participant's investment in the contract is treated as received ratably over the expected payment period of the annuity and excluded from gross income as a tax-free return of capital. Individuals who commence receiving annuity payments on or after January 1, 1987, can exclude from income only their unrecovered investment in the contract. Where such individuals die before they have recovered their entire investment in the contract on a tax-free basis, are entitled to a deduction of the unrecovered amount on their final tax return. In addition to regular income taxes, there is a 10% penalty tax on the taxable portion of a distribution received before the Plan Participant attains age 59 1/2 under the contract, unless the distribution is; (1) made to a Beneficiary on or after death of the Plan Participant, (2) made upon the disability of the Plan Participant; (3) part of a series of substantially equal annuity payments for the life or life expectancy of the Plan Participant or the Plan Participant and Beneficiary; (4) made under an immediate annuity contract, or (5) allocable to Contributions made prior to August 14, 1982. Required Distributions. The Internal Revenue Code does not require a Plan Participant under a Creditor-Exempt Non-Qualified Plan to commence receiving distributions at any particular time and does not limit the duration of annuity payments. However, the contract provides the Annuity Commencement Date must be no later than the April 1 of the calendar year following the calendar year in which the Participant attains age 70 1/2. However, upon the death of the Plan Participant prior to the commencement of annuity payments, the amount accumulated under the contract must be distributed within five years or, if distributions to a beneficiary designated under the contract commence within one year of the Plan Participant's death, distributions are permitted over the life of the beneficiary or over a period not extending beyond the beneficiary's life expectancy. If the Plan Participant has commenced receiving annuity distributions prior to the Plan Participant's death, distributions must continue at least as rapidly as under the method in effect at the date of death. Tax-Free Exchanges. Under Section 1035 of the Code, the exchange of one annuity contract for another is not a taxable transaction, but is reportable to the IRS. Transferring Investment Account Values from this contract to a Companion Contract would fall within the provisions of Section 1035 of the Code. 5. General Creditor Non-Qualified Plans Contributions. Private taxable employers may establish informally funded, General Creditor Non-Qualified Plans for a select group of management or highly compensated employees and/or independent contractors. Certain arrangements of nonprofit employers entered into prior to August 16, 1989, and not subsequently modified, are subject to the rules discussed below. Informally funded General Creditor Non-Qualified Plans represent a bare contractual promise on the part of the employer to pay wages at some future time. The contract used to informally fund the employer's obligation is owned by the employer and is subject to the claims of the employer's creditors. The Plan Participant has no present right or vested interest in the contract and is only entitled to payment in accordance with Plan provisions. If the Employer who is the Contractholder, is not a natural person, the contract does not receive tax-deferred treatment afforded other Contractholders under the Internal Revenue Code. Taxation of Distributions. Amounts received by an individual from a General Creditor Non-Qualified Plan are includible in the employee's gross income for the taxable year in which such amounts are paid or otherwise made available. Such amounts are deductible by the employer when paid to the individual. B. Fund Diversification Separate Account investments must be adequately diversified in order for the increase in the value of Creditor-Exempt Non-Qualified Contracts to receive tax-deferred treatment. In order to be adequately diversified, the portfolio of each underlying Account must, as of the end of each calendar quarter or within 30 days thereafter, have no more than 55% of its assets invested in any one investment, 70% in any two investments, 80% in any three investments and 90% in any four investments. Failure of an Account to meet the diversification requirements could result in tax liability to Creditor-Exempt Non-Qualified Contractholders. The investment opportunities of the Accounts could conceivably be limited by adhering to the above diversification requirements. This would affect all Contractholders, including those owners of contracts for whom diversification is not a requirement for tax-deferred treatment. STATE REGULATION The Company is subject to the laws of the State of Iowa governing insurance companies and to regulation by the Insurance Department of the State of Iowa. An annual statement in a prescribed form must be filed by March 1 in each year covering the operations of the Company for the preceding year and its financial condition on December 31st of such year. Its books and assets are subject to review or examination by the Commissioner of Insurance of the State of Iowa or her representatives at all times, and a full examination of its operations is conducted periodically by the National Association of Insurance Commissioners. Iowa law and regulations also prescribe permissible investments, but this does not involve supervision of the investment management or policy of the Company. In addition, the Company is subject to the insurance laws and regulations of other states and jurisdictions in which it is licensed to operate. Generally, the insurance departments of these states and jurisdictions apply the laws of the state of domicile in determining the field of permissible investments. LEGAL OPINIONS Legal matters applicable to the issue and sale of the contracts, including the right of the Company to issue contracts under Iowa Insurance Law, have been passed upon by Karen E. Shaff, Senior Vice President and General Counsel of the Company. LEGAL PROCEEDINGS There are no legal proceedings pending to which Separate Account B is a party or which would materially affect Separate Account B. REGISTRATION STATEMENT This Prospectus omits some information contained in the Statement of Additional Information (or Part B of the Registration Statement) and Part C of the Registration Statement which the Company has filed with the Securities and Exchange Commission. The Statement of Additional Information is hereby incorporated by reference into this Prospectus. A copy of the Statement of Additional Information can be obtained upon request, free of charge, by writing or telephoning Princor Financial Services Corporation. You may obtain a copy of Part C of the Registration Statement filed with the Securities and Exchange Commission, Washington, D.C. from the Commission upon payment of the prescribed fees. INDEPENDENT AUDITORS The financial statements of Principal Life Insurance Company Separate Account B and the consolidated financial statements of Principal Life Insurance Company which are included in the Statement of Additional Information have been audited by Ernst & Young LLP, independent auditors, for the periods indicated in their reports thereon which appear in the Statement of Additional Information. CONTRACTHOLDERS' INQUIRIES Contractholders' inquiries should be directed to Princor Financial Services Corporation, a company of the Principal Financial Group, Des Moines, Iowa 50392-0200, (515) 247-5711. TABLE OF CONTENTS OF THE STATEMENT OF ADDITIONAL INFORMATION The table of contents for the Statement of Additional Information is provided below. TABLE OF CONTENTS Page Independent Auditors................................................ 4 Underwriting Commissions............................................ 4 Calculation of Yield and Total Return............................... 4 Principal Life Insurance Company Separate Account B Report of Independent Auditors............................. 7 Financial Statements....................................... 8 Principal Life Insurance Company Report of Independent Auditors............................. 31 Consolidated Financial Statements.......................... 32 To obtain a copy of the Statement of Additional Information, free of charge, write or telephone: Princor Financial Services Corporation a company of the Principal Financial Group Des Moines, IA 50392-0200 Telephone: 1-800-633-1373 PART B PRINCIPAL LIFE INSURANCE COMPANY SEPARATE ACCOUNT B PREMIER VARIABLE (A GROUP VARIABLE ANNUITY CONTRACT FOR EMPLOYER- SPONSORED QUALIFIED AND NON-QUALIFIED RETIREMENT PLANS) Statement of Additional Information dated May 1, 2000 This Statement of Additional Information provides information about Principal Life Insurance Company Separate Account B Premier Variable - Group Variable Annuity Contracts (the "Contract" or the "Contracts") in addition to the information that is contained in the Contract's Prospectus, dated May 1, 2000. This Statement of Additional Information is not a prospectus. It should be read in conjunction with the Prospectus, a copy of which can be obtained free of charge by writing or telephoning: Princor Financial Services Corporation a company of the Principal Financial Group Des Moines, Iowa 50392-0200 Telephone: 1-800-633-1373 TABLE OF CONTENTS Page Independent Auditors ..................................................... 4 Underwriting Commissions.................................................. 4 Calculation of Yield and Total Return..................................... 4 Principal Life Insurance Company Separate Account B Report of Independent Auditors................................... 7 Financial Statements............................................. 8 Principal Life Insurance Company Report of Independent Auditors................................... 31 Consolidated Financial Statements................................ 32 INDEPENDENT AUDITORS Ernst & Young LLP, Des Moines, Iowa, serve as independent auditors for Principal Life Insurance Company Separate Account B and Principal Life Insurance Company and perform audit and accounting services for Separate Account B and Principal Life Insurance Company. UNDERWRITING COMMISSIONS Aggregate dollar amount of underwriting commissions paid to and retained by Princor Financial Services Corporation for all Separate Account B contracts: Year Paid To Retained by 1999 $12,331,736.46 -- 1998 $13,709,101.12 -- 1997 $11,491,356.06 $340.24 1996 $11,090,837.12 $14,528.47 1995 $5,326,848.77 $26,014.78 CALCULATION OF YIELD AND TOTAL RETURN The Separate Account may publish advertisements containing information (including graphs, charts, tables and examples) about the performance of one or more of its Divisions. The contract was not offered prior to July 15, 1992. However, the Divisions invest in Accounts of the Principal Variable Contract Fund, Inc. These Accounts correspond to open-end investment companies ("mutual funds") which, effective January 1, 1998, were reorganized into the Accounts of the Principal Variable Contracts Fund, Inc. as follows: Old Mutual Fund Name New Corresponding Account Name Principal Balanced Fund, Inc. Balanced Account Principal Bond Fund, Inc. Bond Account Principal Capital Accumulation Fund, Inc. Capital Value Account Principal Emerging Growth Fund, Inc. MidCap Account Principal Government Securities Fund, Inc. Government Securities Account Principal Growth Fund, Inc. Growth Account Principal Money Market Fund, Inc. Money Market Account Principal World Fund, Inc. International Account Some of the Accounts (under their former names) were offered prior to the date that the Contract was available. Thus, the Separate Account may publish advertisements containing information about the hypothetical performance of one or more of its Divisions for this contract had the contract been issued on or after the date the Account in which such Division invests was first offered. The hypothetical performance from the date of inception of the Account in which the Division invests is derived by reducing the actual performance of the underlying Account by the fees and charges of the Contract as if it had been in existence. The yield and total return figures described below will vary depending upon market conditions, the composition of the underlying Account's portfolios and operating expenses. These factors and possible differences in the methods used in calculating yield and total return should be considered when comparing the Separate Account performance figures to performance figures published for other investment vehicles. The Separate Account may also quote rankings, yields or returns as published by independent statistical services or publishers and information regarding performance of certain market indices. Any performance data quoted for the Separate Account represents only historical performance and is not intended to indicate future performance. From time to time the Account advertises its Money Market Division's "yield" and "effective yield" for these contracts. Both yield figures are based on historical earnings and are not intended to indicate future performance. The "yield" of the Division refers to the income generated by an investment under the contract in the Division over a seven-day period (which period will be stated in the advertisement). This income is then "annualized." That is, the amount of income generated by the investment during that week is assumed to be generated each week over a 52-week period and is shown as a percentage of the investment. The "effective yield" is calculated similarly but, when annualized, the income earned by an investment in the division is assumed to be reinvested. The "effective yield" will be slightly higher than the "yield" because of the compounding effect of this assumed reinvestment. Neither yield quotation reflects sales load deducted from purchase payments which, if included, would reduce the "yield" and "effective yield." For the period ended December 31, 1999, the 7-day annualized and effective yields were 5.05% and 5.18%, respectively. From time to time, the Separate Account will advertise the average annual total return of its various divisions for these contracts. The average annual total return for any of the divisions is computed by calculating the average annual compounded rate of return over the stated period that would equate an initial $1,000 investment to the ending redeemable contract value. Assuming the contract had been offered as of the periods indicated in the table below, the hypothetical average annual total returns for the periods ending December 31, 1999 are: One Year Five Year Ten Year Balanced Division 1.97% 13.31% 10.98% Bond Division -3.00% 7.30% 7.38% Capital Value Division -4.69% 17.42% 12.53% Government Securities Division -0.70% 7.54% 7.36% Growth Division 15.95% 19.98% 18.49%(1) International Division 25.40% 16.83% 13.98%(1) MidCap Division 12.57% 17.13% 14.94% Money Market Division 4.41% 4.78% 4.64% (1) Period from May 2, 1994 - December 31, 1999 Report of Independent Auditors Board of Directors and Participants Principal Life Insurance Company We have audited the accompanying individual and combined statements of net assets of Principal Life Insurance Company Separate Account B (comprised of the Aggressive Growth, AIM V.I. Growth, AIM V.I. Growth and Income, AIM V.I. Value, American Century VP Growth & Income, Asset Allocation, Balanced, Blue Chip, Bond, Capital Value, Fidelity VIP II Contrafund, Fidelity VIP Growth, Government Securities, Growth, International, International SmallCap, LargeCap Growth, MicroCap, MidCap, MidCap Growth, MidCap Value, Money Market, Real Estate, SmallCap, Small Cap Growth, SmallCap Value, Stock Index 500, Templeton VP Stock, and Utilities Divisions) as of December 31, 1999, and the related statements of operations for the year then ended, and changes in net assets for each of the two years in the period then ended, except for those divisions operating for portions of such periods as disclosed in the financial statements. These financial statements are the responsibility of the management of Principal Life Insurance Company. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned as of December 31, 1999, by correspondence with the transfer agents. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the individual and combined financial position of the respective divisions of Principal Life Insurance Company Separate Account B at December 31, 1999, and the individual and combined results of their operations and the changes in their net assets for the periods described above, in conformity with accounting principles generally accepted in the United States. Des Moines, Iowa January 31, 2000 Principal Life Insurance Company Separate Account B Statements of Net Assets December 31, 1999
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
Principal Life Insurance Company Separate Account B Statements of Net Assets (continued) December 31, 1999
Units Unit Value 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 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
Principal Life Insurance Company Separate Account B Statements of Operations Year ended December 31, 1999
AIM V.I. Aggressive AIM V.I. Growth and Growth Growth Income Combined Division Division (2) Division (2) 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 (1) Commenced operations April 30, 1999. (2) Commenced operations July 30, 1999.
See accompanying notes.
American Century VP AIM V.I. Growth & Asset Value Income Allocation Balanced Blue Chip Division (2) Division (1) Division Division Division (1) Bond Division $ 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)
Principal Life Insurance Company Separate Account B Statements of Operations (continued) Year ended December 31, 1999
Fidelity VIP II Fidelity VIP Government Capital Value Contrafund Growth Securities Division Division (2) Division (2) Division 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) (1) Commenced operations April 30, 1999. (2) Commenced operations July 30, 1999.
See accompanying notes.
International LargeCap Growth International SmallCap Growth MicroCap MidCap Division Division Division Division(1) Division Division $ 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
Principal Life Insurance Company Separate Account B Statements of Operations (continued) Year ended December 31, 1999
MidCap MidCap Money Growth Value Market Real Estate Division Division (1) Division Division 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) (1) Commenced operations April 30, 1999.
See accompanying notes.
SmallCap Stock Templeton SmallCap Growth SmallCap Index 500 VP Stock Utilities Division Division Value Division Division (1) Division (1) Division $ 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
Principal Life Insurance Company Separate Account B Statements of Changes in Net Assets Years ended December 31, 1999 and 1998
AIM V.I. Aggrewssive AIM V.I. Growth and Growth Growth Income Combined Division Division (3) Division (3) 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 (1) Commenced operations May 1, 1998. (2) Commenced operations April 30, 1999. (3) Commenced operations July 30, 1999.
See accompanying notes.
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 $ - $ - $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
Principal Life Insurance Company Separate Account B Statements of Changes in Net Assets (continued) Years ended December 31, 1999 and 1998
Fidelity VIP II Fidelity VIP Government Contrafund Growth Securities Growth Division (3) Division (3) Division Division 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 (1) Commenced operations May 1, 1998. (2) Commenced operations April 30, 1999. (3) Commenced operations July 30, 1999.
See accompanying notes.
International LargeCap International SmallCap Growth MicroCap MidCap Division Division (1) Division (2) Division (1) Division $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
Principal Life Insurance Company Separate Account B Statements of Changes in Net Assets (continued) Years ended December 31, 1999 and 1998
MidCap MidCap Money Growth Value Market Real Estate Division (1) Division (2) Division Division (1) 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 (1) Commenced operations May 1, 1998. (2) Commenced operations April 30, 1999. (3) Commenced operations July 30, 1999.
See accompanying notes.
SmallCap SmallCap Stock Templeton SmallCap Growth Value Index 500 VP Stock Utilities Division (1) Division (1) Division (1) Division (2) Division (2) Division (1) $ - $ - $ - $ - $ - $ - (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
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: 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) (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.
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. 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. 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. 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:
Year ended December 31, 1999 Units Amount Units Amount Purchased Purchased Redeemed Redeemed 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
Principal Life Insurance Company Separate Account B Notes to Financial Statements (continued) 4. Purchases and Sales of Investment Securities (continued) Year ended December 31, 1999
Units Amount Units Amount Purchased Purchased Redeemed Redeemed 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
Principal Life Insurance Company Separate Account B Notes to Financial Statements (continued) 4. Purchases and Sales of Investment Securities (continued) Year ended December 31, 1999
Units Amount Units Amount Purchased Purchased Redeemed Redeemed 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
Principal Life Insurance Company Separate Account B Notes to Financial Statements (continued) 4. Purchases and Sales of Investment Securities (continued) Year ended December 31, 1998
Units Amount Units Amount Purchased Purchased Redeemed Redeemed 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
Principal Life Insurance Company Separate Account B Notes to Financial Statements (continued) 4. Purchases and Sales of Investment Securities (continued) Year ended December 31, 1998
Units Amount Units Amount Purchased Purchased Redeemed Redeemed 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
Principal Life Insurance Company Separate Account B Notes to Financial Statements (continued) 4. Purchases and Sales of Investment Securities (continued) Purchases include reinvested dividends and capital gains. Mortality adjustments are included in purchases and redemptions, as applicable. Money Market purchases include transactions where investment allocations are not known at the time of the deposit. Redemptions reflect subsequent allocations to directed investment divisions. 5. Year 2000 Issues (Unaudited) As of January 31, 2000, virtually all of the major technology systems, processes and infrastructure, including those which rely on third party vendors used by Principal Life and other service providers of Separate Account B appear to be operating smoothly following the rollover to the Year 2000. Principal Life has experienced no significant interruptions to normal business operations, including the processing of customer account data and transactions. Principal Life will continue its Year 2000 vigilance into early 2001. Based on the performance of its major technology systems to date, ongoing plans to deal with external relationships, and contingency plans, Principal Life believes that in the worst case scenario it will experience, at most, isolated and insignificant disruptions of business processes as a result of Year 2000 issues. Such disruptions are not expected to have a material effect on Separate Account B's future results of operations, liquidity, or financial condition. Principal Life Insurance Company Consolidated Statements of Operations
Year ended December 31 1999 1998 1997 ------------------------------------------ (In Millions) 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 ==========================================
See accompanying notes. Principal Life Insurance Company Consolidated Statements of Financial Position
December 31 1999 1998 --------------------------- --------------------------- (In Millions) 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 ===========================
See accompanying notes. Principal Life Insurance Company Consolidated Statements of Stockholder's Equity
Net Unrealized Gains (Losses) on Net Foreign Available-for-Sale Currency Total Common Retained Securities Translation Stockholder's Stock Earnings Adjustment Equity ------------------------------------------------------------------------------- (In Millions) 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
Principal Life Insurance Company Consolidated Statements of Stockholder's Equity (continued)
Net Unrealized Gains (Losses) on Net Foreign Available-for-Sale Currency Total Common Retained Securities Translation Stockholder's Stock Earnings Adjustment Equity ------------------------------------------------------------------------------- (In Millions) 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 ===============================================================================
See accompanying notes. Principal Life Insurance Company Consolidated Statements of Cash Flows
Year ended December 31 1999 1998 1997 --------------------------------------- (In Millions) 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)
Principal Life Insurance Company Consolidated Statements of Cash Flows (continued)
Year ended December 31 1999 1998 1997 --------------------------------------- (In Millions) 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.
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):
Year ended December 31 1999 1998 1997 ------------------------------------------ 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 ==========================================
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):
December 31 1999 1998 ----------------------------- Goodwill $176 $185 Other intangibles 21 16 ----------------------------- 197 201 Accumulated amortization (45) (40) ============================= Total goodwill and other intangibles, net $152 $161 =============================
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):
December 31 1999 1998 1997 ------------------------------------------ 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 ==========================================
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):
Gross Gross Unrealized Unrealized Fair Cost Gains Losses Value --------------------------------------------------------------- --------------------------------------------------------------- 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 ===============================================================
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):
Cost Fair Value ------------------------------ ------------------------------ 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 ==============================
The above summarized activity is based on expected maturities. Actual maturities may differ because borrowers may have the right to call or pre-pay obligations. Major categories of net investment income are summarized as follows (in millions):
Year ended December 31 1999 1998 1997 ------------------------------------------ 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 ==========================================
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):
Year ended December 31 1999 1998 1997 ------------------------------------------- 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 ===========================================
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)
December 31 1999 1998 ----------------------------- 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 =============================
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:
Geographic Distribution Property Type Distribution - ------------------------------------------------------ -------------------------------------------------- December 31 December 31 1999 1998 1999 1998 ----------------------- ----------------------- ----------------------- ----------------------- 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)
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):
December 31 1999 1998 1997 ------------------------------------ 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 ====================================
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):
December 31 1999 1998 ----------------------------- 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 =============================
For the six-month For the year ended period from formation December 31, 1999 to December 31, 1998 ---------------------------------------------- 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 ==============================================
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):
December 31 1999 1998 1997 ------------------------------------------ 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 ==========================================
7. Insurance Liabilities Major components of contractholder funds in the consolidated statements of financial position, are summarized as follows (in millions):
December 31 1999 1998 ----------------------------- 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 =============================
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):
December 31 1999 1998 1997 ------------------------------------------ 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 ==========================================
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):
December 31 1999 1998 ------------------------------ 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 ==============================
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):
Year ended December 31 1999 1998 1997 ------------------------------------------ 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 ==========================================
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:
Year ended December 31 1999 1998 1997 ------------------------------------------ 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% ==========================================
Significant components of the Company's net deferred income taxes are as follows (in millions):
December 31 1999 1998 ----------------------------- 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) =============================
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):
Other Postretirement Pension Benefits Benefits ---------------------------------- ------------------------------ December 31 December 31 1999 1998 1997 1999 1998 1997 ---------- ----------- ----------- --------- ---------- --------- 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%
Principal Life Insurance Company Notes to Consolidated Financial Statements (continued) 10. Employee and Agent Benefits (continued)
Other Postretirement Pension Benefits Benefits ---------------------------------- ------------------------------ December 31 December 31 1999 1998 1997 1999 1998 1997 ---------- ----------- ----------- --------- ---------- --------- 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 ========== =========== =========== ========= ========== =========
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):
1-Percentage-Point 1-Percentage-Point Increase Decrease ---------------------- --------------------- Effect on total of service and interest cost components $ 8 $ (6) Effect on accumulated postretirement benefit obligation 41 (33)
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):
Held for Sale Held for Total Rental Investment Commitments --------------------------------------------------- 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 ===================================================
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) 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 ===========
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):
1999 1998 --------------------------- ---------------------------- Carrying Fair Carrying Fair Amount Value Amount Value --------------------------- ---------------------------- Assets (liabilities) Fixed maturities (see Note 3) $21,660 $21,660 $21,006 $21,006 Equity securities (see Note 3) 864 864 1,102 1,102 Mortgage loans 12,296 12,155 12,091 12,711 Policy loans 28 28 25 25 Other investments 465 465 198 198 Cash and cash equivalents 362 362 461 461 Accrued investment income 408 408 375 375 Mortgage servicing rights 1,081 1,288 778 821 Financial instruments included in Closed Block (see Note 5) 3,658 3,649 3,587 3,652 Investment-type insurance contracts (23,563) (23,068) (22,127) (21,606) Short-term debt - - (200) (200) Long-term debt 834 790 (671) (708)
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):
Stockholder's Net Assets Equity Income ------------------------------------------ ------------------------------------------ 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 ==========================================
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):
Year ended December 31 1999 1998 1997 ------------------------------------------ Domestic (United States) $7,252 $7,449 $8,547 Non-domestic 272 237 115 ------------------------------------------ Total revenues $7,524 $7,686 $8,662 ==========================================
Total assets by geographic region are as follows (in millions):
December 31 1999 1998 ----------------------------- Domestic (United States) $77,856 $72,704 Non-domestic 1,454 1,239 ============================= Total assets $79,310 $73,943 =============================
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. Principal Life Insurance Company Notes to Consolidated Financial Statements (continued) 15. Year 2000 (Unaudited) (continued) Based on the performance of its major technology systems to date, ongoing plans to deal with external relationships and contingency plans, the Company believes that in the worst case scenario it will experience, at most, isolated and insignificant disruptions of business processes as a result of Year 2000 issues. Such disruptions are not expected to have a material effect on the Company's future results of operations, liquidity or financial condition. Report of Independent Auditors The Board of Directors Principal Life Insurance Company We have audited the accompanying consolidated statements of financial position of Principal Life Insurance Company (the Company, an indirect wholly-owned subsidiary of Principal Mutual Holding Company) as of December 31, 1999 and 1998, and the related consolidated statements of operations, stockholder's equity and cash flows for each of the three years in the period ended December 31, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Principal Life Insurance Company at December 31, 1999 and 1998, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States. /s/Ernst & Young LLP Des Moines, Iowa January 31, 2000 PART C PREMIER VARIABLE CONTRACT OTHER INFORMATION Item 24. Financial Statements and Exhibits (a) Financial Statements included in the Registration Statement (1) Part A: Condensed Financial Information for the seven years ended December 31, 1999 and for the period beginning July 15, 1992 and ended December 31, 1992. (2) Part B: Principal Life Insurance Company Separate Account B: Report of Independent Auditors. Statement of Net Assets, December 31, 1999. Statement of Operations for the year ended December 31, 1999. Statements of Changes in Net Assets for the years ended December 31, 1999 and 1998. Notes to Financial Statements. Principal Life Insurance Company: Report of Independent Auditors. Consolidated Statements of Operations for the years ended December 31, 1999, 1998 and 1997. Consolidated Statements of Financial Position, December 31, 1999 and 1998. Consolidated Statements of Stockholder's Equity for the years ended December 31, 1999, 1998 and 1997. Consolidated Statements of Cash Flows for the years ended December 31, 1999, 1998 and 1997. Notes to Consolidated Financial Statements. (b) Exhibits (1) Board resolution of Registrant (Filed 3/1/96) (3a) Distribution Agreement (Filed 3/1/96) (3b) Selling Agreement (Filed 3/1/96) (4a) Form of Variable Annuity Contract (Filed 12/16/97) (4b) Variable Annuity Contract Endorsement (Filed 12/16/97) (4c) Variable Annuity Contract Rider (Filed 12/16/97) (5) Form of Variable Annuity Application (Filed 10/23/97) (6a) Articles of Incorporation of Depositor (Filed 3/1/96) (6b) Bylaws of Depositor (Filed 3/1/96) (9) Opinion of Counsel (Filed 3/1/96) (10a) Consent of Ernst & Young LLP (10b) Powers of Attorney (Filed 2/28/00) (13a) Total Return Calculation (Filed 3/1/96) (13b) Annualized Yield for Separate Account B (Filed 3/1/96) Item 25. Officers and Directors of the Depositor Principal Life Insurance Company is managed by a Board of Directors which is elected by its policyowners. The directors and executive officers of the Company, their positions with the Company, including Board Committee memberships, and their principal business address, are as follows: DIRECTORS: Principal Name, Positions and Offices Business Address BETSY J. BERNARD U.S. West Director 1801 California Street Member, Nominating Committee 52nd Floor Denver, CO 80202 JOCELYN CARTER-MILLER Motorola, Inc. Director 1000 Corporate Drive Member, Audit Committee Suite 700 Ft. Lauderdale, FL 33334 DAVID J. DRURY The Principal Financial Group Director Des Moines, IA 50392 Chairman of the Board Chair, Executive Committee C. DANIEL GELATT, JR. NMT Corporation Director 2004 Kramer Street Member, Executive Committee La Crosse, WI 54603 Chair, Human Resources Committee J. BARRY GRISWELL The Principal Financial Group Director, President Des Moines, IA 50392 and Chief Executive Officer G. DAVID HURD The Principal Financial Group Director Des Moines, IA 50392 Member, Executive and Nominating Committees CHARLES S. JOHNSON Pioneer Hi-Bred International, Inc. Director 400 Locust, Ste. 700 Capital Square Member, Audit Committee Des Moines, IA 50309 WILLIAM T. KERR Meredith Corporation Director 1716 Locust St. Member, Executive Committee Des Moines, IA 50309-3023 and Chair, Nominating Committee LEE LIU IES Industries Inc. Director Post Office Box 351 Member, Executive and Cedar Rapids, IA 52406 Human Resources Committees VICTOR. H. LOEWENSTEIN Egon Zehnder International Director 350 Park Avenue - 8th Floor Member, Nominating New York, NY 10022 Committee RONALD D. PEARSON Hy-Vee, Inc. Director 5820 Westown Parkway Member, Human Resources West Des Moines, IA 50266 Committee Federico F. Pena Vestar Capital Partners Member, Audit 1225 17th Street, Ste 1660 Committee Denver, CO 80202 JOHN R. PRICE The Chase Manhattan Corporation Director 270 Park Avenue - 44th Floor Member, Nominating Committee New York, NY 10017 DONALD M. STEWART The College Board Director 45 Columbus Avenue Member, Human Resources New York, NY 10023-6992 Committee ELIZABETH E. TALLETT Dioscor, Inc. Director 48 Federal Twist Road Chair, Audit Committee Stockton, NJ 08559 FRED W. WEITZ Essex Meadows, Inc. Director 800 Second Avenue, Suite 150 Member, Human Resources Des Moines, IA 50309 Committee Executive Officers (Other than Directors): JOHN E. ASCHENBRENNER Executive Vice President PAUL S. BOGNANNO Senior Vice President GARY M. CAIN Senior Vice President C. ROBERT DUNCAN Senior Vice President DENNIS P. FRANCIS Senior Vice President MICHAEL H.GERSIE Executive Vice President and Chief Financial Officer THOMAS J. GRAF Senior Vice President ROBB B. HILL Senior Vice President DANIEL J. HOUSTON Senior Vice President ELLEN Z. LAMALE Senior Vice President and Chief Actuary MARY A. O'KEEFE Senior Vice President RICHARD L. PREY Senior Vice President KAREN E. SHAFF Senior Vice President and General Counsel ROBERT A. SLEPICKA Senior Vice President NORMAN R. SORENSEN Senior Vice President CARL C. WILLIAMS Senior Vice President and Chief Information Officer LARRY D. ZIMPLEMAN Senior Vice President Item 26. Persons Controlled by or Under Common Control with Depositor Principal Financial Services, Inc. (an Iowa corporation) an intermediate holding company organized pursuant to Section 512A.14 of the Iowa Code. Subsidiaries wholly-owned by Principal Financial Services, Inc. a. Principal Life Insurance Company (an Iowa corporation) a life group, pension and individual insurance company. b. Princor Financial Services Corporation (an Iowa Corporation) a registered broker-dealer. c. PFG Do Brasil LTDA (Brazil) a Brazilian holding company. d. Principal Financial Services (Australia), Inc. (an Iowa holding company) formed to facilitate the acquisition of the Australian business of BT Australia. e. Principal Financial Services (NZ), Inc. (an Iowa holding company) formed to facilitate the acquisition of the New Zealand business of BT Australia. f. Principal Capital Management (Singapore) Limited (a Singapore asset management company). g. Principal Capital Management (Europe) Limited a fund management company. h. Principal Capital Management (Ireland) Limited a fund management company. i. Principal Financial Group Investments (Australia) Pty Limited. Subsidiary wholly-owned by Princor Financial Services Corporation: a. Principal Management Corporation (an Iowa Corporation) a registered investment advisor. Subsidiary wholly-owned by PFG Do Brasil LTDA a. Brasilprev Previdencia Privada S.A.(Brazil) a pension administration company. Subsidiary wholly-owned by Principal Financial Services (Australia), Inc.: a. Principal Financial Group (Australia) Holdings Pty Ltd. an Australian holding company organized in connection with the contemplated acquisition of BT Australia Funds Management. Subsidiary wholly-owned by Principal Financial Group (Australia) Holdings Pty Ltd: a. Principal Financial Group (Australia) Pty Ltd. an Australia holding company organized on connection the contemplated acquisition of BT Australia Funds Management. Subsidiary wholly-owned by Principal Financial Group (Australia) Pty Ltd: a. BT International (Australia) Limited (an Australian holding company). Subsidiary wholly-owned by BT Investment (Australia) Limited: a. Bankers Trust Australia Limited (an Australian holding company). Subsidiary wholly-owned by Bankers Trust Australia Limited: a. BT Financial Group Limited an asset management company. Subsidiaries wholly-owned by BT Financial Group Limited: a. BT Life Limited a commercial and investment linked life insurance company. b. BT Funds Management Limited (an Australian financial services company). c. BT Funds Management (International) Limited (an Australian financial services company). d. BT Securities Limited (an Australian financial services company). e. BT (Queensland) Pty Limited (an Australian financial services company). f. BT Portfolio Services Pty Limited (an Australian financial services company). g. BT Australia Corporate Services Pty Limited a holding company. h. Oniston Pty Ltd (an Australian financial services company). i. QV1 Pty Limited Subsidiaries wholly-owned by BT Portfolio Services Limited: a. BT Custodial Services Pty Ltd (an Australian financial services company). b. National Registry Services Pty Ltd. (an Australian financial services company). c. National Registry Services (WA) Pty Limited (an Australian financial services company). d. BT Finance & Investments Pty Ltd (an Australian financial services company). Subsidiaries organized and wholly-owned by BT Australia Corporate Services Pty Limited: a. BT Finance Pty Limited (an Australian financial services company). b. Chifley Services Pty Limited (an Australian financial services company). c. BT Nominees Pty Limited (an Australian financial services company). Subsidiary organized and wholly-owned by BT Funds Management Limited: a. BT Tactical Asset Management Limited (an Australian financial services company). Subsidiary organized and wholly-owned by Principal Financial Services (NZ), Inc. a. BT Financial Group (NZ) Limited (a New Zealand holding company). b. BT Hotel Group Pty Limited c. BT Custodians Limited a manager and trustee of various unit trusts. d. Dellarak Pty Limited a trustee company. Subsidiary organized and wholly-owned by BT Financial Group (NZ) Limited: a. BT Portfolio Service (NZ) Limited (a New Zealand financial services company). b. BT New Zealand Nominees Limited (a New Zealand financial services company). c. BT Funds Management (NZ) Limited (a New Zealand financial services company). Subsidiary organized and wholly-owned by Principal Financial Group Investments (Australia) Pty Limited: a. Principal Hotels Holdings Pty Ltd. a holding company. Subsidiary organized and wholly-owned by Principal Hotels Holdings Pty Ltd.: a. Principal Hotels Australia Pty Ltd. a holding company. Subsidiary organized and wholly-owned by Principal Hotels Australia Pty Ltd.: a. BT Hotel Limited Principal Life Insurance Company sponsored the organization of the following mutual funds, some of which it controls by virtue of owning voting securities: Principal Balanced Fund, Inc.(a Maryland Corporation) 0.15% of shares outstanding owned by Principal Life Insurance Company (including subsidiaries and affiliates) on January 31, 2000. Principal Blue Chip Fund, Inc.(a Maryland Corporation) 0.80% of shares outstanding owned by Principal Life Insurance Company (including subsidiaries and affiliates) on January 31, 2000. Principal Bond Fund, Inc.(a Maryland Corporation) 0.67% of shares outstanding owned by Principal Life Insurance Company (including subsidiaries and affiliates) on January 31, 2000. Principal Capital Value Fund, Inc. (a Maryland Corporation) 24.72% of outstanding shares owned by Principal Life Insurance Company (including subsidiaries and affiliates)on January 31, 2000. Principal Cash Management Fund, Inc. (a Maryland Corporation) 5.73% of outstanding shares owned by Principal Life Insurance Company (including subsidiaries and affiliates) on January 31, 2000. Principal Government Securities Income Fund, Inc. (a Maryland Corporation) 0.03% of shares outstanding owned by Principal Life Insurance Company (including subsidiaries and affiliates) on January 31, 2000. Principal Growth Fund, Inc. (a Maryland Corporation) 0.37% of outstanding shares owned by Principal Life Insurance Company (including subsidiaries and affiliates) on January 31, 2000. Principal High Yield Fund, Inc. (a Maryland Corporation) 7.80% of shares outstanding owned by Principal Life Insurance Company (including subsidiaries and affiliates) on January 31, 2000. Principal International Emerging Markets Fund, Inc. (a Maryland Corporation) 34.31% of shares outstanding owned by Principal Life Insurance Company (including subsidiaries and affiliates) on January 31, 2000. Principal International Fund, Inc. (a Maryland Corporation) 24.74% of shares outstanding owned by Principal Life Insurance Company (including subsidiaries and affiliates) on January 31, 2000. Principal International SmallCap Fund, Inc. (a Maryland Corporation) 31.00% of shares outstanding owned by Principal Life Insurance Company (including subsidiaries and affiliates) on January 31, 2000. Principal Limited Term Bond Fund, Inc. (a Maryland Corporation) 21.85% of shares outstanding owned by Principal Life Insurance Company (including subsidiaries and affiliates) on January 31, 2000. Principal LargeCap Stock Index Fund, Inc. (a Maryland Corporation) 100.00% of shares outstanding owned by Principal Life Insurance Company (including subsidiaries and affiliates) on February 24, 2000. Principal MidCap Fund, Inc. (a Maryland Corporation) 0.79% of shares outstanding owned by Principal Life Insurance Company (including subsidiaries and affiliates) on January 31, 2000 Principal Partners Aggressive Growth Fund, Inc.(a Maryland Corporation) 12.91% of shares outstanding owned by Principal Life Insurance Company (including subsidiaries and affiliates) on January 31, 2000 Principal Partners LargeCap Growth Fund, Inc.(a Maryland Corporation) 100.00% of shares outstanding owned by Principal Life Insurance Company (including subsidiaries and affiliates) on February 24, 2000 Principal Partners MidCap Growth Fund, Inc.(a Maryland Corporation) 100.00% of shares outstanding owned by Principal Life Insurance Company (including subsidiaries and affiliates) on February 24, 2000 Principal Real Estate Fund, Inc. (a Maryland Corporation) 62.40% of shares outstanding owned by Principal Life Insurance Company (including subsidiaries and affiliates) on January 31, 2000 Principal SmallCap Fund, Inc.(a Maryland Corporation) 13.73% of shares outstanding owned by Principal Life Insurance Company (including subsidiaries and affiliates) on January 31, 2000. Principal Special Markets Fund, Inc. (a Maryland Corporation) 83.47% of shares outstanding of the International Emerging Markets Portfolio, 43.49% of the shares outstanding of the International Securities Portfolio, 98.66% of shares outstanding of the International SmallCap Portfolio and 100% of the shares outstanding of the Mortgage-Backed Securities Portfolio were owned by Principal Life Insurance Company (including subsidiaries and affiliates) on January 31, 2000 Principal Tax-Exempt Bond Fund, Inc. (a Maryland Corporation) 0.05% of shares outstanding owned by Principal Life Insurance Company (including subsidiaries and affiliates) on January 31, 2000. Principal Utilities Fund, Inc. (a Maryland Corporation) 0.27% of shares outstanding owned by Principal Life Insurance Company (including subsidiaries and affiliates) on January 31, 2000. Principal Variable Contracts Fund, Inc. (a Maryland Corporation) 100% of shares outstanding of the following Accounts owned by Principal Life Insurance Company and its Separate Accounts on January 31, 2000: Aggressive Growth, Asset Allocation, Balanced, Blue Chip, Bond, Capital Value, Government Securities, Growth, High Yield, International, International SmallCap, LargeCap Growth, MicroCap, MidCap, MidCap Growth, MidCap Value, Money Market, Real Estate, SmallCap, SmallCap Growth, SmallCap Value Stock Index 500, and Utilities. Subsidiaries organized and wholly-owned by Principal Life Insurance Company: a. Principal Holding Company (an Iowa Corporation) a holding company wholly-owned by Principal Life Insurance Company. b. PT Asuransi Jiwa Principal Indonesia (an Indonesia Corporation) a life insuranced corporation which offers group and individual products. c. Principal Development Investors, LLC (a Delaware Corporation) a limited liability company engaged in acquiring and improving real property through development and redevelopment. d. Principal Capital Management, LLC (a Delaware Corporation) a limited liability company that provides investment management services. e. Principal Net Lease Investors, LLC (a Delaware Corporation) a limited liability company which operates as a buyer and seller of net leased investments. Subsidiaries wholly-owned by Principal Capital Management, LLC: a. Principal Structured Investments, LLC (a Delaware Corporation) a limited liability company that provides product development administration, marketing and asset management services associated with stable value products together with other related institutional financial services including derivatives, asset-liability management, fixed income investment management and ancillary money management products. b. Principal Enterprise Capital, LLC (a Delaware Corporation) a company engaged in the operation of nonresidential buildings. c. Principal Commercial Acceptance, LLC (a Delaware Corporation) a limited liability company involved in purchasing, managing and selling commercial real estate assets in the secondary market. d. Principal Real Estate Investors, LLC (a Delaware Corporation) a registered investment advisor. e. Principal Commercial Funding, LLC (a Delaware Corporation) a correspondent lender and service provider for loans. f. Principal Real Estate Services, LLC (a Delaware Corporation) a limited liability company which acts as a property manager and real estate service provider. Subsidiaries wholly-owned by Principal Holding Company: a. Principal Bank (a Federal Corporation) a Federally chartered direct delivery savings bank. b. Patrician Associates, Inc. (a California Corporation) a real estate development company. c. Petula Associates, Ltd. (an Iowa Corporation) a real estate development company. d. Principal Development Associates, Inc. (a California Corporation) a real estate development company. e. Principal Spectrum Associates, Inc. (a California Corporation) a real estate development company. f. Principal FC, Ltd. (an Iowa Corporation) a limited purpose investment corporation. g. Equity FC, Ltd. (an Iowa Corporation) engaged in investment transactions including limited partnership and limited liability companies. h. HealthRisk Resource Group, Inc. (an Iowa Corporation) a management services organization. i. Invista Capital Management, LLC (an Iowa Corporation) a registered investment adviser. j. Principal Residential Mortgage, Inc. (an Iowa Corporation) a residential mortgage loan broker. k. Principal Asset Markets, Inc. (an Iowa Corporation) a residential mortgage loan broker. l. Principal Portfolio Services, Inc. (an Iowa Corporation) a mortgage due diligence company. m. The Admar Group, Inc. (a Florida Corporation) a national managed care service organization that develops and manages preferred provider organizations. n. The Principal Financial Group, Inc. (a Delaware corporation) a general business corporation established in connection with the new corporate identity. It is not currently active. o. Principal Product Network, Inc. (a Delaware corporation) an insurance broker. p. Principal Health Care, Inc. (an Iowa Corporation) a developer and administrator of managed care systems. q. Dental-Net, Inc. (an Arizona Corporation) holding company of Employers Dental Services; a managed dental care services organization. HMO and dental group practice. r. Principal Financial Advisors, Inc. (an Iowa Corporation) a registered investment advisor. s. Delaware Charter Guarantee & Trust Company, d/b/a Trustar Retirement Services (a Delaware Corporation) a nondepository trust company. t. Professional Pensions, Inc. (a Connecticut Corporation) a corporation engaged in sales, marketing and administration of group insurance plans and serves as a record keeper and third party administrator for various clients' defined contribution plans. u. Principal Investors Corporation (a New Jersey Corporation) a registered broker-dealer with the Securities Exchange Commission. It is not currently active. v. Principal International, Inc. (an Iowa Corporation) a company formed for the purpose of international business development. Subsidiaries organized and wholly-owned by PT Asuransi Jiwa Principal Indonesia: a. PT Jasa Principal Indonesia a defined benefit pension company. b. PT Principal Capital Management Indonesia a fund management company. Subsidiary wholly-owned by Invista Capital Management, LLC: a. Principal Capital - Invista Trust. (a Delaware Corporation) a business trust and private investment company offering non-registered units, initially, to tax-exempt entities. Subsidiary wholly-owned by Principal Residential Mortgage, Inc.: a. Principal Wholesale Mortgage, Inc. (an Iowa Corporation) a brokerage and servicer of residential mortgages. b. Principal Mortgage Reinsurance Company (a Vermont corporation) a mortgage reinsurance company. Subsidiaries wholly-owned by The Admar Group, Inc.: a. Admar Corporation (a California Corporation) a managed care services organization. Subsidiaries wholly-owned by Dental-Net, Inc. a. Employers Dental Services, Inc. (an Arizona corporation) a prepaid dental plan organization. Subsidiaries wholly-owned by Professional Pensions, Inc.: a. Benefit Fiduciary Corporation (a Rhode Island corporation) serves as a corporate trustee for retirement trusts. b. PPI Employee Benefits Corporation (a Connecticut corporation) a registered broker-dealer pursuant to Section 15(b) of the Securities Exchange Act an a member of the National Association of Securities Dealers (NASD), limited to the sale of open-end mutual funds and variable insurance products. c. Boston Insurance Trust, Inc. (a Massachusetts corporation) authorized by charter to serve as a trustee in connection with multiple-employer group life insurance trusts or arrangements, and to generally participate in the administration of insurance trusts. Subsidiaries wholly-owned by Principal International, Inc.: a. Principal International Espana, S.A. de Seguros de Vida (a Spain Corporation) a life insurance company (individual group), annuities and pension. b. Zao Principal International (a Russia Corporation) inactive. c. Principal International Argentina, S.A. (an Argentina services corporation). d. Principal Asset Management Company (Asia) Ltd. (Hong Kong) a corporation which manages pension funds. e. Principal International Asia Limited (a Hong Kong Corporation) a corporation operating as a regional headquarters for Asia. f. Principal Insurance Company (Hong Kong) Limited (a Hong Kong Corporation) group life and group pension products. g. Principal Trust Company (Asia) Limited (an Asia trust company). h. Principal International de Chile, S.A. (a Chile Corporation) a holding company. i. Principal Mexico Compania de Seguros, S.A. de C.V. (a Mexico Corporation) a life insurance company (individual and group), personal accidents. j. Principal Pensiones, S.A. de C.V. (a Mexico Corporation) a single premium annuity. k. Principal Afore, S.A. de C.V. (a Mexico Corporation), a pension administration company. l. Principal Consulting (India) Private Limited (an India corporation) an India consulting company. Subsidiary wholly-owned by Principal International Espana, S.A. de Seguros de Vida: a. Princor International Espana Sociedad Anonima de Agencia de Seguros (a Spain Corporation) an insurance agency. Subsidiary wholly-owned by Principal International (Asia) Limited (Hong Kong): a. BT Funds Management (Asia) Limited (Hong Kong)(a Hong Kong Corporation) an asset management company. Subsidiaries wholly-owned by Principal International Argentina, S.A.: a. Principal Retiro Compania de Seguros de Retiro, S.A. (an Argentina Corporation) an individual annuity/employee benefit company. b. Principal Life Compania de Seguros, S.A. (an Argentina Corporation) a life insurance company. Subsidiary wholly-owned by Principal International de Chile, S.A.: a. Principal Compania de Seguros de Vida Chile S.A. (a Chile Corporation) life insurance and annuity company. Subsidiary wholly-owned by Principal Compania de Seguros de Vida Chile S.A.: a. Andueza & Principal Creditos Hipotecarios S.A. (a Chile Corporation) a residential mortgage company. Subsidiary wholly-owned by Principal Afore, S.A. de C.V.: a. Siefore Principal, S.A. de C.V. (a Mexico Corporation) an investment fund company. Item 27. Number of Contractowners - As of: March 31, 2000 (1) (2) (3) Number of Plan Number of Title of Class Participants Contractowners -------------- -------------- -------------- BFA Variable Annuity Contracts 76 8 Pension Builder Contracts 535 308 Personal Variable Contracts 5514 125 Premier Variable Contracts 21677 259 Flexible Variable Annuity Contract 40796 40796 Freedom Variable Annuity Contract 268 268 Item 28. Indemnification None Item 29. Principal Underwriters (a) Princor Financial Services Corporation, principal underwriter for Registrant, acts as principal underwriter for, Principal Balanced Fund, Inc., Principal Blue Chip Fund, Inc., Principal Bond Fund, Inc., Principal Capital Value Fund, Inc., Principal Cash Management Fund, Inc., Principal European Equity Fund, Inc., Principal Government Securities Income Fund, Inc., Principal Growth Fund, Inc., Principal High Yield Fund, Inc., Principal International Emerging Markets Fund, Inc., Principal International Fund, Inc., Principal International SmallCap Fund, Inc., Principal LargeCap Stock Index Fund, Inc., Principal Limited Term Bond Fund, Inc., Principal MidCap Fund, Inc., Principal Pacific Basin Fund, Inc., Principal Partners Aggressive Growth Fund, Inc., Principal Partners LargeCap Growth Fund, Inc., Principal Partners MidCap Growth Fund, Inc., Principal Real Estate Fund, Inc., Principal SmallCap Fund, Inc., Principal Special Markets Fund, Inc., Principal Tax-Exempt Bond Fund, Inc., Principal Utilities Fund, Inc., Principal Variable Contracts Fund, Inc. and for variable annuity contracts participating in Principal Life Insurance Company Separate Account B, a registered unit investment trust for retirement plans adopted by public school systems or certain tax-exempt organizations pursuant to Section 403(b) of the Internal Revenue Code, Section 457 retirement plans, Section 401(a) retirement plans, certain non- qualified deferred compensation plans and Individual Retirement Annuity Plans adopted pursuant to Section 408 of the Internal Revenue Code, and for variable life insurance contracts issued by Principal Life Insurance Company Variable Life Separate Account, a registered unit investment trust. (b) (1) (2) Positions and offices Name and principal with principal business address underwriter John E. Aschenbrenner Director The Principal Financial Group Des Moines, IA 50392 Robert W. Baehr Marketing Services The Principal Officer Financial Group Des Moines, IA 50392 Craig L. Bassett Treasurer The Principal Financial Group Des Moines, IA 50392 Michael J. Beer Executive Vice President The Principal Financial Group Des Moines, IA 50392 Jerald L. Bogart Insurance License Officer The Principal Financial Group Des Moines, IA 50392 David J. Drury Director The Principal Financial Group Des Moines, IA 50392 Ralph C. Eucher Director and President The Principal Financial Group Des Moines, IA 50392 Arthur S. Filean Vice President The Principal Financial Group Des Moines, IA 50392 Dennis P. Francis Director The Principal Financial Group Des Moines, IA 50392 Paul N. Germain Vice President- The Principal Mutual Fund Operations Financial Group Des Moines, IA 50392 Ernest H. Gillum Vice President- The Principal Compliance and Product Financial Group Development Des Moines, IA 50392 Thomas J. Graf Director The Principal Financial Group Des Moines, IA 50392 J. Barry Griswell Director and The Principal Chairman of the Financial Group Board Des Moines, IA 50392 Susan R. Haupts Marketing Officer The Principal Financial Group Des Moines, IA 50392 Joyce N. Hoffman Vice President and The Principal Corporate Secretary Financial Group Des Moines, IA 50392 Kraig L. Kuhlers Marketing Officer The Principal Financial Group Des Moines, IA 50392 Ellen Z. Lamale Director The Principal Financial Group Des Moines, IA 50392 Julia M. Lawler Director The Principal Financial Group Des Moines, IA 50392 John R. Lepley Senior Vice The Principal President - Marketing Financial Group and Distribution Des Moines, IA 50392 Kelly A. Paul Systems & Technology The Principal Officer Financial Group Des Moines, IA 50392 Elise M. Pilkington Assistant Director - The Principal Retirement Consulting Financial Group Des Moines, IA 50392 Richard L. Prey Director The Principal Financial Group Des Moines, IA 50392 Layne A. Rasmussen Controller-Mutual Funds The Principal Financial Group Des Moines, IA 50392 Martin R. Richardson Operations Officer- The Principal Broker/Dealer Services Financial Group Des Moines, IA 50392 Elizabeth R. Ring Controller The Principal Financial Group Des Moines, IA 50392 Michael D. Roughton Counsel The Principal Financial Group Des Moines, IA 50392 Jean B. Schustek Product Compliance Officer- The Principal Registered Products Financial Group Des Moines, IA 50392 Kyle R. Selberg Vice President- The Principal Marketing Financial Group Des Moines, IA 50392 Minoo Spellerberg Compliance Officer The Principal Financial Group Des Moines, IA 50392 (c) (1) (2) Net Underwriting Name of Principal Discounts and Underwriter Commissions Princor Financial $12,331,736.46 Services Corporation (3) (4) (5) Compensation on Brokerage Redemption Commissions Compensation 0 0 0 Item 30. Location of Accounts and Records All accounts, books or other documents of the Registrant are located at the offices of the Depositor, The Principal Financial Group, Des Moines, Iowa 50392. Item 31. Management Services Inapplicable Item 32. Undertakings The Registrant undertakes that in restricting cash withdrawals from Tax Sheltered Annuities to prohibit cash withdrawals before the Participant attains age 59 1/2, separates from service, dies, or becomes disabled or in the case of hardship, Registrant acts in reliance of SEC No Action Letter addressed to American Counsel of Life Insurance (available November 28, 1988). Registrant further undertakes that: 1. Registrant has included appropriate disclosure regarding the redemption restrictions imposed by Section 403(b)(11) in its registration statement, including the prospectus, used in connection with the offer of the contract; 2. Registrant will include appropriate disclosure regarding the redemption restrictions imposed by Section 403(b)(11) in any sales literature used in connection with the offer of the contract; 3. Registrant will instruct sales representatives who solicit Plan Participants to purchase the contract specifically to bring the redemption restrictions imposed by Section 403(b)(11) to the attention of the potential Plan Participants; and 4. Registrant will obtain from each Plan Participant who purchases a Section 403(b) annuity contract, prior to or at the time of such purchase, a signed statement acknowledging the Plan Participant's understanding of (a) the restrictions on redemption imposed by Section 403(b)(11), and (b) the investment alternatives available under the employer's Section 403(b) arrangement, to which the Plan Participant may elect to transfer his contract value. REPRESENTATION PURSUANT TO SECTION 26 OF THE INVESTMENT COMPANY ACT OF 1940 Principal Life Insurance Company represents the fees and charges deducted under the Policy, in the aggregate, are reasonable in relation to the services rendered, the expenses expected to be incurred, and the risks assumed by the Company. SIGNATURES Pursuant to the requirements of the Securities Act of 1933 and the Investment Company Act of 1940, the Registrant, Principal Life Insurance Company Separate Account B, certifies that it meets the requirements of Securities Act Rule 485(b) for effectiveness of the Registration Statement and has duly caused this Amendment to the Registration Statement to be signed on its behalf by the undersigned thereto duly authorized in the City of Des Moines and State of Iowa, on the 20th day of April, 2000 PRINCIPAL LIFE INSURANCE COMPANY SEPARATE ACCOUNT B (Registrant) By: PRINCIPAL LIFE INSURANCE COMPANY (Depositor) /s/ David J. Drury By ______________________________________________ David J. Drury Chairman Attest: /s/ Joyce N. Hoffman - ----------------------------------- Joyce N. Hoffman Vice President and Corporate Secretary As required by the Securities Act of 1933, this Amendment to the Registration Statement has been signed by the following persons in the capacities and on the date indicated. Signature Title Date /s/ D. J. Drury Chairman and April 20, 2000 - -------------------- Director D. J. Drury /s/ D. C. Cunningham Vice President and April 20, 2000 - -------------------- Controller (Principal D. C. Cunningham Accounting Officer) /s/ M. H. Gersie Executive Vice President and April 20, 2000 - -------------------- Chief Financial Officer M. H. Gersie (Principal Financial Officer) (B. J. Bernard)* Director April 20, 2000 - -------------------- B. J. Bernard (J. Carter-Miller)* Director April 20, 2000 - -------------------- J. Carter-Miller (C. D. Gelatt, Jr.)* Director April 20, 2000 - -------------------- C. D. Gelatt, Jr. (J. B. Griswell)* Director April 20, 2000 - -------------------- J. B. Griswell (G. D. Hurd)* Director April 20, 2000 - -------------------- G. D. Hurd (C. S. Johnson)* Director April 20, 2000 - -------------------- C. S. Johnson (W. T. Kerr)* Director April 20, 2000 - -------------------- W. T. Kerr (L. Liu)* Director April 20, 2000 - -------------------- L. Liu (V. H. Loewenstein)* Director April 20, 2000 - -------------------- V. H. Loewenstein (R. D. Pearson)* Director April 20, 2000 - -------------------- R. D. Pearson (F. F. Pena)* Director April 20, 2000 - -------------------- F. F. Pena (J. R. Price)* Director April 20, 2000 - -------------------- J. R. Price, Jr. (D. M. Stewart)* Director April 20, 2000 - -------------------- D. M. Stewart (E. E. Tallett)* Director April 20, 2000 - -------------------- E. E. Tallett (F. W. Weitz)* Director April 20, 2000 - -------------------- F. W. Weitz *By /s/ David J. Drury ------------------------------------ David J. Drury Chairman Pursuant to Powers of Attorney Previously Filed or Included Herein EX-99.10A 2 CONSENT OF ERNST & YOUNG LLP Consent of Independent Auditors We consent to the reference to our firm under the captions "Independent Auditors" and to the use of our reports dated January 31, 2000 with respect to Principal Life Insurance Company Separate Account B and Principal Life Insurance Company, in the Registration Statement (Post-Effective Amendment No. 15 to Form N-4 No. 33-44670) and related Prospectus of Principal Life Insurance Company Separate Account B Premier Variable (A Group Variable Annuity Contract for Employer-Sponsored Qualified and Non-Qualified Retirement Plans). /s/ Ernst & Young LLP Des Moines, Iowa April 19, 2000 -----END PRIVACY-ENHANCED MESSAGE-----