-----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, I66y/dnZEJHKGDGKsRGHOFPKqHZIkAwEwSc4piH7KKtMbtYLFmJn3JcXZWW7v2rf H2EGujdngClUW3YjK5PdUQ== /in/edgar/work/0000009713-00-500007/0000009713-00-500007.txt : 20001117 0000009713-00-500007.hdr.sgml : 20001117 ACCESSION NUMBER: 0000009713-00-500007 CONFORMED SUBMISSION TYPE: 485BPOS PUBLIC DOCUMENT COUNT: 2 FILED AS OF DATE: 20001116 EFFECTIVENESS DATE: 20001116 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: 033-74232 FILM NUMBER: 771103 FILING VALUES: FORM TYPE: 485BPOS SEC ACT: SEC FILE NUMBER: 811-02091 FILM NUMBER: 771104 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 0001.txt PMLIC - FLEX VARIABLE ANNUITY Registration No. 33-74232 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. _16__ __X__ and/or REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 Amendment No. ___16_____ (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 November 15, 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 FLEXIBLE VARIABLE ANNUITY ("FVA") CONTRACT 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 Flexible Variable Annuity ("FVA") Contract 2. Definitions Glossary 3. Synopsis Summary of Expense Information 4. Condensed Financial Condensed Financial Information Information Independent Auditors, Financial Statements 5. General Description of Summary, The Company, Registrant The Separate Account, Voting Rights, The Underlying Mutual Funds 6. Deductions Summary, Charges and Deductions, Annual Fee, Mortality and Expense Risks Charge, Transaction Fee, Premium Taxes, Surrender Charge, Administrative Charge Distribution of the Contract 7. General Description of Summary, The Contract, Variable Annuity Contract To Buy a Contract, Purchase Payments, Right to Examine the Contract, Exchange Credit, Prior to the Retirement Date, Performance Calculation, The Accumulation Period, The Value of Your Contract, Separate Account Division, Unscheduled Transfers, Scheduled Transfers, Automatic Portfolio Rebalancing, Surrenders, Total Surrender, Unscheduled Partial Surrender, Scheduled Partial Surrender, Death Benefit Payment of Death Benefit, The Annuity payment Period, Annuity Payment Date, Annuity Payment Options, Transfers, The Separate Account, General Provisions, Rights Reserved by the Company, Customer Inquiries 8. Annuity Period Annuity Payment Period, Annuity Payment Date, Annuity Payment Options 9. Death Benefit Death Benefit, Payment of Death Benefit, Federal Tax Matters, Non-Qualified Contracts, Required Distributions for Non- Qualified Contracts, IRA, SEP and SIMPLE-IRA, Rollover IRAs 10. Purchase and Contract Value Summary, The Contract, To Buy a Contract, Purchase Payments, Right to Examine the Contract, Replacement Contracts, The Accumulation Period, The Value of Your Contract, Purchase Payments, Separate Account Division Transfers, Delay of Payments, Distribution of the Contract 11. Redemptions Summary, Annuity Payment Options, Surrenders, Delay of Payments 12. Taxes Summary, Annuity Payment Options, Federal Tax Matters, Non-Qualified Contracts, Required Distributions for Non-Qualified Contracts, IRA, SEP, SAR/SEP and SIMPLE-IRA, Rollover IRAs, Withholding, Mutual Fund Diversification 13. Legal Proceedings Legal Proceedings 14. Table of Contents of the Table of Contents of the Statement of Additional Statement of Additional Information Information Part B Statement of Additional Information Caption** 15. Cover Page Principal Life Insurance Company Separate Account B Flexible Variable Annuity ("FVA") Contract 16. Table of Contents Table of Contents 17. General Information and None History 18. Services Independent Auditors**, Independent Auditors 19. Purchase of Securities Summary**, Purchase Payments Being Offered Distribution of the Contract 20. Underwriters Summary**, Distribution of the Contract** 21. Calculation of Performance Calculation of Yield and Data Total Return 22. Annuity Payments Annuity Payment Options** 23. Financial Statements Financial Statements ** Prospectus caption given where appropriate. SUPPLEMENT DATED NOVEMBER 15, 2000 TO THE PROSPECTUS FOR PRINCIPAL FLEXIBLE VARIABLE ANNUITY DATED NOVEMBER 15, 2000 This document is a supplement to the prospectus dated November 15, 2000 for the Principal Flexible Variable Annuity. This supplement must be accompanied by the prospectus. As described in the prospectus, if you purchase the Contract with the purchase payment credit rider, we will add a credit to each purchase payment that you make during the first Contract year. We have sought an order from the Securities and Exchange Commission (the "SEC") that will permit us, as described in the prospectus, to take back all of the credit if you return your Contract during the examination period. Once the SEC grants the order, we will take back the credit as described in the prospectus. We expect that the SEC will grant the order on November 28, 2000, although we cannot be sure that the SEC will do so. Until the SEC grants the order, the special rules described below will apply regarding the amount you will receive if you return the Contract with the purchase payment credit rider during the examination period. These rules do not apply to a Contract without the purchase payment credit rider. If your Contract accumulated value has increased or stayed the same, we will refund your Contract accumulated value minus any credit but plus any purchase payment credit rider charge that we deducted on or before the date we receive your Contract. If your Contract accumulated value has decreased, we will refund your Contract accumulated value minus any credit but plus any purchase payment credit rider charge and plus any investment loss (including any charges made by the Mutual Funds in which you have invested) attributable to the credit as of the date we receive your Contract. This means you receive any gains, and we bear any losses, attributable to the credit during the examination period. In those states that require it, we will refund the full amount of your purchase payment if it is more than the amount specified above. We will not assess a surrender charge or an annual Contract fee if you return the Contract during the examination period. Flexible Variable Annuity Issued by Principal Life Insurance Company (the "Company") This prospectus is dated November 15, 2000. The individual deferred annuity contract ("Contract") described in this prospectus is funded with the Principal Life Insurance Company Separate Account B ("Separate Account"), dollar cost averaging fixed accounts ("DCA Plus Accounts") and a fixed account ("Fixed Account"). The assets of the Separate Account Divisions ("Divisions") are invested in a corresponding Account of the Principal Variable Contracts Fund, Inc., AIM V.I. Growth Fund, AIM V.I. Growth and Income Fund, AIM V.I. Value Fund, Fidelity Variable Insurance Products Fund II Contrafund Portfolio, Fidelity Variable Insurance Products Fund Growth Portfolio and Janus Aspen Series - Service Shares Aggressive Growth Portfolio (the "Funds"). The DCA Plus Accounts and the Fixed Account are a part of the General Account of the Company. This prospectus provides information about the Contract and the Separate Account that you, as owner, should know before investing. It should be read and retained for future reference. Additional information about the Contract is included in the Statement of Additional Information ("SAI"), dated November 15, 2000, which has been filed with the Securities and Exchange Commission (the "SEC"). The SAI is a part of this prospectus. The table of contents of the SAI is on page 46 of this prospectus. You may obtain a free copy of the SAI by writing or telephoning: Principal Flexible Variable Annuity Principal Financial Group P. O. Box 9382 Des Moines, Iowa 50306-9382 Telephone: 1-800-852-4450 An investment in the Contract is not a deposit or obligation of any bank and is not insured or guaranteed by any bank, the Federal Deposit Insurance Corporation or any other government agency. As the owner of this Contract, you may elect a purchase payment credit rider with an additional charge and an associated 9-year surrender charge period. The purchase payment credit rider is only available when the Contract is issued. The portions of this prospectus that specifically pertain to election of the purchase payment credit rider are shown by gray boxes. The charges used to recoup our expense of paying the purchase payment credit include the surrender charge and the purchase payment credit rider charge. The Contract is available with or without the purchase payment credit rider. There may be circumstances where electing the purchase payment credit rider is not to your advantage. In certain circumstances, the amount of the credit may be more than offset by the charges associated with it. The Contract without the purchase payment credit rider has surrender charges and total Separate Account annual expenses that may be lower than the charges for the Contract with the purchase payment credit rider. You should consult with your sales representative to decide if the purchase payment credit rider is suitable. In making this determination, you and your sales representative should consider the following factors: o the length of time you plan to own the Contract; o the frequency, amount and timing of any partial surrenders; and o the amount and timing of your purchase payment(s). Additionally, if you decide to return the Contract during the examination period, we will recover the original purchase payment credit amount. As a result, if the value of the purchase payment credit has declined during the examination period, then we still recover the full amount of the purchase payment credit. The Contract provides an exchange credit that is available to eligible purchasers (see Replacement Contracts - Exchange Credit). The exchange credit is paid for by a reduction in sales commissions for Contracts sold with the exchange credit. Sales commissions are paid by Contract charges and deductions. The charges and deductions are neither proportionally reduced nor increased for Contracts sold with the exchange credit. These securities have not been approved or disapproved by the Securities and Exchange Commission or any state securities commission nor has the Securities and Exchange Commission or any state securities commission passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense. This prospectus is valid only when accompanied by the current prospectuses for the Funds. These prospectuses should be kept for future reference. TABLE OF CONTENTS GLOSSARY .................................................... 4 SUMMARY OF EXPENSE INFORMATION............................... 6 SUMMARY .................................................... 10 Investment Limitations................................... 10 Separate Account Investment Options...................... 10 Transfers................................................ 11 Surrenders............................................... 11 Charges and Deductions................................... 11 Annuity Payments......................................... 12 Death Benefit............................................ 12 Examination Period (Free-Look)........................... 12 CONDENSED FINANCIAL INFORMATION.............................. 13 THE PRINCIPAL FLEXIBLE VARIABLE ANNUITY...................... 16 THE COMPANY.................................................. 16 THE SEPARATE ACCOUNT......................................... 16 THE UNDERLYING MUTUAL FUNDS.................................. 16 SURPLUS DISTRIBUTIONS........................................ 21 THE CONTRACT................................................. 21 To Buy a Contract........................................ 21 Purchase Payments............................................ 21 Right to Examine the Contract (Free-Look)................ 22 Replacement Contracts.................................... 22 Purchase Payment Credit Rider............................ 23 The Accumulation Period.................................. 25 Automatic Portfolio Rebalancing (APR).................... 27 Telephone Services....................................... 27 Direct Dial.............................................. 27 Internet................................................. 28 Surrenders............................................... 28 Death Benefit............................................ 29 The Annuity Payment Period............................... 30 CHARGES AND DEDUCTIONS....................................... 32 Annual Fee............................................... 32 Mortality and Expense Risks Charge....................... 33 Purchase Payment Credit.................................. 33 Transaction Fee.......................................... 33 Premium Taxes............................................ 33 Surrender Charge......................................... 34 Free Surrender Privilege................................. 35 Administration Charge.................................... 36 Special Provisions for Group or Sponsored Arrangements... 36 FIXED ACCOUNT AND DCA PLUS ACCOUNTS.......................... 36 Fixed Account............................................ 36 Fixed Account Accumulated Value.............................. 37 Fixed Account Transfers, Total and Partial Surrenders.... 37 Dollar Cost Averaging Plus Program (DCA Plus Program).... 38 GENERAL PROVISIONS........................................... 39 The Contract............................................. 39 Delay of Payments........................................ 39 Misstatement of Age or Gender............................ 39 Assignment............................................... 39 Change of Owner.......................................... 39 Beneficiary.............................................. 40 Contract Termination..................................... 40 Reinstatement............................................ 40 Reports.................................................. 40 RIGHTS RESERVED BY THE COMPANY............................... 40 DISTRIBUTION OF THE CONTRACT................................. 41 PERFORMANCE CALCULATION...................................... 41 VOTING RIGHTS................................................ 41 FEDERAL TAX MATTERS.......................................... 42 Non-Qualified Contracts.................................. 42 Required Distributions for Non-Qualified Contracts....... 43 IRA, SEP and SIMPLE-IRA.................................. 43 Rollover IRAs............................................ 44 Withholding.............................................. 44 MUTUAL FUND DIVERSIFICATION.................................. 44 STATE REGULATION............................................. 45 LEGAL OPINIONS............................................... 45 LEGAL PROCEEDINGS............................................ 45 REGISTRATION STATEMENT....................................... 45 OTHER VARIABLE ANNUITY CONTRACTS............................. 45 INDEPENDENT AUDITORS......................................... 45 FINANCIAL STATEMENTS......................................... 45 CUSTOMER INQUIRIES........................................... 46 TABLE OF CONTENTS OF THE STATEMENT OF ADDITIONAL INFORMATION. 46 The Contract offered by this prospectus may not be available in all states. This prospectus is not an offer to sell, or solicitation of an offer to buy, the Contract in states in which the offer or solicitation may not be lawfully made. No person is authorized to give any information or to make any representation in connection with this Contract other than those contained in this prospectus. GLOSSARY Accumulated value - an amount equal to the DCA Plus Account(s) value plus the Fixed Account value plus the Separate Account value. Anniversary - the same date and month of each year following the Contract date. Annuitant - the person, including any joint annuitant, on whose life the annuity payment is based. This person may or may not be the owner. Annuity payment date - the date the owner's accumulated value is applied, under an annuity payment option, to make income payments. (Referred to in the Contract as "Retirement Date.") Contract date - the date that the Contract is issued and which is used to determine Contract years. Contract year - the one-year period beginning on the Contract date and ending one day before the Contract anniversary and any subsequent one-year period beginning on a Contract anniversary. (e.g. If the contract date is June 5, 2000, the first Contract year ends on June 4, 2001, and the first Contract anniversary falls on June 5, 2001.) Dollar Cost Averaging Plus (DCA Plus) Account - an account which earns guaranteed interest for a specific amount of time. (Referred to in the Contract as "Fixed DCA Account.") Dollar Cost Averaging Plus (DCA Plus) accumulated value - the amount of your accumulated value which is in the DCA Plus Account(s). Dollar Cost Averaging Plus (DCA Plus) Program - a program through which purchase payments are transferred from a DCA Plus Account to the Divisions and/or the Fixed Account over a specified period of time. (Referred to in the Contract as "Fixed DCA Account.") Fixed Account - an account which earns guaranteed interest. Fixed Account accumulated value - the amount of your accumulated value which is in the Fixed Account. Investment Options - the DCA Plus Accounts, Fixed Account and Separate Account Divisions. Joint annuitant - additional annuitant. Joint annuitants must be husband and wife and must be named as owner and joint owner. Joint owner - an owner who has an undivided interest with the right of survivorship in this Contract with another owner. Joint owners must be husband and wife and must be named as annuitant and joint annuitant. Mutual Fund - a registered open-end investment company, including a series or portfolio thereof, in which a Division invests. Non-Qualified Contract - a Contract which does not qualify for favorable tax treatment as a Qualified Plan, Individual Retirement Annuity, Roth IRA, SEP IRA, Simple-IRA or Tax Sheltered Annuity. Notice - any form of written communication received by us, at the annuity service office, P.O. Box 9382, Des Moines, Iowa 50306-9382, or in another form approved by us in advance. Owner - the person, including joint owner, who owns all the rights and privileges of this Contract. Purchase payments - the gross amount contributed to the Contract. Qualified Plans - retirement plans which receive favorable tax treatment under Section 401 or 403(a) of the Internal Revenue Code (the "Code"). Separate Account Division (Division(s) )- a part of the Separate Account which invests in shares of a Mutual Fund. (Referred to in the marketing materials as "sub-accounts.") Separate Account accumulated value - the amount of your accumulated value in all Divisions. Surrender charge - the charge deducted upon certain partial or total surrender of the Contract before the annuity payment date. Surrender value - accumulated value less any applicable surrender charge, annual fee, transaction fee and any premium or other taxes. Unit - the accounting measure used to calculate the value of a Division prior to annuity payment date. Unit value - a measure used to determine the value of an investment in a Division. Valuation date - each day the New York Stock Exchange ("NYSE") is open. Valuation period - the period of time from one determination of the value of a unit of a Division to the next. Each valuation period begins at the close of normal trading on the NYSE, generally 4:00 p.m. E.T. (3:00 p.m. C.T.) on each valuation date and ends at the close of normal trading of the NYSE on the next valuation date. You, Your - the owner of this Contract, including any joint owner. SUMMARY OF EXPENSE INFORMATION The purpose of these tables is to assist you in understanding the various costs and expenses of the Contract. This information includes expenses of the Contract as well as the Mutual Funds but does not include any premium taxes that may apply. For a more complete description of the Contract expenses see CHARGES AND DEDUCTIONS. Contract owner transaction expenses: o There is no sales charge imposed on purchase payments. o Surrender charge without the purchase payment credit rider (as a percentage of amounts surrendered): Table of surrender charges without the purchase payment credit rider Number of completed Contract years Surrender charge applied to all since each purchase payment purchase payments received in was made that Contract year 0 (year of purchase payment) 6% 1 6% 2 6% 3 5% 4 4% 5 3% 6 2% 7 and later 0% o Surrender charge with the purchase payment credit rider (as a percentage of amounts surrendered): Table of surrender charges with the purchase payment credit rider Number of completed Contract years Surrender charge applied to all since each purchase payment purchase payments received in was made that Contract year 0 (year of purchase payment) 8% 1 8% 2 8% 3 8% 4 7% 5 6% 6 5% 7 4% 8 3% 9 and later 0% o Annual Contract fee-- the lesser of $30 or 2% of the accumulated value. o Transaction fee (currently not assessed) -- a $30 fee for each unscheduled partial surrender after the 12th unscheduled partial surrender in a Contract year. o Transaction fee (currently not assessed) -- a $30 fee for each unscheduled transfer after the 12th unscheduled transfer in a Contract year. Separate Account annual expenses (as a percentage of average account value) mortality and expense risks charge 1.25% other Separate Account expenses .00 total Separate Account annual expenses 1.25%* optional purchase payment credit rider charge 0.60% total Separate Account annual expenses with the purchase payment credit rider 1.85%* * Currently, the administrative charge is not assessed. However, if the entire administrative charge were imposed, then the total Separate Account expenses would increase by 0.15% (1.40% and 2.00%, respectively). Annual expenses of the Mutual Funds (as a percentage of average net assets) as of December 31, 1999:
Management Other Rule 12(b)1 Total Annual Expenses Mutual Fund Fees Expenses Fees After Reimbursement Principal Variable Contracts Fund, Inc. Aggressive Growth 0.75% 0.02% N/A 0.77% Asset Allocation 0.80 0.05 N/A 0.85 Balanced 0.57 0.01 N/A 0.58 Bond 0.49 0.01 N/A 0.50 Capital Value 0.43(1) 0.00 N/A 0.43 Government Securities 0.49 0.01 N/A 0.50 Growth 0.45(1) 0.00 N/A 0.45 International 0.73(1) 0.05 N/A 0.78 International Emerging Markets 0.97 0.38 N/A 1.35(2) International SmallCap 1.20 0.12 N/A 1.32 LargeCap Growth 1.07 0.13 N/A 1.20(2) LargeCap Growth Equity 0.78 0.32 N/A 1.10(2) LargeCap Stock Index 0.35 0.14 N/A 0.40(2) MicroCap 1.00 0.28 N/A 1.06(2) MidCap 0.61 0.00 N/A 0.61 MidCap Growth 0.90 0.19 N/A 0.96(2) MidCap Growth Equity 0.78 0.32 N/A 1.10(2) Money Market 0.50 0.02 N/A 0.52 Real Estate 0.90 0.09 N/A 0.99 SmallCap 0.85 0.06 N/A 0.91 SmallCap Growth 1.00 0.07 N/A 1.06(2) SmallCap Value 1.10 0.34 N/A 1.16(2) Utilities 0.60 0.04 N/A 0.64 AIM V.I. Growth Fund 0.63 0.10 N/A 0.73 AIM V.I. Growth and Income Fund 0.61 0.16 N/A 0.77 AIM V.I. Value Fund 0.61 0.15 N/A 0.76 Fidelity Variable Insurance Products Fund II Fidelity VIP II Contrafund Portfolio-Service Class 0.58 0.10 0.10%(3) 0.78(4) Fidelity Variable Insurance Products Fund Fidelity VIP Growth Portfolio-Service Class 0.58 0.09 0.10(3) 0.77(4) Janus Aspen Series - Service Shares Aggressive Growth Portfolio 0.65 0.02 0.25(3) 0.92 (1) As a result of a shareholder meeting the Account's management fee was modified effective 1/1/2000. (2) If total annual expenses exceed the amount stated on the chart, then the Manager has voluntarily agreed to reimburse expenses. Without the reimbursement, the total annual expenses for 2000 would be: International Emerging Markets 1.63% LargeCap Growth 1.23% LargeCap Growth Equity 1.32% LargeCap Stock Index 0.49% MicroCap 1.28% MidCap Growth Equity 1.32% MidCap Growth 1.09% SmallCap Growth 1.07% SmallCap Value 1.44% (3) The Company and Princor Financial Services Corporation may receive a portion of the Mutual Fund Annual Expenses for recordkeeping, marketing and distribution services. (4) Without third party payments or reductions the Total Annual Expenses would have been: Fidelity VIP II Contrafund Portfolio-Service Class 0.81% Fidelity VIP Growth Portfolio-Service Class 0.79%
Example: The purpose of the following examples is to assist you in understanding the various costs and expenses that you, as a Contract owner, bear directly or indirectly. They reflect expenses of the Division as well as the expenses of the Mutual Fund in which the Division invests. In certain circumstances, state premium taxes also apply. The examples should not be considered representations of past or future expenses. Actual expenses may be more or less than those shown. If you surrender your Contract at the end of the applicable time period, you would pay the following expenses on a $1,000 investment. The examples assume that your investment has a 5% return each year and that current expense levels (and waivers and reimbursements, if any) continue.
Separate Account Division 1 Year 1 Year 3 Years 3 Years 5 Years 5 Years 10 years 10 Years Aggressive Growth $83 $109 $119 $168 $145 $208 $238 $299 Asset Allocation 83 109 121 170 149 212 247 307 Balanced 81 107 113 163 136 199 218 280 Bond 80 106 111 161 132 196 210 272 Capital Value 79 106 109 159 128 192 202 265 Government Securities 80 106 111 161 132 196 210 272 Growth 80 106 110 159 129 193 205 267 International 83 109 119 169 146 209 239 300 International Emerging Markets 91 117 143 191 187 247 324 379 International SmallCap 88 114 135 183 172 233 294 351 LargeCap Growth 87 113 132 181 168 229 285 342 LargeCap Growth Equity 88 114 135 183 172 233 294 351 LargeCap Stock Index* 85 111 125 174 156 218 261 320 MicroCap* 87 113 134 182 170 231 290 347 MidCap 81 107 114 164 137 201 222 283 MidCap Growth* 86 112 128 177 161 223 271 329 MidCap Growth Equity 88 114 135 183 172 233 294 351 Money Market 80 106 112 161 133 196 212 274 Real Estate 85 111 125 174 156 218 261 320 SmallCap 84 110 123 172 152 215 253 312 SmallCap Growth* 85 111 128 176 160 222 269 328 SmallCap Value* 89 115 138 186 178 239 306 362 Utilities 81 108 115 165 139 202 225 286 AIM V.I. Growth 82 108 118 167 143 206 234 295 AIM V.I. Growth and Income 83 109 119 168 145 208 238 299 AIM V.I. Value 83 109 119 168 145 208 237 298 Fidelity VIP II Contrafund 83 109 119 169 146 209 239 300 Fidelity VIP Growth 83 109 119 168 145 208 238 299 Janus Aspen Aggressive Growth 84 110 123 172 153 215 254 313 * After expense reimbursement
If you elect to receive payments under an annuity payment option (referred to in the Contract as "Benefit Option") at the end of the applicable time period or do not surrender your Contract, you would pay the following expenses on a $1,000 investment. The examples assume that your investment has a 5% annual return each year and that current expense levels (and waivers and reimbursements, if any) continue.
Separate Account Division 1 Year 1 Year 3 Years 3 Years 5 Years 5 Years 10 years 10 Years Aggressive Growth $21 $27 $64 $82 $111 $141 $238 $299 Asset Allocation 22 28 67 85 115 145 247 307 Balanced 19 25 59 77 101 131 218 280 Bond 18 24 56 74 97 127 210 272 Capital Value 17 23 54 72 93 124 202 265 Government Securities 18 24 56 74 97 127 210 272 Growth 18 24 55 73 94 125 205 267 International 21 27 65 83 111 141 239 300 International Emerging Markets 29 35 90 108 154 182 324 379 International SmallCap 26 32 81 99 138 168 294 351 LargeCap Growth 25 31 78 96 134 163 285 342 LargeCap Growth Equity 26 32 81 99 138 168 294 351 LargeCap Stock Index* 23 29 71 89 122 152 261 320 MicroCap* 26 32 80 98 136 166 290 347 MidCap 19 25 60 78 102 133 222 283 MidCap Growth* 24 30 74 92 127 156 271 329 MidCap Growth Equity 26 32 81 99 138 168 294 351 Money Market 18 24 57 75 98 128 212 274 Real Estate 23 29 71 89 122 152 261 320 SmallCap 22 28 69 87 118 148 253 312 SmallCap Growth* 24 30 73 91 126 155 269 328 SmallCap Value* 28 34 85 102 144 173 306 362 Utilities 20 26 60 79 104 134 225 286 AIM V.I. Growth 20 26 63 81 109 139 234 295 AIM V.I. Growth and Income 21 27 64 82 111 141 238 299 AIM V.I. Value 21 27 64 82 110 140 237 298 Fidelity VIP II Contrafund 21 27 65 83 111 141 239 300 Fidelity VIP Growth 21 27 64 82 111 141 238 299 Janus Aspen Aggressive Growth 22 28 69 87 118 148 254 313 * After expense reimbursement
SUMMARY This prospectus describes a flexible variable annuity offered by the Company. The Contract is designed to provide individuals with retirement benefits, including (1) Individual Retirement Annuity plans ("IRA Plans"), Simplified Employee Pension plans ("SEPs") and Savings Incentive Match Plan for Employees ("SIMPLE") IRAs adopted according to Section 408 of the Internal Revenue Code (the "Code") and (2) non-qualified retirement programs. This is a brief summary of the Contract's features. More detailed information follows later in this prospectus. Investment Limitations o Initial purchase payment must be $2,500 or more for non-qualified retirement programs. o Initial purchase payment must be $1,000 for all other contracts. o Each subsequent payment must be at least $100. o If you are a member of a retirement plan covering three or more persons and payments are made through an automatic investment program, then the initial and subsequent purchase payments for the Contract must average at least $100 and not be less than $50. If purchase payments are not paid during two consecutive calendar years and the accumulated value or total purchase payments less partial surrenders and applicable surrender charges is less than $2,000, then we reserve the right to terminate a Contract and distribute the accumulated value, less any applicable charges. Separate Account Investment Options (see THE UNDERLYING MUTUAL FUNDS):
Division invests in: Principal Variable Contracts Fund, Inc. Aggressive Growth Aggressive Growth Account Asset Allocation Asset Allocation Account Balanced Balanced Account Bond Bond Account Capital Value Capital Value Account Government Securities Government Securities Account Growth Growth Account International International Account International Emerging Markets International Emerging Markets Account International SmallCap International SmallCap Account LargeCap Growth LargeCap Growth Account LargeCap Growth Equity LargeCap Growth Equity Account LargeCap Stock Index LargeCap Stock Index Account MicroCap MicroCap Account MidCap MidCap Account MidCap Growth MidCap Growth Account MidCap Growth Equity MidCap Growth Equity Account Money Market Money Market Account Real Estate Real Estate Account SmallCap SmallCap Account SmallCap Growth SmallCap Growth Account SmallCap Value SmallCap Value Account Utilities Utilities Account AIM V.I. Growth AIM V.I. Growth Fund AIM V.I. Growth and Income AIM V.I. Growth and Income Fund AIM V.I. Value AIM V.I. Value Fund Fidelity Variable Insurance Products Fund II Fidelity VIP II Contrafund Fidelity VIP II Contrafund Portfolio Service Class Fidelity Variable Insurance Products Fund Fidelity VIP Growth Fidelity VIP Growth Portfolio Service Class Janus Aspen Series - Janus Aspen Aggressive Growth Service Shares Aggressive Growth Portfolio
You may allocate your net premium payments to Divisions, the DCA Plus Accounts and/or the Fixed Account. Not all Divisions or the DCA Plus Accounts are available in all states. A current list of Divisions available in your state may be obtained from a sales representative or our annuity service office. Each Division invests in shares of an underlying Mutual Fund. More detailed information about the underlying Mutual Funds may be found in the current prospectus for each underlying Mutual Fund. The underlying Mutual Funds are NOT available to the general public directly. The underlying Mutual Funds are available only as investment options in variable life insurance policies or variable annuity contracts issued by life insurance companies. Some of the underlying Mutual Funds have been established by investment advisers that manage publicly traded mutual funds having similar names and investment objectives. While some of the underlying Mutual Funds may be similar to, and may in fact be modeled after publicly traded mutual funds, you should understand that the underlying Mutual Funds are not otherwise directly related to any publicly traded mutual fund. Consequently, the investment performance of publicly traded mutual funds and of any underlying Mutual Fund may differ substantially. Transfers (See SEPARATE ACCOUNT DIVISION TRANSFERS and FIXED ACCOUNT TRANSFERS, TOTAL AND PARTIAL SURRENDERS for additional restrictions.) This section does not apply to transfers under the DCA Plus Program (see SCHEDULED DCA PLUS TRANSFERS and UNSCHEDULED DCA PLUS TRANSFERS). During the accumulation period: o a dollar amount or percentage of transfer must be specified; o a transfer may occur on a scheduled or unscheduled basis; and o transfers into DCA Plus Accounts are not permitted. During the annuity payment period, transfers are not permitted (no transfers once payments have begun). Surrenders (see SURRENDERS and FIXED ACCOUNT TRANSFERS, TOTAL AND PARTIAL SURRENDERS and DCA PLUS SURRENDERS) During the accumulation period: o a dollar amount must be specified; o surrendered amounts may be subject to surrender charge; o total surrenders may be subject to an annual Contract fee; o during a Contract year, partial surrenders less than the Contract's earnings or 10% of purchase payments are not subject to a surrender charge; and o withdrawals before age 59 1/2 may involve an income tax penalty (see FEDERAL TAX MATTERS). Charges and Deductions o No sales charge on purchase payments. o A contingent deferred surrender charge is imposed on certain total or partial surrenders. o A mortality and expense risks daily charge equal to 1.25% per year applies to amounts in the Separate Account. o If elected, a purchase payment credit rider daily charge equal to 0.60% per year applies to amounts in the Separate Account. The purchase payment credit rider charge terminates upon completion of your 8th Contract year. o Daily Separate Account administration charge is currently zero but we reserve the right to assess a charge not to exceed 0.15% annually. o Contracts with an accumulated value of less than $30,000 are subject to an annual Contract fee of the lesser of $30 or 2% of the accumulated value. Currently we do not charge the annual fee if your accumulated value is $30,000 or more. If you own more than one Contract, then all the Contracts you own or jointly own are aggregated, on each Contract's anniversary, to determine if the $30,000 minimum has been met. o Certain states and local governments impose a premium tax. The Company reserves the right to deduct the amount of the tax from purchase payments or accumulated values. Annuity Payments o You may choose from several fixed annuity payment options which start on your selected annuity payment date. o Payments are made to the owner (or beneficiary depending on the annuity payment option selected). You should carefully consider the tax implications of each annuity payment option (see ANNUITY PAYMENT OPTIONS and FEDERAL TAX MATTERS). o Your Contract refers to annuity payments as "retirement benefit" payments. Death Benefit o If the annuitant or owner dies before the annuity payment date, then a death benefit is payable to the beneficiary of the Contract. o The death benefit may be paid as either a single sum cash benefit or under an annuity payment option (see DEATH BENEFIT). o If the annuitant dies on or after the annuity payment date, then the beneficiary will receive only any continuing payments which may be provided by the annuity payment option in effect. Examination Period (Free-Look) o You may return the Contract during the examination period which is generally 10 days from the date you receive the Contract. The examination period may be longer in certain states. o We return all purchase payments if required by state law. Otherwise we return accumulated value. o We recover the full amount of any purchase payment credit. CONDENSED FINANCIAL INFORMATION Financial statements are included in the Statement of Additional Information. Following are unit values for the Contract for the periods ended December 31.
Number of Accumulation Unit Value Accumulation Units Outstanding Beginning End of Percentage of Change End of Period of Period Period from Prior Period (in thousands) Aggressive Growth Division Year Ended December 31 1999 $27.815 $38.363 37.92% 9,018 1998 23.689 27.815 17.42 7,486 1997 18.340 23.689 29.17 6,077 1996 14.503 18.340 26.46 3,971 1995 10.184 14.503 42.41 1,324 Period Ended December 31, 1994(1) 10.075 10.184 1.08 362 Asset Allocation Division Year Ended December 31 1999 16.690 19.696 18.01 3,913 1998 15.478 16.690 7.83 3,762 1997 13.260 15.478 16.73 3,134 1996 11.891 13.260 11.51 2,264 1995 9.978 11.891 19.17 912 Period Ended December 31, 1994(1) 10.075 9.978 -0.96 303 Balanced Division Year Ended December 31 1999 17.647 17.846 1.13 9,103 1998 15.966 17.647 10.53 8,903 1997 13.708 15.966 16.47 6,717 1996 12.270 13.708 11.72 4,661 1995 9.972 12.270 23.04 1,373 Period Ended December 31, 1994(1) 10.266 9.972 -2.86 370 Bond Division Year Ended December 31 1999 14.260 13.718 -3.80 7,677 1998 13.408 14.260 6.35 7,499 1997 12.275 13.408 9.23 5,017 1996 12.143 12.275 1.09 3,872 1995 10.064 12.143 20.66 1,401 Period Ended December 31, 1994(1) 10.050 10.064 0.14 301 Capital Value Division Year Ended December 31 1999 23.156 21.888 -5.48 11,634 1998 20.642 23.156 12.18 11,720 1997 16.261 20.642 26.94 9,320 1996 13.333 16.261 21.96 6,267 1995 10.234 13.333 30.28 2,232 Period Ended December 31, 1994(1) 10.328 10.234 -0.91 699 Government Securities Division Year Ended December 31 1999 13.954 13.741 -1.53 8,554 1998 13.049 13.954 6.94 8,554 1997 11.969 13.049 9.02 5,946 1996 11.728 11.969 2.06 5,443 1995 9.973 11.728 17.60 2,023 Period Ended December 31, 1994(1) 10.133 9.973 -1.93 572 Growth Division Year Ended December 31 1999 $21.657 $24.904 14.99% 10,999 1998 18.070 21.657 19.85 9,863 1997 14.411 18.070 25.39 7,898 1996 12.970 14.411 11.11 6,089 1995 10.454 12.970 24.07 2,619 Period Ended December 31, 1994(1) 10.336 10.454 1.14 764 International Division Year Ended December 31 1999 16.071 19.987 24.37 7,799 1998 14.795 16.071 8.62 7,866 1997 13.347 14.795 10.85 7,316 1996 10.804 13.347 23.54 4,797 1995 9.582 10.804 12.75 2,146 Period Ended December 31, 1994(1) 9.624 9.582 -0.43 936 International SmallCap Division Year Ended December 31 1999 8.978 17.184 91.40 1,246 Period Ended December 31, 1998(2) 10.000 8.978 -10.22 419 LargeCap Stock Index Division(3) Period Ended December 31, 1999(4) 10.000 10.956 9.56 2,314 MicroCap Division Year Ended December 31 1999 8.106 7.920 -2.30 244 Period Ended December 31, 1998(2) 10.000 8.106 -18.94 141 MidCap Division Year Ended December 31 1999 19.125 21.351 11.64 9,229 1998 18.676 19.125 2.40 10,738 1997 15.405 18.676 21.23 9,820 1996 12.880 15.405 19.60 7,285 1995 10.108 12.880 27.42 3,059 Period Ended December 31, 1994(1) 10.157 10.108 -0.48 973 MidCap Growth Division Year Ended December 31 1999 9.607 10.522 9.52 746 Period Ended December 31, 1998(2) 10.000 9.607 -3.93 352 Money Market Division Year Ended December 31 1999 11.913 12.306 3.30 7,145 1998 11.463 11.913 3.93 4,905 1997 11.027 11.463 3.95 2,752 1996 10.628 11.027 3.75 2,929 1995 10.194 10.628 4.26 1,370 Period Ended December 31, 1994(1) 10.027 10.194 1.67 702 Real Estate Division Year Ended December 31 1999 $ 9.275 $ 8.750 -5.66% 261 Period Ended December 31, 1998(2) 10.000 9.275 -7.25 195 SmallCap Division Year Ended December 31 1999 7.928 11.242 41.80 1,208 Period Ended December 31, 1998(2) 10.000 7.928 -20.72 459 SmallCap Growth Division Year Ended December 31 1999 10.179 19.672 93.26 1,388 Period Ended December 31, 1998(2) 10.000 10.179 1.79 314 SmallCap Value Division Year Ended December 31 1999 8.440 10.123 19.94 536 Period Ended December 31, 1998(2) 10.000 8.440 -15.60 306 Utilities Division Year Ended December 31 1999 11.464 11.581 1.02 1,670 Period Ended December 31, 1998(2) 10.000 11.464 14.64 639 AIM V.I. Growth Division Period Ended December 31, 1999(4) 10.000 12.256 22.56 968 AIM V.I. Growth and Income Division Period Ended December 31, 1999(4) 10.000 12.101 21.01 1,494 AIM V.I. Value Division Period Ended December 31, 1999(4) 10.000 11.553 15.53 1,149 Fidelity VIP II Contrafund Division Period Ended December 31, 1999(4) 10.000 11.294 12.94 1,436 Fidelity VIP Growth Division Period Ended December 31, 1999(4) 10.000 12.108 21.08 1,441 (1) Commenced operations on June 16, 1994. (2) Commenced operations on May 1, 1998. (3) Formerly known as Stock Index 500 Division. (4) Commenced operations on July 30, 1999.
THE PRINCIPAL FLEXIBLE VARIABLE ANNUITY The Principal Flexible Variable Annuity is significantly different from a fixed annuity. As the owner of a variable annuity, you assume the risk of investment gain or loss (as to amounts in the Divisions) rather than the insurance company. The Separate Account value under a variable annuity is not guaranteed and varies with the investment performance of the underlying Mutual Funds. Based on your investment objectives, you direct the allocation of purchase payments and accumulated values. There can be no assurance that your investment objectives will be achieved. THE COMPANY The Company is a stock life insurance company with its home office at: Principal Financial Group, Des Moines, Iowa 50306. It is authorized to transact life and annuity business in all of the United States and the District of Columbia. The Company is a wholly owned subsidiary of Principal Financial Services, Inc. In 1879, the Company was incorporated under Iowa law as a mutual life insurance company named Bankers Life Association. It changed its name to Bankers Life Company in 1911 and then to Principal Mutual Life Insurance Company in 1986. The name change to Principal Life Insurance Company and reorganization into a mutual holding company structure took place in 1998. THE SEPARATE ACCOUNT Separate Account B was established under Iowa law on January 12, 1970. It was registered as a unit investment trust with the SEC on July 17, 1970. This registration does not involve SEC supervision of the investments or investment policies of the Separate Account. The income, gains, and losses, whether or not realized, of the Separate Account are credited to or charged against the Separate Account without regard to other income, gains, or losses of the Company. Obligations arising from the Contract, including the promise to make annuity payments, are general corporate obligations of the Company. However, the Contract provides that the portion of the Separate Account's assets equal to the reserves and other liabilities under the Contract are not charged with any liabilities arising out of any other business of the Company. The assets of each Division invest in a corresponding Mutual Fund. New Divisions may be added and made available. Divisions may also be eliminated from the Separate Account. THE UNDERLYING MUTUAL FUNDS The Principal Variable Contracts Fund, Inc., AIM V.I. Growth Fund, AIM V.I. Growth and Income Fund, AIM V.I. Value Fund, Fidelity Variable Insurance Product Fund, Fidelity Variable Insurance Product Fund II and Janus Aspen Series are Mutual Funds registered under the Investment Company Act of 1940 as open-end investment management companies. The Mutual Funds provide the investment vehicles for the Separate Account. A full description of the Mutual Funds, the investment objectives, policies and restrictions, charges and expenses and other operational information are contained in the accompanying prospectuses (which should be read carefully before investing) and the Statement of Additional Information ("SAI"). Additional copies of these documents are available from a sales representative or our annuity service office. Principal Management Corporation (the "Manager") serves as the manager for the Principal Variable Contracts Fund. The Manager is a subsidiary of Princor Financial Services Corporation. It has managed mutual funds since 1969. As of June 30, 2000, the funds it managed had assets of approximately $6.6 billion. The Manager's address is Principal Financial Group, Des Moines, Iowa 50392-0200. Some of the Principal Variable Contracts Fund's Accounts are used to fund the Company's variable life insurance contracts. The Board of Directors (the "Board") monitors events in order to identify any material irreconcilable conflicts between the interests of the variable annuity contract owners and variable life insurance policyowners. The Board determines any responsive action which may need to be taken. If it becomes necessary for any Separate Account to replace shares of any Division with an alternate investment, then the Division may have to liquidate securities on a disadvantageous basis. AIM Advisors, Inc. (the advisor) serves as the investment advisor for the AIM V.I. Growth Fund, AIM V.I. Growth and Income Fund and the AIM V.I. Value Fund. The advisor is located at 11 Greenway Plaza, Suite 100, Houston, Texas 77046-1173. The advisor supervises all aspects of the funds' operations and provides investment advisory services to the funds, including obtaining and evaluating economic, statistical and financial information to formulate and implement investment programs for the funds. Fidelity Investments Institutional Services, Inc. is the manager for the Fidelity Insurance Products Fund and Fidelity Insurance Products Fund II. As of December 31, 1999, Fidelity had approximately $863 billion in discretionary assets under management. The manager is located at 82 Devonshire Street, Boston, Massachusetts 02109. As the manager, Fidelity is responsible for choosing the account investments and handling their business affairs. Janus Capital ("Janus") is the investment advisor for the Janus Aspen Series. Janus is located at 100 Fillmore Street, Denver, Colorado 80206-4928. Janus is responsible for the day-to-day management of investment portfolio and other business affairs of the portfolio. The Company purchases and sells Mutual Fund shares for the Separate Account at their net asset value without any sales or redemption charge. Shares represent interests in the Mutual Fund available for investment by the Separate Account. Each Mutual Fund corresponds to one of the Divisions. The assets of each Division are separate from the others. A Division's performance has no effect on the investment performance of any other Division. The following is a brief summary of the investment objectives of each Division:
Division Division Invests In Investment Advisor* Investment Objective - -------- ------------------- ------------------ -------------------- Aggressive Growth Principal Variable Contracts Morgan Stanley Asset to provide long-term capital appreciation Fund, Inc. - Aggressive Growth Management through a by investing primarily in growth-oriented Account sub-advisory agreement common stocks of medium and large capitalization U.S. corporations and, to a limited extent, foreign corporations. Asset Allocation Principal Variable Contracts Morgan Stanley Asset to generate a total investment return Fund, Inc. - Asset Allocation Management through a consistent with the preservation of capital. Account sub-advisory agreement The Account intends to pursue a flexible investment policy in seeking to achieve this investment objective. Balanced Principal Variable Contracts Invista Capital Management, LLC to generate a total return consisting of Fund, Inc. - Balanced Account through a sub-advisory agreement current income and capital appreciation (equity securities portion) while assuming reasonable risks in Balanced Account (fixed Principal Capital Income furtherance of this objective. securities portion) Investors, LLC through a sub-advisory agreement Bond Principal Variable Contracts Principal Management Corporation to provide as high a level of income as is Fund, Inc. - Bond Account consistent with preservation of capital and prudent investment risk. Capital Value Principal Variable Contracts Invista Capital Management, LLC to provide long-term capital appreciation Fund, Inc. - Capital Value through a sub-advisory agreement and secondarily growth of investment Account income. The Account seeks to achieve its investment objectives through the purchase primarily of common stocks, but the Account may invest in other securities. Government Securities Principal Variable Contracts Principal Capital Income to seek a high level of current income, Fund, Inc. - Government Investors, LLC through a liquidity and safety of principal. The Securities Account sub-advisory agreement Account seeks to achieve its objective through the purchase of obligations issued or guaranteed by the United States Government or its agencies, with emphasis on Government National Mortgage Association Certificates ("GNMA Certificates"). Account shares are not guaranteed by the United States Government. Growth Principal Variable Contracts Invista Capital Management, LLC to seek growth of capital. The Account Fund, Inc. - Growth Account through a sub-advisory agreement seeks to achieve its objective through the purchase primarily of common stocks, but the Account may invest in other securities. International Principal Variable Contracts Invista Capital Management, LLC to seek long-term growth of capital by Fund, Inc. - International through a sub-advisory agreement investing in a portfolio of equity Account securities domiciled in any of the nations of the world. International Principal Variable Contracts Invista Capital Management, LLC seeks to achieve long-term growth of capital Emerging Markets Fund, Inc. - International through a sub-advisory agreement by investing primarily in equity securities Emerging Account of issuers in emerging market countries. International Principal Variable Contracts Invista Capital Management, LLC seeks long-term growth of capital. The SmallCap Fund, Inc. - International through a sub-advisory agreement Account will attempt to achieve its SmallCap Account objective by investing primarily in equity securities of non-United States companies with comparatively smaller market capitalizations. LargeCap Growth Principal Variable Contracts Janus Capital Management, LLC seeks long-term growth of capital by Fund, Inc. - LargeCap Growth through a sub-advisory agreement investing in equity securities of growth Account companies with market capitalization of greater than $10 billion. LargeCap Growth Principal Variable Contracts Duncan-Hurst Capital seeks to achieve long-term growth of capital Equity Fund, Inc. - LargeCap Growth Management, Inc. investing primarily in common stocks Equity Account through a sub-advisory agreement of larger capitalization domestic companies. LargeCap Stock Index Principal Variable Contracts Invista Capital Management, LLC The Account attempts to mirror the Fund, Inc. - LargeCap Stock through a sub-advisory agreement investment results of the Standard & Index Account Poor's 500 Stock Index. MicroCap Principal Variable Contracts Goldman Sachs Asset Management seeks long-term growth of capital. The Fund, Inc. - MicroCap Account through a sub-advisory agreement Account will attempt to achieve its objective by investing primarily in value and growth oriented companies with small market capitalizations, generally less than $700 million. MidCap Principal Variable Contracts Invista Capital Management, LLC to achieve capital appreciation by Fund, Inc. - MidCap Account through a sub-advisory agreement investing primarily in securities of emerging and other growth-oriented companies. MidCap Growth Principal Variable Contracts Dreyfus Corporation through seeks long-term growth of capital. The Fund, Inc. - MidCap Growth a sub-advisory agreement Account will attempt to achieve its Account objective by investing primarily in growth stocks of companies with market capitalizations in the $1 billion to $10 billion range. MidCap Growth Principal Variable Contracts Turner Investment Partners, Inc. seeks to achieve long-term growth of Equity Fund, Inc. - MidCap Growth through a sub-advisory agreement capital by investing primarily in medium Equity Account capitalization of U.S. companies with strong earnings growth potential. Money Market Principal Variable Contracts Principal Management Corporation to seek as high a level of current income Fund, Inc. - Money Market available from short-term securities as is Account considered consistent with preservation of principal and maintenance of liquidity by investing all of its assets in a portfolio of money market instruments. Real Estate Principal Variable Contracts Principal Management Corporation seeks to generate a high total return. The Fund, Inc. - Real Estate Account will attempt to achieve its Account objective by investing primarily in equity securities of companies principally engaged in the real estate industry. SmallCap Principal Variable Contracts Invista Capital Management, LLC seeks long-term growth of capital. The Fund, Inc. - SmallCap Account through a sub-advisory agreement Account will attempt to achieve its objective by investing primarily in equity securities of both growth and value oriented companies with comparatively smaller market capitalizations. SmallCap Growth Principal Variable Contracts Berger LLC through seeks long-term growth of capital. The Fund, Inc. - SmallCap a sub-advisory agreement Account will attempt to achieve its Growth Account objective by investing primarily in equity securities of small growth companies with market capitalization of less than $1 billion. SmallCap Value Principal Variable Contracts J.P. Morgan Investment seeks long-term growth of capital. The Fund, Inc. - SmallCap Value Management Inc. through a Account will attempt to achieve its Account sub-advisory agreement objective by investing primarily in equity securities of small companies with value characteristics and market capitalizations of less than $1 billion. Utilities Principal Variable Contracts Invista Capital Management, LLC seeks to provide current income and long- Fund, Inc. - Utilities Account through a sub-advisory agreement term growth of income and capital. The Account will attempt to achieve its objective by investing primarily in equity and fixed-income securities of companies in the public utilities industry. AIM V.I. Growth AIM V.I. Growth Fund AIM Advisors, Inc. seeks growth of capital primarily by investing in seasoned and better capitalized companies considered to have strong earnings momentum. AIM V.I. Growth AIM V.I. Growth AIM Advisors, Inc. seeks growth of capital with a secondary and Income and Income Fund objective of current income. AIM V.I. Value AIM V.I. Value Fund AIM Advisors, Inc. seeks long-term growth of capital by investing primarily in equity securities judged by the fund's investment advisor to be undervalued relative to the investment advisor's appraisal of the current or projected earnings of the companies issuing the securities, or relative to current market values of assets owned by the companies issuing the securities or relative to the equity market generally. Income is a secondary objective. Fidelity VIP II Fidelity Variable Insurance Fidelity Management seeks long-term capital appreciation. Contrafund Products Fund II and Research Company Fidelity VIP II Contrafund Portfolio Service Class Fidelity VIP Growth Fidelity Variable Insurance Fidelity Management seeks to maximize total return by allocating Products Fund and Research Company its assets among stocks, bonds, short-term Fidelity VIP Growth instruments, and other investments. Portfolio Service Class Janus Aspen Janus Aspen Series - Janus Capital Corporation seeks long-term growth of capital. It Aggressive Growth Service Shares pursues its objective by investing primarily Aggressive Growth in common stocks selected for their growth Portfolio potential, and normally invests at least 50% of its equity assets in medium-sized companies. Medium-sized companies are those whose market capitalization falls within the range of companies in the S&P MidCap 400 Index. * An Investment Advisor agrees to provide investment advisory services for a specific underlying Mutual Fund or underlying Mutual Fund Account. For these services, each Investment Advisor is paid a fee.
SURPLUS DISTRIBUTIONS Divisible surplus distributions are not anticipated because the Contracts are not expected to result in a contribution to the divisible surplus of the Company. However, if any divisible surplus distribution is made, then it will be made to the owners in the form of cash. THE CONTRACT The following descriptions are based on provisions of the Contract offered by this prospectus. You should refer to the actual Contract and the terms and limitations of any qualified plan which is to be funded by the Contract. Qualified plans are subject to several requirements and limitations which may affect the terms of any particular Contract or the advisability of taking certain action permitted by the Contract. To Buy a Contract If you want to buy a Contract, you must submit an application and make an initial purchase payment. If you are buying the Contract to fund a SIMPLE-IRA or SEP, an initial purchase payment is not required at the time you send in the application. If the application is complete and the Contract applied for is suitable, the Contract is issued subject to underwriting. If the completed application is received in proper order, the initial purchase payment is credited within two valuation days after the later of receipt of the application or receipt of the initial purchase payment at the annuity service office. If the initial purchase payment is not credited within five valuation days, it is refunded unless we have received your permission to retain the purchase payment until we receive the information necessary to issue the Contract. The date the Contract is issued is the Contract date. The Contract date is the date used to determine Contract years, regardless of when the Contract is delivered. Purchase Payments o The initial purchase payment must be at least $2,500 for non-qualified retirement programs. o All other initial purchase payments must be at least $1,000. o If you are making purchase payments through a payroll deduction plan or through a bank account (or similar financial institution) under an automated investment program, then your initial and subsequent purchase payments must be at least $100. o You may elect a purchase payment credit rider with an additional charge and an associated 9-year surrender charge period. o All purchase payments are subject to a surrender charge period that begins from the Contract year each payment is received. o If you do not elect the purchase payment credit rider, each purchase payment is subject to a 7 year surrender charge period. o If you elect the purchase payment credit rider, each purchase payment is subject to a 9 year surrender charge period. o Subsequent payments must be at least $100 and can be made until the annuity payment date. o If you are a member of a retirement plan covering three or more persons, then the initial and subsequent purchase payments for the Contract must average at least $100 and cannot be less than $50. o The total of all purchase payments may not be greater than $2,000,000 without our prior approval. o In New Jersey after the first Contract year, purchase payments cannot exceed $100,000 per Contract year. The Company reserves the right to: o increase the minimum amount for each purchase payment to not more than $1,000; and o terminate* a Contract and send you the accumulated value if no premiums are paid during two consecutive calendar years and the accumulated value (or total purchase payments less partial surrenders and applicable surrender charges) is less than $2,000. * The Company will first notify you of its intent to exercise this right and give you 60 days to increase the accumulated value to at least $2,000. Right to Examine the Contract (Free-Look) Under state law, you have the right to return the Contract for any reason during the examination period. The examination period is 10 days after the Contract is delivered to you in all states, unless your Contract is issued in: a. California and you are age 60 and over (30 day examination period); b. Colorado (15 day examination period); or c. Idaho or North Dakota (20 day examination period). Some states require us to return the initial purchase payment. If your Contract is issued in one of those states, your initial purchase payments are allocated to the Money Market Division for 15 days (20 days for Contracts issued in Idaho) after the Contract date. After the 15-day period (20 days in Idaho), the then current value of the Money Market Division is reallocated according to your allocation instructions. The states in which purchase payments are returned are: Colorado Kentucky North Carolina Connecticut* Louisiana Oklahoma Georgia Maryland Rhode Island Hawaii Michigan South Carolina Idaho Missouri Utah Indiana Nebraska Washington * Purchase payments are refunded if the Contract is canceled prior to its delivery, otherwise the accumulated value is refunded. If your Contract is issued in a state not listed above and if you return the Contract during the examination period, you will receive the accumulated value. Additionally, if you decide to return the Contract during the examination period, the amount returned is reduced by any credits. If the value of the purchase payment credit declines during the examination period, we recover the full amount of the purchase payment credit. If you are purchasing this Contract to fund an IRA, Roth IRA, Simple-IRA or SEP IRA and you return it on or before the seventh day of the free-look period, then we will return the greater of: o total purchase payments; or o Contract accumulated value. To return a Contract you must send it and a written request to the annuity service office or to the sales representative who sold it to you before the close of business on the last day of the examination period. If you send the request (properly addressed and postage prepaid) to the annuity service office, the date of the postmark is used to determine if the examination period has expired. Replacement Contracts If the purchase of this Contract is a replacement for another annuity contract or a life insurance policy, different examination periods may apply. The Company reserves the right to keep the initial purchase payment in the Money Market Division longer than 15 days to correspond to the examination periods of a particular state's replacement requirements. Exchange Credit If you own a Single Premium Deferred Annuity ("SPDA") or a Single Premium Deferred Annuity Plus ("SPDA+") issued by us and are within at least 8 months of the 8th Contract year, then you may transfer the accumulated value, without charge, to the Contract described in this prospectus. Additionally, we will add 1% of the current SPDA/SPDA+ surrender value to the purchase payment. We reserve the right to change or terminate this program. Any changes or termination will follow at least 1 year notice. Both SPDA and SPDA+ are annuities which provide a fixed rate of accumulation. This Contract varies with the investment experience and objectives of the various Divisions. Thus, the value of your Contract may increase or decrease with the investment holdings of the Divisions. When making an exchange decision, the owner should carefully review the SPDA or SPDA+ contract and this prospectus because the charges and provisions of the contracts differ. An existing SPDA or SPDA+ contract may be currently eligible for waiver of surrender charge due to critical need, while similar riders may not be available under this Contract. Electing the exchange credit does not result in additional charges or deductions. The charges and deductions associated with your Contract and any riders still apply. To complete a transfer to this Contract, send 1) a Contract application, 2) a SPDA/SPDA+ surrender form, 3) a replacement form (based on state written), and 4) an Annuity Exchange Request and Release Form. The exchange is effective when we receive the completed forms and accept the application. The transaction is valued at the end of the valuation period in which we receive the necessary documents. (This "exchange credit" is not available in New York and may not be available in other states as well. Specific information is available from your registered representative or the annuity service office (1-800-852-4450)). The Exchange Credit is allocated among the Separate Account Divisions, the DCA Plus Account(s) or the Fixed Account in the same ratio as the allocation of the purchase payment. The credit is treated as earnings. The 1% credit is subject to a vesting period. Therefore, the 1% credit is not credited to your Contract until the examination period has expired. If you exercise your right to return the Contract during the examination period, then the amount returned is the original amount invested (see RIGHT TO EXAMINE THE CONTRACT). Purchase Payment Credit Rider You may elect a purchase payment credit rider at the time the Contract is issued (may not be available in all states; consult your sales representative or the annuity service office for availability). If the purchase payment credit rider is elected, then the following provisions apply to the Contract: o A credit of 5% will be applied to purchase payments received during your first Contract year. For example, if you make purchase payments totaling $10,000 in your first Contract year, a credit amount of $500 will be added to your Contract (5% x $10,000). If an additional purchase payment of $5,000 is made in your second Contract year, then a credit is not added as a result of the $5,000 purchase payment. o The credit is allocated among the Fixed Account and the Divisions according to your then current purchase payment allocations. o If you exercise your right to return the Contract during the examination period, the amount returned to you is reduced by any credits. o Credits are considered earnings under the Contract. o All purchase payments are subject to the 9-year surrender charge table (see Surrender Charge). o The purchase payment credit rider may not be cancelled and the associated 9-year surrender charge period cannot be changed. o You may not participate in the DCA Plus Program. The 0.60% purchase payment credit rider charge is assessed against the entire Separate Account accumulated value for the first eight Contract years. If you anticipate making additional purchase payments after the first Contract year you should carefully examine the purchase payment credit rider and consult your sales representative regarding its desirability. The following tables demonstrate hypothetical values. The first tables shows Contract accumulated values. The second table shows surrender values. The tables are based on: o a $100,000 initial purchase payment and no additional purchase payments; o the deduction of total Separate Account annual expenses of 1.85% (for the first eight Contract years) annually for Contracts with the purchase payment credit rider and 1.25% annually for Contracts without the rider; o the deduction of Mutual Fund expenses equal to those calculated as of December 31, 1999; o purchase payment allocation among the Divisions proportionally equal to the allocation of the company's total Separate Account assets as of April 30, 2000; and o 5% and 10% annual rates of return before charges.
5% Annual Return 10% Annual Return Contract Contract Contract Contract accumulated value accumulated value accumulated value accumulated value without with without with purchase payment purchase payment purchase payment purchase payment Contract Year credit rider credit rider credit rider credit rider 1 $103,138 $107,648 $108,410 $113,151 2 $106,383 $110,371 $117,553 $121,960 3 $109,731 $113,164 $127,468 $131,455 4 $113,185 $116,027 $138,219 $141,691 5 $116,747 $118,964 $149,878 $152,723 6 $120,423 $121,975 $162,521 $164,616 7 $124,214 $125,062 $176,232 $177,435 8 $128,126 $128,229 $191,099 $191,253 9 $132,161 $132,265 $207,222 $207,385 10 $136,323 $136,431 $224,705 $224,882 15 $159,196 $159,322 $336,921 $337,186 20 $185,924 $186,070 $505,220 $505,617
5% Annual Return 10% Annual Return Surrender value Surrender value Surrender value Surrender value without with without with purchase payment purchase payment purchase payment purchase payment Contract Year credit rider credit rider credit rider credit rider 1 $97,550 $99,836 $102,505 $105,151 2 $100,600 $102,371 $111,553 $113,960 3 $103,747 $105,164 $121,468 $123,455 4 $108,185 $108,027 $133,219 $133,691 5 $112,747 $111,964 $145,878 $145,723 6 $117,423 $115,975 $159,521 $158,616 7 $122,214 $120,062 $174,232 $172,435 8 $128,126 $124,229 $191,099 $187,253 9 $132,161 $129,265 $207,222 $204,385 10 $136,323 $136,431 $224,705 $224,882 15 $159,196 $159,322 $336,921 $337,186 20 $185,924 $186,070 $505,220 $505,617
Based on the assumptions stated above, Contract accumulated value will generally be higher for Contracts with the purchase payment credit rider than without, regardless of the rate of return. In addition, the higher the rate of return, the more advantageous the purchase payment credit rider becomes. However, Contracts with the purchase payment credit rider are subject to both a greater surrender charge and a longer surrender charge period than Contracts issued without the purchase payment credit rider. If you surrender your Contract with the purchase payment credit rider while subject to a surrender charge, your Contract surrender value may be less than a Contract without the purchase payment credit rider. The Accumulation Period The Value of Your Contract The value of your Contract is the total of the Separate Account value plus the DCA Plus Account(s) value plus the Fixed Account value. The DCA Plus Accounts and Fixed Account are described in the section titled FIXED ACCOUNT AND DCA PLUS ACCOUNTS. There is no guaranteed minimum Separate Account value. Its value reflects the investment experience of the Divisions that you choose. It also reflects your purchase payments, partial surrenders, surrender charges and the Contract expenses deducted from the Separate Account. The Separate Account value changes from day to day. To the extent the accumulated value is allocated to the Separate Account, you bear the investment risk. At the end of any valuation period, your Contract's value in a Division is: o the number of units you have in a Division multiplied by o the value of a unit in the Division. The number of units is the total of units purchased by allocations to the Division from: o your initial purchase payment; o an exchange credit (if applicable); o subsequent investments; o purchase payment credits; and o transfers from another Division, a DCA Plus Account or the Fixed Account. minus units sold: o for partial surrenders from the Division; o as part of a transfer to another Division or the Fixed Account; and o to pay contract charges and fees. Unit values are calculated each valuation date at the close of normal trading of the NYSE (generally 3:00 p.m. Central Time). To calculate the unit value of a Division, the unit value from the previous valuation date is multiplied by the Division's net investment factor for the current valuation period. The number of units does not change due to a change in unit value. The net investment factor measures the performance of each Division. The net investment factor for a valuation period is calculated as follows: [{share price (net asset value) of the underlying Mutual Fund at the end of the valuation period plus per share amount of any dividend* (or other distribution) made by the Mutual Fund during the valuation period} divided by share price (net asset value) of the underlying Mutual Fund at the end of the previous valuation period] minus {total Separate Account annual expenses} * When an investment owned by a Mutual Fund pays a dividend, the dividend increases the net asset value of a share of the Mutual Fund as of the date the dividend is recorded. As the net asset value of a share of a Mutual Fund increases, the unit value of the corresponding Division also reflects an increase. Payment of a dividend under these circumstances does not increase the number of units you own in the Division. The Separate Account charges are calculated by dividing the annual amount of the charge by 365 and multiplying by the number of days in the valuation period. The Separate Account charges and any taxes (currently none) are accrued daily and are transferred from the Separate Account at the Company's discretion. Purchase Payments o On your application, you direct your purchase payments to be allocated to the Investment Options. o Allocations may be in percentages. o Percentages must be in whole numbers and total 100%. o Subsequent purchase payments are allocated according to your current allocation instructions. o Changes to the allocation instructions may be made without charge. o A change is effective on the next valuation period after we receive your new instructions. o You can change the allocations and allocation instructions by: 1) mailing your instructions to us; 2) calling us at 1-800-852-4450 (if telephone privileges apply); 3) faxing your instructions to us at 1-515-248-9800; or 4) visting www.principal.com. o Changes to purchase payment allocations do not transfer any existing Investment Option accumulated values. o Purchase payments are credited on the basis of unit value next determined after we receive a purchase payment. Separate Account Division Transfers o You may request an unscheduled transfer or set up a scheduled transfer by sending us a written request, by telephoning if you have telephone privileges (1-800-852-4450) or sending us a fax (1-515-248-9800). o You must specify the dollar amount or percentage to transfer from each Division. o The minimum amount is $100 or if the Division's value is less than $100, then 100% of the Division from which the transfer is being made. o In states where allowed, we reserve the right to reject transfer instructions from someone providing them for multiple Contracts for which he or she is not the owner. You may not make a transfer to the Fixed Account if: o a transfer has been made from the Fixed Account to a Division within six months; or o following the transfer, the Fixed Account value would be greater than $1,000,000 (without our prior approval). Unscheduled Transfers o You may make unscheduled Division transfers from a Division to another Division or to the Fixed Account by: 1) mailing your instructions to us; 2) calling us at 1-800-852-4450 (if telephone privileges apply); 3) faxing your instructions to us at 1-515-248-9800; or 4) visting www.principal.com. o Transfers are not permitted into DCA Plus Accounts. o The transfer is made, and values determined, as of the end of the valuation period in which we receive your request. Scheduled Transfers (Dollar Cost Averaging) o You may elect to have transfers made on a scheduled basis. o You must specify the dollar amount of the transfer. o You select the transfer date (other than the 29th, 30th or 31st) and the transfer period (monthly, quarterly, semi-annually or annually). o If the selected date is not a valuation date, the transfer is completed on the next valuation date. o Transfers are not permitted into DCA Plus Accounts. o If you want to stop a scheduled transfer, then you must provide us notice prior to the date of the scheduled transfer. o Transfers continue until your value in the Division is zero or we receive notice to stop them. o We reserve the right to limit the number of Divisions from which simultaneous transfers are made. In no event will it ever be less than two. Automatic Portfolio Rebalancing (APR) o APR allows you to maintain a specific percentage of your Separate Account accumulated value in specified Divisions over time. o You may elect APR at any time. o APR is not available for values in the Fixed Account or the DCA Plus Accounts. o APR is not available if you have arranged scheduled transfers from the same Division. o APR will not begin until the examination period has expired. o There is no charge for APR transfers. o APR can be selected for quarterly, semi-annual or annual rebalancing. o You may rebalance by completing and submitting a form to us, by telephoning if you have telephone privileges (1-800-852-4450) or faxing your instructions to us (1-515-248-9800). (Divisions are rebalanced at the end of the next valuation period following your request.) Example: You elect APR to maintain your Separate Account accumulated value with 50% in the A Division and 50% in the B Division. At the end of the specified period, 60% of the values are in the A Division, with the remaining 40% in the B Division. By rebalancing, units from the A Division are sold and applied to the B Division so that 50% of the Separate Account accumulated value is once again in each Division. Telephone Services* Telephone services are permitted for: o purchase payment allocation changes; o transfers; and o changes to APR. Telephone services are available for both you and your sales representative. Telephone services may be declined on the application or at any later date by providing us with written notice. Telephone services are used by calling us at 1-800-852-4450. Telephone instructions must be made while we are open for business. They are effective when received by us before the close of normal trading of the NYSE (generally 3 p.m. Central Time). Requests received when we are not open for business or after the NYSE closes its normal trading will be effective on the next valuation date. Direct Dial* You may obtain Contract information from our direct dial system between 7:00 a.m. and 9:00 p.m., Central Time, Sunday through Friday, and between 7:00 a.m. and 4:00 p.m., Central Time, on Saturday. The telephone number is 1-800-852-4450. Internet* Internet access is available for both you and your sales representative at www.principal.com. Internet access may be declined on the application or at a later date by providing us with written notice. * Instructions received via our telephone services, direct dial system and internet are binding on both owners if the Contract is jointly owned. Neither the Company nor the Separate Account are responsible for the authenticity of telephone service, direct dial or internet transaction requests. We reserve the right to refuse telephone service, direct dial or internet transaction requests. You assume the risk of loss caused by fraudulent telephone service, direct dial or internet transactions we reasonably believe to be genuine. We follow procedures in an attempt to assure genuine telephone service, direct dial or internet transactions. If these procedures are not followed, then we may be liable for loss caused by unauthorized or fraudulent transactions. The procedures may include recording telephone service transactions, recording direct dial transactions, requesting personal identification (name, daytime telephone number, social security number and/or birth date) and sending written confirmation to your address of record. We reserve the right to modify or terminate telephone service, direct dial or internet transaction procedures at any time. Surrenders Surrenders result in the cancellation of units and your receipt of the canceled unit values minus any applicable fee and surrender charge. Surrenders from the Separate Account are generally paid within seven days of the effective date of the request for surrender (or earlier if required by law). However, certain delays in payment are permitted (see DELAY OF PAYMENTS). Surrenders before age 59 1/2 may involve an income tax penalty (see FEDERAL TAX MATTERS). You must send us a written request for any surrender. You may specify surrender allocation percentages with each partial surrender request. If you don't provide us with specific percentages, we will use your purchase payment allocation percentages for the partial surrender. Surrenders may be subject to a surrender charge (see SURRENDER CHARGE). Total Surrender o You may surrender the Contract at any time before the annuity payment date. o You receive the cash surrender value at the end of the valuation period during which we receive your surrender request. o The cash surrender value is your accumulated value minus any applicable fee and charge. o The written consent of all collateral assignees and irrevocable beneficiaries must be obtained prior to surrender. o We reserve the right to require you to return the Contract to us prior to making any payment though this does not affect the amount of the cash surrender value. Unscheduled Partial Surrender o Prior to the annuity payment date and during the lifetime of the Annuitant, you may surrender a part of the accumulated value by sending us a written request. o You must specify the dollar amount of the surrender (which must be at least $100). o The surrender is effective at the end of the valuation period during which we receive your written request for surrender. o The surrender is deducted from your Investment Options according to the surrender allocation percentages you specify. o If surrender allocation percentages are not specified, we use your purchase payment allocation percentages. o We surrender units from your Investment Options to equal the dollar amount of the surrender request plus any applicable surrender charge and fee. o The accumulated value after the unscheduled partial surrender must be equal to or greater than $5,000 (we reserve the right to change the minimum remaining accumulated value but it will not be greater than $10,000). Scheduled Partial Surrender o You may elect partial surrenders from any of the Investment Options on a scheduled basis by sending us written notice. o Your accumulated value must be at least $5,000 when the scheduled surrenders begin. o You may specify monthly, quarterly, semi-annually or annually and choose a surrender date (other than the 29th, 30th or 31st). o If the selected date is not a valuation date, the surrender is completed on the next valuation date. o The surrenders continue until your value in the Division is zero or we receive written notice to stop them. Death Benefit If you or the annuitant die before the annuity payment date, then we will pay a death benefit. In the case of joint annuitants, the death benefit is paid upon death of the first annuitant. If the owner is not a natural person, death benefits are paid to the beneficiary(ies) upon the death of the annuitant. Before the annuity payment date, you may give us written instructions for payment under a death benefit option. If we do not receive your instructions, the death benefit is paid according to instructions from the beneficiary(ies). You name the beneficiary or beneficiaries in your application. The beneficiary(ies) receives benefits upon your death. Generally, unless the beneficiary(ies) elects otherwise we pay the death benefit in a single sum, subject to proof of your death. Unless you have named an irrevocable beneficiary(ies), you may change your beneficiary by providing us with written notice. If a beneficiary dies before you, on your death we will make equal payments to the surviving beneficiaries unless you had provided us with other written instructions. If none of your beneficiaries survive you, we will pay the death benefit to your estate in a lump sum. Upon death of the annuitant, your beneficiary may elect to: o apply the death benefit under an annuity payment option; or o receive the death benefit as a single payment. No surrender charge applies when a death benefit is paid. If you die before the annuitant and your beneficiary is your spouse, we will continue the Contract with your spouse as the new owner unless your spouse elects to receive the death benefit. If the owner or annuitant of a Contract, not issued as an IRA, Roth IRA, SEP IRA or Simple-IRA, dies before the annuitant and before the annuity payment date, written notice of the death must be sent to us promptly so distribution arrangements can be made to avoid adverse tax consequences. Standard Death Benefit The amount of the standard death benefit is the greatest of: o your accumulated value on the date we receive proof of death and all required documents; o the total of purchase payments minus any partial surrenders, fees and charges as of the date we receive all required documents and notice (including proof) of death; or o the highest accumulated value on any prior Contract anniversary that is divisible equally by seven, plus any purchase payments and less any partial surrenders (and surrender charges incurred) made after that Contract anniversary. Annual Enhanced Death Benefit This is an optional death benefit rider. Under this rider, if the original annuitant or owner dies before the annuity payment date, then the death benefit payable to the beneficiary is the greatest of: 1) the standard death benefit; 2) the annual increasing death benefit, based on purchase payments (accumulated at 5% annually) minus any surrenders and surrender charges (accumulated at 5% annually) until the later of the Contract anniversary after the original owner's or original annuitant's 75th birthday or five years from the effective date of the rider; or 3) the highest accumulated value on a Contract anniversary, plus any subsequent purchase payments minus any surrenders and surrender charges, until the Contract anniversary following the original owner's or original annuitant's 75th birthday or five years from the effective date of the rider, whichever comes last. For Contracts issued in New York - under this rider, if the original annuitant or owner dies before the annuity payment date, then the death benefit payable to the beneficiary is the greater of: 1) the standard death benefit; or 2) the highest accumulated value on a Contract anniversary until the Contract anniversary following the original owner's or original annuitant's 75th birthday or five years from the effective date of the rider, whichever comes last. Lock-In Feature At the later of the Contract anniversary following the original owner's or original annuitant's 75th birthday ("lock-in date"), the death benefit amount is locked-in. After the lock-in date, the death benefit increases by purchase payments (subject to applicable restrictions) made after the lock-in date, minus any surrenders and surrender charges. However, because the death benefit is locked-in, it will only decrease by surrenders and surrender charges. Once the standard death benefit equals the annual enhanced death benefit, then the annual enhanced death benefit and any associated charge terminate. The standard death benefit then applies. Termination You may terminate the annual enhanced death benefit at anytime. Once the annual enhanced death benefit is terminated, it cannot be reinstated (except in Florida). The annual cost of the rider is 0.20% of the annual accumulated value (0.15% in New York). The charge is equal to 0.05% (0.0375% in New York) of the average accumulated value during the calendar quarter. The cost will be deducted throughout the redemption of units from your Contract's accumulated value in the same proportion as the purchase payment allocations among the DCA Plus Accounts, Fixed Account and Separate Account Divisions. If the rider is purchased after the beginning of a quarter, then the charge is prorated according to the number of days it is in effect during the quarter. Upon termination of the rider or upon death, you will be charged based on the number of days it is in effect during the quarter. The enhanced death benefit rider is only available at the time the Contract is issued. Thus, once a Contract has been purchased without the rider, it may not be added at a later date. Payment of Death Benefit The death benefit is usually paid within seven days of our receiving all documents (including proof of death) that we require to process the claim. Payment is made according to benefit instructions provided by you. Some states require this payment to be made in less than seven days. Under certain circumstances, this payment may be delayed (see DELAY OF PAYMENTS). We pay interest (at least 3% or as required by state law) on the death benefit from the date we receive all required documents until payment is made or until the death benefit is applied under an annuity payment option. NOTE:Proof of death includes: a certified copy of a death certificate; a certified copy of a court order; a written statement by a medical doctor; or other proof satisfactory to us. The Annuity Payment Period Annuity Payment Date You may specify an annuity payment date in your application. You may elect to receive payments under an annuity payment option at any time. If you do not specify an annuity payment date, then the annuity payment date is the later of the older annuitant's 85th birthday or 10 years after issuance. If the annuitant is living and the Contract is in force on that date, we will notify you to begin taking payments under the Contract. You may not select an annuity payment date which is on or after the older annuitant's 85th birthday or 10 years after the Contract date, whichever is the later. (No later than age 88 in Pennsylvania or age 90 in New York.) Depending on the type of annuity payment option selected, payments that are initiated either before or after the annuity payment date may be subject to penalty taxes (see FEDERAL TAX MATTERS). You should consider this carefully when you select or change the annuity payment date. You may change the annuity payment date with our prior approval. The request must be in writing and approved before we issue a supplementary Contract which provides an annuity payment option. Annuity Payment Options We offer fixed annuity payments. If, however, the accumulated value on the annuity payment date is less than $5,000 or if the amount applied under an annuity payment option is less than the minimum requirement we may pay out the entire amount. No surrender charge would be imposed. The Contract would then be canceled. You may choose from several fixed annuity payment options. Payments will be made on the frequency you choose. You may elect to have your annuity payments made on a monthly, quarterly, semiannual or annual basis. The dollar amount of the payments is specified for the entire payment period according to the option selected. There is no right to make any total or partial surrender after the annuity payments start. The amount of the annuity payment depends on: o amount of accumulated value; o annuity payment option selected; and o age and gender of annuitant (unless fixed income option is selected). Annuity payments generally are higher for male annuitants than for female annuitants with an otherwise identical Contract. This is because statistically females have longer life expectancies than males. In certain states, this difference may not be taken into consideration in fixing the payment amount. Additionally, Contracts with no gender distinctions are made available for certain employer-sponsored plans because under most such plans, such Contract provisions are prohibited by law. You may select an annuity payment option or change a previous selection by written request. We must receive the request on or before the annuity payment date. If an annuity payment option is not selected, then we will automatically apply the Life Income with Payments Guaranteed for a Period of 10 Years (see below). If you designate joint annuitants, then payment will be made pursuant to a Joint and Full Survivor Life Income for a Period of 10 Years (see below). Tax laws and regulations may impose further restrictions on annuity payment options. Payments under the annuity payment options are made as of the first day of each payment period beginning with the annuity payment date. The available annuity payment options are: Fixed Income. Payments of a fixed amount or payments for a fixed period of at least five years but not more than 30 years. Payments stop after all guaranteed payments are made. Life Income. Payments are made as of the first day of each payment period during the annuitant's life, starting with the annuity payment date. No payments are made after the annuitant dies. It is possible that you would only receive one payment under this option if the annuitant dies before the second payment is due. Life Income with Payments Guaranteed for a Period of 5 to 20 Years. Payments are made on the first day of each payment period beginning on the annuity payment date. Payments will continue until the annuitant dies. If the annuitant dies before all of the guaranteed payments have been made, then we will continue the guaranteed payments to the beneficiary. Joint and Full Survivor Life Income with Payments Guaranteed for a Period of 10 Years. Payments continue as long as either the annuitant or the joint annuitant is alive. If both die before all guaranteed payments have been made, the guaranteed remaining payments are made to the beneficiary. Joint and Two-thirds Survivor Life Income. Payments continue as long as either the annuitant or the joint annuitant is alive. If either the annuitant or joint annuitant dies, payments continue to the survivor at two-thirds the original amount. Payments stop when both the annuitant and joint annuitant have died. It is possible that only one payment is made under this option if both annuitants die before the second payment is due. Other annuity payment options may be available with our approval. Death of Annuitant If the owner or annuitant dies during the annuity payment period, remaining payments are made to the beneficiary throughout the guarantee period, if any, or for the life of any joint annuitant, if any. In all cases the person entitled to receive payments also receives any rights and privileges under the annuity payment option. The mortality risk assumed by the Company is to make annuity payments for the full life of all annuitants regardless of how long they, or any individual annuitant, might live. Mortality risk does not apply to the Fixed Income option. Annuity payments are determined in accordance with annuity tables and other provisions contained in the Contract. This assures neither an annuitant's own longevity, nor an improvement in life expectancy, will have an adverse effect on the annuity payments received under this Contract. The annuity payment tables contained in this Contract are based on the Annuity Mortality 1983 Table a. These tables are guaranteed for the life of the Contract. If you own one or more qualified annuity contracts, in order to avoid tax penalties, payments from at least one of your qualified contracts must start no later than April 1 following the calendar year in which you turn age 70 1/2. The required minimum payment is a distribution in equal (or substantially equal) amounts over your life or over the joint lives of you and your designated beneficiary. In addition, payments must be made at least once a year. Tax penalties may also apply at your death on certain excess accumulations. You should consider potential tax penalties with your tax advisor when selecting an annuity payment option or taking other distributions from the Contract. Additional rules apply to distributions under non-qualified contracts (see REQUIRED DISTRIBUTIONS FOR NON-QUALIFIED CONTRACTS). However, the rules do not apply to contracts issued in connection with IRAs, SEPs or SIMPLE-IRAs. CHARGES AND DEDUCTIONS An annual fee, a mortality and expense risks charge and in some circumstances a purchase credit rider charge are deducted under the Contract. A surrender charge may also be deducted from certain surrenders made before the annuity payment date. We reserve the right to assess a transaction fee, state premium taxes and a daily administration charge. There are also deductions from and expenses paid out of the assets of the Mutual Funds which are described in the Mutual Funds' prospectuses. Annual Fee An annual fee exists which is the lesser of $30 or 2% of your accumulated value (subject to any applicable state law limitations). The fee is deducted from the DCA Plus Accounts, Fixed Account or your interest in a Division, whichever has the greatest value. The fee is deducted on each contract anniversary and upon total surrender of the Contract. This fee is currently waived for Contracts having an accumulated value on the last day of the Contract year of $30,000 or more. The aggregate value of multiple Contracts owned, or jointly owned, by you is used to attain the $30,000 accumulated value. Aggregation occurs on each Contract's anniversary. The fee assists in covering administrative costs. The Company does not anticipate any profit from this fee. The administrative costs include costs associated with: o issuing Contracts; o establishing and maintaining the records which relate to Contracts; o making regulatory filings and furnishing confirmation notices; o preparing, distributing and tabulating voting materials and other communications; o providing computer, actuarial and accounting services; and o processing Contract transactions. Mortality and Expense Risks Charge We assess each Division with a daily charge for mortality and expense risks. The annual rate of the charge is 1.25% of the average daily net assets of the Separate Account. We agree not to increase this charge for the duration of the Contract. This charge is assessed only prior to the annuity payment date. This charge is assessed daily when the value of a unit is calculated. We have a mortality risk in that we guarantee payment of a death benefit in a single sum or under an annuity payment option. No surrender charge is imposed on a death benefit payment which gives us an additional mortality risk. The expense risk that we assume is that the actual expenses incurred in issuing and administering the Contract exceed the Contract limits on administrative charges. If the mortality and expense risks charge is not enough to cover the costs, we bear the loss. If the amount of mortality and expense risks charge deducted is more than our costs, the excess is profit to the Company. We expect a profit from the mortality and expense risks charge. Purchase Payment Credit If you elect the purchase payment credit rider we assess each Division with an additional daily charge. The annual rate of the charge is 0.60% of the average daily net assets of the Separate Account. We agree not to increase this charge for the duration of the Contract. This charge is assessed until completion of your 8th Contract year and only prior to the annuity payment date. This charge is assessed daily when the value of a unit is calculated. If the purchase payment credit rider charge is not enough to cover the cost of the credit, we bear the loss. If the amount of the purchase payment credit rider charge deducted is more than our costs, the excess is profit to the Company. We expect a profit from the purchase payment credit rider charge. Transaction Fee We reserve the right to charge a transaction fee of $30 that applies to each unscheduled partial surrender after the 12th unscheduled partial surrender in a Contract year. We also reserve the right to charge a $30 transaction fee on each unscheduled transfer after the 12th such transfer in a Contract year. The transaction fee would be deducted from the DCA Plus Accounts, Fixed Account and/or your interest in a Division from which the amount is surrendered or transferred, on a pro rata basis. Premium Taxes We reserve the right to deduct an amount to cover any premium taxes imposed by states or other jurisdictions. Any deduction is made from either a purchase payment when we receive it, or the accumulated value when you request a surrender (total or partial) or it is applied under an annuity payment option. Premium taxes range from 0% in most states to as high as 3.50%. Surrender Charge No sales charge is collected or deducted when purchase payments are applied under the Contract. A surrender charge is assessed on certain total or partial surrenders. The amounts we receive from the surrender charge are used to cover some of the expenses of the sale of the Contract (commissions and other promotional or distribution expenses). If the surrender charge collected is not enough to cover the actual costs of distribution, the costs are paid from the company's General Account assets which includes profit, if any, from the mortality and expense risks charge. The surrender charge for any total or partial surrender is a percentage of the purchase payments surrendered which were received by us during the Contract years prior to the surrender. The applicable percentage which is applied to the sum of the purchase payments paid during each Contract year is determined by the following tables. Surrender Charge without the purchase payment credit rider (as a percentage of amounts surrendered) Table of surrender charges without the purchase payment credit rider Number of completed Contract years Surrender charge applied to all since each purchase payment purchase payments received in was made that Contract year 0 (year of purchase payment)* 6% 1 6% 2 6% 3 5% 4 4% 5 3% 6 2% 7 and later 0% Surrender Charge with the purchase payment credit rider (as a percentage of amounts surrendered) Table of surrender charges with the purchase payment credit rider Number of completed Contract years Surrender charge applied to all since each purchase payment purchase payments received in was made that Contract year 0 (year of purchase payment)* 8% 1 8% 2 8% 3 8% 4 7% 5 6% 6 5% 7 4% 8 3% 9 and later 0% * Each purchase payment begins in year 0 for purposes of calculating the percentage applied to that payment. However, purchase payments are added together by Contract year for purposes of determining the applicable surrender charge percentage. If your Contract year begins April 1 and ends March 31 the following year, then all purchase payments received during that period are considered to have been made in that Contract year. For purpose of calculating surrender charges, we assume that surrenders and transfers are made in the following order: o first from purchase payments no longer subject to a surrender charge; o then from the free surrender privilege (first from the earnings, then from the oldest purchase payments (first-in, first-out)) described below; and o then from purchase payments subject to a surrender charge on a first-in, first-out basis. A surrender charge is not imposed in states where it is prohibited, including: o New Jersey- no surrender charge for total surrender on or after the later of the annuitant's 64th birthday or 4 years after the Contract date. o Washington- no surrender charge for total surrender on or after the later of the annuitant's 70th birthday or 10 years after the Contract date. Free Surrender Privilege The free surrender privilege is an amount normally subject to a surrender charge that may be surrendered without a charge. The free surrender privilege is the greater of: o earnings in the Contract (earnings = accumulated value less unsurrendered purchase payments as of the surrender date); or o 10% of the purchase payments still subject to the surrender charge, decreased by any partial surrenders since the last Contract anniversary. The free surrender privilege not used in a Contract year is not added to the free surrender privilege for any following Contract year(s). Unscheduled partial surrenders of the free surrender privilege may be subject to the transaction fee described above. Waiver of Surrender Charge The surrender charge does not apply to: o amounts applied under an annuity payment option; or o payment of any death benefit, however, the surrender charge does apply to purchase payments made by a surviving spouse after an owner's death; or o amounts distributed to satisfy the minimum distribution requirement of Section 401(a)9 of the Code provided that the amount surrendered does not exceed the minimum distribution amount which would have been calculated based on the value of this Contract alone; or o an amount transferred from the Contract to a single premium immediate annuity issued by the Company after the surrender charge period has expired; or o an amount transferred from a Contract used to fund an IRA to another annuity contract issued by the Company to fund an IRA of the participant's spouse when the distribution is made pursuant to a divorce decree; or o if permitted by state law, withdrawals made after the first Contract anniversary if the original owner or original annuitant has a critical need. Waiver of the surrender charge is available for critical need if the following conditions are met: o original owner or original annuitant has a critical need; and o the critical need did not exist before the Contract date. For the purposes of this section, the following definitions apply: o critical need - owner's or annuitant's confinement to a health care facility, terminal illness diagnosis or total and permanent disability. If the critical need is confinement to a health care facility, the confinement must continue for at least 60 consecutive days after the Contract date and the surrender must occur within 90 days of the confinement's end. o health care facility - a licensed hospital or inpatient nursing facility providing daily medical treatment and keeping daily medical records for each patient (not primarily providing just residency or retirement care). This does not include a facility primarily providing drug or alcohol treatment, or a facility owned or operated by the owner, annuitant or a member of their immediate families. o terminal illness - sickness or injury that results in the owner's or annuitant's life expectancy being 12 months or less from the date notice to receive a distribution from the Contract is received by the Company. o total and permanent disability - a disability that occurs after the Contract date but before the original owner or annuitant reaches age 65 and qualifies to receive social security disability benefits. In New York and West Virginia, different definitions of total and permanent disability apply. Contact us at 1-800-852-4450 for additional information. This waiver of surrender charge rider is not available in Massachusetts, New Jersey or Pennsylvania. In New York, the rider only applies if the original owner or original annuitant suffers a total and permanent disability. Specific information is available from your sales representative or the annuity service office (1-800-852-4450). Administration Charge We reserve the right to assess each Division with a daily charge at the annual rate of 0.15% of the average daily net assets of the Division. This charge would only be imposed before the annuity payment date. This charge would be assessed to help cover administrative expenses. Administrative expenses include the cost of issuing the Contract, clerical, recordkeeping and bookkeeping services, keeping the required financial and accounting records, communicating with Contract owners and making regulatory filings. Special Provisions for Group or Sponsored Arrangements Wherepermitted by state law, Contracts may be purchased under group or sponsored arrangements as well as on an individual basis. Group Arrangement - program under which a trustee, employer or similar entity purchases Contracts covering a group of individuals on a group basis. Sponsored Arrangement - program under which an employer permits group solicitation of its employees or an association permits group solicitation of its members for the purchase of Contracts on an individual basis. The charges and deductions described above may be reduced or eliminated for Contracts issued in connection with group or sponsored arrangements. The rules in effect at the time the application is approved will determine if reductions apply. Reductions may include but are not limited to sales of Contracts without, or with reduced, mortality and expense risks charges, annual fees or surrender charges. Availability of the reduction and the size of the reduction (if any) is based on certain criteria. Eligibility for and the amount of these reductions are determined by a number of factors, including the number of individuals in the group, the amount of expected purchase payments, total assets under management for the Contract owner, the relationship among the group's members, the purpose for which the Contract is being purchased, the expected persistency of the Contract, and any other circumstances which, in our opinion are rationally related to the expected reduction in expenses. Reductions reflect the reduced sales efforts and administrative costs resulting from these arrangements. We may modify the criteria for and the amount of the reduction in the future. Modifications will not unfairly discriminate against any person, including affected Contract owners and other contract owners with contracts funded by the Separate Account. FIXED ACCOUNT AND DCA PLUS ACCOUNTS This prospectus is intended to serve as a disclosure document only for the Contract as it relates to the Separate Account. It only contains selected information regarding the Fixed Account and DCA Plus Accounts. Assets in the Fixed Account and DCA Plus Accounts are held in the General Account of the Company. The General Account is the assets of the Company other than those allocated to any of the Company's Separate Accounts. Subject to applicable law, the Company has sole discretion over the assets in the General Account. Because of exemptive and exclusionary provisions, interests in the Fixed Account and DCA Plus Accounts are not registered under the Securities Act of 1933 and the General Account is not registered as an investment company under the Investment Company Act of 1940. The Fixed Account and DCA Plus Accounts are not subject to these Acts. The staff of the SEC does not review the prospectus disclosures relating to the Fixed Account or DCA Plus Accounts. However, these disclosures are subject to certain generally applicable provisions of the federal securities laws relating to the accuracy and completeness of statements made in the prospectus. Separate Account expenses are not assessed against any Fixed Account or DCA Plus Account values. More information concerning the Fixed Account and DCA Plus Accounts is available from our annuity service office or from a sales representative. Fixed Account The Company guarantees that purchase payments allocated to the Fixed Account earn interest at a guaranteed interest rate. In no event will the guaranteed interest rate be less than 3% compounded annually. Each purchase payment allocated or amount transferred to the Fixed Account earns interest at the guaranteed rate in effect on the date it is received or transferred. This rate applies to each purchase payment or amount transferred through the end of the Contract year. Each Contract anniversary, we declare a renewal interest rate that is guaranteed and applies to the Fixed Account value in existence at that time. This rate applies until the end of the Contract year. Interest is earned daily and compounded annually at the end of each Contract year. Once credited, the interest is guaranteed and becomes part of the Fixed Account accumulated value from which deductions for fees and charges may be made. Fixed Account Accumulated Value Your Fixed Account value on any valuation date is equal to: o purchase payments allocated to the Fixed Account; o plus any transfers to the Fixed Account from the Separate Account and DCA Plus Accounts; o plus interest credited to the Fixed Account; o minus any surrenders or applicable surrender charges from the Fixed Account; o minus any transfers to the Separate Account. Fixed Account Transfers, Total and Partial Surrenders Transfers and surrenders from the Fixed Account are subject to certain limitations. In addition, surrenders from the Fixed Account may be subject to a charge (see SURRENDER CHARGE). You may transfer amounts from the Fixed Account to the Divisions before the annuity payment date and as provided below. The transfer is effective on the valuation date following our receiving your instructions. You may transfer amounts on either a scheduled or unscheduled basis. You may not make both scheduled and unscheduled Fixed Account transfers in the same Contract year. Unscheduled Fixed Account Transfers The minimum transfer amount is $100 (or entire Fixed Account accumulated value if less than $100). Once per Contract year, within the 30 days following the Contract anniversary date, you can: 1) transfer an amount not to exceed 25% of your Fixed Account accumulated value; or 2) transfer up to 100% of your Fixed Account accumulated value if: o your Fixed Account value is less than $1,000; o o the renewal interest rate for your Fixed Account accumulated value for the current Contract year is more than one percentage point lower than the weighted average of your Fixed Account interest rates for the preceding Contract year. We will inform you if the renewal interest rate falls to that level. Scheduled Fixed Account Transfers Fixed Account Dollar Cost Averaging You may make scheduled transfers on a monthly basis from the Fixed Account to the Separate Account as follows: o You may establish scheduled transfers by sending a written request or by telephoning the annuity service office at 1-800-852-4450. o Transfers occur on a date you specify (other than the 29th, 30th or 31st of any month). o If the selected date is not a valuation date, the transfer is completed on the next valuation date. o Scheduled transfers are only available if the Fixed Account accumulated value is $5,000 or more at the time the scheduled transfers begin. o Scheduled monthly transfers of an amount not to exceed 2% of your Fixed Account accumulated value at the beginning of the Contract year or the current Fixed Account value will continue until the Fixed Account value is zero or until you notify us to discontinue them. o The minimum transfer amount is $100. o If the Fixed Account accumulated value is less than $100 at the time of transfer, then the entire Fixed Account accumulated value will be transferred. o If you stop the transfers, you may not start them again without our prior approval. Dollar Cost Averaging Plus Program (DCA Plus Program) Purchase payments allocated to the DCA Plus Accounts earn a guaranteed interest rate. A portion of your DCA Plus Account accumulated value is periodically transferred (on the 28th of each month) to Divisions or to the Fixed Account. If the 28th is not a valuation date, then the transfer occurs on the next valuation date. The transfers are allocated according to your DCA Plus allocation instructions. Transfers into a DCA Plus Account are not permitted. If you elect the purchase payment credit rider, you may not participate in the DCA Plus Program. DCA Plus Purchase Payments You may enroll in the DCA Plus program by allocating a minimum purchase payment of $1,000 into a DCA Plus Account and selecting Divisions and/or the Fixed Account into which transfers will be made. Subsequent purchase payments of at least $1,000 are permitted. You can change your DCA Plus allocation instructions during the transfer period. Automatic portfolio rebalancing does not apply to DCA Plus Accounts. DCA Plus purchase payments receive the fixed rate of return in effect on the date each purchase payment is received by us. The rate of return remains in effect for the remainder of the 6-month or 12-month DCA Plus transfer program. Selecting A DCA Plus Account DCA Plus Accounts are available in either a 6-month transfer program or a 12-month transfer program. The 6-month transfer program and the 12-month transfer program generally will have different credited interest rates. You may enroll in both a 6-month and 12-month DCA Plus program. However, you may only participate in one 6-month and one 12-month DCA Plus program at a time. Under the 6-month transfer program, all payments and accrued interest must be transferred from the DCA Plus Account to the selected Divisions and/or Fixed Account in no more than 6 months. Under the 12-month transfer program, all payments and accrued interest must be transferred to the selected Divisions and/or Fixed Account in no more than 12 months. We will transfer an amount each month which is equal to your DCA Plus Account value divided by the number of months remaining in your transfer program. For example, if 4 scheduled transfers remain in your 6-month transfer program and you had a $4,000 DCA Plus Account accumulated value, the transfer amount would be $1,000 ($4,000 / 4). Scheduled DCA Plus Transfers Transfers are made from DCA Plus Accounts to Divisions and the Fixed Account according to your allocation instructions. The transfers begin after we receive your purchase payment and completed enrollment instructions. Transfers occur on the 28th of the month and continue until your entire DCA Plus Account accumulated value is transferred. Unscheduled DCA Plus Transfers You may make unscheduled transfers from DCA Plus Accounts to Divisions and/or the Fixed Account. A transfer is made, and values determined, as of the end of the valuation period in which we receive your request. DCA Plus Surrenders You may make scheduled or unscheduled surrenders from DCA Plus Accounts. Purchase payments earn interest according to the corresponding rate until the surrender date. Surrenders are subject to any applicable surrender charge. GENERAL PROVISIONS The Contract The entire Contract is made up of: the Contract, copies of any applications, amendments, riders and endorsements attached to the Contract; current data pages; copies of any supplemental applications, amendments, endorsements and revised Contract pages or data pages which are mailed to you. Only our corporate officers can agree to change or waive any provisions of a Contract. Any change or waiver must be in writing and signed by an officer of the Company. Delay of Payments Surrenders are generally made within seven days after we receive your instruction for a surrender in a form acceptable to us. This period may be shorter where required by law. However, payment of any amount upon total or partial surrender, death or the transfer to or from a Division may be deferred during any period when the right to sell Mutual Fund shares is suspended as permitted under provisions of the Investment Company Act of 1940 (as amended). The right to sell shares may be suspended during any period when: o trading on the NYSE is restricted as determined by the SEC or when the NYSE is closed for other than weekends and holidays; or o an emergency exists, as determined by the SEC, as a result of which: o disposal by a Mutual Fund of securities owned by it is not reasonably practicable; o it is not reasonably practicable for a Mutual Fund to fairly determine the value of its net assets; or o the SEC permits suspension for the protection of security holders. If payments are delayed and your surrender or transfer is not canceled by your written instruction, the amount to be surrendered or transferred will be determined the first valuation date following the expiration of the permitted delay. The surrender or transfer will be made within seven days thereafter. In addition, payments on surrenders attributable to a purchase payment made by check may be delayed up to 15 days. This permits payment to be collected on the check. We may also defer payment of surrender proceeds payable out of the Fixed Account for a period of up to six months. Misstatement of Age or Gender If the age or, where applicable, gender of the annuitant has been misstated, we adjust the annuity payment under your Contract to reflect the amount that would have been payable at the correct age and gender. If we make any overpayment because of incorrect information about age or gender, or any error or miscalculation, we deduct the overpayment from the next payment or payments due. Underpayments are added to the next payment. Assignment You may assign ownership of your non-qualified Contract. Each assignment is subject to any payments made or action taken by the Company prior to our notification of the assignment. We assume no responsibility for the validity of any assignment. An assignment or pledge of a Contract may have adverse tax consequences. An assignment must be made in writing and filed with us at the annuity service office. The irrevocable beneficiary(ies), if any, must authorize any assignment in writing. Your rights, as well as those of the annuitant and beneficiary, are subject to any assignment on file with us. Any amount paid to an assignee is treated as a partial surrender and is paid in a single lump sum. Change of Owner You may change your non-qualified Contract ownership designation at any time. Your request must be in writing and approved by us. After approval, the change is effective as of the date you signed the request for change. If ownership is changed, then the waiver of the surrender charge for surrenders made because of critical need of the owner is not available. We reserve the right to require that you send us the Contract so that we can record the change. Beneficiary Before the annuity payment date and while the annuitant is alive, you have the right to name or change a beneficiary. This may be done as part of the application process or by sending us a written request. Under certain retirement programs, however, spousal consent may be required to name or change a beneficiary. Unless you have named an irrevocable beneficiary, you may change your beneficiary designation by sending us a written request. If a beneficiary has not been named at the time of the annuitant's death, then the benefit will be paid to the owner, if living, otherwise, to the owner's estate. If the beneficiary dies during the annuity payment period, and no other beneficiary is alive, then any remaining benefits will be paid to the beneficiary's estate. If there are joint annuitants on the Contract, the benefit is paid on the first annuitant's death. Contract Termination We reserve the right to terminate the Contract and make a single sum payment (without imposing any charges) to you if your accumulated value at the end of the accumulation period is less than $2,000. Before the Contract is terminated, we will send you a notice to increase the accumulated value to $2,000 within 60 days. Reinstatement If you have replaced this Contract with an annuity contract from another company and want to reinstate this Contract, then the following apply: o we reinstate the Contract effective on the original surrender date; o if you elect the purchase payment credit rider on the reinstatement Contract, then the 9-year surrender charge period will commence from the date of reinstatement we calculate the purchase payment credit based on the amount of the reinstatement; o we apply the amount received from the other company and the amount of the surrender charge you paid when you surrendered the Contract; o these amounts are priced on the valuation day the money from the other company is received by us; o commissions are not paid on the reinstatement amounts; and o new data pages are sent to your address of record. Reports We will mail to you a statement, along with any reports required by state law, of your current accumulated value at least once per year prior to the annuity payment date. After the annuity payment date, any reports will be mailed to the person receiving the annuity payments. Quarterly statements reflect purchases and surrenders occurring during the quarter as well as the balance of units owned and accumulated values. RIGHTS RESERVED BY THE COMPANY We reserve the right to make certain changes if, in our judgment, they best serve the interests of you and the annuitant or are appropriate in carrying out the purpose of the Contract. Any changes will be made only to the extent and in the manner permitted by applicable laws. Also, when required by law, we will obtain your approval of the changes and approval from any appropriate regulatory authority. Approvals may not be required in all cases. Examples of the changes the Company may make include: o transfer assets in any Division to another Division or to the Fixed Account; o add, combine or eliminate a Division(s); o substitute the units of a Division for the units of another Division; o if units of a Division are no longer available for investment; or o if in our judgment, investment in a Division becomes inappropriate considering the purposes of the Separate Account. DISTRIBUTION OF THE CONTRACT The individuals who sell the Contract are authorized to sell life and other forms of personal insurance and variable annuities. These people will usually be representatives of Princor Financial Services Corporation ("Princor"), Principal Financial Group, Des Moines, Iowa 50392-0200 which is a broker-dealer registered under the Securities Exchange Act of 1934 and a member of the National Association of Securities Dealers, Inc. As the principal underwriter, Princor is paid 6.5% of purchase payments by the Company for the distribution of the Contract. The Company and Princor may receive a portion of the Fidelity Variable Insurance Products and Janus Aspen Series Funds' expenses for recordkeeping, marketing and distribution services. The Contract may also be sold through other selected broker-dealers registered under the Securities and Exchange Act of 1933 or firms that are exempt from such registration. Princor is also the principal underwriter for various registered investment companies organized by the Company. Princor is a subsidiary of Principal Financial Services, Inc. PERFORMANCE CALCULATION The Separate Account may publish advertisements containing information (including graphs, charts, tables and examples) about the hypothetical performance of its Divisions for this Contract as if the Contract had been issued on or after the date the Mutual Fund in which the Division invests was first offered. The hypothetical performance from the date of the inception of the Mutual Fund in which the Division invests is calculated by reducing the actual performance of the underlying Mutual Fund by the fees and charges of this Contract as if it had been in existence. The yield and total return figures described below vary depending upon market conditions, composition of the underlying Mutual Fund's portfolios and operating expenses. These factors and possible differences in the methods used in calculating yield and total return should be considered when comparing the Separate Account performance figures to performance figures published for other investment vehicles. The Separate Account may also quote rankings, yields or returns as published by independent statistical services or publishers and information regarding performance of certain market indices. Any performance data quoted for the Separate Account represents only historical performance and is not intended to indicate future performance. For further information on how the Separate Account calculates yield and total return figures, see the SAI. From time to time the Separate Account advertises its Money Market Division's "yield" and "effective yield" for these Contracts. Both yield figures are based on historical earnings and are not intended to indicate future performance. The "yield" of the Division refers to the income generated by an investment in the division over a 7-day period (which period is stated in the advertisement). This income is then "annualized." That is, the amount of income generated by the investment during that week is assumed to be generated each week over a 52-week period and is shown as a percentage of the investment. The "effective yield" is calculated similarly but, when annualized, the income earned by an investment in the Division is assumed to be reinvested. The "effective yield" is slightly higher than the "yield" because of the compounding effect of the assumed reinvestment. In addition, the Separate Account advertises the "yield" for other Divisions for the Contract. The "yield" of a Division is determined by annualizing the net investment income per unit for a specific, historical 30-day period and dividing the result by the ending maximum offering price of the unit for the same period. The Separate Account also advertises the average annual total return of its various Divisions. The average annual total return for any of the Divisions is computed by calculating the average annual compounded rate of return over the stated period that would equate an initial $1,000 investment to the ending redeemable accumulated value. VOTING RIGHTS The Company votes shares of the Principal Variable Contracts Fund, Inc., AIM V.I. Growth Fund, AIM V.I. Growth and Income Fund, AIM V.I. Value Fund, Fidelity Variable Insurance Products Fund, Fidelity Variable Insurance Products Fund II and Janus Aspen Series - Service Shares Aggressive Growth Portfolio held in the Separate Account at meetings of shareholders of those Mutual Funds. It follows your voting instructions if you have an investment in the corresponding Division. The number of Mutual Fund shares in which you have a voting interest is determined by your investments in a Mutual Fund as of a "record date." The record date is set by the Mutual Fund within the requirements of the laws of the state which govern the various Mutual Funds. The number of Mutual Fund shares held in the Separate Account attributable to your interest in each Division is determined by dividing the value of your interest in that Division by the net asset value of one share of the Mutual Fund. Shares for which owners are entitled to give voting instructions, but for which none are received, and shares of the Mutual Fund owned by the Company are voted in the same proportion as the total shares for which voting instructions have been received. Voting materials are provided to you along with an appropriate form that may be used to give voting instructions to the Company. If the Company determines pursuant to applicable law, that Mutual Fund shares held in Separate Account B need not be voted pursuant to instructions received from owners, then the Company may vote Mutual Fund shares held in the Separate Account in its own right. FEDERAL TAX MATTERS The following description is a general summary of the tax rules, primarily related to federal income taxes, which in our opinion are currently in effect. These rules are based on laws, regulations and interpretations which are subject to change at any time. This summary is not comprehensive and is not intended as tax advice. Federal estate and gift tax considerations, as well as state and local taxes, may also be material. You should consult a qualified tax adviser about the tax implications of taking action under a Contract or related retirement plan. Non-Qualified Contracts Section 72 of the Code governs the income taxation of annuities in general. o Purchase payments made under non-qualified Contracts are not excludable or deductible from your gross income or any other person's gross income. o An increase in the accumulated value of a non-qualified Contract owned by a natural person resulting from the investment performance of the Separate Account or interest credited to the DCA Plus Accounts and the Fixed Account is generally not taxable until paid out as surrender proceeds, death benefit proceeds, or otherwise. o Generally, owners who are not natural persons are immediately taxed on any increase in the accumulated value. The following discussion applies generally to Contracts owned by natural persons. o Surrenders or partial surrenders are taxed as ordinary income to the extent of the accumulated income or gain under the Contract. o The value of the Contract pledged or assigned is taxed as ordinary income to the same extent as a partial surrender. o Annuity payments: o The investment in the Contract is generally the total of the purchase payments made. o The portion of the annuity payment that represents the amount by which the accumulated value exceeds purchase payments is taxed as ordinary income. The remainder of each annuity payment is not taxed. o After the purchase payment(s) in the Contract is paid out, the full amount of any annuity payment is taxable. For purposes of determining the amount of taxable income resulting from distributions, all Contracts and other annuity contracts issued by us or our affiliates to the same owner within the same calendar year are treated as if they are a single contract. A transfer of ownership of a Contract, or designation of an annuitant or other payee who is not also the owner, may result in a certain income or gift tax consequences to the owner. If you are contemplating any transfer or assignment of a Contract, you should contact a competent tax advisor with respect to the potential tax effects of such transactions. Required Distributions for Non-Qualified Contracts In order for a non-qualified Contract to be treated as an annuity contract for federal income tax purposes, the Code requires: o If the person receiving payments dies on or after the annuity payment date but prior to the time the entire interest in the Contract has been distributed, the remaining portion of the interest is distributed at least as rapidly as under the method of distribution being used as of the date of that person's death. o If you die prior to the annuity payment date, the entire interest in the Contract will be distributed: o within five years after the date of your death; or o as annuity payments which begin within one year of your death and which are made over the life of your designated beneficiary or over a period not extending beyond the life expectancy of that beneficiary. o If you take a distribution from the Contract before you are 59 1/2, you may incur an income tax penalty. Generally, unless the beneficiary elects otherwise, the above requirements are satisfied prior to the annuity payment date by paying the death benefit in a single sum, subject to proof of your death. The beneficiary may elect by written request to receive an annuity payment option instead of a lump sum payment. If your designated beneficiary is your surviving spouse, the Contract may be continued with your spouse deemed to be the new owner for purposes of the Code. Where the owner or other person receiving payments is not a natural person, the required distributions provided for in the Code apply upon the death of the annuitant. IRA, SEP, and SIMPLE-IRA The Contract may be used to fund IRAs, SEPs, and SIMPLE-IRAs. o IRA - An Individual Retirement Annuity (IRA) is a retirement savings annuity. Contributions grow tax deferred. o SEP-IRA - A SEP is a form of IRA. A SEP allows you, as an employer, to provide retirement benefits for your employees by contributing to their IRAs. o SIMPLE-IRA - SIMPLE stands for Savings Incentive Match Plan for Employers. A SIMPLE-IRA allows employees to save for retirement by deferring salary on a pre-tax basis and receiving predetermined company contributions. The tax rules applicable to owners, annuitants and other payees vary according to the type of plan and the terms and conditions of the plan itself. In general, purchase payments made under a retirement program recognized under the Code are excluded from the participant's gross income for tax purposes prior to the annuity payment date (subject to applicable state law). The portion, if any, of any purchase payment made that is not excluded from their gross income is their investment in the Contract. Aggregate deferrals under all plans at the employee's option may be subject to limitations. If you are purchasing this Contract to fund a tax qualified retirement plan, you should be aware that the tax-deferred accrual feature is available with any qualified investment vehicle within a qualified plan and is NOT unique to a variable annuity. This Contract provides additional benefits such as lifetime income options, death benefit protection and guaranteed expense levels. The tax implications of these plans are further discussed in the SAI under the heading Taxation Under Certain Retirement Plans. Check with your tax advisor for the rules which apply to your specific situation. With respect to IRAs, IRA rollovers and SIMPLE-IRAs there is a 10% penalty under the Code on the taxable portion of a "premature distribution." The tax is increased to 25% in the case of distributions from SIMPLE-IRAs during the first two years of participation. Generally, an amount is a "premature distribution" unless the distribution is: o made on or after you reach age 59 1/2; o made to a beneficiary on or after your death; o made upon your disability; o part of a series of substantially equal periodic payments for the life or life expectancy of you or you and the beneficiary; o made to pay medical expenses; o for certain unemployment expenses; o for first home purchases (up to $10,000); or o for higher education expenses. Rollover IRAs If you receive a lump-sum distribution from a pension or profit sharing plan or tax-sheltered annuity, you may maintain the tax-deferred status of the money by rolling it into a "Rollover Individual Retirement Annuity." Generally, distributions from a qualified plan are subject to mandatory income tax withholding at a rate of 20%, unless the participant elects a direct rollover. You have 60 days from receipt of the money to complete this transaction. If you choose not to reinvest or go beyond the 60 day limit and are under age 59 1/2, you will incur a 10% IRS penalty as well as income tax expenses. Withholding Annuity payments and other amounts received under the Contract are subject to income tax withholding unless the recipient elects not to have taxes withheld. The amounts withheld vary among recipients depending on the tax status of the individual and the type of payments from which taxes are withheld. Notwithstanding the recipient's election, withholding may be required on payments delivered outside the United States. Moreover, special "backup withholding" rules may require us to disregard the recipient's election if the recipient fails to supply us with a "TIN" or taxpayer identification number (social security number for individuals), or if the Internal Revenue Service notifies us that the TIN provided by the recipient is incorrect. Mutual Fund Diversification The United States Treasury Department has adopted regulations under Section 817(h) of the Code which establishes standards of diversification for the investments underlying the Contracts. Under this Code Section, Separate Account investments must be adequately diversified in order for the increase in the value of non-qualified Contracts to receive tax-deferred treatment. In order to be adequately diversified, the portfolio of each underlying Mutual Fund must, as of the end of each calendar quarter or within 30 days thereafter, have no more than 55% of its assets invested in any one investment, 70% in any two investments, 80% in any three investments and 90% in any four investments. Failure of a Mutual Fund to meet the diversification requirements could result in tax liability to non-qualified Contract holders. The investment opportunities of the Mutual Funds could conceivably be limited by adhering to the above diversification requirements. This would affect all owners, including owners of Contracts for whom diversification is not a requirement for tax-deferred treatment. STATE REGULATION The Company is subject to the laws of the State of Iowa governing insurance companies and to regulation by the Insurance Department of the State of Iowa. An annual statement in a prescribed form must be filed by March 1 in each year covering our operations for the preceding year and our financial condition on December 31 of the prior year. Our books and assets are subject to examination by the Commissioner of Insurance of the State of Iowa or her representatives at all times. A full examination of our operations is conducted periodically by the National Association of Insurance Commissioners. Iowa law and regulations also prescribe permissible investments, but this does not involve supervision of the investment management or policy of the Company. In addition, we are subject to the insurance laws and regulations of other states and jurisdictions where we are licensed to operate. Generally, the insurance departments of these states and jurisdictions apply the laws of the state of domicile in determining the field of permissible investments. LEGAL OPINIONS Legal matters applicable to the issue and sale of the Contracts, including our right to issue Contracts under Iowa Insurance Law, have been passed upon by Karen Shaff, General Counsel and Senior Vice President. LEGAL PROCEEDINGS There are no legal proceedings pending to which Separate Account B is a party or which would materially affect Separate Account B. REGISTRATION STATEMENT This prospectus omits some information contained in the SAI (Part B of the registration statement) and Part C of the registration statement which the Company has filed with the SEC. The SAI is hereby incorporated by reference into this prospectus. You may request a free copy of the SAI by writing or telephoning the annuity service office. You may obtain a copy of Part C of the registration statement from the SEC, Washington, D.C. by paying the prescribed fees. OTHER VARIABLE ANNUITY CONTRACTS The Company currently offers other variable annuity contracts that participate in Separate Account B. In the future, we may designate additional group or individual variable annuity contracts as participating in Separate Account B. INDEPENDENT AUDITORS The financial statements of Principal Life Insurance Company Separate Account B and the consolidated financial statements of Principal Life Insurance Company are included in the SAI. Those statements have been audited by Ernst & Young LLP, independent auditors, for the periods indicated in their reports which also appear in the SAI. FINANCIAL STATEMENTS The consolidated financial statements of Principal Life Insurance Company which are included in the SAI should be considered only as they relate to our ability to meet our obligations under the Contract. They do not relate to investment performance of the assets held in the Separate Account. CUSTOMER INQUIRIES Your questions should be directed to: Principal Flexible Variable Annuity, Principal Financial Group, P.O. Box 9382, Des Moines, Iowa 50306-9382, 1-800-852-4450. TABLE OF CONTENTS OF THE STATEMENT OF ADDITIONAL INFORMATION Independent Auditors ..................................................... 4 Calculation of Yield and Total Return .................................... 4 Taxation Under Certain Retirement Plans..................................... 8 Principal Life Insurance Company Separate Account B Report of Independent Auditors ........................................ 9 Financial Statements................................................... 10 Principal Life Insurance Company Report of Independent Auditors ........................................ 37 Consolidated Financial Statements...................................... 38 To obtain a free copy of the SAI write or telephone: Principal Flexible Variable Annuity Principal Financial Group P.O. Box 9382 Des Moines, Iowa 50306-9382 Telephone: 1-800-852-4450 PART B PRINCIPAL LIFE INSURANCE COMPANY SEPARATE ACCOUNT B FLEXIBLE VARIABLE ANNUITY ("FVA") CONTRACT Statement of Additional Information dated November 15, 2000 This Statement of Additional Information provides information about Principal Life Insurance Company Separate Account B Flexible Variable Annuity (the "Contract") in addition to the information that is contained in the Contract's Prospectus, dated November 15, 2000. This Statement of Additional Information is not a prospectus. It should be read in conjunction with the Prospectus, a copy of which can be obtained free of charge by writing or telephoning: Variable Annuity The Principal Financial Group P.O. Box 9382 Des Moines Iowa 50306-9382 Telephone: 1-800-852-4450 TABLE OF CONTENTS Independent Auditors .................................................. 4 Principal Underwriter.................................................. 4 Calculation of Yield and Total Return.................................. 4 Taxation Under Certain Retirement Plans................................ 8 Principal Life Insurance Company Separate Account B Report of Independent Auditors................................. 9 Financial Statements........................................... 10 Principal Life Insurance Company Report of Independent Auditors................................. 37 Consolidated Financial Statements.............................. 38 INDEPENDENT AUDITORS Ernst & Young LLP, Des Moines, Iowa, serve as independent auditors for Principal Life Insurance Company Separate Account B and Principal Life Insurance Company and perform audit and accounting services for Separate Account B and Principal Life Insurance Company. PRINCIPAL UNDERWRITER Princor Financial Services Corporation ("Princor") is the principal underwriter of the Contract. Princor is a subsidiary of Principal Financial Services, Inc. The Contract's offering to the public is continuous. As the principal underwriter, Princor is paid for the distribution of the Contract. For the last three fiscal years Princor has received and retained the following commissions: 1999 1998 1997 received/retained received/retained received/retained ----------------- ----------------- ----------------- $11,907,807/$0 $13,284,014/$0 $11,491,356/$0 CALCULATION OF YIELD AND TOTAL RETURN The Separate Account may publish advertisements containing information (including graphs, charts, tables and examples) about the performance of one or more of its Divisions. The Contract was not offered prior to June 16, 1994. However, the Divisions invest in Accounts of the Principal Variable Contracts Fund, Inc., AIM V.I. Growth Fund, AIM V.I. Growth and Income Fund, AIM V.I. Value Fund, Fidelity Variable Insurance Products Fund, and Fidelity Variable Income Products Fund II. Effective June 12, 2000 the Principal Variable Contracts Fund, Inc. Stock Index 500 Account changed its name to the LargeCap Stock Index Account. Effective January 1, 1998 the Mutual Funds which correspond to Accounts of the Principal Variable Contracts Fund, Inc. were reorganized as follows:
Old Mutual Fund Name New Corresponding Name -------------------- ---------------------- Principal Variable Contracts Fund, Inc. Principal Aggressive Growth Fund, Inc. Aggressive Growth Account Principal Asset Allocation Fund, Inc. Asset Allocation Account Principal Balanced Fund, Inc. Balanced Account Principal Bond Fund, Inc. Bond Account Principal Capital Accumulation Fund, Inc. Capital Value Account Principal Emerging Growth Fund, Inc. MidCap Account Principal Government Securities Fund, Inc. Government Securities Account Principal Growth Fund, Inc. Growth Account Principal Money Market Fund, Inc. Money Market Account Principal World Fund, Inc. International Account
These Accounts, along with AIM V.I. Growth Fund, AIM V.I. Growth and Income Fund, AIM V.I. Value Fund and Fidelity VIP Growth Portfolio Service Class, were offered prior to the date the Contract was available. Thus, the Separate Account may publish advertisements containing information about the hypothetical performance of one or more of its Divisions for this Contract had the Contract been issued on or after the date the Mutual Fund in which such Division invests was first offered. Because Service Class shares for the Fidelity VIP Growth Division were not offered until November 3, 1997, performance shown for periods prior to that date represent the historical results of Initial Class shares and do not include the effects of the Service Class' higher annual fees and expenses. Service Shares of the Janus Aspen Series were first offered on December 31, 1999. Performance shown for periods prior to December 31, 1999, reflects performance of a different class of shares (the Institutional Shares) restated based on the Service Shares' estimated fees and expenses including the Service Shares' .25% 12b-1 fee and ignoring any fee and expense limitations. The hypothetical performance from the date of inception of the Mutual Fund in which the Division invests is derived by reducing the actual performance of the underlying Mutual Fund by the fees and charges of the Contract as if it had been in existence. The yield and total return figures described below will vary depending upon market conditions, the composition of the underlying Mutual Fund's portfolios and operating expenses. These factors and possible differences in the methods used in calculating yield and total return should be considered when comparing the Separate Account performance figures to performance figures published for other investment vehicles. The Separate Account may also quote rankings, yields or returns as published by independent statistical services or publishers and information regarding performance of certain market indices. Any performance data quoted for the Separate Account represents only historical performance and is not intended to indicate future performance. From time to time the Separate Account advertises its Money Market Division's "yield" and "effective yield" for these Contracts. Both yield figures are based on historical earnings and are not intended to indicate future performance. The "yield" of the Division refers to the income generated by an investment under the Contract in the Division over a seven-day period (which period will be stated in the advertisement). This income is then "annualized." That is, the amount of income generated by the investment during that week is assumed to be generated each week over a 52-week period and is shown as a percentage of the investment. The "effective yield" is calculated similarly but, when annualized, the income earned by an investment in the Division is assumed to be reinvested. The "effective yield" will be slightly higher than the "yield" because of the compounding effect of this assumed reinvestment. Neither yield quotation reflects a sales load deducted from purchase payments which, if included, would reduce the "yield" and "effective yield." In addition, from time to time, the Separate Account will advertise the "yield" for certain other Divisions for the Contract. The "yield" of a Division is determined by annualizing the net investment income per unit for a specific, historical 30-day period and dividing the result by the ending maximum offering price of the unit for the same period. This yield quotation does not reflect a surrender charge which, if included, would reduce the "yield." Also, from time to time, the Separate Account will advertise the average annual total return of its various Divisions. The average annual total return for any of the Divisions is computed by calculating the average annual compounded rate of return over the stated period that would equate an initial $1,000 investment to the ending redeemable Contract value. In this calculation the ending value is reduced by a surrender charge that decreases from 6% to 0% over a period of 7 years. The Separate Account may also advertise total return figures for its Divisions for a specified period that does not take into account the surrender charge in order to illustrate the change in the Division's unit value over time. See "Charges and Deductions" in the Prospectus for a discussion of surrender charges. Following are the hypothetical average annual total returns for the period ending December 31, 1999 assuming the Contract had been offered as of the effective dates of the underlying Mutual Funds in which the Divisions invest:
Contract without purchase payment credit rider With Surrender Charge Without Surrender Charge Division One Year Five Year Ten Year One Year Five Year Ten Year - ----------------------------------------------------------------------------------------------------------------------------- Aggressive Growth Division 31.74% 30.07% 27.01%(1) 37.74% 30.34% 27.19%(1) Asset Allocation Division 11.98 14.06 12.56(1) 17.98 14.53 12.87(1) Balanced Division (4.91) 11.80 9.94 1.09 12.31 9.94 Bond Division (9.83) 5.72 6.38 (3.83) 6.35 6.38 Capital Value Division (11.51) 15.95 11.48 (5.51) 16.39 11.48 Government Securities Division (7.56) 5.96 6.36 (1.56) 6.58 6.36 Growth Division 8.96 18.52 17.19(2) 14.96 18.92 17.44(2) International Division 18.34 15.35 12.66(2) 24.34 15.80 12.96(2) International Emerging Markets Division N/A N/A N/A N/A N/A N/A International SmallCap Division 85.38 34.55(3) N/A 91.38 37.47(3) N/A LargeCap Growth Division 25.34(4) N/A N/A 31.34(4) N/A N/A LargeCap Growth Equity Division N/A N/A N/A N/A N/A N/A LargeCap Stock Index Division 2.00(4) N/A N/A 8.00 (4) N/A N/A MicroCap Division (8.33) (17.20) (3) N/A (2.33) (13.18) (3) N/A MidCap Division 5.61 15.65 13.87 11.61 16.10 13.87 MidCap Growth Division 3.27 (0.82) (3) N/A 9.27 2.76(3) N/A MidCap Growth Equity Division N/A N/A N/A N/A N/A N/A Money Market Division (2.51) 3.32 3.63 3.49 3.84 3.63 Real Estate Division (11.69) (11.63) (3) N/A (5.69) (7.78) (3) N/A SmallCap Division 35.77 3.38(3) N/A 41.77 6.86(3) N/A SmallCap Growth Division 87.23 47.50(3) N/A 93.23 50.25(3) N/A SmallCap Value Division 13.91 (3.05)(3) N/A 19.91 0.58(3) N/A Utilities Division (5.01) 5.60(3) N/A 0.99 9.03(3) N/A AIM V.I. Growth Division 27.54 27.79 21.37(5) 33.54 28.02 21.37(5) AIM V.I. Growth and Income Division 26.57 26.34 22.79(2) 32.57 26.57 22.93(2) AIM V.I. Value Division 22.27 25.39 21.51(5) 28.27 25.64 21.51(5) Fidelity VIP II Contrafund Division 16.58 26.71(6) N/A 22.58 26.95(6) N/A Fidelity VIP Growth Division 29.57 27.84 18.38 35.57 28.06 18.38 Janus Aspen Aggressive Growth Division 114.53 33.97 32.31(7) 120.53 34.15 32.31(7) (1) Partial period beginning June 1, 1994. (2) Partial period beginning May 2, 1994. (3) Partial period beginning May 1, 1998. (4) Partial period beginning May 3, 1999. (5) Partial period beginning May 5, 1993. (6) Partial period beginning January 31, 1995. (7) Partial period beginning September 13, 1993.
Contract with purchase payment credit rider With Surrender Charge Without Surrender Charge Division One Year Five Year Ten Year One Year Five Year Ten Year - ----------------------------------------------------------------------------------------------------------------------------- Aggressive Growth Division 28.92% 29.14% 26.13%(1) 36.92 29.57% 26.43%(1) Asset Allocation Division 9.27 13.12 11.66(1) 17.27 13.85 12.19(1) Balanced Division (7.51) 10.85 9.28 0.49 11.64 9.28 Bond Division (12.41) 4.74 5.74 (4.41) 5.72 5.74 Capital Value Division (14.07) 15.01 10.81 (6.07) 15.69 10.81 Government Securities Division (10.15) 4.97 5.72 (2.15) 5.94 5.72 Growth Division 6.27 17.59 16.30(2) 14.27 18.21 16.74(2) International Division 15.59 14.42 11.76(2) 23.59 15.11 12.28(2) International Emerging Markets Division N/A N/A N/A N/A N/A N/A International SmallCap Division 82.23 32.72(3) N/A 90.23 36.65(3) N/A LargeCap Growth Division 22.82(4) N/A N/A 30.82(4) N/A N/A LargeCap Growth Equity Division N/A N/A N/A N/A N/A N/A LargeCap Stock Index Division (0.43) (4) N/A N/A 7.57(4) N/A N/A MicroCap Division (10.92) (19.11) (3) N/A (2.92) (13.70) (3) N/A MidCap Division 2.94 14.72 13.19 10.94 15.40 13.19 MidCap Growth Division 0.61 (2.66) (3) N/A 8.61 2.14(3) N/A MidCap Growth Equity Division N/A N/A N/A N/A N/A N/A Money Market Division (5.13) 2.14 3.01 2.87 3.22 3.01 Real Estate Division (14.26) (13.51) (3) N/A (6.26) (8.33) (3) N/A SmallCap Division 32.92 1.55(3) N/A 40.92 6.22(3) N/A SmallCap Growth Division 84.08 45.66(3) N/A 92.08 49.35(3) N/A SmallCap Value Division 11.19 (4.90) (3) N/A 19.19 (0.02) (3) N/A Utilities Division (7.61) 3.77(3) N/A 0.39 8.38(3) N/A AIM V.I. Growth Division 24.75 26.80 20.44(5) 32.75 27.26 20.65(5) AIM V.I. Growth and Income Division 23.78 25.34 21.85(2) 31.78 25.82 22.20(2) AIM V.I. Value Division 19.51 24.39 20.59(5) 27.51 24.89 20.79(5) Fidelity VIP II Contrafund Division 13.86 25.70(6) N/A 21.86 26.20(6) N/A Fidelity VIP Growth Division 26.76 26.84 17.68 34.76 27.31 17.68 Janus Aspen Aggressive Growth Division 111.29 32.98 31.39(7) 119.29 33.37 31.58(7) (2) Partial period beginning May 2, 1994. (3) Partial period beginning May 1, 1998. (4) Partial period beginning May 3, 1999. (5) Partial period beginning May 5, 1993. (6) Partial period beginning January 31, 1995. (7) Partial period beginning September 13, 1993.
TAXATION UNDER CERTAIN RETIREMENT PLANS INDIVIDUAL RETIREMENT ANNUITIES Purchase Payments. Individuals may make contributions for individual retirement annuity ("IRA") Contracts. Deductible contributions for any year may be made up to the lesser of $2,000 or 100% of compensation for individuals who (1) are not active participants in another retirement plan, (2) are unmarried and have adjusted gross income of $40,000 or less, or (3) are married and have adjusted gross income of $60,000 or less. Such individuals may establish an IRA for a spouse who makes no contribution to an IRA for the tax year. The annual purchase payments for both spouses' Contracts cannot exceed the lesser of $4,000 or 100% of the working spouse's earned income, and no more than $2,000 may be contributed to either spouse's IRA for any year. Individuals who are active participants in other retirement plans and whose adjusted gross income (with certain special adjustments) exceeds the cut-off point ($40,000 for unmarried, $60,000 for married persons filing jointly, and $0 for married persons filing a separate return) by less than $10,000 are entitled to make deductible IRA contributions in proportionately reduced amounts. For example, a married individual who is an active participant in another retirement plan and files a separate tax return is entitled to a partial IRA deduction if the individual's adjusted gross income is less than $10,000, and no IRA deduction if his or her adjusted gross income is equal to or greater than $10,000. Individuals whose spouse is an active participant in other retirement plans and whose combined adjusted gross income exceeds the cutoff point of $150,000 by less than $10,000 are entitled to make deductible IRA contributions in proportionately reduced amounts. An individual may make non-deductible IRA contributions to the extent of the excess of (1) the lesser of $2,000 ($4,000 in the case of a spousal IRA) or 100% of compensation over (2) the IRA deductible contributions made with respect to the individual. An individual may not make any contribution to his/her own IRA for the year in which he/she reaches age 70 1/2 or for any year thereafter. Taxation of Distributions. Distributions from IRA Contracts are taxed as ordinary income to the recipient, although special rules exist for the tax-free return of non-deductible contributions. In addition, taxable distributions received under an IRA Contract prior to age 59 1/2 are subject to a 10% penalty tax in addition to regular income tax. Certain distributions are exempted from this penalty tax, including distributions following the owner's death or disability if the distribution is paid as part of a series of substantially equal periodic payments made for the life (or life expectancy) of the Owner or the joint lives (or joint life expectancies) of Owner and the Owner's designated Beneficiary; distributions to pay medical expenses; distributions for certain unemployment expenses; distributions for first home purchases (up to $10,000) and distributions for higher education expenses. Required Distributions. Generally, distributions from IRA Contracts must commence not later than April 1 of the calendar year following the calendar year in which the owner attains age 70 1/2, and such distributions must be made over a period that does not exceed the life expectancy of the owner (or the owner and beneficiary). A penalty tax of 50% would be imposed on any amount by which the minimum required distribution in any year exceeded the amount actually distributed in that year. In addition, in the event that the owner dies before his or her entire interest in the Contract has been distributed, the owner's entire interest must be distributed in accordance with rules similar to those applicable upon the death of the Contract Owner in the case of a non-qualified Contract, as described in the Prospectus. Tax-Free Rollovers. The Internal Revenue Code (the "Code") permits the taxable portion of funds to be transferred in a tax-free rollover from a qualified employer pension, profit-sharing, annuity, bond purchase or tax-deferred annuity plan to an IRA Contract if certain conditions are met, and if the rollover of assets is completed within 60 days after the distribution from the qualified plan is received. A direct rollover of funds may avoid a 20% federal tax withholding generally applicable to qualified plans or tax-deferred annuity plan distributions. In addition, not more frequently than once every twelve months, amounts may be rolled over tax-free from one IRA to another, subject to the 60-day limitation and other requirements. The once-per-year limitation on rollovers does not apply to direct transfers of funds between IRA custodians or trustees. SIMPLIFIED EMPLOYEE PENSION PLANS AND SALARY REDUCTION SIMPLIFIED EMPLOYEE PENSION PLANS Purchase Payments. Under Section 408(k) of the Code, employers may establish a type of IRA plan referred to as a simplified employee pension plan (SEP). Employer contributions to a SEP cannot exceed the lesser of $24,000 or 15% or the employee's earned income. Employees of certain small employers may have contributions made to the salary reduction simplified employee pension plan ("SAR/SEP") on their behalf on a salary reduction basis. These salary reduction contributions may not exceed $10,000 in 2000, which is indexed for inflation. Employees of tax-exempt organizations and state and local government agencies are not eligible for SAR/SEPs. Taxation of Distributions. Generally, distribution payments from SEPs and SAR/SEPs are subject to the same distribution rules described above for IRAs. Required Distributions. SEPs and SAR/SEPs are subject to the same minimum required distribution rules described above for IRAs. Tax-Free Rollovers. Generally, rollovers and direct transfers may be made to and from SEPs and SAR/SEPs in the same manner as described above for IRAs, subject to the same conditions and limitations. SAVINGS INCENTIVE MATCH PLANS FOR EMPLOYEES (SIMPLE IRA) Purchase Payments. Under Section 408(p) of the Code, employers may establish a type of IRA plan known as a Simple IRA. Employees may have contributions made to the SIMPLE IRA on a salary reduction basis. These salary reduction contributions may not exceed $6,000 in 2000, which is indexed for inflation. Total salary reduction contributions are limited to $10,000 per year for any employee who makes salary reduction contributions to more than one plan. Employers are required to contribute to the SIMPLE IRA, which contributions may not exceed the lesser of: (1) The amount of salary deferred by the employee, (2) 3% of the employee's compensation, or (3) $6,000, if the employer contributes on a matching basis; or the lesser of: (1) 2% of the employee's compensation, or (2) $3,200, if the employer makes non-elective contributions. An employer may not make contributions to both a SIMPLE IRA and another retirement plan for the same calendar year. Taxation of Distributions. Generally, distribution payments from SIMPLE IRAs are subject to the same distribution rules described above for IRAs, except that distributions made within two years of the date of an employee's first participation in a SIMPLE IRA of an employer are subject to a 25% penalty tax instead of the 10% penalty tax discussed previously. Required Distributions. SIMPLE IRAs are subject to the same minimum required distribution rules described above for IRAs. Tax-Free Rollovers. Direct transfers may be made among SIMPLE IRAs in the same manner as described above for IRAs, subject to the same conditions and limitations. Rollovers from SIMPLE IRAs are permitted after two years have elapsed from the date of an employee's first participation in a SIMPLE IRA of the employer. Rollovers to SIMPLE IRAs from other plans are not permitted. ROTH INDIVIDUAL RETIREMENT ANNUITIES (ROTH IRA) Purchase Payments. Under Section 408A of the Code, Individuals may make nondeductible contributions to Roth IRA contracts up to $2,000. This contribution amount must be reduced by the amount of any contributions made to other IRAs for the benefit of the Roth IRA owner. The maximum $2,000 contribution is phased out for single taxpayers with adjusted gross income between $95,000 and $110,000 and for joint filers with adjusted gross income between $150,000 and $160,000. If taxable income is recognized on the regular IRA, an IRA owner with adjusted gross income of less than $100,000 may convert a regular IRA into a Roth IRA. If the conversion is made in 1999, IRA income recognized may be spread over four years. Otherwise, all IRA income will need to be recognized in the year of conversion. No IRS 10% tax penalty will apply to the conversion. Taxation of Distribution. Qualified distributions are received income-tax free by the Roth IRA owner, or beneficiary in case of the Roth IRA owner's death. A qualified distribution is any distribution made after five years if the IRA owner is over age 59 1/2, dies, becomes disabled, or uses the funds for first-time home buyer expenses at the time of distribution. The five-year period for converted amounts begins from the year of the conversion. Report of Independent Auditors Board of Directors and Participants Principal Life Insurance Company We have audited the accompanying individual and combined statements of net assets of Principal Life Insurance Company Separate Account B (comprised of the Aggressive Growth, AIM V.I. Growth, AIM V.I. Growth and Income, AIM V.I. Value, American Century VP Growth & Income, Asset Allocation, Balanced, Blue Chip, Bond, Capital Value, Fidelity VIP II Contrafund, Fidelity VIP Growth, Government Securities, Growth, International, International SmallCap, LargeCap Growth, MicroCap, MidCap, MidCap Growth, MidCap Value, Money Market, Real Estate, SmallCap, Small Cap Growth, SmallCap Value, Stock Index 500, Templeton VP Stock, and Utilities Divisions) as of December 31, 1999, and the related statements of operations for the year then ended, and changes in net assets for each of the two years in the period then ended, except for those divisions operating for portions of such periods as disclosed in the financial statements. These financial statements are the responsibility of the management of Principal Life Insurance Company. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned as of December 31, 1999, by correspondence with the transfer agents. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the individual and combined financial position of the respective divisions of Principal Life Insurance Company Separate Account B at December 31, 1999, and the individual and combined results of their operations and the changes in their net assets for the periods described above, in conformity with accounting principles generally accepted in the United States. /s/ Ernst & Young LLP Des Moines, Iowa January 31, 2000 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. Report of Independent Auditors The Board of Directors Principal Life Insurance Company We have audited the accompanying consolidated statements of financial position of Principal Life Insurance Company (the Company, an indirect wholly-owned subsidiary of Principal Mutual Holding Company) as of December 31, 1999 and 1998, and the related consolidated statements of operations, stockholder's equity and cash flows for each of the three years in the period ended December 31, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Principal Life Insurance Company at December 31, 1999 and 1998, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States. /s/Ernst & Young LLP Des Moines, Iowa January 31, 2000 Principal Life Insurance Company Consolidated Statements of Operations
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 Financial instruments included in Closed Block (see Note 5) 3,658 3,649 3,587 3,652 Mortgage servicing rights 1,081 1,288 778 821 Investment-type insurance contracts (23,563) (23,068) (22,127) (21,606) Short-term debt - - (200) (200) Long-term debt 834 790 (671) (708)
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. PART C OTHER INFORMATION Item 24. Financial Statements and Exhibits (a) Financial Statements included in the Registration Statement (1) Part A: Condensed Financial Information for the five years ended December 31, 1999 and for the period beginning June 16, 1994 and ended December 31, 1994. (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 5/5/99) (3a) Distribution Agreement (Filed 3/1/96) (3b) Selling Agreement (Filed 4/20/99) (4a) Form of Variable Annuity Contract (Filed 3/1/96) (4b) Form of Variable Annuity Contract (Filed 3/1/96) (5) Form of Variable Annuity Application (Filed 3/1/96) (6a) Articles of Incorporation of the 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 12/16/97) (13b) Annualized Yield for Separate Account B (Filed 12/16/97) * Filed herein Item 25. Officers and Directors of the Depositor Principal Life Insurance Company is managed by a Board of Directors which is elected by its policyowners. The directors and executive officers of the Company, their positions with the Company, including Board Committee memberships, and their principal business address, are as follows: DIRECTORS: Principal Name, Positions and Offices Business Address BETSY J. BERNARD U.S. West Director 1801 California Street Member, Nominating Committee 52nd Floor Denver, CO 80202 JOCELYN CARTER-MILLER Motorola, Inc. Director 1000 Corporate Drive Member, Audit Committee Suite 700 Ft. Lauderdale, FL 33334 DAVID J. DRURY The Principal Financial Group Director Des Moines, IA 50392-0100 Chairman of the Board Chair, Executive Committee C. DANIEL GELATT, JR. NMT Corporation Director P.O. Box 2287 Member, Executive Committee La Crosse, WI 54602-2287 Chair, Human Resources Committee J. BARRY GRISWELL The Principal Financial Group Director, President Des Moines, IA 50392-0100 and Chief Executive Officer Member, Executive Committee CHARLES S. JOHNSON DuPont Director 4935 Mesa Capella Drive Member, Audit Committee Las Vegas, NV 89113-1441 WILLIAM T. KERR Meredith Corporation Director 1716 Locust St. Member, Executive Committee Des Moines, IA 50309-3023 and Chair, Nominating Committee LEE LIU Alliant Energy Corporation Director Post Office Box 351 Member, Executive and Cedar Rapids, IA 52406 Human Resources Committees VICTOR. H. LOEWENSTEIN Egon Zehnder International Director Cours de Rive #10 Member, Nominating CH-1204 Geneva, Switzerland Committee RONALD D. PEARSON Hy-Vee, Inc. Director 5820 Westown Parkway Member, Human Resources West Des Moines, IA 50266 Committee FEDERICO F. PENA Vestar Capital Partners Director 1225 17th Street, Ste 1660 Member, Audit Denver, CO 80202 Committee JOHN R. PRICE The Chase Manhattan Corporation Director 270 Park Avenue - 21st Floor Member, Nominating Committee New York, NY 10169 DONALD M. STEWART The Chicago Community Trust Director 222 North LaSalle Street,Suite 1400 Member, Human Resources Chicago, IL 60601-1009 Committee ELIZABETH E. TALLETT Dioscor, Inc. Director 48 Federal Twist Road Chair, Audit Committee Stockton, NJ 08559 FRED W. WEITZ Essex Meadows, Inc. Director 800 Second Avenue, Suite 150 Member, Human Resources Des Moines, IA 50309 Committee Executive Officers (Other than Directors): JOHN E. ASCHENBRENNER Executive Vice President MICHAEL T. DALEY Executive Vice President MICHAEL H.GERSIE Executive Vice President and Chief Financial Officer RICHARD L. PREY Executive Vice President PAUL S. BOGNANNO Senior Vice President GARY M. CAIN Senior Vice President C. ROBERT DUNCAN Senior Vice President DENNIS P. FRANCIS Senior Vice President THOMAS J. GRAF Senior Vice President ROBB B. HILL Senior Vice President DANIEL J. HOUSTON Senior Vice President ELLEN Z. LAMALE Senior Vice President and Chief Actuary MARY A. O'KEEFE Senior Vice President KAREN E. SHAFF Senior Vice President and General Counsel ROBERT A. SLEPICKA Senior Vice President NORMAN R. SORENSEN Senior Vice President CARL C. WILLIAMS Senior Vice President and Chief Information Officer LARRY D. ZIMPLEMAN Senior Vice President Item 26. Persons Controlled by or Under Common Control with Registrant Principal Financial Services, Inc. (an Iowa corporation) an intermediate holding company organized pursuant to Section 512A.14 of the Iowa Code. Subsidiaries wholly-owned by Principal Financial Services, Inc. a. Principal Life Insurance Company (an Iowa corporation) a stock life insurance company engaged in the business of insurance and retirement services. b. Princor Financial Services Corporation (an Iowa Corporation) a registered broker-dealer. c. PFG DO Brasil LTDA (Brazil) a Brazilian holding company. d. Principal Financial Group (Mauritius) Ltd. a Mauritius holding company. e. Principal Pensions Co., Ltd. (Japan) a Japan company who engages in the management, investment and administration of financial assets and any services incident thereto. f. Principal Financial Services (Australia), Inc. (an Iowa holding company) formed to facilitate the acquisition of the Australian business of BT Australia. g. Principal Financial Services (NZ), Inc. (an Iowa holding company) formed to facilitate the acquisition of the New Zealand business of BT Australia. h. Principal Capital Management (Singapore) Limited (a Singapore corporation) a company engaging in funds management. i. Principal Capital Management (Europe) Limited a United Kingdom company that engages in European representation and distributor of the Principal Investments Funds. j. Principal Capital Management (Ireland) Limited an Ireland company that engages in fund management. k. Principal Financial Group Investments (Australia) Pty Limited an Australia holding company. Subsidiary wholly-owned by Princor Financial Services Corporation: a. Principal Management Corporation (an Iowa Corporation) a registered investment advisor. Subsidiary 42% owned by PFG DO Brasil LTDA a. Brasilprev Previdencia Privada S.A.(Brazil) a pension fund company. Subsidiary wholly-owned by Principal Financial Group (Mauritius) Ltd. a. IDBI Principal Asset Management Company (India) a India asset management company. Subsidiary wholly-owned by Principal Financial Services (Australia), Inc.: a. Principal Financial Group (Australia) Holdings Pty Ltd. an Australian holding company organized in connection with the contemplated acquisition of BT Australia Funds Management. Subsidiary wholly-owned by Principal Financial Group (Australia) Holdings Pty Ltd: a. BT Financial Group Pty Ltd. an Australia holding company. Subsidiary wholly-owned by BT Financial Group Pty Ltd: a. BT Investments (Australia) Limited a Delaware holding company. Subsidiary wholly-owned by BT Investments (Australia) Limited: a. BT Australia (Holdings) Ltd an Australia commercial and investment banking and asset management company. Subsidiary wholly-owned by BT Australia (Holdings) Ltd: a. BT Australia Limited an Australia company engaged in asset management and trustee/administrative activites. Subsidiaries wholly-owned by BT Australia Limited: a. BT Life Limited an Australia company engaged in commercial and investment linked life insurance policies. b. BT Funds Management Limited an Australia company engaged in institutional and retail money management. c. BT Funds Management (International) Limited an Australia company who manages international funds (New Zealand, Singapore, Asia, North America and United Kingdom). d. BT Securities Limited an Australia company that engages in loan finance secured against share and managed fund portfolios. e. BT Portfolio Services Limited an Australia company that engages in processing and transaction services for financial planners and financial intermediaries. f. BT Australia Corporate Services Pty Limited an Australia holding company for internal service companies. g. QV1 Pty Limited an Australia company. Subsidiaries wholly-owned by BT Portfolio Services Limited: a. BT Custodial Services Pty Ltd an Australia custodian nominee for investment management activities. b. National Registry Services Pty Ltd. an Australia company that engages in registry services. c. National Registry Services (WA) Pty Limited an Australia company that engages in registry services. d. BT Finance & Investments Pty Ltd an Australia trustee of wholesale cash management trust. Subsidiaries organized and wholly-owned by BT Australia Corporate Services Pty Limited: a. BT Finance Pty Limited an Australia provider of finance by loans and leases. b. Chifley Services Pty Limited an Australia company that engages in staff car leasing management. c. BT Nominees Pty Limited an Australia company that operates as a trustee of staff superannuation fund (pension plan). Subsidiary organized and wholly-owned by BT Funds Management Limited: a. BT Tactical Asset Management Pty Limited an Australia company that engages in management of futures positions. b. Oniston Pty Ltd an Australia company that is a financial services investment vehicle. Subsidiary organized and wholly-owned by BT Securities Limited: a. BT (Queensland) Pty Limited an Australia trustee company. Subsidiary organized and wholly-owned by BT Custodial Services Pty Ltd: a. BT Hotel Group Pty Ltd an Australia corporation - an inactive shelf corporation to be wound up. b. BT Custodians Ltd an Australia manager and trustee of various unit trusts. c. Dellarak Pty Ltd an Australia trustee company. Subsidiary organized and wholly-owned by Principal Financial Services (NZ), Inc. a. BT Financial Group (NZ) Limited a New Zealand holding company. Subsidiary organized and wholly-owned by BT Financial Group (NZ) Limited: a. BT Portfolio Service (NZ) Limited a New Zealand company that provides third party administration and registry services. b. BT New Zealand Nominees Limited a New Zealand company who acts as a custodian for local assets. c. BT Funds Management (NZ) Limited a New Zealand funds manager. Subsidiary organized and wholly-owned by Principal Financial Group Investments (Australia) Pty Limited: a. Principal Hotels Holdings Pty Ltd. a holding company. Subsidiary organized and wholly-owned by Principal Hotels Holdings Pty Ltd.: a. Principal Hotels Australia Pty Ltd. a holding company. Subsidiary organized and wholly-owned by Principal Hotels Australia Pty Ltd.: a. BT Hotel Limited an Australia corporation, which is the hotel operating/managing company of the BT Hotel Group. Principal Life Insurance Company sponsored the organization of the following mutual funds, some of which it controls by virtue of owning voting securities: Principal Balanced Fund, Inc.(a Maryland Corporation) 0.06% of shares outstanding owned by Principal Life Insurance Company (including subsidiaries and affiliates) on September 13, 2000. Principal Blue Chip Fund, Inc.(a Maryland Corporation) 0.03% of shares outstanding owned by Principal Life Insurance Company (including subsidiaries and affiliates) on September 13, 2000. Principal Bond Fund, Inc.(a Maryland Corporation) 0.63% of shares outstanding owned by Principal Life Insurance Company (including subsidiaries and affiliates) on September 13, 2000. Principal Capital Value Fund, Inc. (a Maryland Corporation) 27.47% of outstanding shares owned by Principal Life Insurance Company (including subsidiaries and affiliates)on September 13,2000 Principal Cash Management Fund, Inc. (a Maryland Corporation) 13.63% of outstanding shares owned by Principal Life Insurance Company (including subsidiaries and affiliates) on September 13,2000 Principal European Equity Fund, Inc. (a Maryland Corporation) 77.96% of outstanding shares owned by Principal Life Insurance Company (including subsidiaries and affiliates) on September 13, 2000. Principal Government Securities Income Fund, Inc. (a Maryland Corporation) 0.04% of shares outstanding owned by Principal Life Insurance Company (including subsidiaries and affiliates) on September 13, 2000. Principal Growth Fund, Inc. (a Maryland Corporation) 0.01% of outstanding shares owned by Principal Life Insurance Company (including subsidiaries and affiliates) on September 13, 2000. Principal High Yield Fund, Inc. (a Maryland Corporation) 8.13% of shares outstanding owned by Principal Life Insurance Company (including subsidiaries and affiliates) on September 13, 2000. Principal International Emerging Markets Fund, Inc. (a Maryland Corporation) 29.86% of shares outstanding owned by Principal Life Insurance Company (including subsidiaries and affiliates) on September 13, 2000. Principal International Fund, Inc. (a Maryland Corporation) 24.18% of shares outstanding owned by Principal Life Insurance Company (including subsidiaries and affiliates) on September 13, 2000. Principal International SmallCap Fund, Inc. (a Maryland Corporation) 10.89% of shares outstanding owned by Principal Life Insurance Company (including subsidiaries and affiliates) on September 13, 2000. Principal Limited Term Bond Fund, Inc. (a Maryland Corporation) 16.58% of shares outstanding owned by Principal Life Insurance Company (including subsidiaries and affiliates) on September 13, 2000. Principal LargeCap Stock Index Fund, Inc. (a Maryland Corporation) 18.37% of shares outstanding owned by Principal Life Insurance Company (including subsidiaries and affiliates) on September 13, 2000. Principal MidCap Fund, Inc. (a Maryland Corporation) 0.02% of shares outstanding owned by Principal Life Insurance Company (including subsidiaries and affiliates) on September 13, 2000 Principal Pacific Basin Fund, Inc. (a Maryland Corporation) 84.43% of outstanding shares owned by Principal Life Insurance Company (including subsidiaries and affiliates) on September 13, 2000. Principal Partners Aggressive Growth Fund, Inc.(a Maryland Corporation) 4.75% of shares outstanding owned by Principal Life Insurance Company (including subsidiaries and affiliates) on September 13, 2000 Principal Partners LargeCap Growth Fund, Inc.(a Maryland Corporation) 28.03% of shares outstanding owned by Principal Life Insurance Company (including subsidiaries and affiliates) on September 13, 2000 Principal Partners MidCap Growth Fund, Inc.(a Maryland Corporation) 22.41% of shares outstanding owned by Principal Life Insurance Company (including subsidiaries and affiliates) on September 13, 2000 Principal Real Estate Fund, Inc. (a Maryland Corporation) 56.26% of shares outstanding owned by Principal Life Insurance Company (including subsidiaries and affiliates) on September 13, 2000 Principal SmallCap Fund, Inc.(a Maryland Corporation) 5.50% of shares outstanding owned by Principal Life Insurance Company (including subsidiaries and affiliates) on September 13, 2000. Principal Special Markets Fund, Inc. (a Maryland Corporation) 83.56% of shares outstanding of the International Emerging Markets Portfolio, 46.62% of the shares outstanding of the International Securities Portfolio, 98.66% of shares outstanding of the International SmallCap Portfolio and 100% of the shares outstanding of the Mortgage-Backed Securities Portfolio were owned by Principal Life Insurance Company (including subsidiaries and affiliates) on September 13, 2000 Principal Tax-Exempt Bond Fund, Inc. (a Maryland Corporation) 0.05% of shares outstanding owned by Principal Life Insurance Company (including subsidiaries and affiliates) on September 13, 2000. Principal Utilities Fund, Inc. (a Maryland Corporation) 0.08% of shares outstanding owned by Principal Life Insurance Company (including subsidiaries and affiliates) on September 13, 2000. Principal Variable Contracts Fund, Inc. (a Maryland Corporation) 100% of shares outstanding of the following Accounts owned by Principal Life Insurance Company and its Separate Accounts on September 13, 2000: Aggressive Growth, Asset Allocation, Balanced, Blue Chip, Bond, Capital Value, Government Securities, Growth, High Yield, International, International Emerging Markets, International SmallCap, LargeCap Growth, LargeCap Growth Equity, LargeCap Stock Index (f/k/a Stock Index 500), MicroCap, MidCap, MidCap Growth, MidCap Growth Equity, MidCap Value, Money Market, Real Estate, SmallCap, SmallCap Growth, SmallCap Value, and Utilities. Subsidiaries organized and wholly-owned by Principal Life Insurance Company: a. Principal Holding Company (an Iowa Corporation) a downstream holding company for Principal Life Insurance Company. b. Principal Development Investors, LLC (a Delaware Corporation) a limited liability company engaged in acquiring and improving real property through development and redevelopment. c. Principal Capital Management, LLC (a Delaware Corporation) a limited liability company that provides private mortgage, real estate & fixed-income securities services to institutional clients. d. Principal Net Lease Investors, LLC (a Delaware Corporation) a limited liability company which operates as a buyer and seller of net leased investments. Subsidiaries organized and 90% owned by Principal Life Insurance Company: a. PT Asuransi Jiwa Principal Indonesia (an Indonesia Corporation) a life insuranced corporation which offers group and individual products. Subsidiaries wholly-owned by Principal Capital Management, LLC: a. Principal Structured Investments, LLC (a Delaware Corporation) a limited liability company that provides product development administration, marketing and asset management services associated with stable value products together with other related institutional financial services including derivatives, asset-liability management, fixed income investment management and ancillary money management products. b. Principal Enterprise Capital, LLC (a Delaware Corporation) a company engaged in portfolio management on behalf of institutional clients for structuring, underwriting and management of entity-level investments in real estate operating companies (REOCs). c. Principal Commercial Acceptance, LLC (a Delaware Corporation) a limited liability company that provides private market bridge financing and other secondary market opportunities. d. Principal Capital Real Estate Investors, LLC (a Delaware Corporation) a registered investment advisor. e. Principal Commercial Funding, LLC (a Delaware Corporation) a limited liability company engaged in the structuring, warehousing, securitization and sale of commercial mortgage-backed securities. f. Principal Generation Plant, LLC an inactive Delaware limited liability company. g. Principal Capital Income Investors, LLC a Delaware limited liability company which provides investment and financial services. h. Principal Capital Futures Trading Advisor, LLC a Delaware funds management limited liability company. Subsidiaries wholly-owned by Principal Holding Company: a. Principal Bank (a Federal Corporation) a Federally chartered direct delivery savings bank. b. Patrician Associates, Inc. (a California Corporation) a real estate development company. c. Petula Associates, Ltd. (an Iowa Corporation) a real estate development company. d. Principal Development Associates, Inc. (a California Corporation) a real estate development company. e. Principal Spectrum Associates, Inc. (a California Corporation) a real estate development company. f. Principal FC, Ltd. (an Iowa Corporation) a limited purpose investment corporation. g. Equity FC, Ltd. (an Iowa Corporation) engaged in investment transactions, including limited partnerships and limited liability companies. h. HealthRisk Resource Group, Inc. (an Iowa Corporation) a general business corporation that engages in investment transactions, including limited partnerships and limited liability companies i. Invista Capital Management, LLC (an Delaware Corporation) a limited liability company which is a registered investment adviser. j. Principal Residential Mortgage, Inc. (an Iowa Corporation) a full service mortgage banking company that makes and services a wide variety of loan types on a nationwide basis. k. Principal Asset Markets, Inc. (an Iowa Corporation) a corporation which is currently inactive. l. Principal Portfolio Services, Inc. (an Iowa Corporation) a corporation which is currently inactive. m. The Admar Group, Inc. (a Florida Corporation) a national managed care service organization that develops and manages preferred provider organizations. n. The Principal Financial Group, Inc. (a Delaware corporation) a corporation which is currently inactive. o. Principal Product Network, Inc. (a Delaware corporation) an insurance broker. p. Principal Health Care, Inc. (an Iowa Corporation) a managed care company. q. Dental-Net, Inc. (an Arizona Corporation) a managed dental care services organization. HMO and dental group practice. r. Principal Financial Advisors, Inc. (an Iowa Corporation) a registered investment advisor. s. Delaware Charter Guarantee & Trust Company, d/b/a Trustar Retirement Services (a Delaware Corporation) a corporation that administers individual and group retirement plans for stock brokerage firm clients and mutual fund distributors. t. Professional Pensions, Inc. (a Connecticut Corporation) a corporation engaged in sales, marketing and administration of group insurance plans and third-party administrator for defined contribution plans. u. Principal Investors Corporation (a New Jersey Corporation) a corporation which is currently inactive. v. Principal International, Inc. (an Iowa Corporation) a company engaged in international business development. Subsidiaries organized and wholly-owned by PT Asuransi Jiwa Principal Indonesia: a. PT Jasa Principal Indonesia an Indonesia pension company. b. PT Principal Capital Management Indonesia an Indonesia funds management company. Subsidiary wholly-owned by Invista Capital Management, LLC: a. Principal Capital Trust. (a Delaware Corporation) a business trust and private investment company offering non-registered units, initially, to tax-exempt entities. Subsidiary wholly-owned by Principal Residential Mortgage, Inc.: a. Principal Wholesale Mortgage, Inc. (an Iowa Corporation) a brokerage and servicer of residential mortgages. b. Principal Mortgage Reinsurance Company (a Vermont corporation) a mortgage reinsurance company. Subsidiaries wholly-owned by The Admar Group, Inc.: a. Admar Corporation (a California Corporation) a managed care services organization. Subsidiaries wholly-owned by Dental-Net, Inc. a. Employers Dental Services, Inc. (an Arizona corporation) a prepaid dental plan organization. Subsidiaries wholly-owned by Professional Pensions, Inc.: a. Benefit Fiduciary Corporation (a Rhode Island corporation) serves as a corporate trustee for retirement trusts. b. PPI Employee Benefits Corporation (a Connecticut corporation) a registered broker-dealer limited to the sale of open-end mutual funds and variable insurance products. c. Boston Insurance Trust, Inc. (a Massachusetts corporation) a corporation which serves as a trustee and administrator of insurance trusts and arrangements. Subsidiaries wholly-owned by Principal International, Inc.: a. Principal International Espana, S.A. de Seguros de Vida (Spain) a life insurance, annuity, and accident and health company. b. Zao Principal International (a Russia Corporation) inactive. c. Principal International Argentina, S.A. (an Argentina corporation) a holding company that owns Argentina corporations offering annuities, group and individual insurance policies. d. Principal Asset Management Company (Asia) Ltd. (Hong Kong) an asset management company. e. Principal International (Asia) Limited (Hong Kong) a corporation operating as a regional headquarters for Asia. f. Principal Trust Company (Asia) Limited (Hong Kong) (an Asia trust company). g. Principal International de Chile, S.A. (Chile) a holding company. h. Principal Mexico Compania de Seguros, S.A. de C.V. (Mexico) a life insurance company. i. Principal Pensiones, S.A. de C.V. (Mexico) a pension company. j. Principal Afore, S.A. de C.V. (Mexico), a pension company. k. Principal Consulting (India) Private Limited (an India corporation) an India consulting company. Subsidiaries 88% owned by Principal International, Inc.: a. Principal Insurance Company (Hong Kong) Limited (a Hong Kong Corporation) a company that sells insurance and pension products. Subsidiary wholly-owned by Principal International Espana, S.A. de Seguros de Vida (Spain): a. Princor International Espana S.A. de Agencia de Seguros (Spain) an insurance agency. Subsidiary wholly-owned by Principal International (Asia) Limited (Hong Kong): a. Principal Capital Management (Asia) Limited (Hong Kong) Asian representative and distributor for the Principal Investment Funds. Subsidiaries wholly-owned by Principal International Argentina, S.A. (Argentina): a. Principal Retiro Compania de Seguros de Retiro, S.A. (Argentina) an annuity company. b. Principal Life Compania de Seguros, S.A. (Argentina) a life insurance company. Subsidiary wholly-owned by Principal International de Chile, S.A.: a. Principal Compania de Seguros de Vida Chile S.A. (Chile) life insurance company. Subsidiary 60% owned by Principal Compania de Seguros de Vida Chile S.A. (Chile): a. Andueza & Principal Creditos Hipotecarios S.A. (Chile) a residential mortgage company. Subsidiary wholly-owned by Principal Afore, S.A. de C.V.: a. Siefore Principal, S.A. de C.V. (Mexico) an investment fund company. Item 27. Number of Contractowners - As of: September 30, 2000 (1) (2) (3) Number of Plan Number of Title of Class Participants Contractowners -------------- -------------- -------------- BFA Variable Annuity Contracts 69 8 Pension Builder Contracts 485 284 Personal Variable Contracts 3,485 62 Premier Variable Contracts 13,668 165 Flexible Variable Annuity Contract 42,714 42,714 Principal Freedom Variable Annuity Contract 341 341 Item 28. Indemnification None Item 29. Principal Underwriters (a) Princor Financial Services Corporation, principal underwriter for Registrant, acts as principal underwriter for, Principal Balanced Fund, Inc., Principal Blue Chip Fund, Inc., Principal Bond Fund, Inc., Principal Capital Value Fund, Inc., Principal Cash Management Fund, Inc., Principal European Equity Fund, Inc., Principal Government Securities Income Fund, Inc., Principal Growth Fund, Inc., Principal High Yield Fund, Inc., Principal International Emerging Markets Fund, Inc., Principal International Fund, Inc., Principal International SmallCap Fund, Inc., Principal Investors Fund, Inc. (f/k/a Principal Special Markets Fund, Inc.), Principal LargeCap Stock Index Fund, Inc., Principal Limited Term Bond Fund, Inc., Principal MidCap Fund, Inc., Principal Pacific Basin Fund Inc., Principal Partners Aggressive Growth Fund, Inc., Principal Partners LargeCap Blend Fund, Inc., Principal Partners LargeCap Growth Fund, Inc., Principal Partners LargeCap Value Fund, Inc., Principal Partners MidCap Growth Fund, Inc., Principal Partners SmallCap Growth Fund, Inc., Principal Real Estate Fund, Inc., Principal SmallCap Fund, Inc., Principal Tax-Exempt Bond Fund, Inc., Principal Utilities Fund, Inc., Principal Variable Contracts Fund, Inc. and for variable annuity contracts participating in Principal Life Insurance Company Separate Account B, a registered unit investment trust for retirement plans adopted by public school systems or certain tax-exempt organizations pursuant to Section 403(b) of the Internal Revenue Code, Section 457 retirement plans, Section 401(a) retirement plans, certain non-qualified deferred compensation plans and Individual Retirement Annuity Plans adopted pursuant to Section 408 of the Internal Revenue Code, and for variable life insurance contracts issued by Principal Life Insurance Company Variable Life Separate Account, a registered unit investment trust. (b) (1) (2) Positions and offices Name and principal with principal business address underwriter Thomas E. Ackerman Regional Vice President - The Principal Variable Annuities Financial Group Des Moines, IA 50392 Lindsay L. Amadeo Assistant Director - The Principal Marketing Services Financial Group Des Moines, IA 50392 John E. Aschenbrenner Director The Principal Financial Group Des Moines, IA 50392 Robert W. Baehr Marketing Services The Principal Officer Financial Group Des Moines, IA 50392 Patricia A. Barry Assistant Corporate Secretary The Principal Financial Group Des Moines, IA 50392 Craig L. Bassett Treasurer The Principal Financial Group Des Moines, IA 50392 David J. Brown Vice President The Principal Financial Group Des Moines, IA 50392 Michael T. Daley Director The Principal Financial Group Des Moines, IA 50392 Ronald L. Danilson Executive Vice President and The Principal Chief Operating Officer Financial Group Des Moines, IA 50392 Mark B. Davis Assistant Director - Compliance The Principal Financial Group Des Moines, IA 50392 David J. Drury Director The Principal Financial Group Des Moines, IA 50392 Ralph C. Eucher Director and The Principal President Financial Group Des Moines, IA 50392 Arthur S. Filean Senior Vice President The Principal Financial Group Des Moines, IA 50392 Dennis P. Francis Director The Principal Financial Group Des Moines, IA 50392 Paul N. Germain Vice President - The Principal Mutual Fund Operations Financial Group Des Moines, IA 50392 Ernest H. Gillum Vice President - The Principal Product Development Financial Group Des Moines, IA 50392 Thomas D. Gualdoni Vice President - National Sales The Principal Manager/Variable Annuities Financial Group Des Moines, IA 50392 J. Barry Griswell Director and The Principal Chairman of the Financial Group Board Des Moines, IA 50392 Susan R. Haupts Marketing Officer The Principal Financial Group Des Moines, IA 50392 Joyce N. Hoffman Vice President and The Principal Corporate Secretary Financial Group Des Moines, IA 50392 Jeffrey L. Kane Marketing Officer The Principal Financial Group Des Moines, IA 50392 Peter R. Kornweiss Vice President The Principal Financial Group Des Moines, IA 50392 Kraig L. Kuhlers Regional Sales Director The Principal Financial Group Des Moines, IA 50392 John R. Lepley Senior Vice The Principal President - Marketing Financial Group and Distribution Des Moines, IA 50392 Kelly A. Paul Assistant Vice President - The Principal Business Systems and Technology Financial Group Des Moines, IA 50392 Elise M. Pilkington Assistant Director - The Principal Retirement Consulting Financial Group Des Moines, IA 50392 Richard L. Prey Director The Principal Financial Group Des Moines, IA 50392 Martin R. Richardson Operations Officer - The Principal Broker/Dealer Services Financial Group Des Moines, IA 50392 Elizabeth R. Ring Controller The Principal Financial Group Des Moines, IA 50392 Michael D. Roughton Counsel The Principal Financial Group Des Moines, IA 50392 James F. Sager Vice President The Principal Financial Group Des Moines, IA 50392 Kyle R. Selberg Vice President-Marketing The Principal Financial Group Des Moines, IA 50392 Karen E. Shaff Director The Principal Financial Group Des Moines, IA 50392 Minoo Spellerberg Assistant Vice President and The Principal Compliance Officer Financial Group Des Moines, IA 50392 Paul D. Steingreaber Director of National Sales The Principal Financial Group Des Moines, IA 50392 Kirk L. Tibbetts Senior Vice President and The Principal Chief Financial Officer Financial Group Des Moines, IA 50392 (c) (1) (2) Net Underwriting Name of Principal Discounts and Underwriter Commissions Princor Financial $12,331,736.46 Services Corporation (3) (4) (5) Compensation on Brokerage Redemption Commissions Compensation 0 0 0 Item 30. Location of Accounts and Records All accounts, books or other documents of the Registrant are located at the offices of the Depositor, The Principal Financial Group, Des Moines, Iowa 50392. Item 31. Management Services Inapplicable Item 32. Undertakings The Registrant undertakes to file a post-effective amendment to this registration statement as frequently as is necessary to ensure that the audited financial statements in the registration statement are never more than 16 months old for so long as payments under the variable annuity contracts may be accepted. The Registrant undertakes to include either (1) as part of any application to purchase a contract offered by the prospectus, a space that an applicant can check to request a Statement of Additional Information, or (2) a post card or similar written communication affixed to or included in the prospectus that the applicant can remove to send for a Statement of Additional Information. The Registrant undertakes to deliver any Statement of Additional Information and any financial statements required to be made available under this Form promptly upon written or oral request. REPRESENTATION PURSUANT TO SECTION 26 OF THE INVESTMENT COMPANY ACT OF 1940 Principal Life Insurance Company represents the fees and charges deducted under the Policy, in the aggregate, are reasonable in relation to the services rendered, the expenses expected to be incurred, and the risks assumed by the Company. 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 15th day of November, 2000 PRINCIPAL LIFE INSURANCE COMPANY SEPARATE ACCOUNT B (Registrant) By: PRINCIPAL LIFE INSURANCE COMPANY (Depositor) /s/ David J. Drury By ______________________________________ David J. Drury Chairman Attest: /s/ Joyce N. Hoffman - ----------------------------------- Joyce N. Hoffman Vice President and Corporate Secretary As required by the Securities Act of 1933, this Amendment to the Registration Statement has been signed by the following persons in the capacities and on the date indicated. Signature Title Date /s/ D. J. Drury Chairman and November 15, 2000 - -------------------- Director D. J. Drury /s/ D. C. Cunningham Vice President and November 15, 2000 - -------------------- Controller (Principal D. C. Cunningham Accounting Officer) /s/ M. H. Gersie Executive Vice President and November 15, 2000 - -------------------- Chief Financial Officer M. H. Gersie (Principal Financial Officer) (B. J. Bernard)* Director November 15, 2000 - -------------------- B. J. Bernard (J. Carter-Miller)* Director November 15, 2000 - -------------------- J. Carter-Miller (C. D. Gelatt, Jr.)* Director November 15, 2000 - -------------------- C. D. Gelatt, Jr. (J. B. Griswell)* Director November 15, 2000 - -------------------- J. B. Griswell (C. S. Johnson)* Director November 15, 2000 - -------------------- C. S. Johnson (W. T. Kerr)* Director November 15, 2000 - -------------------- W. T. Kerr (L. Liu)* Director November 15, 2000 - -------------------- L. Liu (V. H. Loewenstein)* Director November 15, 2000 - -------------------- V. H. Loewenstein (R. D. Pearson)* Director November 15, 2000 - -------------------- R. D. Pearson (F. F. Pena)* Director November 15, 2000 - -------------------- F. F. Pena (J. R. Price)* Director November 15, 2000 - -------------------- J. R. Price, Jr. (D. M. Stewart)* Director November 15, 2000 - -------------------- D. M. Stewart (E. E. Tallett)* Director November 15, 2000 - -------------------- E. E. Tallett (F. W. Weitz)* Director November 15, 2000 - -------------------- F. W. Weitz *By /s/ David J. Drury ------------------------------------ David J. Drury Chairman Pursuant to Powers of Attorney Previously Filed or Included Herein EX-99.10A 2 0002.txt 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. 16 to Form N-4 No. 33-74232) and related Prospectus of Principal Life Insurance Company Separate Account B Flexible Variable Annuity Contract. /s/ Ernst & Young LLP Des Moines, Iowa November 15, 2000 -----END PRIVACY-ENHANCED MESSAGE-----