497 1 complete.txt IPVA PROSPECTUS SUPPLEMENT DATED 4/2/08 SUPPLEMENT DATED APRIL 2, 2008 TO THE PRINCIPAL INVESTMENT PLUS VARIABLE ANNUITYsm PROSPECTUS DATED MAY 1, 2007 This Supplement is intended for distribution with the Principal Investment Plus Variable Annuity Prospectus dated May 1, 2007, as supplemented to date (together, the "Prospectus") and updates and amends certain information contained in the Prospectus. The terms and section headings we use in this Supplement have the same meaning as in the Prospectus. You should read this Supplement in its entirety and keep it together with your Prospectus and any previous prospectus supplements for future reference. Except as described below, all other information included in the Prospectus remains unchanged. -------------------------------------------------------------------------------- THE CONTRACT - RMD Program for the GMWB Riders On page 31 of your Prospectus, insert the following description of the RMD Program for GMWB Riders after the section titled Investment Protector Plus 2 Rider and prior the section titled Death Benefit. Required Minimum Distributions under the Investment Protector Plus and Investment Protector Plus 2 Riders Tax-qualified Contracts are subject to certain federal tax rules requiring that Required Minimum Distributions ("RMD") be taken on a calendar year basis (i.e., compared to a contract year basis), usually beginning after age 70 1/2. If you have elected either the Investment Protector Plus Rider or the Investment Protector Plus 2 Rider, RMD may exceed your withdrawal benefits, which will cause a recalculation of the applicable remaining withdrawal benefit base at the time of the excess withdrawal and recalculation of the applicable withdrawal benefit base and withdrawal benefit payment at the next contract anniversary. Excess withdrawals may result in a lower withdrawal benefit payment(s) in the future and/or termination of this rider for lack of value in the withdrawal benefit bases. However, if your rider effective date is on or after March 25, 2008, a surrender taken from this Contract to satisfy RMD for this Contract (an "RMD withdrawal") that exceeds a withdrawal benefit under your rider for a specific contract year will NOT be deemed an excess withdrawal if you enroll in our RMD Program for GMWB Riders and provided you satisfy the following requirements: o your contract may not have the Enhanced Death Benefit Rider; o the amount required to be distributed each calendar year for purposes of satisfying the RMD rules of the Internal Revenue Code is based only on this Contract (the "RMD amount"); and o you have elected scheduled withdrawal payments. NOTE: The RMD Program for GMWB Riders is only available if your rider effective date is on or after March 25, 2008. If your rider effective date is prior to March 25, 2008, the RMD Program for GMWB Riders is not available and surrenders(s) taken from this Contract to satisfy RMD that exceed a withdrawal benefit for a specific contract year will be deemed an excess withdrawal under your rider. If you satisfy the above requirements, an RMD withdrawal will not be treated as an excess withdrawal under your rider While you are enrolled in the RMD Program for GMWB Riders, you continue to have the right to take unscheduled withdrawals. However, such unscheduled withdrawals may result in excess withdrawals under your rider. If an unscheduled withdrawal is taken, the protection of the RMD Program for GMWB Riders will be suspended until the next contract anniversary and the unscheduled withdrawal and any subsequent withdrawals taken (scheduled or unscheduled) will be treated as excess withdrawals if they exceed the applicable withdrawal benefit. The protection of the RMD Program for GMWB Riders will resume on the next contract anniversary. We reserve the right to modify or eliminate the RMD Program for GMWB Riders if there is any change to the Internal Revenue Code or IRS rules relating to RMD, including the issuance of relevant IRS guidance. If we exercise our right to modify or eliminate the RMD Program for GMWB Riders then any withdrawal in excess of a withdrawal benefit will be deemed an excess withdrawal. We will send you notice prior to any change in or termination of the RMD Program for GMWB Riders. More information regarding our RMD Program for GMWB riders may be obtained from your registered representative or by calling us at 1-800-852-4450. -------------------------------------------------------------------------------- THE CONTRACT--Investment Protector Plus Rider The description of the investment options available when utilizing the Investment Protector Plus Rider beginning on page 27 of your Prospectus, as amended by the description beginning on page 1 of the June Supplement, is deleted in its entirety and replaced with the following: Investment Option Restrictions While this rider is in effect, the investment options you may select are restricted to those listed in Appendix C. THE CONTRACT--Investment Protector Plus 2 Rider The description of the investment options available when utilizing the Investment Protector Plus 2 Rider beginning on page 10 of the November Supplement is deleted in its entirety and replaced with the following: Investment Option Restrictions While this rider is in effect, the investment options you may select are restricted to those listed in Appendix C. APPENDIX C - GMWB INVESTMENT OPTIONS On page 74 of the Prospectus, insert the following new Appendix C which describes the investment options under the Investment Protector Plus Rider and the Investment Protector Plus 2 Rider. GMWB INVESTMENT OPTIONS If you have elected either the Investment Protector Plus Rider or the Investment Protector Plus 2 Rider, the investment options you may select under the Contract are restricted. The limited investment options available under your rider are intended to support the rider's guarantees with balanced investment objectives. If your investment goal is aggressive growth, a GMWB rider may not be appropriate for you. You must allocate 100% of your Separate Account division accumulated value and premium payments to one of the following GMWB Models or Separate Account divisions (the "GMWB investment options"): o one of the GMWB Select Models* as described below; o one of the GMWB Self-Build Models as described below; o the Principal LifeTime 2010 Account; o the Principal LifeTime 2020 Account; o the Principal LifeTime 2030 Account**; o the Principal LifeTime Strategic Income Account; o Strategic Asset Management Balanced Portfolio; o Strategic Asset Management Conservative Balanced Portfolio; or o Strategic Asset Management Flexible Income Portfolio. * The GMWB Select Models not available if your rider effective date is on or after May 19, 2008. If your rider effective date is prior to May 19, 2008, see GMWB Select Models below for availability of this investment option. ** The Principal LifeTime 2030 Account is only available as an investment option with the Investment Protector Plus 2 Rider. The Investment Protector Plus Rider and the Investment Protector Plus 2 Rider do not restrict allocations to the Fixed or DCA Accounts. For more information about GMWB Select Models or GMWB Self-Build Models, please see below. For more information about Principal LifeTime Accounts and Strategic Asset Management (SAM) Portfolios, please see the Prospectus sections titled "THE CONTRACT - The Underlying Mutual Funds", "TABLE OF SEPARATE ACCOUNT DIVISIONS" and "SUMMARY OF EXPENSE INFORMATION - Annual Underlying Mutual Fund Expenses" and the underlying fund's prospectus provided with this prospectus. For more information about the Fixed and DCA Accounts, please see "FIXED ACCOUNT AND DCA PLUS ACCOUNTS". We reserve the right to modify the list of available GMWB investment options, from time to time, at our sole discretion. You may transfer from one available investment option to another by moving 100% of your Separate Account division accumulated value to one of the other GMWB investment options available at the time of the transfer. You may make a transfer by providing us notice (the change is effective on the next valuation period after we receive your notice). We may terminate your GMWB rider if you allocate premium payments or transfer your Separate Account division accumulated value to an investment option other than a permitted GMWB investment option. We will not be responsible for any financial impact to you caused by termination of your GMWB rider because you violated the GMWB investment restrictions. GMWB Select Models A GMWB Select Model is only available as a GMWB investment option if: o your rider effective date is prior to May 19, 2008; and o your Separate Account division accumulated value was allocated to one of the GMWB Select Models as of May 19, 2008 and you have not transferred your Separate Account division accumulated value from that GMWB Select Model since May 19, 2008. If you satisfy the above requirements, only your existing GMWB Select Model is available to you and your premium payments and Separate Account division accumulated value may remain allocated to that model. Once you transfer your Separate Account division accumulated value from your chosen GMWB Select Model into one of the other available GMWB investment options, none of the GMWB Select Models will be available to you. However, you may allocate your Separate Account division accumulated value to one of the GMWB Self-Build Models (v. 5/19/2008) or other GMWB investment options. If you have chosen a GMWB Select Model, you are directing us to allocate your premium payments and Separate Account division accumulated value according to the allocation percentages shown in the chart below. In addition, you are directing us to automatically rebalance the Separate Account division accumulated value each calendar quarter to match the allocation percentages of your chosen GMWB Select Model.
------------------------------------------------------------------------------------------------------------------------------------ GMWB Select Models Investment Advisor Model A Model B Model C ------------------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------------------ Stable Divisions 30% 20% 10% Short-Term Bond Principal Global Investors, LLC 30% 20% 10% ------------------------------------------------------------------------------------------------------------------------------------ Conservative Divisions 40% 30% 20% American Century VP Inflation Protection American Century Investment Management, Inc. 10% 5% 10% Bond & Mortgage Securities (f/k/a Bond) Principal Management Corporation 15% 15% 10% Government & High Quality Bond Principal Global Investors, LLC 15% 10% 0% ------------------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------------------ Moderate Divisions 20% 30% 45% Large Cap Blend 10% 10% 10% LargeCap Blend II (f/k/a LargeCap Blend) T. Rowe Price Associates, Inc. 10% 10% 10% Large Cap Value 0% 5% 10% LargeCap Value III (f/k/a LargeCap Value) Bernstein Investment Research and Management N/A 5% 10% Balanced 10% 15% 20% Equity Income (f/k/a Equity Income I) WM Advisors, Inc. 10% 15% 20% Mid Cap Value 0% 0% 5% MidCap Value II (f/k/a MidCap Value) Neuberger Berman Management, Inc. & Jacob N/A N/A 5% Levy Management, Inc. ------------------------------------------------------------------------------------------------------------------------------------ Aggressive Divisions 10% 15% 20% Large Cap Growth 10% 10% 10% American Century VP Ultra II American Century Investment Management, Inc. 10% 10% 10% Mid Cap Blend 0% 5% 5% MidCap Blend (f/k/a MidCap) Principal Global Investors, LLC N/A 5% 5% Small Cap Value 0% 0% 5% SmallCap Value I (f/k/a SmallCap Value) JP Morgan Fleming Asset Management N/A N/A 5% ------------------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------------------ Dynamic Divisions 0% 5% 5% Fidelity VIP Overseas Fidelity Management & Research Company N/A 5% 5% ------------------------------------------------------------------------------------------------------------------------------------
For more information about divisions named in the GMWB Select Models above, please see the prospectus sections titled "THE CONTRACT - The Underlying Mutual Funds", "TABLE OF SEPARATE ACCOUNT DIVISIONS" and "SUMMARY OF EXPENSE INFORMATION - Annual Underlying Mutual Fund Expenses" and the underlying fund's prospectus provided with this Prospectus. GMWB Self-Build Models The GMWB Self-Build Models provide you limited ability to select the Separate Account divisions for allocation using certain guidelines that we provide. To "build your model," you pick Separate Account divisions from each of the asset classes in the model. The amount you may allocate in each asset class is set out in the tables below. Your division allocation percentages may not exceed the asset class percentages of your GMWB Self-Build Model. The sum of the percentages you invest in the asset classes must total 100%. If you choose a GMWB Self-Build Model, you are directing us to allocate your Separate Account division accumulated value and premium payments according to the allocation percentages you have set. In addition, you are directing us to automatically rebalance your Separate Account division accumulated value each calendar quarter to match the allocation percentages you set in your GMWB Self-Build Model. You may transfer among the divisions within a asset class as long as your allocations for that asset class equal the percentage established by your chosen GMWB Self-Build Model, and you adhere to the transfer provisions of your Contract (See THE CONTRACT - The Accumulation Period, Division Transfers and GENERAL PROVISIONS - Frequent Trading and Market Timing (Abusive Trading Practices)). GMWB Self-Build Models (v. 3/1/2005) The following GMWB Self-Build Models (v. 3/1/2005) are only available if you satisfy the following requirements: o your rider effective date is prior to May 19, 2008; and o your Separate Account division accumulated value was allocated to one of the below Self-Build Models as of May 19, 2008 and you have not transferred your Separate Account division accumulated from that GMWB Select Model since May 19, 2008. If you satisfy the above requirements, only the GMWB Self-Build Model (v. 3/1/2005) in which you are currently allocated is available to you. You may transfer among the divisions within the risk classes of your existing GMWB Self-Build Model (v.3/1/2005) provided that your allocations satisfy the specified risk class percentages in your Self-Build Model, and you adhere to the transfer provisions of your Contract. (See THE CONTRACT - The Accumulation Period, Division Transfers and GENERAL PROVISIONS - Frequent Trading and Market Timing (Abusive Trading Practices)). Once you transfer your Separate Account division accumulated value from your chosen GMWB Self-Build Model (v. 3/1/2005) into one of the other available GMWB investment options, none of the GMWB Self-Build Models (v. 3/1/2005) will be available to you. However, you may allocate your Separate Account division accumulated value to one of the GMWB Self-Build Models (v. 5/19/2008) or other GMWB investment options.
------------------------------------------------------------------------------------------------------------------------------------ GMWB Self-Build Models (v. 3/1/2005) Investment Advisor Model A Model B Model C ------------------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------------------ Stable Divisions 30% 20% 10% Short-Term Bond Principal Global Investors, LLC Money Market Principal Management Corporation ------------------------------------------------------------------------------------------------------------------------------------ Conservative Divisions 40% 30% 20% American Century VP Inflation Protection American Century Investment Management, Inc. Bond & Mortgage Securities (f/k/a Bond) Principal Management Corporation Government & High Quality Bond Principal Global Investors, LLC ------------------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------------------ Moderate Divisions 20% 15% 45% Large Cap Blend 10% 10% 10% LargeCap Blend II (f/k/a LargeCap Blend) T. Rowe Price Associates, Inc. LargeCap S&P 500 Index (f/k/a Large Principal Global Investors, LLC Cap Stock Index) Neuberger Berman AMT Socially Neuberger Berman Management, Inc. Responsible Large Cap Value 0% 5% 10% LargeCap Value (f/k/a Capital Principal Global Investors, LLC N/A Value) LargeCap Value II (f/k/a Equity Value) American Century Investment Management, Inc. N/A LargeCap Value III (f/k/a LargeCap Bernstein Investment Research and Management N/A Value) Balanced 10% 15% 20% Asset Allocation Morgan Stanley Asset Management Equity Income (f/k/a Equity Income) WM Advisors, Inc. LifeTime 2010 Principal Global Investors, LLC LifeTime 2020 Principal Global Investors, LLC LifeTime Strategic Income Principal Global Investors, LLC Mid Cap Value 0% 0% 5% MidCap Value II (f/k/a MidCap Value) Neuberger Berman Management, Inc. & Jacob N/A N/A 5% Levy Management, Inc. ------------------------------------------------------------------------------------------------------------------------------------ Aggressive Divisions 10% 15% 20% Large Cap Growth 10% 10% 10% American Century VP Ultra II American Century Investment Management, Inc. Fidelity VIP II ContraFund Fidelity Management & Research Company LargeCap Growth (f/k/a Growth) Columbus Circle Investors T. Rowe Price Health Sciences T. Rowe Price Associates, Inc. Mid Cap Blend 0% 5% 5% MidCap Blend (f/k/a MidCap) Principal Global Investors, LLC N/A 5% 5% Small Cap Value 0% 0% 5% SmallCap Value I (f/k/a SmallCap Value) JP Morgan Fleming Asset Management N/A N/A 5% ------------------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------------------ Dynamic Divisions 0% 5% 5% Diversified International Principal Global Investors, LLC N/A Fidelity VIP Overseas Fidelity Management & Research Company N/A ------------------------------------------------------------------------------------------------------------------------------------
GMWB Self-Build Models (v. 5/19/2008) If your rider effective date is on or after May 19, 2008 or for transfers of Separate Account division accumulated value after May 19, 2008, you may choose one of the four GMWB Self-Build Models shown below:
------------------------------------------------------------------------------------------------------------------------------------ GMWB Self-Build Models (v. 5/19/2008) Investment Advisor Model A Model B Model C Model D ------------------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------------------ Short-Term Fixed Income Divisions 30% 20% 10% 15% Short-Term Bond Principal Global Investors, LLC Money Market Principal Management Corporation ------------------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------------------ Fixed Income Divisions 40% 30% 20% 15% American Century VP Inflation American Century Investment Management, Inc. Protection Bond & Mortgage Securities (f/k/a Principal Management Corporation Bond) Government & High Quality Bond Principal Global Investors, LLC ------------------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------------------ Balanced/Asset Allocation Divisions 10% 15% 20% 25% Asset Allocation Morgan Stanley Asset Management LifeTime 2010 Principal Global Investors, LLC LifeTime 2020 Principal Global Investors, LLC LifeTime Strategic Income Principal Global Investors, LLC Strategic Asset Management ("SAM") Edge Asset Management, Inc. Balanced SAM Conservative Balanced Edge Asset Management, Inc. SAM Flexible Income Edge Asset Management, Inc. ------------------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------------------ Large U.S. Equity Divisions 20% 25% 30% 25% ------------------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------------------ Large Value 0% 5% 10% 10% AIM V.I. Basic Value AIM Advisors, Inc. N/A LargeCap Value III (f/k/a LargeCap Principal Global Investors, LLC N/A Value) Equity Income (f/k/a Equity Income I) WM Advisors, Inc. N/A LargeCap Value II (f/k/a Equity Value) American Century Investment Management, Inc. N/A LargeCap Value III (f/ka LargeCap Bernstein Investment Research and Management N/A Value) ------------------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------------------ Large Blend 10% 10% 10% 10% LargeCap Blend III (f/k/a LargeCap T. Rowe Price Associates, Inc. Blend) LargeCap S&P 500 Index (f/k/a Principal Global Investors, LLC LargeCap Stock Index) Neuberger Berman AMT Socially Neuberger Berman Management, Inc. Responsible ------------------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------------------ Large Growth 10% 10% 10% 5% American Century VP Ultra II American Century Investment Management, Inc. Fidelity VIP II ContraFund Fidelity Management & Research Company LargeCap Growth (f/k/a Growth) Columbus Circle Investors T. Rowe Price Blue Chip Growth T. Rowe Price Associates, Inc. ------------------------------------------------------------------------------------------------------------------------------------ Small/Mid U.S. Equity Divisions 0% 5% 15% 0% ------------------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------------------ Mid Cap Value 0% 0% 5% 0% MidCap Value II (f/k/a MidCap Value) Neuberger Berman Management, Inc. & Jacob N/A N/A N/A Levy Management, Inc. Real Estate Securities Principal Global Investors, LLC N/A N/A N/A ------------------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------------------ Mid Cap Blend and Growth 0% 5% 5% 0% American Century VP Vista American Century Investment Management, Inc. N/A N/A T. Rowe Price Heath Sciences T. Rowe Price Associates N/A N/A MidCap Blend (f/k/a MidCap) Principal Global Investors, LLC N/A N/A ------------------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------------------ Small Cap 0% 0% 5% 0% AIM V.I. SmallCap Equity AIM Advisors, Inc. N/A N/A N/A Neuberger Berman AMT Fasciano Neuberger Berman Management, Inc. N/A N/A N/A SmallCap Value I (f/k/a Small Cap JP Morgan Fleming Asset Management N/A Value) N/A N/A ------------------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------------------ International Equity Divisions 0% 5% 5% 20% Diversified International Principal Global Investors, LLC N/A Fidelity VIP Overseas Fidelity Management & Research Company N/A ------------------------------------------------------------------------------------------------------------------------------------
For more information about divisions named in the GMWB Self-Build Models above, please see the prospectus sections titled "THE CONTRACT - The Underlying Mutual Funds", "TABLE OF SEPARATE ACCOUNT DIVISIONS" and "SUMMARY OF EXPENSE INFORMATION - Annual Underlying Mutual Fund Expenses" and the underlying fund's prospectus provided with this prospectus. -------------------------------------------------------------------------------- SUPPLEMENT DATED March 25, 2008 TO THE PRINCIPAL INVESTMENT PLUS VARIABLE ANNUITYsm PROSPECTUS DATED MAY 1, 2007 Effective March , 2008 this Supplement updates your Principal Investment Plus Variable Annuitysm Prospectus dated May 1, 2007, as supplemented to date (together, the "Prospectus"). This Supplement o replaces the description of the GMWB investment options for the Investment Protector Plus Rider found in the Prospectus, as amended by the Supplement dated June 4, 2007 to your Prospectus (the "June Supplement"); o replaces the description of the GMWB investment options for the Investment Protector Plus 2 Rider found in the Supplement dated November 30, 2007 to your Prospectus (the "November Supplement"); and o describes the new, optional Required Minimum Distribution (RMD) Program for tax-qualified contracts with the Investment Protector Plus Rider and Investment Protector Plus 2 Rider. Unless otherwise indicated, all other information included in the Prospectus remains unchanged. The terms and section headings we use in this Supplement have the same meaning as in the Prospectus. You should read this Supplement in its entirety and keep it together with your Prospectus and any previous prospectus supplements for future reference. -------------------------------------------------------------------------------- INVESTMENT PROTECTOR PLUS RIDER Effective May 19, 2008, the GMWB Select Models will not be available to new purchasers of the Investment Protector Plus Rider. As a result, the GMWB Select Models will not be available as an investment option if your rider effective date is May 19, 2008 or later and you should disregard all references in the Prospectus to this investment option. If your rider effective date is prior to May 19, 2008 and you are currently invested in a Select Model, your existing GMWB Select Model will continue to be available as an investment option as described below. In addition, effective May 19, 2008, the existing GMWB Self-Build Models (the "GMWB Self-Build Models (v. 3/1/2005)") will not be available to new purchasers of the rider. As a result, the GMWB Self-Build Models (v. 3/1/2005) will not be available as an investment option if your rider effective date is May 19, 2008 or later. However, GMWB Self-Build Models (v. 5/19/2008) are available as an investment option. If your rider effective date is prior to May 19, 2008 and you are currently invested in a GMWB Self-Build Model (v. 3/1/2005), your existing GMWB Self-Build Model (v. 3/1/2005) will continue to be available as an investment option as described below. Further, effective March 25, 2008, you may enroll in our RMD Program if your rider effective date is March 25, 2008 or later and you satisfy the RMD Program requirements. If you are eligible and you enroll in the RMD Program, withdrawals taken to satisfy RMD will not be deemed excess withdrawals under this rider, provided the requirements of the RMD program are satisfied. -------------------------------------------------------------------------------- THE CONTRACT--Investment Protector Plus Rider On page 26 of your Prospectus, insert the following new section describing Required Minimum Distributions under the Investment Protector Plus Rider after Calculation of the Remaining Withdrawal Benefit Base and prior to Effect of Accumulated Value. Required Minimum Distributions under this Rider Tax-qualified Contracts are subject to certain federal tax rules requiring that Required Minimum Distributions ("RMD") be taken on a calendar year basis (i.e., compared to a contract year basis), usually beginning after age 70 1/2. If Your Rider Effective Date is prior to March 25, 2008 A withdrawal taken from this Contract to satisfy RMD that exceeds a withdrawal benefit payment for a specific contract year will be deemed an excess withdrawal. An excess withdrawal will cause a recalculation of the applicable remaining withdrawal benefit base at the time of the excess withdrawal and recalculation of the applicable withdrawal benefit base and withdrawal benefit payment at the next contract anniversary. Excess withdrawals may result in a lower withdrawal benefit payment(s) in the future and/or termination of this rider for lack of value in the withdrawal benefit bases. If Your Rider Effective Date is on or after March 25, 2008 A withdrawal taken from this Contract to satisfy RMD for this Contract (an "RMD withdrawal") that exceeds a withdrawal benefit payment under this rider for a specific contract year will NOT be deemed an excess withdrawal if you enroll in our RMD Program for GMWB Riders and meet the following RMD Program requirements: o your contract does not have the Enhanced Death Benefit Rider; and o the amount required to be distributed each calendar year for purposes of satisfying the RMD rules of the Internal Revenue Code is based only on this Contract (the "RMD amount") o you elect one of the following Flexible Withdrawal Options (FWO): - payments equal to the greater of Investment Back withdrawal benefit payments or the RMD amount; - payments equal to the greater of For Life withdrawal benefit payments or the RMD amount; - RMD amount; o you do not take an unscheduled withdrawal; and o FWO instructions may be updated only once per contract year while within 30 calendar days following your contract anniversary. If you satisfy the above requirements, an RMD withdrawal will not be treated as an excess withdrawal for purposes of recalculating the applicable remaining withdrawal benefit base at the time of the RMD withdrawal and will not result in recalculation of the withdrawal benefit bases and withdrawal benefit payments at the next contract anniversary. Any amounts withdrawn in excess of a withdrawal benefit payment, other than RMD withdrawals, will be deemed an excess withdrawal. We reserve the right to modify or eliminate the RMD Program for GMWB riders if there is any change to the Internal Revenue Code or IRS rules relating to RMD, including the issuance of relevant IRS guidance. If we exercise our right to modify or eliminate the RMD Program for GMWB riders then any withdrawal in excess of a withdrawal benefit payment will be deemed an excess withdrawal. We will send you notice prior to any change in or termination of the RMD Program. More information regarding our RMD Program for GMWB riders may be obtained from your registered representative or by calling us at 1-800-852-4450. -------------------------------------------------------------------------------- THE CONTRACT--Investment Protector Plus Rider The description of the investment options available when utilizing the Investment Protector Plus Rider beginning on page 27 of your Prospectus, as amended by the description beginning on page 1 of the June Supplement, is deleted in its entirety and replaced with the following: Investment Option Restrictions While this rider is in effect, the investment options you may select are restricted. The limited investment options available under this rider are intended to support this rider's guarantees with balanced investment objectives. If your investment goal is aggressive growth, this rider may not be appropriate for you. You must allocate 100% of your Separate Account division accumulated value and premium payments to one of the following GMWB Models or Separate Account divisions (the "GMWB investment options"): o one of the GMWB Select Models* as described below; o one of the GMWB Self-Build Models as described below; o the Principal LifeTime 2010 Account; o the Principal LifeTime 2020 Account; o the Principal LifeTime Strategic Income Account; o Strategic Asset Management Balanced Portfolio; o Strategic Asset Management Conservative Balanced Portfolio; or o Strategic Asset Management Flexible Income Portfolio. * The GMWB Select Models are not available if your rider effective date is on or after May 19, 2008. If your rider effective date is prior to May 19, 2008, see GMWB Select Models below for availability of this investment option. This rider does not restrict allocations to the Fixed or DCA Accounts. For more information about GMWB Select Models or GMWB Self-Build Models, please see below. For more information about Principal LifeTime Accounts and Strategic Asset Management (SAM) Portfolios, please see the prospectus sections titled "THE CONTRACT - The Underlying Mutual Funds", "TABLE OF SEPARATE ACCOUNT DIVISIONS" and "SUMMARY OF EXPENSE INFORMATION - Annual Underlying Mutual Fund Expenses" and the underlying fund's prospectus provided with this prospectus. For more information about the Fixed and DCA Accounts, please see "FIXED ACCOUNT AND DCA PLUS ACCOUNTS". We reserve the right to modify the list of available GMWB investment options, from time to time, at our sole discretion. We have retained Principal Financial Advisors, an Iowa corporation and a registered investment adviser with the Securities and Exchange Commission, to provide investment advisory services with respect to the selection and retention of the GMWB investment options. Principal Financial Advisors and the Company are both member companies of the Principal Financial Group, Inc. Principal Financial Advisors provides asset allocation advice and other investment advisory services to qualified retirement plans funded with group annuity products purchased from the Company. Principal Financial Advisors also manages two balanced separate accounts of the Company. You may transfer from one available investment option to another by moving 100% of your Separate Account division accumulated value to one of the other GMWB investment options available at the time of the transfer. You may make a transfer by providing us notice (the change is effective on the next valuation period after we receive your notice). We may terminate your rider if you allocate premium payments or transfer your Separate Account division accumulated value to an investment option other than the permitted GMWB investment options. We will not be responsible for any financial impact to you caused by termination of your GMWB rider because you violated the GMWB investment restrictions. GMWB Select Models A GMWB Select Model is only available as a GMWB investment option if: o your rider effective date is prior to May 19, 2008; and o your Separate Account division accumulated value was allocated to one of the GMWB Select Models as of May 19, 2008 and you have not transferred your Separate Account division accumulated value from that GMWB Select Model since May 19, 2008. If you satisfy the above requirements, only your existing GMWB Select Model is available to you and your premium payments and Separate Account division accumulated value may remain allocated to that model. Once you transfer your Separate Account division accumulated value from your chosen GMWB Select Model into one of the other available GMWB investment options, none of the GMWB Select Models will be available to you. However, you may allocate your Separate Account division accumulated value to one of the GMWB Self-Build Models (v. 5/19/2008) or other GMWB investment options. If you have chosen a GMWB Select Model, you are directing us to allocate your premium payments and Separate Account division accumulated value according to the allocation percentages shown in the chart below. In addition, you are directing us to automatically rebalance the Separate Account division accumulated value each calendar quarter to match the allocation percentages of your chosen GMWB Select Model.
----------------------------------------------------------------------------------------------------------------------------------- GMWB Select Models Investment Advisor Model A Model B Model C ----------------------------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------------------------------- Stable Divisions 30% 20% 10% Short-Term Bond Principal Global Investors, LLC 30% 20% 10% ----------------------------------------------------------------------------------------------------------------------------------- Conservative Divisions 40% 30% 20% American Century VP Inflation Protection American Century Investment Management, Inc. 10% 5% 10% Bond & Mortgage Securities (f/k/a Bond) Principal Management Corporation 15% 15% 10% Government & High Quality Bond Principal Global Investors, LLC 15% 10% 0% ----------------------------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------------------------------- Moderate Divisions 20% 30% 45% Large Cap Blend 10% 10% 10% LargeCap Blend II (f/k/a LargeCap Blend) T. Rowe Price Associates, Inc. 10% 10% 10% Large Cap Value 0% 5% 10% LargeCap Value III (f/k/a LargeCap Value) Bernstein Investment Research and Management N/A 5% 10% Balanced 10% 15% 20% Equity Income (f/k/a Equity Income I) WM Advisors, Inc. 10% 15% 20% Mid Cap Value 0% 0% 5% MidCap Value II (f/k/a MidCap Value) Neuberger Berman Management, Inc. & Jacob N/A N/A 5% Levy Management, Inc. ----------------------------------------------------------------------------------------------------------------------------------- Aggressive Divisions 10% 15% 20% Large Cap Growth 10% 10% 10% American Century VP Ultra II American Century Investment Management, Inc. 10% 10% 10% Mid Cap Blend 0% 5% 5% MidCap Blend (f/k/a MidCap) Principal Global Investors, LLC N/A 5% 5% Small Cap Value 0% 0% 5% SmallCap Value I (f/k/a SmallCap Value) JP Morgan Fleming Asset Management N/A N/A 5% ----------------------------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------------------------------- Dynamic Divisions 0% 5% 5% Fidelity VIP Overseas Fidelity Management & Research Company N/A 5% 5% -----------------------------------------------------------------------------------------------------------------------------------
For more information about divisions named in the GMWB Select Models above, please see the prospectus sections titled "THE CONTRACT - The Underlying Mutual Funds", "TABLE OF SEPARATE ACCOUNT DIVISIONS" and "SUMMARY OF EXPENSE INFORMATION - Annual Underlying Mutual Fund Expenses" and the underlying fund's prospectus provided with this prospectus. GMWB Self-Build Models The GMWB Self-Build Models provide you limited ability to select the Separate Account divisions for allocation using certain guidelines that we provide. To "build your model," you pick Separate Account divisions from each of the asset classes in the model. The amount you may allocate in each asset class is set out in the tables below. Your division allocation percentages may not exceed the asset class percentages of your GMWB Self-Build Model. The sum of the percentages you invest in the asset classes must total 100%. If you choose a GMWB Self-Build Model, you are directing us to allocate your Separate Account division accumulated value and premium payments according to the allocation percentages you have set. In addition, you are directing us to automatically rebalance your Separate Account division accumulated value each calendar quarter to match the allocation percentages you set in your GMWB Self-Build Model. You may transfer among the divisions within a asset class as long as your allocations for that asset class equal the percentage established by your chosen GMWB Self-Build Model, and you adhere to the transfer provisions of your Contract (See THE CONTRACT - The Accumulation Period, Division Transfers and GENERAL PROVISIONS - Frequent Trading and Market Timing (Abusive Trading Practices)). GMWB Self-Build Models (v. 3/1/2005) The following GMWB Self-Build Models (v. 3/1/2005) are only available if you satisfy the following requirements: o your rider effective date is prior to May 19, 2008; and o your Separate Account division accumulated value was allocated to one of the below Self-Build Models as of May 19, 2008 and you have not transferred your Separate Account division accumulated from that GMWB Select Model since May 19, 2008. If you satisfy the above requirements, only the GMWB Self-Build Model (v. 3/1/2005) in which you are currently allocated is available to you. You may transfer among the divisions within the risk classes of your GMWB Self-Build Model (v.3/1/2005) provided that your allocations satisfy the specified risk class percentages in your Self-Build Model, and you adhere to the transfer provisions of your Contract. (See THE CONTRACT - The Accumulation Period, Division Transfers and GENERAL PROVISIONS - Frequent Trading and Market Timing (Abusive Trading Practices)). Once you transfer your Separate Account division accumulated value from your chosen GMWB Self-Build Model (v. 3/1/2005) into one of the other available GMWB investment options, none of the GMWB Self-Build Models (v. 3/1/2005) will be available to you. However, you may allocate your Separate Account division accumulated value to one of the GMWB Self-Build Models (v. 5/19/2008) or other GMWB investment options.
----------------------------------------------------------------------------------------------------------------------------------- GMWB Self-Build Models (v. 3/1/2005) Investment Advisor Model A Model B Model C ----------------------------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------------------------------- Stable Divisions 30% 20% 10% Short-Term Bond Principal Global Investors, LLC Money Market Principal Management Corporation ----------------------------------------------------------------------------------------------------------------------------------- Conservative Divisions 40% 30% 20% American Century VP Inflation Protection American Century Investment Management, Inc. Bond & Mortgage Securities (f/k/a Bond) Principal Management Corporation Government & High Quality Bond Principal Global Investors, LLC ----------------------------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------------------------------- Moderate Divisions 20% 15% 45% Large Cap Blend 10% 10% 10% LargeCap Blend II (f/k/a LargeCap Blend) T. Rowe Price Associates, Inc. LargeCap S&P 500 Index (f/k/a Large Principal Global Investors, LLC Cap Stock Index) Neuberger Berman AMT Socially Neuberger Berman Management, Inc. Responsible Large Cap Value 0% 5% 10% LargeCap Value (f/k/a Capital Principal Global Investors, LLC N/A Value) LargeCap Value II (f/k/a Equity Value) American Century Investment Management, Inc. N/A LargeCap Value III (f/k/a LargeCap Bernstein Investment Research and Management N/A Value) Balanced 10% 15% 20% Asset Allocation Morgan Stanley Asset Management Equity Income (f/k/a Equity Income) WM Advisors, Inc. LifeTime 2010 Principal Global Investors, LLC LifeTime 2020 Principal Global Investors, LLC LifeTime Strategic Income Principal Global Investors, LLC Mid Cap Value 0% 0% 5% MidCap Value II (f/k/a MidCap Value) Neuberger Berman Management, Inc. & Jacob N/A N/A 5% Levy Management, Inc. ----------------------------------------------------------------------------------------------------------------------------------- Aggressive Divisions 10% 15% 20% Large Cap Growth 10% 10% 10% American Century VP Ultra II American Century Investment Management, Inc. Fidelity VIP II ContraFund Fidelity Management & Research Company LargeCap Growth (f/k/a Growth) Columbus Circle Investors T. Rowe Price Health Sciences T. Rowe Price Associates, Inc. Mid Cap Blend 0% 5% 5% MidCap Blend (f/k/a MidCap) Principal Global Investors, LLC N/A 5% 5% Small Cap Value 0% 0% 5% SmallCap Value I (f/k/a SmallCap Value) JP Morgan Fleming Asset Management N/A N/A 5% ----------------------------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------------------------------- Dynamic Divisions 0% 5% 5% Diversified International Principal Global Investors, LLC N/A Fidelity VIP Overseas Fidelity Management & Research Company N/A -----------------------------------------------------------------------------------------------------------------------------------
GMWB Self-Build Models (v. 5/19/2008) If your rider effective date is on or after May 19, 2008 or for transfers of Separate Account division accumulated value after May 19, 2008, you may choose one of the four GMWB Self-Build Models shown below:
------------------------------------------------------------------------------------------------------------------------------------ GMWB Self-Build Models (v. 5/19/2008) Investment Advisor Model A Model B Model C Model D ------------------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------------------ Short-Term Fixed Income Divisions 30% 20% 10% 15% Short-Term Bond Principal Global Investors, LLC Money Market Principal Management Corporation ------------------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------------------ Fixed Income Divisions 40% 30% 20% 15% American Century VP Inflation American Century Investment Management, Inc. Protection Bond & Mortgage Securities (f/k/a Principal Management Corporation Bond) Government & High Quality Bond Principal Global Investors, LLC ------------------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------------------ Balanced/Asset Allocation Divisions 10% 15% 20% 25% Asset Allocation Morgan Stanley Asset Management LifeTime 2010 Principal Global Investors, LLC LifeTime 2020 Principal Global Investors, LLC LifeTime Strategic Income Principal Global Investors, LLC Strategic Asset Management ("SAM") Edge Asset Management, Inc. Balanced SAM Conservative Balanced Edge Asset Management, Inc. SAM Flexible Income Edge Asset Management, Inc. ------------------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------------------ Large U.S. Equity Divisions 20% 25% 30% 25% ------------------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------------------ Large Value 0% 5% 10% 10% AIM V.I. Basic Value AIM Advisors, Inc. N/A LargeCap Value III (f/k/a LargeCap Principal Global Investors, LLC N/A Value) Equity Income (f/k/a Equity Income I) WM Advisors, Inc. N/A LargeCap Value II (f/k/a Equity Value) American Century Investment Management, Inc. N/A LargeCap Value III (f/ka LargeCap Bernstein Investment Research and Management N/A Value) ------------------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------------------ Large Blend 10% 10% 10% 10% LargeCap Blend III (f/k/a LargeCap T. Rowe Price Associates, Inc. Blend) LargeCap S&P 500 Index (f/k/a Principal Global Investors, LLC LargeCap Stock Index) Neuberger Berman AMT Socially Neuberger Berman Management, Inc. Responsible ------------------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------------------ Large Growth 10% 10% 10% 5% American Century VP Ultra II American Century Investment Management, Inc. Fidelity VIP II ContraFund Fidelity Management & Research Company LargeCap Growth (f/k/a Growth) Columbus Circle Investors T. Rowe Price Blue Chip Growth T. Rowe Price Associates, Inc. ------------------------------------------------------------------------------------------------------------------------------------ Small/Mid U.S. Equity Divisions 0% 5% 15% 0% ------------------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------------------ Mid Cap Value 0% 0% 5% 0% MidCap Value II (f/k/a MidCap Value) Neuberger Berman Management, Inc. & Jacob N/A N/A N/A Levy Management, Inc. Real Estate Securities Principal Global Investors, LLC N/A N/A N/A ------------------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------------------ Mid Cap Blend and Growth 0% 5% 5% 0% American Century VP Vista American Century Investment Management, Inc. N/A N/A T. Rowe Price Heath Sciences T. Rowe Price Associates N/A N/A MidCap Blend (f/k/a MidCap) Principal Global Investors, LLC N/A N/A ------------------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------------------ Small Cap 0% 0% 5% 0% AIM V.I. SmallCap Equity AIM Advisors, Inc. N/A N/A N/A Neuberger Berman AMT Fasciano Neuberger Berman Management, Inc. N/A N/A N/A SmallCap Value I (f/k/a Small Cap JP Morgan Fleming Asset Management N/A Value) N/A N/A ------------------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------------------ International Equity Divisions 0% 5% 5% 20% Diversified International Principal Global Investors, LLC N/A Fidelity VIP Overseas Fidelity Management & Research Company N/A ------------------------------------------------------------------------------------------------------------------------------------
For more information about divisions named in the GMWB Self-Build Models above, please see the prospectus sections titled "THE CONTRACT - The Underlying Mutual Funds", "TABLE OF SEPARATE ACCOUNT DIVISIONS" and "SUMMARY OF EXPENSE INFORMATION - Annual Underlying Mutual Fund Expenses" and the underlying fund's prospectus provided with this prospectus. -------------------------------------------------------------------------------- INVESTMENT PROTECTOR PLUS 2 RIDER Effective May 19, 2008, the GMWB Select Models will not be available to new purchasers of the Investment Protector Plus 2 Rider. As a result, the GMWB Select Models will not be available as an investment option if your rider effective date is May 19, 2008 or later and you should disregard all references in the Prospectus to this investment option. If your rider effective date is prior to May 19, 2008 and you are currently invested in a Select Model, your existing GMWB Select Model will continue to be available as an investment option as described below. In addition, effective May 19, 2008, the existing GMWB Self-Build Models (the "GMWB Self-Build Models (v. 3/1/2005)") will not be available to new purchasers of the rider. As a result, the GMWB Self-Build Models (v. 3/1/2005) will not be available as an investment option if your rider effective date is May 19, 2008 or later. However, GMWB Self-Build Models (v. 5/19/2008) are available as an investment option. If your rider effective date is prior to May 19, 2008 and you are currently invested in a GMWB Self-Build Model (v. 3/1/2005), your existing GMWB Self-Build Model (v. 3/1/2005) will continue to be available as an investment option as described below. Further, effective March 25, 2008, you may enroll in our RMD Program if your rider effective date is March 25, 2008 or later and you satisfy the RMD Program requirements. If you are eligible and you enroll in the RMD Program, withdrawals taken to satisfy RMD will not be deemed excess withdrawals under this rider, provided the requirements of the RMD program are satisfied. -------------------------------------------------------------------------------- THE CONTRACT--Investment Protector Plus 2 Rider On page 7 of your November Supplement, insert the following new section describing Required Minimum Distributions under the Investment Protector Plus 2 Rider after Calculation Investment Back Withdrawal Measure and prior to Effect of Withdrawals under the Rider. Required Minimum Distributions under this Rider Tax-qualified Contracts are subject to certain federal tax rules requiring that Required Minimum Distributions ("RMD") be taken on a calendar year basis (i.e., compared to a contract year basis), usually beginning after age 70 1/2. If Your Rider Effective Date is prior to March 25, 2008 A withdrawal taken from this Contract to satisfy RMD that exceeds a withdrawal benefit payment for a specific contract year will be deemed an excess withdrawal. An excess withdrawal will cause a recalculation of the applicable remaining withdrawal benefit base at the time of the excess withdrawal and recalculation of the applicable withdrawal benefit base and withdrawal benefit payment at the next contract anniversary. Excess withdrawals may result in a lower withdrawal benefit payment(s) in the future and/or termination of this rider for lack of value in the withdrawal benefit bases. If Your Rider Effective Date is on or after March 25, 2008 A withdrawal taken from this Contract to satisfy RMD for this Contract (an "RMD withdrawal") that exceeds a withdrawal benefit payment under this rider for a specific contract year will NOT be deemed an excess withdrawal if you enroll in our RMD Program for GMWB Riders and meet the following RMD Program requirements: o your contract does not have the Enhanced Death Benefit Rider; and o the amount required to be distributed each calendar year for purposes of satisfying the RMD rules of the Internal Revenue Code is based only on this Contract (the "RMD amount") o you elect one of the following Flexible Withdrawal Options (FWO): - payments equal to the greater of Investment Back withdrawal benefit payments or the RMD amount; - payments equal to the greater of For Life withdrawal benefit payments or the RMD amount; - RMD amount; o you do not take an unscheduled withdrawal; and o FWO instructions may be updated only once per contract year while within 30 calendar days following your contract anniversary. If you satisfy the above requirements, an RMD withdrawal will not be treated as an excess withdrawal for purposes of recalculating the applicable remaining withdrawal benefit base at the time of the RMD withdrawal and will not result in recalculation of the withdrawal benefit bases and withdrawal benefit payments at the next contract anniversary. Any amounts withdrawn in excess of a withdrawal benefit payment, other than RMD withdrawals, will be deemed an excess withdrawal. We reserve the right to modify or eliminate the RMD Program for GMWB riders if there is any change to the Internal Revenue Code or IRS rules relating to RMD, including the issuance of relevant IRS guidance. If we exercise our right to modify or eliminate the RMD Program for GMWB riders then any withdrawal in excess of a withdrawal benefit payment will be deemed an excess withdrawal. We will send you notice prior to any change in or termination of the RMD Program. More information regarding our RMD Program for GMWB riders may be obtained from your registered representative or by calling us at 1-800-852-4450. -------------------------------------------------------------------------------- THE CONTRACT--Investment Protector Plus 2 Rider The description of the investment options available when utilizing the Investment Protector Plus 2 Rider beginning on page 10 of the November Supplement is deleted in its entirety and replaced with the following: Investment Option Restrictions While this rider is in effect, the investment options you may select are restricted. The limited investment options available under this rider are intended to support this rider's guarantees with balanced investment objectives. If your investment goal is aggressive growth, this rider may not be appropriate for you. You must allocate 100% of your Separate Account division accumulated value and premium payments to one of the following GMWB Models or Separate Account divisions (the "GMWB investment options"): o one of the GMWB Select Models* as described below; o one of the GMWB Self-Build Models as described below; o the Principal LifeTime 2010 Account; o the Principal LifeTime 2020 Account; o the Principal LifeTime 2030 Account; o the Principal LifeTime Strategic Income Account; o Strategic Asset Management Balanced Portfolio; o Strategic Asset Management Conservative Balanced Portfolio; or o Strategic Asset Management Flexible Income Portfolio. * The GMWB Select Models are not available if your rider effective date is on or after May 19, 2008. If your rider effective date is prior to May 19, 2008, see GMWB Select Models below for availability of this investment option. This rider does not restrict allocations to the Fixed or DCA Accounts. For more information about GMWB Select Models or GMWB Self-Build Models, please see below. For more information about Principal LifeTime Accounts and Strategic Asset Management (SAM) Portfolios, please see the prospectus sections titled "THE CONTRACT - The Underlying Mutual Funds", "TABLE OF SEPARATE ACCOUNT DIVISIONS" and "SUMMARY OF EXPENSE INFORMATION - Annual Underlying Mutual Fund Expenses" and the underlying fund's prospectus provided with this prospectus. For more information about the Fixed and DCA Accounts, please see "FIXED ACCOUNT AND DCA PLUS ACCOUNTS". We reserve the right to modify the list of available GMWB investment options, from time to time, at our sole discretion. We have retained Principal Financial Advisors, an Iowa corporation and a registered investment adviser with the Securities and Exchange Commission, to provide investment advisory services with respect to the selection and retention of the GMWB investment options. Principal Financial Advisors and the Company are both member companies of the Principal Financial Group, Inc. Principal Financial Advisors provides asset allocation advice and other investment advisory services to qualified retirement plans funded with group annuity products purchased from the Company. Principal Financial Advisors also manages two balanced separate accounts of the Company. You may transfer from one available investment option to another by moving 100% of your Separate Account division accumulated value to one of the other GMWB investment options available at the time of the transfer. You may make a transfer by providing us notice (the change is effective on the next valuation period after we receive your notice). We may terminate your rider if you allocate premium payments or transfer your Separate Account division accumulated value to an investment option other than the permitted GMWB investment options. We will not be responsible for any financial impact to you caused by termination of your GMWB rider because you violated the GMWB investment restrictions. GMWB Select Models A GMWB Select Model is only available as a GMWB investment option if: o your rider effective date is prior to May 19, 2008; and o your Separate Account division accumulated value was allocated to one of the GMWB Select Models as of May 19, 2008 and you have not transferred your Separate Account division accumulated value from that GMWB Select Model since May 19, 2008. If you satisfy the above requirements, only your existing GMWB Select Model is available to you and your premium payments and Separate Account division accumulated value may remain allocated to that model. Once you transfer your Separate Account division accumulated value from your chosen GMWB Select Model into one of the other available GMWB investment options, none of the GMWB Select Models will be available to you. However, you may allocate your Separate Account division accumulated value to one of the GMWB Self-Build Models (v. 5/19/2008) or other GMWB investment options. If you have chosen a GMWB Select Model, you are directing us to allocate your premium payments and Separate Account division accumulated value according to the allocation percentages shown in the chart below. In addition, you are directing us to automatically rebalance the Separate Account division accumulated value each calendar quarter to match the allocation percentages of your chosen GMWB Select Model.
----------------------------------------------------------------------------------------------------------------------------------- GMWB Select Models Investment Advisor Model A Model B Model C ----------------------------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------------------------------- Stable Divisions 30% 20% 10% Short-Term Bond Principal Global Investors, LLC 30% 20% 10% ----------------------------------------------------------------------------------------------------------------------------------- Conservative Divisions 40% 30% 20% American Century VP Inflation Protection American Century Investment Management, Inc. 10% 5% 10% Bond & Mortgage Securities (f/k/a Bond) Principal Management Corporation 15% 15% 10% Government & High Quality Bond Principal Global Investors, LLC 15% 10% 0% ----------------------------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------------------------------- Moderate Divisions 20% 30% 45% Large Cap Blend 10% 10% 10% LargeCap Blend II (f/k/a LargeCap Blend) T. Rowe Price Associates, Inc. 10% 10% 10% Large Cap Value 0% 5% 10% LargeCap Value III (f/k/a LargeCap Value) Bernstein Investment Research and Management N/A 5% 10% Balanced 10% 15% 20% Equity Income (f/k/a Equity Income I) WM Advisors, Inc. 10% 15% 20% Mid Cap Value 0% 0% 5% MidCap Value II (f/k/a MidCap Value) Neuberger Berman Management, Inc. & Jacob N/A N/A 5% Levy Management, Inc. ----------------------------------------------------------------------------------------------------------------------------------- Aggressive Divisions 10% 15% 20% Large Cap Growth 10% 10% 10% American Century VP Ultra II American Century Investment Management, Inc. 10% 10% 10% Mid Cap Blend 0% 5% 5% MidCap Blend (f/k/a MidCap) Principal Global Investors, LLC N/A 5% 5% Small Cap Value 0% 0% 5% SmallCap Value I (f/k/a SmallCap Value) JP Morgan Fleming Asset Management N/A N/A 5% ----------------------------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------------------------------- Dynamic Divisions 0% 5% 5% Fidelity VIP Overseas Fidelity Management & Research Company N/A 5% 5% -----------------------------------------------------------------------------------------------------------------------------------
For more information about divisions named in the GMWB Select Models above, please see the prospectus sections titled "THE CONTRACT - The Underlying Mutual Funds", "TABLE OF SEPARATE ACCOUNT DIVISIONS" and "SUMMARY OF EXPENSE INFORMATION - Annual Underlying Mutual Fund Expenses" and the underlying fund's prospectus provided with this prospectus. GMWB Self-Build Models The GMWB Self-Build Models provide you limited ability to select the Separate Account divisions for allocation using certain guidelines that we provide. To "build your model," you pick Separate Account divisions from each of the asset classes in the model. The amount you may allocate in each asset class is set out in the tables below. Your division allocation percentages may not exceed the asset class percentages of your GMWB Self-Build Model. The sum of the percentages you invest in the asset classes must total 100%. If you choose a GMWB Self-Build Model, you are directing us to allocate your Separate Account division accumulated value and premium payments according to the allocation percentages you have set. In addition, you are directing us to automatically rebalance your Separate Account division accumulated value each calendar quarter to match the allocation percentages you set in your GMWB Self-Build Model. You may transfer among the divisions within a asset class as long as your allocations for that asset class equal the percentage established by your chosen GMWB Self-Build Model, and you adhere to the transfer provisions of your Contract (See THE CONTRACT - The Accumulation Period, Division Transfers and GENERAL PROVISIONS - Frequent Trading and Market Timing (Abusive Trading Practices)). GMWB Self-Build Models (v. 3/1/2005) The following GMWB Self-Build Models (v. 3/1/2005) are only available if you satisfy the following requirements: o your rider effective date is prior to May 19, 2008; and o your Separate Account division accumulated value was allocated to one of the below Self-Build Models as of May 19, 2008 and you have not transferred your Separate Account division accumulated from that GMWB Select Model since May 19, 2008. If you satisfy the above requirements, only the GMWB Self-Build Model (v. 3/1/2005) in which you are currently allocated is available to you. You may transfer among the divisions within the risk classes of your GMWB Self-Build Model (v.3/1/2005) provided that your allocations satisfy the specified risk class percentages in your Self-Build Model, and you adhere to the transfer provisions of your Contract. (See THE CONTRACT - The Accumulation Period, Division Transfers and GENERAL PROVISIONS - Frequent Trading and Market Timing (Abusive Trading Practices)). Once you transfer your Separate Account division accumulated value from your chosen GMWB Self-Build Model (v. 3/1/2005) into one of the other available GMWB investment options, none of the GMWB Self-Build Models (v. 3/1/2005) will be available to you. However, you may allocate your Separate Account division accumulated value to one of the GMWB Self-Build Models (v. 5/19/2008) or other GMWB investment options.
----------------------------------------------------------------------------------------------------------------------------------- GMWB Self-Build Models (v. 3/1/2005) Investment Advisor Model A Model B Model C ----------------------------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------------------------------- Stable Divisions 30% 20% 10% Short-Term Bond Principal Global Investors, LLC Money Market Principal Management Corporation ----------------------------------------------------------------------------------------------------------------------------------- Conservative Divisions 40% 30% 20% American Century VP Inflation Protection American Century Investment Management, Inc. Bond & Mortgage Securities (f/k/a Bond) Principal Management Corporation Government & High Quality Bond Principal Global Investors, LLC ----------------------------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------------------------------- Moderate Divisions 20% 15% 45% Large Cap Blend 10% 10% 10% LargeCap Blend II (f/k/a LargeCap Blend) T. Rowe Price Associates, Inc. LargeCap S&P 500 Index (f/k/a Large Principal Global Investors, LLC Cap Stock Index) Neuberger Berman AMT Socially Neuberger Berman Management, Inc. Responsible Large Cap Value 0% 5% 10% LargeCap Value (f/k/a Capital Principal Global Investors, LLC N/A Value) LargeCap Value II (f/k/a Equity Value) American Century Investment Management, Inc. N/A LargeCap Value III (f/k/a LargeCap Bernstein Investment Research and Management N/A Value) Balanced 10% 15% 20% Asset Allocation Morgan Stanley Asset Management Equity Income (f/k/a Equity Income) WM Advisors, Inc. LifeTime 2010 Principal Global Investors, LLC LifeTime 2020 Principal Global Investors, LLC LifeTime Strategic Income Principal Global Investors, LLC Mid Cap Value 0% 0% 5% MidCap Value II (f/k/a MidCap Value) Neuberger Berman Management, Inc. & Jacob N/A N/A 5% Levy Management, Inc. ----------------------------------------------------------------------------------------------------------------------------------- Aggressive Divisions 10% 15% 20% Large Cap Growth 10% 10% 10% American Century VP Ultra II American Century Investment Management, Inc. Fidelity VIP II ContraFund Fidelity Management & Research Company LargeCap Growth (f/k/a Growth) Columbus Circle Investors T. Rowe Price Health Sciences T. Rowe Price Associates, Inc. Mid Cap Blend 0% 5% 5% MidCap Blend (f/k/a MidCap) Principal Global Investors, LLC N/A 5% 5% Small Cap Value 0% 0% 5% SmallCap Value I (f/k/a SmallCap Value) JP Morgan Fleming Asset Management N/A N/A 5% ----------------------------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------------------------------- Dynamic Divisions 0% 5% 5% Diversified International Principal Global Investors, LLC N/A Fidelity VIP Overseas Fidelity Management & Research Company N/A -----------------------------------------------------------------------------------------------------------------------------------
GMWB Self-Build Models (v. 5/19/2008) If your rider effective date is on or after May 19, 2008 or for transfers of Separate Account division accumulated value after May 19, 2008, you may choose one of the four GMWB Self-Build Models shown below:
------------------------------------------------------------------------------------------------------------------------------------ GMWB Self-Build Models (v. 5/19/2008) Investment Advisor Model A Model B Model C Model D ------------------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------------------ Short-Term Fixed Income Divisions 30% 20% 10% 15% Short-Term Bond Principal Global Investors, LLC Money Market Principal Management Corporation ------------------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------------------ Fixed Income Divisions 40% 30% 20% 15% American Century VP Inflation American Century Investment Management, Inc. Protection Bond & Mortgage Securities (f/k/a Principal Management Corporation Bond) Government & High Quality Bond Principal Global Investors, LLC ------------------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------------------ Balanced/Asset Allocation Divisions 10% 15% 20% 25% Asset Allocation Morgan Stanley Asset Management LifeTime 2010 Principal Global Investors, LLC LifeTime 2020 Principal Global Investors, LLC LifeTime Strategic Income Principal Global Investors, LLC Strategic Asset Management ("SAM") Edge Asset Management, Inc. Balanced SAM Conservative Balanced Edge Asset Management, Inc. SAM Flexible Income Edge Asset Management, Inc. ------------------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------------------ Large U.S. Equity Divisions 20% 25% 30% 25% ------------------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------------------ Large Value 0% 5% 10% 10% AIM V.I. Basic Value AIM Advisors, Inc. N/A LargeCap Value III (f/k/a LargeCap Principal Global Investors, LLC N/A Value) Equity Income (f/k/a Equity Income I) WM Advisors, Inc. N/A LargeCap Value II (f/k/a Equity Value) American Century Investment Management, Inc. N/A LargeCap Value III (f/ka LargeCap Bernstein Investment Research and Management N/A Value) ------------------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------------------ Large Blend 10% 10% 10% 10% LargeCap Blend III (f/k/a LargeCap T. Rowe Price Associates, Inc. Blend) LargeCap S&P 500 Index (f/k/a Principal Global Investors, LLC LargeCap Stock Index) Neuberger Berman AMT Socially Neuberger Berman Management, Inc. Responsible ------------------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------------------ Large Growth 10% 10% 10% 5% American Century VP Ultra II American Century Investment Management, Inc. Fidelity VIP II ContraFund Fidelity Management & Research Company LargeCap Growth (f/k/a Growth) Columbus Circle Investors T. Rowe Price Blue Chip Growth T. Rowe Price Associates, Inc. ------------------------------------------------------------------------------------------------------------------------------------ Small/Mid U.S. Equity Divisions 0% 5% 15% 0% ------------------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------------------ Mid Cap Value 0% 0% 5% 0% MidCap Value II (f/k/a MidCap Value) Neuberger Berman Management, Inc. & Jacob N/A N/A N/A Levy Management, Inc. Real Estate Securities Principal Global Investors, LLC N/A N/A N/A ------------------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------------------ Mid Cap Blend and Growth 0% 5% 5% 0% American Century VP Vista American Century Investment Management, Inc. N/A N/A T. Rowe Price Heath Sciences T. Rowe Price Associates N/A N/A MidCap Blend (f/k/a MidCap) Principal Global Investors, LLC N/A N/A ------------------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------------------ Small Cap 0% 0% 5% 0% AIM V.I. SmallCap Equity AIM Advisors, Inc. N/A N/A N/A Neuberger Berman AMT Fasciano Neuberger Berman Management, Inc. N/A N/A N/A SmallCap Value I (f/k/a Small Cap JP Morgan Fleming Asset Management N/A Value) N/A N/A ------------------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------------------ International Equity Divisions 0% 5% 5% 20% Diversified International Principal Global Investors, LLC N/A Fidelity VIP Overseas Fidelity Management & Research Company N/A ------------------------------------------------------------------------------------------------------------------------------------
For more information about divisions named in the GMWB Self-Build Models above, please see the prospectus sections titled "THE CONTRACT - The Underlying Mutual Funds", "TABLE OF SEPARATE ACCOUNT DIVISIONS" and "SUMMARY OF EXPENSE INFORMATION - Annual Underlying Mutual Fund Expenses" and the underlying fund's prospectus provided with this prospectus. SUPPLEMENT DATED NOVEMBER 30, 2007 TO THE PRINCIPAL INVESTMENT PLUS VARIABLE ANNUITYsm PROSPECTUS DATED MAY 1, 2007 Effective January 21, 2008, this Supplement updates your Principal Investment Plus Variable Annuitysm Prospectus dated May 1, 2007 (the "Prospectus"). This supplement replaces the description of the Investment Protector Plus 2 Rider found in the Supplement dated June 4, 2007 to your Prospectus (the "June Supplement") and includes descriptions of enhancements to the features of the Investment Protector Plus 2 Rider. You should read this Supplement in its entirety and keep it together with your Prospectus for future reference. INVESTMENT PROTECTOR PLUS 2 RIDER Subject to state availability, purchasers of Contracts issued on or after June 4, 2007, may elect the optional Investment Protector Plus 2 Rider. Effective January 21, 2008, the Investment Protector Plus 2 Rider includes additional feature enhancements including For Life withdrawal benefits as single life or joint life. This rider does not replace the current Investment Protector Plus Rider. You may elect either the Investment Protector Plus Rider or the Investment Protector Plus 2 Rider. You may not elect both riders. THE CONTRACT--Investment Protector Plus 2 Rider The following description of the Investment Protector Plus 2 Rider (i) replaces the description of the Investment Protector Plus 2 Rider beginning on page 3 and continuing through page 10 of the June Supplement; and (ii) should be inserted at the top of page 31 of the Prospectus, which follows the description of the Investment Protector Plus Rider and precedes the section titled Death Benefit. INVESTMENT PROTECTOR PLUS 2 RIDER For an additional charge, you may elect to purchase the optional Investment Protector Plus 2 Rider. The Contract is available with or without this rider. This rider provides protection against market risk by allowing you to take certain annual withdrawals (i.e., partial surrenders and partial annuitizations), regardless of your Contract's accumulated value. Rider Availability and Eligibility The Investment Protector Plus 2 Rider is generally available to new contracts purchased on or after June 4, 2007. This rider or certain features of this rider may not be available in all states or through all broker-dealers and may be subject to additional restrictions. Certain terms and conditions may differ between states or between broker-dealers. We may withdraw or restrict the availability of this rider at any time. You may contact your registered representative or contact us at 1-800-852-4450 for availability of this rider. In order to be eligible to elect the Investment Protector Plus 2 Rider the following requirements must be met: o The owner(s) (or the annuitant(s) if the owner is not a natural person) and covered life(ves) must satisfy the minimum issue age and maximum issue age. The minimum issue age is 45. The maximum issue age is 80. o Allocations to investment options must be in accordance with the investment option restrictions described below in "Investment Option Restrictions". o No other guaranteed minimum withdrawal benefit (GMWB) rider offered under the Contract may be elected. You may elect this rider only at the time of your initial purchase of the Contract. We may, at our sole discretion, allow this rider to be elected at a later date. Benefits under the Investment Protector Plus 2 Rider This rider provides protection against market risk by guaranteeing that you may withdraw certain GMWB amounts each contract year, regardless of the impact of market performance on your Contract's accumulated value, subject to the terms and conditions of this rider. This rider provides the flexibility of two alternative withdrawal measures - "For Life" and "Investment Back"; without requiring you to elect either measure. o The For Life withdrawal measure is intended to be available to you during your lifetime (and the lifetime of your spouse, if the "Joint Life" For Life withdrawal benefit is selected), so long as you do not withdraw more than a specified percentage of the For Life withdrawal benefit base each contract year. Your right to For Life withdrawal benefits does not commence until the contract year after the oldest owner (oldest annuitant if the owner is not a natural person) attains age 59 1/2. o The Investment Back withdrawal measure is intended to return your premium payments, so long as you do not withdraw more than 7% of the Investment Back withdrawal benefit base each contract year. Your right to Investment Back withdrawal benefits commences immediately. These withdrawal measures are described in further detail below under captions containing those names. You are not required to elect a withdrawal measure as long as your Contract's accumulated value is greater than zero. We will inform you of the amount of the For Life withdrawal benefit and the Investment Back withdrawal benefit available to you each contract year. This rider does not require, restrict or change your right to take withdrawals under the Contract, including your right to elect scheduled withdrawals. This rider may be appropriate if you o intend to take partial surrenders or partial annuitizations from your contract; o are concerned about losing the premiums you have paid due to poor market performance; or o have concerns about outliving your savings or income. This rider may be inappropriate if you o do not intend to take any partial surrenders or partial annuitizations from your contract; o anticipate the need for withdrawals greater than 7% of your total premium payments; or o seek more aggressive growth investment options. You should work with your registered representative to decide whether this rider is appropriate for you based on a thorough analysis of your particular needs, financial objectives, investment goals, time horizons and risk tolerance. Other Important Considerations o The features of this rider may not be purchased separately. As a result, there is a risk that you may ultimately pay for features that you may never use. o Although this rider is designed to permit you to recover at least your premium payments, you should not assume that you will necessarily receive your investment back or payments for life if you take excess withdrawals (i.e. withdrawals that exceed the withdrawal benefit under a measure). o Certain actions you take may reduce or even deplete your withdrawal benefits. For example, the withdrawal benefit bases and remaining withdrawal benefit bases are sensitive to excess withdrawals. Excess withdrawals have a negative effect on the benefits of this rider and may result in lower withdrawal benefits and/or termination of this rider for lack of value in the withdrawal benefit base. o There is no guarantee that the income provided by the withdrawal benefits of this rider will be sufficient to cover any individual's particular needs. In addition, as with any GMWB, the Investment Protector Plus 2 Rider does not assure that you will receive any return on your investments. Moreover, this rider does not protect against loss of purchasing power of assets covered by this rider due to inflation. o This rider restricts the investment options available under the Contract. The more aggressive growth investment options under the Contract are not available to you if you elect this rider. o There is a charge for this rider. The fee for this rider may increase as long as you remain eligible for GMWB Step-Ups. The rider charge is subject to the maximum fee disclosed in CHARGES AND DEDUCTIONS - Charges for Optional Riders, Investment Protector Plus 2 Rider. o You may not terminate this rider during the first five years following the rider effective date. Definitions We use the following definitions to describe how the features of this rider work: o Covered life - the natural person or persons upon whose lives the For Life withdrawal benefits of this rider are based. There can be no more than two covered lives. o Excess withdrawal - the portion of a withdrawal that exceeds the withdrawal benefit remaining prior to the withdrawal. o GMWB Bonus - a feature of this rider that credits a bonus to the withdrawal benefit base and the remaining withdrawal benefit base for each withdrawal measure, provided certain conditions are met. The GMWB Bonus is calculated and credited as described below in "GMWB Bonus". o GMWB Step-Up - a feature of this rider that increases the withdrawal benefit base and remaining withdrawal benefit base for each withdrawal measure to the Contract's accumulated value on the contract anniversary, provided certain conditions are met. The GMWB Step-Up is applied as described below in "GMWB Step-Up". o Remaining withdrawal benefit base - the amount available for future withdrawal benefits under a withdrawal measure. The remaining withdrawal benefit for each measure is calculated as described below in "For Life Withdrawal Measure, Calculating the For Life Remaining Withdrawal Benefit Base" and "Investment Back Withdrawal Measure, Calculating the Investment Back Remaining Withdrawal Benefit Base". o Rider effective date - the date the rider is issued. If you elect this rider at the time you purchase the Contract, the rider effective date and the contract date will be the same. If you elect this rider after you purchase the Contract pursuant to a special offer from us, the rider effective date and the contract date will be different. o Spouse - the person who is recognized as the owner's spouse and eligible to make a spousal election under federal tax laws. o Withdrawal - any partial surrender of the Contract's accumulated value (including surrender charges, if any) and/or any partial annuitization of the Contract. o Withdrawal benefit - the amount that we guarantee you may withdraw each contract year under a withdrawal measure. The withdrawal benefit for each withdrawal measure is calculated as described below in "For Life Withdrawal Measure, Calculating the For Life Withdrawal Benefit" and "Investment Back Withdrawal Measure, Calculating the Investment Back Withdrawal Benefit". o Withdrawal benefit base - the basis for determining the withdrawal benefit available each year under a withdrawal measure. The withdrawal benefit base for each withdrawal measure is calculated as described below in "For Life Withdrawal Measure, Calculating the For Life Withdrawal Benefit Base" and "Investment Back Withdrawal Measure, Calculating the Investment Back Withdrawal Benefit Base". For Life Withdrawal Measure Your right to withdraw For Life withdrawal benefits begins on the contract anniversary following the date the oldest owner (oldest annuitant if the owner is not a natural person) attains age 59 1/2. If the oldest owner (oldest annuitant if the owner is not a natural person) is 59 1/2 years old or older on the rider effective date, the For Life withdrawal benefits are available on the rider effective date. We calculate the For Life withdrawal benefit as described below in "Calculating the For Life Withdrawal Benefit". If you elected this rider on or after January 21, 2008, the For Life withdrawal benefits under this rider may be "Single Life" or "Joint Life" as described below. For Life withdrawal benefits will be automatically calculated as "Single Life" unless you elect "Joint Life" For Life withdrawal benefits. If eligible, you may elect "Joint Life" For Life withdrawal benefits anytime on or before your first withdrawal following the rider effective date. Once you take this first withdrawal, you cannot change your election of "Single Life" or "Joint Life" For Life withdrawal benefits, regardless of any change in life events. If you elected this rider prior to January 21, 2008 and that rider remains in effect, the For Life withdrawal benefits are "Single Life". "Single Life" For Life Withdrawal Benefits "Single Life" For Life withdrawal benefits are based on one covered life. The covered life for "Single Life" 1. must be a. the owner if there is only one owner; b. the annuitant if the owner is not a natural person; c. the youngest joint owner if there are joint owners; or d. the youngest annuitant if there are joint annuitants and the owner is not a natural person. and 2. must satisfy the minimum and maximum issue age requirements in "Rider Availability and Eligibility" on the date the covered life is named. "Single Life" For Life withdrawal benefits may be taken until the earlier of the death of the first owner to die (first annuitant to die, if the owner is not a natural person) or the date the For Life withdrawal benefit base reduces to zero. "Joint Life" For Life Withdrawal Benefits "Joint Life" For Life withdrawal benefits are based on two covered lives. You may only elect "Joint Life" For Life withdrawal benefits if there are two eligible covered lives. The covered lives for "Joint Life" 1. must be a. if there is only one owner, the owner and the owner's spouse, provided the spouse is named as a primary beneficiary; or b. the joint owners, provided the joint owners are each other's spouse. NOTE: The "Joint Life" election is not available if the owner is a not a natural person. and 2. must satisfy the minimum and maximum issue age requirements in "Rider Availability and Eligibility" on the date each covered life is named. "Joint Life" For Life withdrawal benefits will continue until the earlier of the death of the last covered life to die or the date the For Life withdrawal benefit base reduces to zero. NOTE: If you elected the Investment Protector Plus 2 Rider prior to January 21, 2008 and that rider remains in effect, you may not elect "Joint Life" withdrawal benefits and all references to "Joint Life" withdrawal benefits do not apply to your rider. Calculating the For Life Withdrawal Benefit Base We calculate the For Life withdrawal benefit base on the rider effective date and on each contract anniversary. The initial For Life withdrawal benefit base equals o the initial premium payment, if the rider effective date and the contract date are the same; or o the Contract's accumulated value on the rider effective date, if the rider effective date and the contract date are different. On each succeeding contract anniversary, the For Life withdrawal benefit base will be o increased by any additional premium payments made since the previous contract anniversary and any GMWB bonus credited since the previous contract anniversary; and o reduced by the amount of any excess withdrawals taken since the previous contract anniversary (as calculated below). Excess withdrawals will reduce the For Life withdrawal benefit base in an amount equal to the greater of 1. the excess withdrawal; or 2. the result of (a. divided by b.) multiplied by c. where: a. is the amount withdrawn that exceeds the For Life withdrawal benefit remaining prior to the withdrawal; b. is the Contract's accumulated value after the For Life withdrawal benefit is deducted, but prior to deducting the amount of the excess withdrawal; and c. is the For Life withdrawal benefit base prior to the adjustment for the excess withdrawal. NOTE: All withdrawals taken prior to the contract anniversary following the date the oldest owner (oldest annuitant if the owner is not a natural person) attains age 59 1/2 are excess withdrawals when calculating the For Life withdrawal benefit base. Calculating the For Life Withdrawal Benefit We calculate the For Life withdrawal benefit on the rider effective date, each subsequent contract anniversary and the date you take the first withdrawal following the rider effective date. The For Life withdrawal benefit is equal to a percentage of the For Life withdrawal benefit base. The For Life withdrawal benefit percentage depends on whether you have elected "Single Life" or "Joint Life" For Life withdrawal benefits and when you take the first withdrawal following the rider effective date, as shown in the charts below. o If "Single Life" For Life withdrawal benefits are elected: Age of Covered Life For Life withdrawal at first withdrawal benefit percentage ------------------------- ------------------------ ------------------------- ------------------------ 45-49 3.50% 50-54 4.00% 55-59 4.50% 60-69 5.00% 70-74 5.50% 75-79 6.00% 80+ 6.50% o If "Joint Life" For Life withdrawal benefits are elected: Age of younger Covered Life For Life withdrawal at first withdrawal benefit percentage ---------------------------- ------------------------ ---------------------------- ------------------------ 45-49 3.00% 50-54 3.50% 55-59 4.00% 60-69 4.50% 70-74 5.00% 75-79 5.50% 80+ 6.00% You should carefully choose when you take the first withdrawal following the rider effective date, because this withdrawal will lock in the For Life withdrawal benefit percentage for the life of this rider. Once you take this withdrawal, your election of "Single Life" or "Joint Life" and the resulting For Life withdrawal benefit percentage are locked in and will not change. For example, if you have elected "Joint Life" For Life withdrawal benefits and take the first withdrawal when the younger covered life is age 46, your For Life withdrawal benefit percentage will be locked in at 3.00% for the remaining life of this rider and will never be higher. Calculating the For Life Remaining Withdrawal Benefit Base We calculate the For Life remaining withdrawal benefit base on the rider effective date, when a premium payment is made, when any applicable GMWB bonus is credited and when a withdrawal or excess withdrawal is taken. The initial For Life remaining withdrawal benefit base equals the initial For Life withdrawal benefit base on the rider effective date. After the rider effective date, the For Life remaining withdrawal benefit base will be o increased by each additional premium payment and each GMWB bonus credited; and o reduced by the amount of each withdrawal and the amount of each excess withdrawal (as calculated below). Excess withdrawals will reduce the For Life remaining withdrawal benefit base in an amount equal to the greater of 1. the excess withdrawal; or 2. the result of (a. divided by b.) multiplied by c. where: a. is the amount withdrawn that exceeds the For Life withdrawal benefit remaining prior to the withdrawal; b. is the Contract's accumulated value after the For Life withdrawal benefit is deducted, but prior to deducting the amount of the excess withdrawal; and c. is the For Life remaining withdrawal benefit base after the For Life withdrawal benefit is deducted, but prior to the adjustment for the excess withdrawal. NOTE: All withdrawals taken prior to the contract anniversary following the date the oldest owner (oldest annuitant if the owner is not a natural person) attains age 59 1/2 are excess withdrawals when calculating the For Life remaining withdrawal benefit base. Investment Back Withdrawal Measure Your right to withdraw Investment Back withdrawal benefits begins on the rider effective date and will continue until the Investment Back remaining withdrawal benefit base reduces to zero. We calculate the Investment Back withdrawal benefit as described below in "Calculating the Investment Back Withdrawal Benefit". Calculating the Investment Back Withdrawal Benefit Base We calculate the Investment Back withdrawal benefit base on the rider effective date and each contract anniversary. The initial Investment Back withdrawal benefit base equals o the initial premium payment, if the rider effective date and the contract date are the same; or o the Contract's accumulated value on the rider effective date, if the rider effective date and the contract date are different. On each succeeding contract anniversary, the Investment Back withdrawal benefit base will be o increased by any additional premium payments made since the previous contract anniversary and any GMWB bonus credited since the previous contract anniversary; and o reduced by the amount of any excess withdrawals taken since the previous contract anniversary (as calculated below). Excess withdrawals will reduce the Investment Back withdrawal benefit base in an amount equal to the greater of 1. the excess withdrawal; or 2. the result of (a. divided by b.) multiplied by c. where: a. is the amount withdrawn that exceeds the Investment Back withdrawal benefit remaining prior to the withdrawal; b. is the Contract's accumulated value after the Investment Back withdrawal benefit is deducted, but prior to deducting the amount of the excess withdrawal; and c. is the Investment Back withdrawal benefit base prior to the adjustment for the excess withdrawal. Calculating the Investment Back Withdrawal Benefit We calculate the Investment Back withdrawal benefit on the rider effective date and on each subsequent contract anniversary. The Investment Back withdrawal benefit is equal to 7% of the Investment Back withdrawal benefit base. Calculating the Investment Back Remaining Withdrawal Benefit Base We calculate the Investment Back remaining withdrawal benefit base on the rider effective date, when a premium payment is made, when any applicable GMWB bonus is credited and when a withdrawal or excess withdrawal is taken. The initial Investment Back remaining withdrawal benefit base equals the initial Investment Back withdrawal benefit base. After the rider effective date, the Investment Back remaining withdrawal benefit base will be o increased by each additional premium payment and each GMWB bonus credited; and o reduced by the amount of each withdrawal and the amount of each excess withdrawal (as calculated below). Excess withdrawals will reduce the Investment Back remaining withdrawal benefit base in an amount equal to the greater of 1. the excess withdrawal; or 2. the result of (a. divided by b.) multiplied by c. where: a. is the amount withdrawn that exceeds the Investment Back withdrawal benefit remaining prior to the withdrawal; b. is the Contract's accumulated value after the Investment Back withdrawal benefit is deducted, but prior to deducting the amount of the excess withdrawal; and c. is the Investment Back remaining withdrawal benefit base after the Investment Back withdrawal benefit is deducted, but prior to the adjustment for the excess withdrawal. Effect of Withdrawals under the Rider So long as your Contract's accumulated value is greater than zero, you may take withdrawals under either withdrawal measure. However, this rider does not require you to take any or all of the available withdrawal benefit each contract year. Any untaken withdrawal benefit amount will not be carried forward to the next contract year. This rider does not restrict or change your right to take withdrawals under the Contract, including your right to elect withdrawals, or take withdrawals that are in excess of the withdrawal benefit under a withdrawal measure. Each time you take a withdrawal under the Contract, we determine the effect of the withdrawal under the Investment Back and For Life withdrawal measures separately, as described above in "For Life Withdrawal Measure" and "Investment Back Withdrawal Measure". Your withdrawal benefits under this rider may decrease based on adjustments to the withdrawal benefit bases due to excess withdrawals. Any portion of a withdrawal that exceeds the applicable withdrawal benefit when aggregated with all prior withdrawals during the contract year is an excess withdrawal. For example, the Investment Back withdrawal measure generally permits larger payments to you than the For Life withdrawal measure. As a result, if you take a withdrawal(s) in an amount permitted under the Investment Back withdrawal benefit, that withdrawal will be an excess withdrawal to the extent it exceeds your For Life withdrawal benefit. In addition, all withdrawals made prior to the contract anniversary following the date the oldest owner (oldest annuitant if the owner is not a natural person) attains age 59 1/2 are excess withdrawals when calculating the For Life withdrawal measure. Excess withdrawals will have a negative effect on the withdrawal benefits of this rider and may result in lower withdrawal benefits in the future and/or termination of this rider for lack of value in the withdrawal benefit bases. Effect of Accumulated Value Reaching Zero Once the accumulated value of your Contract reduces to zero, you must elect either o the For Life withdrawal measure (only available if the For Life withdrawal benefit base is greater than zero). The For Life withdrawal benefit will be based on "Single Life" or "Joint Life" as described above in "For Life Withdrawal Measure". or o the Investment Back withdrawal measure (only available if the Investment Back remaining withdrawal benefit base is greater than zero). We will pay the withdrawal benefits under the withdrawal measure you have elected as follows: o If you elect Investment Back withdrawal benefits, you may take withdrawals each year in an amount up to the Investment Back withdrawal benefit until the Investment Back remaining withdrawal benefit base is zero. If there is any Investment Back remaining withdrawal benefit base at the time of your death, we will pay it as described in "Rider Death Provision" below. o If you elect "Single Life" For Life withdrawal benefits, you may take withdrawals each year in an amount up to the "Single Life" For Life withdrawal benefit until the later of a. the date the For Life remaining withdrawal benefit base is zero; or b. the date of your death (annuitant's death if the owner is not a natural person). If there is any For Life remaining withdrawal benefit base at the time of your death, we will pay it as described in "Rider Death Provision" below. o If you elect "Joint Life" For Life withdrawal benefits, you may take withdrawals each year in an amount up to the "Joint Life" For Life withdrawal benefit until the later of a. the date the For Life remaining withdrawal benefit base is zero; or b. the date of the death of the last covered life to die. If there is any For Life remaining withdrawal benefit base at the time of your death, we will pay it as described in "Rider Death Provision" below. NOTE: If the Contract accumulated value is zero, the withdrawal benefits elected above will continue, but all other rights and benefits under this rider and the Contract (including the death benefits) will terminate, and no additional premium payments will be accepted. Effect of Reaching Annuitization Date You must elect one of the contract or rider payment options described below on or before the annuitization date. The Contract's payment options: o Payments resulting from applying the accumulated value to an annuity benefit payment option. o Payment of the accumulated value as a lump sum. This rider's payment options: o If you elect Investment Back withdrawal benefits, you may take withdrawals each year in an amount up to the Investment Back withdrawal benefit until the Investment Back remaining withdrawal benefit base is zero. o If you elect "Single Life" For Life withdrawal benefits, you may take withdrawals each year in an amount up to the "Single Life" For Life withdrawal benefit until the later of o the date the For Life remaining withdrawal benefit base is zero; or o the date of the death of the first owner to die (the death of the first annuitant to die if the owner is not a natural person). o If you elect "Joint Life" For Life withdrawal benefits, you may take withdrawals each year in an amount up to the "Joint Life" For Life withdrawal benefit until the later of o the date the For Life remaining withdrawal benefit base is zero; or o the date of the death of the last covered life to die. We will send you notice when you are approaching the annuitization date and request that you elect one of the above payment options. If we do not receive your election prior to the annuitization date, we will automatically apply the Contract's accumulated value to an annuity benefit payment option as described in "THE CONTRACT - The Annuitization Period, Annuity Benefit Payment Options". GMWB Bonus On each of the first three contract anniversaries following the rider effective date, we will credit a bonus ("GMWB Bonus") to the withdrawal benefit base and the remaining withdrawal benefit base for each withdrawal measure provided you have not taken any withdrawals since the rider effective date. If the contract date and the rider effective date are the same, the GMWB Bonus is equal to the total of all premiums paid multiplied by the applicable GMWB Bonus percentage shown in the chart below. If the contract date and the rider effective date are different, the GMWB Bonus is equal to the contract accumulated value on the rider effective date plus all premiums paid since the rider effective date, multiplied by the applicable GMWB Bonus percentage shown in the chart below. Contract Anniversary following the rider effective date GMWB Bonus Percentage -------------------------------- -------------------------------- -------------------------------- -------------------------------- 1 7.00% 2 6.00% 3 5.00% The GMWB bonus is no longer available after the earlier of o the third contract anniversary following the rider effective date; or o the date you take a withdrawal following the rider effective date. NOTE: The GMWB bonus is used only for purposes of calculating the withdrawal benefit bases and the remaining withdrawal benefit bases. It is not included in the Contract's accumulated value. GMWB Step-Up If you elected the Investment Protector Plus 2 Rider on or after January 21, 2008 -------------------------------------------------------------------------------- On each contract anniversary following the rider effective date, you may receive an automatic increase ("Step-Up") of the withdrawal benefit bases and remaining withdrawal benefit bases, provided that you satisfy certain eligibility requirements. You are eligible for a Step-Up of a withdrawal benefit base if the following requirements are satisfied: 1. the contract anniversary occurs before the later of a. the contract anniversary following the date the oldest owner (oldest annuitant if the owner is not a natural person) attains age 80; or b. ten years after the rider effective date; 2. you have not declined any increases in the rider charge; and 3. you have not fully annuitized the Contract. You are eligible for a Step-Up of a remaining withdrawal benefit base if the following requirements are satisfied: 1. the contract anniversary occurs before the later of a. the contract anniversary following the date the oldest owner (oldest annuitant if the owner is not a natural person) attains age 80; or b. ten years after the rider effective date; 2. you have not declined any increases in the rider charge; 3. you have not fully annuitized the Contract; and 4. the remaining withdrawal benefit base has not reduced to zero during the life of this rider. NOTE: Once a remaining withdrawal benefit base reduces to zero, you will no longer be eligible for any future Step-Ups to that remaining withdrawal benefit base, even if you make subsequent premium payments. We determine eligibility for a Step-Up of the withdrawal benefit base and remaining withdrawal benefit base for each withdrawal measure separately. If you satisfy the applicable Step-Up eligibility requirements, on each contract anniversary following the rider effective date, we will Step-Up the applicable withdrawal benefit base and/or remaining withdrawal benefit base to an amount equal to 100% of the Contract's accumulated value on that date. We will not Step-Up a withdrawal benefit base or remaining withdrawal benefit base if the Contract's accumulated value on that contract anniversary is less than the applicable withdrawal benefit base. So long as you are eligible for a Step-Up to a withdrawal benefit base or remaining withdrawal benefit base, you will be charged the then current rider charge. You may choose to opt out of the Step-Up feature of this rider if the charge for your rider will increase. We will send you advance notice if the charge for your rider will increase in order to give you the opportunity to opt out of the Step-Up feature. Once you opt out, the Step-Up feature can not be added back to the rider. If you elected the Investment Protector Plus 2 Rider prior to January 21, 2008 and that rider remains in effect On each contract anniversary following the rider effective date, you are eligible for an automatic increase ("Step-Up") of the withdrawal benefit bases and remaining withdrawal benefit bases, provided that you satisfy the following requirements: 1. the contract anniversary occurs before the later of a. the contract anniversary following the date the oldest owner (oldest annuitant if the owner is not a natural person) attains age 80; or b. ten years after the rider effective date; 2. you have not declined any increases in the rider charge; and 3. you have not fully annuitized the Contract. We determine eligibility for a Step-Up of the withdrawal benefit base and remaining withdrawal benefit base for each withdrawal measure separately. If you satisfy the eligibility requirements, on each contract anniversary following the rider effective date, we will Step-Up the applicable withdrawal benefit base and remaining withdrawal benefit base to an amount equal to 100% of the Contract's accumulated value on that date. We will not Step-Up a withdrawal benefit base or remaining withdrawal benefit base if the Contract's accumulated value on that contract anniversary is less than the applicable withdrawal benefit base. So long as you are eligible for a Step-Up to a withdrawal benefit base or remaining withdrawal benefit base, you will be charged the then current rider charge. You may choose to opt out of the Step-Up feature of this rider if the charge for your rider will increase. We will send you advance notice if the charge for your rider will increase in order to give you the opportunity to opt out of the Step-Up feature. Once you opt out, the Step-Up feature can not be added back to the rider. If your surviving spouse continues your Contract with this rider attached as described in "Spousal Continuation", your surviving spouse may elect a special Step-Up at the time of making the spousal election provided you did not previously opt out of the Step-Up feature. If your spouse elects the special Step-Up, we will Step-Up the remaining withdrawal benefit base and withdrawal benefit base to the Contract's accumulated value as of the date the spousal continuation election is received by us in good order if the withdrawal benefit base on that date is less than the Contract's accumulated value on that date. Following the special Step-Up, the Step-Up feature will continue according to the terms of the rider and you will be charged the then current rider charge. Investment Option Restrictions While this rider is in effect, the investment options you may select are restricted to those listed below. The limited investment options available under this rider are intended to support the rider guarantees with balanced investment objectives. If your investment goal is aggressive growth, this rider may not be appropriate for you. You may transfer from one available investment option to another by moving 100% of the accumulated value in the separate account divisions to any of the other investment options available with this rider at the time of the transfer. You may make a transfer by providing us notice (the change is effective on the next valuation period after we receive your notice). We may terminate this rider if you allocate premium payments or transfer your Contract's accumulated value to an investment option other than the permitted investment options listed below. We will not be responsible for any financial impact to you caused by termination of your rider because you violated the investment restrictions. You must allocate 100% of your Separate Account division value and premium payments to any one of the following Separate Account divisions: o one of the GMWB Select Models or Self-Build Models described below, o the Principal LifeTime 2010 Account, o the Principal LifeTime 2020 Account, o the Principal LifeTime Strategic Income Account; o Strategic Asset Management Balanced Portfolio; o Strategic Asset Management Conservative Balanced Portfolio; or o Strategic Asset Management Flexible Income Portfolio. This rider does not restrict allocations to the Fixed or DCA Accounts. We reserve the right to modify the list of available investment options, from time to time, at our sole discretion. For more information about GMWB Select Models or Self-Build Models, please see below. For more information about Principal LifeTime Accounts and Strategic Asset Management (SAM) Portfolios, please see the Prospectus sections titled "THE UNDERLYING MUTUAL FUNDS", "TABLE OF SEPARATE ACCOUNT DIVISIONS" and "SUMMARY OF EXPENSE INFORMATION - Annual Underlying Mutual Fund Expenses" and the prospectus for the underlying funds provided with your Prospectus. For more information about the Fixed and DCA Accounts, please see "FIXED ACCOUNT AND DCA PLUS ACCOUNTS". GMWB Select Models You may select one of the three GMWB Select Models shown below. If you choose a Select Model, you are directing us to allocate your Separate Account division value and premium payments according to the allocation percentages shown in the chart below. In addition, you are directing us to automatically rebalance the Separate Account division value each calendar quarter to match the allocation percentages of the chosen Select Model. SELECT MODELS
INVESTMENT ADVISOR GMWB MODEL A GMWB MODEL B GMWB MODEL C ------------------------------------------------------------------------------------------ STABLE DIVISIONS 30% 20% 10% Short-Term Bond Principal Global 30% 20% 10% Investors, LLC ------------------------------------------------------------------------------------------ CONSERVATIVE DIVISIONS 40% 30% 20% American Century VP American Century Inflation Protection Investment Management, Inc. 10% 5% 10% Bond Principal Global Investors, LLC 15% 15% 10% Government & High Principal Global Quality Bond Investors, LLC 15% 10% N/A MODERATE DIVISIONS 20% 30% 45% Large Cap Blend 10% 10% 10% LargeCap Blend T. Rowe Price 10% 10% 10% Associates, Inc. ------------------------------------------------------------------------------------------ Large Cap Value 0% 5% 10% LargeCap Value AllianceBernstein L.P. N/A 5% 10% ------------------------------------------------------------------------------------------ Balanced 10% 15% 20% Equity Income Principal Global 10% 15% 20% Investors, LLC ------------------------------------------------------------------------------------------ Mid Cap Value 0% 0% 5% MidCap Value Neuberger Berman N/A N/A 5% Management, Inc. ------------------------------------------------ -------------- AGGRESSIVE DIVISIONS 10% 15% 20% Large Cap Growth 10% 10% 10% American Century VP American Century Ultra Investment Management, 10% 10% 10% Inc. -------------- MidCap Blend 0% 5% 5% MidCap Principal Global N/A 5% 5% Investors, LLC ------------------------------------------------------------------------------------------ Small Cap Value 0% 0% 5% SmallCap Value JP Morgan Investment Management, Inc. and Mellon Equity Associates, LLP N/A N/A 5% DYNAMIC DIVISIONS 0% 5% 5% Fidelity VIP Overseas Fidelity Management & N/A 5% 5% Research Company ------------------------------------------------------------------------------------------
For more information about the divisions named in the Select Models above, please see the Prospectus sections titled "THE UNDERLYING MUTUAL FUNDS", "TABLE OF SEPARATE ACCOUNT DIVISIONS" and "SUMMARY OF EXPENSE INFORMATION - Annual Underlying Mutual Fund Expenses" and the prospectus for the underlying funds provided with your Prospectus. GMWB Self-Build Models You may choose one of the three GMWB Self-Build Models shown below, which provides you limited ability to select the divisions for allocation in each risk category and determine the allocation percentages. Your allocation percentages may not exceed the risk category percentages of the chosen Self-Build Model. For example, if you choose Self-Build Model A, you must allocate 30% of your Separate Account division value and premium payments into the "stable divisions." You choose how you will allocate that 30% between the Money Market and the Short-Term Bond divisions (for example: 15% in each of Money Market and Short-Term bond; or 10% in Money Market and 20% in Short-Term Bond). If you choose a Self-Build Model, you are directing us to allocate your Separate Account division value and premium payments according to the allocation percentages you have set. In addition, you are directing us to automatically rebalance the Separate Account division value each calendar quarter to match the allocation percentages you set. SELF-BUILD MODELS
INVESTMENT ADVISOR GMWB MODEL A GMWB MODEL B GMWB MODEL C ------------------------------------------------------------------------------------------ STABLE DIVISIONS 30% 20% 10% ------------------------------------------------------------------------------------------ Short-Term Bond Principal Global Investors, LLC ------------------------------------------------------------------------------------------ Money Market Principal Global Investors, LLC ------------------------------------------ CONSERVATIVE DIVISIONS 40% 30% 20% ------------------------------------------------------------------------------------------ Bond Principal Global Investors, LLC Government & High Principal Global Quality Bond Investors, LLC American Century VP American Century Inflation Protection Investment Management, Inc. ------------------------------------------------------------------------------------------ MODERATE DIVISIONS 20% 30% 45% ------------------------------------------------------------------------------------------ Large Cap Blend 10% 10% 10% LargeCap Blend T. Rowe Price Associates, Inc. LargeCap Stock Index Principal Global Investors, LLC Neuberger Berman AMT Neuberger Berman Socially Responsive Management, Inc. ------------------------------------------------------------------------------------------ Large Cap Value 0% 5% 10% Capital Value Principal Global Investors, LLC N/A Equity Value American Century Investment Management, Inc. N/A LargeCap Value AllianceBernstein L.P. N/A ------------------------------------------------------------------------------------------ Balanced 10% 15% 20% Asset Allocation Morgan Stanley Asset Management Equity Income Principal Global Investors, LLC Principal LifeTime Principal Global 2010 Investors, LLC and Principal Management Corporation Principal LifeTime Principal Global 2020 Investors, LLC and Principal Management Corporation Principal LifeTime Principal Global Strategic Income Investors, LLC and Principal Management Corporation ------------------------------------------------------------------------------------------ Mid Cap Value 0% 0% 5% MidCap Value Neuberger Berman Management, Inc. N/A N/A 5% AGGRESSIVE DIVISIONS 10% 15% 20% ------------------------------------------------------------------------------------------ Large Cap Growth 10% 10% 10% American Century VP American Century Ultra Investment Management, Inc. Fidelity VIP Fidelity Management & Contrafund Research Company T. Rowe Price Health T. Rowe Price Sciences Associates, Inc. ------------------------------------------------------------------------------------------ Mid Cap Blend 0% 5% 5% MidCap Principal Global N/A 5% 5% Investors, LLC ------------------------------------------------------------------------------------------ Small Cap Value N/A N/A 5% SmallCap Value JP Morgan Investment Management, Inc. and Mellon Equity N/A N/A 5% Associates, LLP ----------------------------------------------------------------------------------------------- DYNAMIC DIVISIONS 0% 5% 5% ------------------------------------------------------------------------------------------ Diversified Principal Global International Investors, LLC N/A Fidelity VIP Overseas Fidelity Management & N/A Research Company ------------------------------------------------------------------------------------------
For more information about the divisions named in the Self-Build Models above, please see the Prospectus sections titled "THE UNDERLYING MUTUAL FUNDS", "TABLE OF SEPARATE ACCOUNT DIVISIONS" and "SUMMARY OF EXPENSE INFORMATION - Annual Underlying Mutual Fund Expenses" and the prospectus for the underlying funds provided with your Prospectus. Rider Death Provision When the Contract's accumulated value is greater than zero The following table illustrates the various changes and the resulting outcomes associated with your death if the Contract's accumulated value is greater than zero at your death. ------------------------------------------------------------------------------------------------------------------------------------
If you die and... And ... Then ... ------------------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------------------ You are the sole owner Your spouse is The primary beneficiary(ies) must elect one of the following: not named as a a. receive the death benefit under the Contract*; or primary b. receive the Investment Back remaining withdrawal benefit base as a series of beneficiary payments.** Upon your death, only your beneficiary(ies)'s right to the above-selected payments will continue; all other rights and benefits under the rider and Contract will terminate. ------------------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------------------ You are the sole owner Your spouse is Your spouse must named as a a. continue the contract with or without this rider as set forth below in "Spousal primary Continuation"; or beneficiary b. elect one of the following: o receive the death benefit under the Contract*; o receive the Investment Back remaining withdrawal benefit base as a series of payments.** All other primary beneficiaries must elect one of the options listed above in b. Unless your spouse elects to continue the contract with this rider, only your spouse's and beneficiary(ies)'s right to the above-selected payments will continue; all other rights and benefits under the rider and Contract will terminate. ------------------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------------------ You are a joint owner The surviving The surviving owner must elect one of the following: joint owner is a. receive the death benefit under the Contract*; or not your spouse b. receive the Investment Back remaining withdrawal benefit base as a series of payments.** Upon your death, only the surviving owner's right to the above-selected payments will continue; all other rights and benefits under the rider and Contract will terminate. ------------------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------------------ You are a joint owner The surviving Your spouse must joint owner is a. continue the contract with or without this rider as set forth below in "Spousal your spouse Continuation"; or b. elect one of the following: o receive the death benefit under the Contract*; o receive the Investment Back remaining withdrawal benefit base as a series of payments.** Unless the surviving spouse owner elects to continue the contract with this rider, upon your death, only your spouse's right to the above-selected payments will continue; all other rights and benefits under the rider and Contract will terminate. ------------------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------------------ You are the annuitant The owner is The primary beneficiary(ies) must elect one of the following: not a natural a. receive the death benefit under the Contract*; or person b. receive the Investment Back remaining withdrawal benefit base as a series of payments.** Upon your death, only the beneficiary(ies)' right to the above-selected payments will continue; all other rights and benefits under the rider and Contract will terminate. ------------------------------------------------------------------------------------------------------------------------------------
*Please see "THE CONTRACT - Death Benefit" for an explanation of the Contract's standard death benefit and the enhanced death benefit rider and payment options available for the Contract's death benefit. **We will make payments in an amount and frequency acceptable to us. If a surviving owner or beneficiary chooses a periodic payment, it must be at least $100 per payment until the Investment Back remaining withdrawal benefit base is zero. If the Contract's accumulated value is zero The following table illustrates the various changes and the resulting outcomes associated with your death if the Contract's accumulated value is zero at your death. ------------------------------------------------------------------------------------------------------------------------------------
If you die and... And... And... Then ... ------------------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------------------ You are the sole --- You elected the "Single We will continue payments to your beneficiary(ies) according to the owner Life" For Life schedule established when you made your election until the For Life withdrawal measure* remaining withdrawal benefit base reduces to zero. ------------------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------------------ You are the sole --- You elected the "Joint We will continue payments to the surviving covered life according to owner Life" For Life the schedule established when you made your election until the date withdrawal measure* of the surviving covered life's death. Upon the surviving covered life's death, we will continue payments to your beneficiary(ies) according to the schedule established when you made your election until the For Life remaining withdrawal benefit base reduces to zero. ------------------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------------------ You are the sole --- You elected the We will continue payments to your beneficiary(ies) according to the owner Investment Back schedule established when you made your election until the Investment withdrawal measure* Back remaining withdrawal benefit base reduces to zero. ------------------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------------------ You are a joint --- You elected the "Single We will continue payments to the surviving joint owner according to owner Life" For Life the schedule established when you made your election until the For withdrawal measure* Life remaining withdrawal benefit base reduces to zero. Upon the surviving joint owner's death, we will continue payments to your beneficiary(ies) according to the schedule established when you made your election until the For Life remaining withdrawal benefit base reduces to zero. ------------------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------------------ You are a joint --- You elected the "Joint We will continue payments to the surviving covered life according to owner Life" For Life the schedule established when you made your election until the date withdrawal measure* of the surviving covered life's death. Upon the surviving covered life's death, we will continue payments to your beneficiary(ies) according to the schedule established when you made your election until the For Life remaining withdrawal benefit base reduces to zero. ------------------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------------------ You are a joint --- You elected the We will continue payments to the surviving joint owner according to owner Investment Back the schedule established when you made your election until the withdrawal measure* Investment Back remaining withdrawal benefit base reduces to zero. Upon the surviving joint owner's death, we will continue payments to your beneficiary(ies) according to the schedule established when you made your election until the Investment Back remaining withdrawal benefit base reduces to zero. ------------------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------------------ You The owner is The owner elected the We will continue payments to the owner's beneficiary(ies) according are an not a natural "Single Life" For Life to the schedule established when the owner made its election until the annuitant person withdrawal measure* For Life remaining withdrawal benefit base reduces to zero. ------------------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------------------ You are an The owner is The owner elected the We will continue payments to the owner's beneficiary(ies) according to annuitant not a natural Investment Back the schedule established when the owner made its election until the person withdrawal measure* Investment Back remaining withdrawal benefit base reduces to zero. ------------------------------------------------------------------------------------------------------------------------------------
*Please see "Effect of Accumulated Value Reaching Zero" for details regarding election of the For Life withdrawal measure or the Investment Back withdrawal measure. NOTE: The "Joint Life" For Life withdrawal measure is not available if the owner is a not a natural person. Spousal Continuation of the Rider If you die while this rider is in effect and if your surviving spouse elects to continue the Contract in accordance with its terms, the surviving spouse may elect to continue this rider if 1. the Contract's accumulated value is greater than zero; 2. the Contract and this rider have not been previously continued; and 3. your spouse is either a. your primary beneficiary, if you were the sole owner; or b. the surviving joint owner, if there were joint owners. If your spouse elects to continue the contract without this rider, this rider and all rights, benefits and charges under this rider will terminate and cannot be reinstated. NOTE: Although spousal continuation may be available under federal tax laws for a subsequent spouse, this rider may only be continued once. Effect of Spousal Continuation on the Rider Benefits The following table illustrates the various changes and the resulting outcomes associated with continuation of this rider by an eligible surviving spouse. ---------------------- --------------- --------------- -----------------------------------------------------------------------------
If you die and ... And ... And... Then if your spouse continues this rider... ---------------------- --------------- --------------- ----------------------------------------------------------------------------- ---------------------- --------------- --------------- ----------------------------------------------------------------------------- No withdrawals Your spouse --- Your spouse may take withdrawals under either withdrawal measure as follows: have been taken meets the a. The For Life withdrawal measure will be available until the earlier since the minimum of the death of your spouse or the For Life withdrawal benefit base rider issue age reduces to zero. For Life withdrawal benefits will automatically be effective date requirement calculated as "Single Life" and your spouse will be the sole covered life. Your spouse may not add a new covered life or elect "Joint Life". The For Life withdrawal benefit percentage will be based on your spouse's age and will lock in at the "Single Life" percentage applicable on the date of your spouse's first withdrawal. b. The Investment Back withdrawal measure will continue to be available until the Investment Back remaining withdrawal benefit base is zero. c. All other provisions of this rider will continue as in effect on the date of your death. ---------------------- --------------- --------------- ----------------------------------------------------------------------------- ---------------------- --------------- --------------- ----------------------------------------------------------------------------- No withdrawals have Your spouse --- The For Life withdrawal measure terminates upon your death. been taken since the does not meet rider effective date the minimum Your spouse may take withdrawals under the Investment Back withdrawal issue age measure as follows: requirement a. The Investment Back withdrawal measure will continue to be available until the Investment Back remaining withdrawal benefit base reduces to zero. b. All other provisions of this rider will continue as in effect on the date of your death. ---------------------- --------------- --------------- ----------------------------------------------------------------------------- ---------------------- --------------- --------------- ----------------------------------------------------------------------------- Withdrawals have You have --- The For Life withdrawal measure terminates upon your death. been taken since the locked in rider effective date "Single Life" Your spouse may take withdrawals under the Investment Back withdrawal For Life measure as follows: withdrawal a. The Investment Back withdrawal measure will continue to be available benefits until the Investment Back remaining withdrawal benefit base reduces to zero. b. All other provisions of this rider will continue as in effect on the date of your death ---------------------- --------------- --------------- ----------------------------------------------------------------------------- ---------------------- --------------- --------------- ----------------------------------------------------------------------------- Withdrawals have You have Your spouse Your spouse may take withdrawals under either withdrawal measure as follows been taken since the locked in is the a. The For Life withdrawal measure will continue to be available until rider effective date "Joint Life" surviving the earlier of the death of your spouse or the For Life withdrawal For Life covered life benefit base reduces to zero. For Life withdrawal benefits will withdrawal continue to be calculated as "Joint Life". The For Life withdrawal benefits benefit percentage will remain locked in at the "Joint Life" percentage applicable on the date of your first withdrawal and will not be reset to reflect your death. b. The Investment Back withdrawal measure will continue to be available until the Investment Back remaining withdrawal benefit base reduces to zero. c. All other provisions of this rider will continue as in effect on the date of your death. ---------------------- --------------- --------------- ----------------------------------------------------------------------------- ---------------------- --------------- --------------- ----------------------------------------------------------------------------- Withdrawals have You have There is no The For Life withdrawal measure terminates upon your death. been taken since the locked in surviving rider effective date "Joint Life" covered life Your spouse may take withdrawals under the Investment Back withdrawal For Life measure as follows: withdrawal a. The Investment Back withdrawal measure will continue to be available benefits until the Investment Back remaining withdrawal benefit base reduces to zero. b. All other provisions of this rider will continue as in effect on the date of your death. ---------------------- --------------- --------------- -----------------------------------------------------------------------------
Covered Life Change Any ownership, beneficiary designation or other contract or rider change before the annuitization date which would cause a change in a covered life (a "Change") will result in termination of this rider, except for the following permissible Changes: 1. Spousal continuation of this rider as described above in "Spousal Continuation of the Rider". 2. If withdrawals have not been taken and you have not previously elected to continue this rider as provided in "Spousal Continuation of the Rider", then a. you may add a joint owner or primary beneficiary to your Contract as a covered life, provided that the new joint owner or primary beneficiary is an eligible covered life as set forth in "For Life Withdrawal Measure". b. you may remove a joint owner or primary beneficiary as a covered life. c. the For Life withdrawal benefit percentage will be based on the age of the covered lives and will lock in at the percentage applicable on the date of your first withdrawal. 3. If withdrawals have been taken and you have locked in "Single Life" For Life withdrawal benefits, then a. you may remove a joint owner as a covered life; b. you may add a primary beneficiary to your Contract; however, you may not add a primary beneficiary as a covered life for purposes of this rider. c. The For Life withdrawal benefit percentage will remain locked at the percentage applicable on the date of your first withdrawal and will not be reset to reflect the removal of the covered life. For Life withdrawal benefits will cease upon your death. 4. If withdrawals have been taken and you have locked in "Joint Life" For Life withdrawal benefits, then a. you may remove a joint owner or primary beneficiary as a covered life; b. you may add a primary beneficiary to your Contract; however, you may not add a primary beneficiary as a covered life for purposes of this rider. c. the For Life withdrawal benefit percentage will remain locked at the percentage applicable on the date of your first withdrawal and will not be reset to reflect the removal of the covered life. For Life withdrawal benefits will cease upon your death. 5. If you have previously elected to continue this rider as provided in "Spousal Continuation of the Rider", then you may add a primary beneficiary to your Contract; however, you may not add a primary beneficiary as a covered life for purposes of this rider. No Change is effective until approved by us in writing. Upon our approval, the Change is effective as of the date you signed the notice requesting the Change. An assignment of the Contract or this rider shall be deemed a request for a Change. If the Change is not one of the above permissible Changes, this rider will be terminated as of the date of the assignment. Effect of Divorce on the Rider Generally, in the event of a divorce, the spouse who retains ownership of the contract will continue to be entitled to all rights and benefits of this rider while the former spouse will no longer have any such rights or be entitled to any benefits under this rider. If you make a withdrawal to satisfy a court order to pay a portion of the contract to your former spouse, any portion of such withdrawal that exceeds the available withdrawal benefit payments shall be an excess withdrawal under this rider. Termination and Reinstatement You may not terminate this rider prior to the 5th contract anniversary following the rider effective date. However, we will terminate this rider upon the earliest of o the date you send us notice to terminate this rider (after the 5th contract anniversary following the rider effective date). (This will terminate the rider, not the Contract.) o the date you fully annuitize, fully surrender or otherwise terminate the Contract. o the date the Investment Back remaining withdrawal benefit base and the For Life withdrawal benefit base are both zero. o the date the Investment Back remaining withdrawal benefit base is zero and there are no eligible covered lives. o the date any portion of the Contract's accumulated value is no longer invested according to the investment restrictions established and maintained by us for this rider, o the date you change a covered life(ves) or owner (annuitant if the owner is not a natural person), except as permitted in "Covered Life Change". o the date your surviving spouse elects to continue the Contract without this rider. If this rider terminates for any reason other than full surrender of the Contract, this rider may not be reinstated. If you surrender the Contract with this rider attached and the Contract is later reinstated, this rider also must be reinstated. If the Contract and rider are reinstated, this rider will be reinstated as of the date of the termination. At the time this rider is reinstated, we will deduct rider fees scheduled during the period of termination and make any other adjustments necessary to reflect any changes in the amount reinstated and the contract accumulated value as of the date of termination. For examples of how the features of this rider operate, please see Appendix B. Comparison of Important Differences Between the Investment Protector Plus Rider and Investment Protector Plus 2 Rider The following chart may help you decide which GMWB rider is best for you. Features Investment Protector Plus Investment Protector Plus 2 ------------------------------------------------------------------------------------------------------------------------------------
Rider Issue Age 0 - 80 45 - 80 ------------------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------------------ Rider Charge o Current annual charge is 0.60% of the o Current annual charge is 0.75% of the Investment Investment Back remaining withdrawal benefit base Back withdrawal benefit base o Maximum annual charge of 0.85% o Maximum annual charge of 1.00% ------------------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------------------ Guaranteed o Investment Back o Investment Back Withdrawal o For Life o For Life Benefits ------------------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------------------ Annual Withdrawal o Investment Back - 7% of the Investment Back o Investment Back - 7% of the Investment Back Limits withdrawal benefit base withdrawal benefit base o For Life - 5% of the For Life withdrawal o For Life - tiered percentage based on age at first benefit base withdrawal and election of "Single Life" or "Joint Life" o "Single Life" - begins at 3.50% and caps at a maximum of 6.50% of the For Life withdrawal benefit base o "Joint Life" - begins at 3.00% and caps at a maximum of 6.00% of the For Life withdrawal benefit base ------------------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------------------ For Life o Single Life only o Single Life or Joint Life (your life and the Withdrawal o Available the contract anniversary following lifetime of your spouse) Benefits the date the oldest owner turns 59 1/2 - all o For Life withdrawal benefits default to "Single withdrawals prior to that contract anniversary are Life" unless "Joint Life" is elected excess withdrawals under the For Life o Available the contract anniversary following the withdrawal measure date the oldest owner turns 59 1/2 - all withdrawals prior to that contract anniversaryare excess withdrawals under the For Life withdrawal measure ------------------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------------------ Termination Available anytime after the 5th contract anniversary Available anytime after the 5th contract anniversary following the rider effective date following the rider effective date ------------------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------------------ GMWB Optional GMWB Step-Up that you may elect beginning with Automatic annual GMWB Step-Up available until the later Step-Up the 5th contract anniversary. Once you have elected a of age 80 or 10 years after the rider effective date. GMWB Step-Up, you must wait 5 contract years to elect another GMWB Step-Up. For riders issued after January 21, 2008, the remaining withdrawal benefit bases are no longer eligible for Step-Ups after they are reduced to zero. If additional premiums are paid, only the amount of the premium will be added to the remaining withdrawal benefit bases. ------------------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------------------ GMWB Bonus If no withdrawals are taken, a bonus of 5% is applied If no withdrawals are taken, a bonus of each year on the contract anniversary for the first 5 Year 1 - 7.00% years. Year 2 - 6.00% Year 3 - 5.00% is applied on the contract anniversary. ------------------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------------------ Investment You must select one of the GMWB investment options. You must select one of the GMWB investment options. This Restrictions This rider does not restrict allocations to the Fixed rider does not restrict allocations to the Fixed or DCA or DCA Accounts. Accounts. ------------------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------------------ Spousal o At the death of the first owner to die, a o At the death of the first owner to die, a spouse Continuation spouse who is a joint owner or primary beneficiary who is a joint owner or primary beneficiary may may continue the contract with or without this rider continue the contract with or without this rider o Only the Investment Back withdrawal measure o The Investment Back withdrawal measure and if continues eligible, the Joint Life For Life withdrawal measure continues ------------------------------------------------------------------------------------------------------------------------------------
CHARGES AND DEDUCTIONS - Charges for Optional Riders Insert the following description of the charge for the Investment Protector Plus 2 Rider on page 36 of the Prospectus, immediately preceding Premium Payment Credit Rider: Investment Protector Plus 2 Rider. At the end of each calendar quarter, the charge for this rider is deducted through the redemption of units from the Contract's accumulated value in the same proportion as the surrender allocation percentages. If this rider is purchased after the beginning of a calendar quarter, the charge is prorated according to the number of days this rider is in effect during the quarter. Upon termination of this rider or upon your death (annuitant's death, if the owner is not a natural person), the charge will be based on the number of days this rider is in effect during the calendar quarter. The current annual charge for this rider is 0.75% of the average quarterly Investment Back withdrawal benefit base. The current quarterly charge for this rider is equal to 0.1875% of the average quarterly Investment Back withdrawal benefit base during the calendar quarter. We reserve the right to increase the quarterly charge up to a maximum of 0.25% of the average quarterly Investment Back withdrawal benefit base. We will send you advance notice if the charge for this rider will increase. If the charge for this rider will increase, you have the following options: 1. Accept the increased rider charge and continue to be eligible to receive a Step-Up at each contract anniversary; or 2. Decline the increased rider charge by sending us notice that you are opting out of the Step-Up feature of this rider and remain at your current rider charge. Once you opt out of the Step-Up feature, you will no longer be eligible for any future Step-Ups and the feature can not be added back to this rider. The rider charge is intended to reimburse us for the cost of the protection provided by the rider. APPENDIX B - INVESTMENT PROTECTOR PLUS 2 (GMWB 2) EXAMPLES The following Appendix B replaces, in its entirety, the Appendix B included with the June Supplement beginning on page 11 of the June Supplement and should be inserted in the Prospectus following Appendix A. The examples provided are based on certain hypothetical assumptions and are for illustrative purposes only. These examples have been provided to assist you in understanding the various features of the Investor Protector Plus 2 Rider and to demonstrate how premium payments received and withdrawals taken from the Contract affect the values and benefits under this Rider. These examples are not intended to serve as projections of future investment returns. NOTE: For the purpose of the following examples, a partial annuitization has the same effect as a partial surrender and both are referred to as a withdrawal in the following examples. ------------------------------------------------------------------------------ EXAMPLES WITHOUT EXCESS WITHDRAWALS The examples without excess withdrawals assume the following: o the client is age 62 and the client's spouse is age 60 on the rider effective date. o initial premium payment = $100,000. o the withdrawal benefit bases prior to partial surrender = $100,000. o the remaining withdrawal benefit bases prior to partial surrender = $100,000. o Investment Back (7%) withdrawal benefit payment = $7,000. o "Single Life" For Life (5%) withdrawal benefit = $5,000, if withdrawals start prior to the client attaining age 70. o "Joint Life" For Life (4.5%) withdrawal benefit = $4,500, if withdrawals start prior to the spouse attaining age 70. EXAMPLE 1 In contract year one, no withdrawals are taken and no For Life withdrawal benefits election has been designated. Because the client has not made a For Life withdrawal benefits election, we automatically calculate For Life withdrawal payments as "Single Life". On the first contract anniversary: o a 7% GMWB bonus is credited to the withdrawal benefit base. The credit is $100,000 x 0.07 = $7,000. o there is no GMWB Step-Up because the withdrawal benefit bases after the bonus is credited are larger than the Contract's accumulated value. oInvestment Back: o the new withdrawal benefit base is $100,000 + 7,000 = $107,000; o the new remaining withdrawal benefit base is $100,000 + 7,000 = $107,000; and o the new withdrawal benefit is $107,000 x 0.07 = $7,490. o For Life: o the new withdrawal benefit base is $100,000 + 7,000 = $107,000; o the new remaining withdrawal benefit base is base is $100,000 + 7,000 = $107,000; and o the new withdrawal benefit is $107,000 x 0.05 = $5,350. EXAMPLE 2 In contract year one: o no withdrawals are taken and no For Life withdrawal benefits election has been designated. Because the client has not made a For Life withdrawal benefits election, we automatically calculate For Life withdrawal payments as "Single Life". o the client makes a premium payment of $50,000. On the first contract anniversary: o a 7% GMWB bonus is credited to the withdrawal benefit base. The credit is ($100,000 + $50,000) x 0.07 = $10,500. o there is no GMWB Step-Up because the withdrawal benefit bases after the bonus is credited are larger than the Contract's accumulated value. o Investment Back: o the new withdrawal benefit base is $100,000 + $50,000 + $10,500 = $160,500; o the new remaining withdrawal benefit base is $100,000 + $50,000 + $10,500 = $160,500; and o the new withdrawal benefit is $160,500 x 0.07 = $11,235. o For Life: o the new withdrawal benefit base is $100,000 + $50,000 + $10,500 = $160,500; o the new remaining withdrawal benefit base is $100,000 + $50,000 + $10,500 = $160,500; and o the new withdrawal benefit is $160,500 x 0.05 = $8,025. EXAMPLE 3 In contract year one, the client elects "Joint Life" For Life withdrawal benefits and takes a withdrawal of $4,500. The "Joint Life" For Life withdrawal benefit percentage is locked-in at 4.5%. On the first contract anniversary, o Since a withdrawal was taken in contract year one, no GMWB bonus is credited. o there is no GMWB Step-Up because the withdrawal benefit bases after the bonus is credited are larger than the Contract's accumulated value. o Investment Back: o the withdrawal benefit base remains the same ($100,000); o the new remaining withdrawal benefit base is $100,000 - $4,500 = $95,500; and o the withdrawal benefit for the next contract year remains the same ($100,000 x 0.07 = $7,000). o For Life o the withdrawal benefit base remains the same ($100,000); o the new remaining withdrawal benefit base is $100,000 - $4,500 = $95,500; and o the withdrawal benefit for the next contract year remains the same ($100,000 x 0.045 = $4,500). EXAMPLE 4 In contract year one, no withdrawals are taken and no For Life withdrawal benefits election has been designated. Because the client has not made a For Life withdrawal benefits election, we automatically calculate For Life withdrawal payments as "Single Life". On the first contract anniversary: o a 7% GMWB bonus is credited to the withdrawal benefit base. The credit is $100,000 x 0.07 = $7,000. o there is no GMWB Step-Up because the withdrawal benefit bases after the bonus is credited are larger than the Contract's accumulated value. o Investment Back: o the new withdrawal benefit base is $100,000 + 7,000 = $107,000; o the new remaining withdrawal benefit base is $100,000 + 7,000 = $107,000; and o the new withdrawal benefit is $107,000 x 0.07 = $7,490. o For Life: o the new withdrawal benefit base is $100,000 + 7,000 = $107,000; o the new remaining withdrawal benefit base is base is $100,000 + 7,000 = $107,000; and o the new withdrawal benefit is $107,000 x 0.05 = $5,350. In contract year two, the client elects "Joint Life" For Life withdrawal benefits and takes a withdrawal of $4,500. The "Joint Life" For Life withdrawal benefit percentage is locked-in at 4.5%. On the second contract anniversary, o Since a withdrawal was taken in contract year two, no GMWB bonus is credited. o there is no GMWB Step-Up because the withdrawal benefit bases are larger than the Contract's accumulated value. o Investment Back: o the withdrawal benefit base remains the same ($107,000); o the new remaining withdrawal benefit base is $107,000 - $4,500 = $102,500; and o the withdrawal benefit for the next contract year remains the same ($107,000 x 0.07 = $7,490). o For Life o the withdrawal benefit base remains the same ($107,000); o the new remaining withdrawal benefit base is $107,000 - $4,500 = $102,500; and o the withdrawal benefit for the next contract year is $107,000 x 0.045 = $4,815. In contract year three, no withdrawals are taken. The "Joint Life" For Life withdrawal benefit percentage remains locked-in at 4.5%. On the third contract anniversary, o Since a withdrawal was taken in contract year two, no GMWB bonus is credited. o there is no GMWB Step-Up because the withdrawal benefit bases are larger than the Contract's accumulated value. o Investment Back: o the withdrawal benefit base remains the same ($107,000); o the remaining withdrawal benefit base remains the same ($102,500); and o the withdrawal benefit for the next contract year remains the same ($107,000 x 0.07 = $7,490). o For Life o the withdrawal benefit base remains the same ($107,000); o the remaining withdrawal benefit base remains the same ($102,500); and o the withdrawal benefit for the next contract year remains the same ($107,000 x 0.045 = $4,815). EXAMPLE 5 The client elects "Single Life" For Life withdrawal benefits, and in each of the first two contract years, takes a withdrawal of $5,000. Assume there is no GMWB Step-Up on the first contract anniversary. On the 2nd contract anniversary, the client will receive GMWB Step-Up if the Contract's accumulated value is greater than the applicable withdrawal benefit base.
If the accumulated value on the second contract $95,000 $110,000 anniversary is: ------------------------------------------------------- ----------------------------------- -------------------------------- ------------------------------------------------------- ----------------------------------- -------------------------------- Investment Back Prior to step-up Withdrawal Benefit Base = $100,000 = $100,00 Withdrawal Benefit Payment = $100,000 x 0.07 = $7,000 = $100,000 x 0.07 = $7,000 Remaining Withdrawal Benefit Base = $90,000 = $90,000 After step-up Withdrawal Benefit Base = $100,000 = $110,000 Withdrawal Benefit Payment = $100,000 x 0.07 = $7,000 = $110,000 x 0.07 = $7,700 Remaining Withdrawal Benefit Base = $90,000 = $110,000 ------------------------------------------------------- ----------------------------------- -------------------------------- ------------------------------------------------------- ----------------------------------- -------------------------------- For Life Prior to step-up Withdrawal Benefit Base = $100,000 = $100,000 Withdrawal Benefit Payment = $100,000 x 0.05 = $5,000 = $100,000 x 0.05 = $5,000 Remaining withdrawal Benefit Base = $90,000 = $90,000 After step-up Withdrawal Benefit Base = $100,000 = $110,000 Withdrawal Benefit Payment = $100,000 x 0.05 = $5,000 = $110,000 x 0.05 = $5,500 Remaining Withdrawal Benefit Base = $95,000 = $110,000 ----------------------------------------------------------------------------------------------------------------------------------
EXAMPLES WITH EXCESS WITHDRAWALS The excess withdrawal examples assume the following: o the client is age 62 and elected "Single Life" For Life withdrawal benefits at the first withdrawal and therefore, locks-in the "Single Life" For Life withdrawal benefit payment at 5%. o the initial premium payment is $100,000. o the withdrawal benefit bases prior to partial surrender = $100,000. o the remaining withdrawal benefit bases prior to partial surrender = $100,000. o Investment Back (7%) withdrawal benefit payment = $7,000. o For Life (5%) withdrawal benefit payment = $5,000 o Withdrawal taken = $8,000. o excess amount under the Investment Back withdrawal measure is $1,000; and oexcess amount under the For Life withdrawal measure is $3,000. EXAMPLE 6 In this example, assume the accumulated value prior to the withdrawal is $90,000. Withdrawal Benefit Base Calculation On the contract anniversary following the withdrawal, the withdrawal benefit base is adjusted for any excess withdrawals. Investment Back. The amount of the adjustment* is $1,204.82. The new withdrawal benefit base is $100,000 - 1,204.82 = $98,795.18. *The amount of the adjustment for the excess withdrawal is the greater of (a) or (b) where: (a) is $1,000 (the amount of the excess withdrawal); and (b) is $1,204.82 (the result of ((1) divided by (2)) multiplied by (3)) where: (1) is the amount of the withdrawal greater than the withdrawal benefit payment remaining prior to the withdrawal ($1,000); (2) is the accumulated value after the withdrawal benefit payment is deducted but prior to the withdrawal of the excess amount ($90,000 - $7,000); and (3) is the withdrawal benefit base prior to the adjustment for the excess amount ($100,000). For Life. The amount of the adjustment* is $3,529.41. The new withdrawal benefit base is $100,000 - $3,529.41 = $96,470.59. *The amount of the adjustment for the excess withdrawal is the greater of (a) or (b) where: (a) is $3,000 (the amount of the excess withdrawal); and (b) is $3,529.41 (the result of ((1) divided by (2)) multiplied by (3)) where: (1) is the amount of the withdrawal greater than the withdrawal benefit payment remaining prior to the withdrawal ($3,000); (2) is the accumulated value after the withdrawal benefit payment is deducted but prior to the withdrawal of the excess amount ($90,000 - $5,000); and (3) is the withdrawal benefit base prior to the adjustment for the excess amount ($100,000). Remaining withdrawal Benefit Base Calculation The remaining withdrawal benefit base is adjusted when withdrawals are taken. Investment Back. The amount of the adjustment* is $8,120.48 (the amount of the withdrawal benefit plus the excess withdrawal). The new remaining withdrawal benefit base is $100,000 - $8,120.48 = $91,879.52. *The amount of the adjustment is (a) plus (b) where: (a) is $7,000 (the actual amount withdrawn that does not exceed the withdrawal benefit); and (b) is $1,120.48 (a proportionate reduction for the excess withdrawal). The amount of the proportionate reduction is the greater of (1) or (2) where: (1) is $1,000 (the amount of the excess withdrawal); and (2) is $1,120.48 (the result of ((i) divided by (ii)) multiplied by (iii)) where; (i) is the amount of the withdrawal greater than the withdrawal benefit remaining prior to the withdrawal ($1,000); (ii) is the accumulated value after the withdrawal benefit is deducted but prior to the withdrawal of the excess amount ($90,000 - $7,000); and (iii) is the remaining withdrawal benefit base after the withdrawal benefit is deducted but prior to the adjustment for the excess amount ($100,000 - $7,000). For Life. The amount of the adjustment* is $8,352.94 (the amount of the withdrawal benefit plus the excess withdrawal). The new remaining withdrawal benefit base is $100,000 - $8,352.94 = $91,647.06. *The amount of the adjustment is (a) plus (b) where (a) is $5,000 (the actual amount withdrawn that does not exceed the withdrawal benefit); and (b) is $3,352.94 (a proportionate reduction for the excess withdrawal). The amount of the proportionate reduction is the greater of (1) or (2) where: (1) is $3,000 (the amount of the excess withdrawal); and (2) is $3,352.94 (the result of ((i) divided by (ii)) multiplied by (iii)) where; (i) is the amount of the withdrawal greater than the withdrawal benefit remaining prior to the withdrawal ($3,000); (ii) is the accumulated value after the withdrawal benefit is deducted but prior to the withdrawal of the excess amount ($90,000 - $5,000); and (iii) is the remaining withdrawal benefit base after the withdrawal benefit is deducted but prior to the adjustment for the excess amount ($100,000 - $5,000). Withdrawal Benefit Payment Calculation (for the next contract year) The withdrawal benefit is the new withdrawal benefit base (calculated on the contract anniversary) multiplied by the associated percentage. The For Life withdrawal benefit percentage is locked-in at 5%. Investment Back. The new Investment Back withdrawal benefit is $98,795.18 x 0.07 = $6,915.66. For Life. The new "Single Life" For Life withdrawal benefit is $96,470.59 x 0.05 = $4,823.53. EXAMPLE 7 In this example, assume the accumulated value prior to the withdrawal is $110,000. Withdrawal Benefit Base Calculation On the contract anniversary following the withdrawal, the withdrawal benefit base is adjusted for any excess withdrawals. Investment Back. The amount of the adjustment* is $1,000 (the amount of the excess withdrawal). The new withdrawal benefit base is $100,000 - $1,000 = $99,000. *The amount of the adjustment for excess withdrawal is the greater of (a) or (b) where; (a) is $1,000 (the amount of the excess withdrawal); and (b) is $970.87 (the result of ((1) divided by (2)) multiplied by (3)) where: (1) is the amount of the withdrawal greater than the withdrawal benefit remaining prior to the withdrawal ($1,000); (2) is the accumulated value after the withdrawal benefit is deducted but prior to the withdrawal of the excess amount ($110,000 minus $7,000); and (3) is the withdrawal benefit base prior to the adjustment for the excess amount ($100,000) For Life. The amount of the adjustment* is $3,000 (the amount of the excess withdrawal). The new withdrawal benefit base is $100,000 - $3,000 = $97,000. *The amount of the adjustment for excess withdrawal is the greater of (a) or (b) where: (a) is $3,000 (the amount of the excess withdrawal); and (b) is $2,857.14 (the result of ((1) divided by (2)) multiplied by (3)) where: (1) is the amount of the withdrawal greater than the withdrawal benefit remaining prior to the withdrawal ($3,000); (2) is the accumulated value after the withdrawal benefit is deducted but prior to the withdrawal of the excess amount ($110,000 minus $5,000); and (3) is the withdrawal benefit base prior to the adjustment for the excess amount ($100,000). Remaining withdrawal Benefit Base Calculation The remaining withdrawal benefit base is adjusted when withdrawals are taken. Investment Back. The amount of the adjustment* is $8,000 (the amount of the withdrawal benefit plus the excess withdrawal). The new remaining withdrawal benefit base is $100,000 - $8,000 = $92,000. *The amount of the adjustment is (a) plus (b) where: (a) is $7,000 (the actual amount withdrawn that does not exceed the withdrawal benefit); and (b) is $1,000 (a proportionate reduction for the excess withdrawal). The amount of the proportionate reduction is the greater of (1) or (2) where: (1) is $1,000 (the amount of the excess withdrawal); and (2) is $902.91 (the result of ((i) divided by (ii)) multiplied by (iii)) where: (i) is the amount of the withdrawal greater than the withdrawal benefit remaining prior to the withdrawal ($1,000); (ii) is the accumulated value after the withdrawal benefit is deducted but prior to the withdrawal of the excess amount ($110,000 - $7,000); and (iii) is the remaining withdrawal benefit base after the withdrawal benefit is deducted but prior to the adjustment for the excess amount ($100,000 - $7,000). For Life. The amount of the adjustment* is $8,000 (the amount of the withdrawal benefit plus the excess withdrawal). The new remaining withdrawal benefit base is $100,000 - $8,000 = $92,000. *The amount of the adjustment is (a) plus (b) where: (a) is $5,000 - the actual amount withdrawn that does not exceed the withdrawal benefit; and (b) is $3,000 - a proportionate reduction for the excess withdrawal. The amount of the proportionate reduction is the greater of (1) or (2) where: 1) is $3,000 (the amount of the excess withdrawal); and (2) is $2,714.28 (the result of ((i) divided by (ii)) multiplied by (iii)) where: (i) is the amount of the withdrawal greater than the withdrawal benefit remaining prior to the withdrawal ($3,000); (ii) is the accumulated value after the withdrawal benefit is deducted but prior to the withdrawal of the excess amount ($110,000 - $5,000); and (iii) is the remaining withdrawal benefit base after the withdrawal benefit is deducted but prior to the adjustment for the excess amount ($100,000 - $5,000). Withdrawal Benefit Payment Calculation (for the next contract year) The withdrawal benefit is the new withdrawal benefit base (calculated on the contract anniversary) multiplied by the associated percentage. The For Life withdrawal benefit percentage is locked-in at 5%. Investment Back. The new Investment Back withdrawal benefit is $99,000 x 0.07 = $6,930. For Life. The new "Single Life" For Life withdrawal benefit is $97,000 x 0.05 = $4,850. SUPPLEMENT DATED OCTOBER 4, 2007 TO THE PRINCIPAL INVESTMENT PLUS VARIABLE ANNUITYsm PROSPECTUS DATED MAY 1, 2007 The information in this Supplement updates and amends certain information contained in the Prospectus dated May 1, 2007 for the Principal Investment Plus Variable Annuitysm. You should read this Supplement along with the Prospectus. THE CONTRACT On p. 17 of your Prospectus, delete the third sentence in the second paragraph under the heading "Right to Examine the Contract" and replace it with the following: In addition, we are required to allocate initial premium payments to the Money Market Division if the Contract is issued in California and the owner is age 60 or older. RF 1042 S-08 SUPPLEMENT DATED AUGUST 8, 2007 TO THE PROSPECTUSES OF THE VARIABLE LIFE INSURANCE POLICIES AND VARIABLE ANNUITY CONTRACTS OF PRINCIPAL LIFE INSURANCE COMPANY DATED MAY 1, 2007 PRINCIPAL VARIABLE CONTRACTS FUND, INC. SMALLCAP ACCOUNT CHANGES This supplement is intended for distribution with prospectuses dated May 1, 2007 for variable life insurance policies and variable annuity contracts issued by Principal Life Insurance Company. This supplement describes changes to the availability of the SmallCap Division which invests in the Principal Variable Contracts Fund, Inc. (VCF) SmallCap Account. Not all Policies or Contracts offer this investment option. Effective November 19, 2007, the Principal VCF SmallCap Account will close to new investors. As a result, the SmallCap Division will not be available as an investment option for Policies or Contracts with an application signature date of November 19, 2007 or later. If you own an affected Policy or Contract, you should disregard all references in the prospectus to this investment option. The SmallCap Division will continue to accept additional investments from Policies and Contracts with an application signature date before November 19, 2007. Refer to the prospectus for more information before investing in the SmallCap Division. SUPPLEMENT DATED AUGUST 8, 2007 TO THE PRINCIPAL INVESTMENT PLUS VARIABLE ANNUITYsm PROSPECTUS DATED MAY 1, 2007 The information in this Supplement updates and amends certain information contained in the Prospectus dated May 1, 2007 for the Principal Investment Plus Variable Annuitysm. You should read this Supplement along with the Prospectus. ================================================================================ On page 1 of your Prospectus, insert the following paragraph after the table of underlying mutual funds and before the grey-shaded box: This prospectus describes optional features, not all of which may be available at the time you are interested in purchasing a Contract. We may withdraw or prospectively restrict the availability of the optional features. Broker dealers selling the Contracts may also limit the availability of an optional feature. In addition, some optional features may restrict your ability to elect certain other optional features. You may contact your representative or contact the annuity servicing center (1-800-852-4450) for availability of any optional feature. ================================================================================ On page 1 of your Prospectus, delete the first sentence in the grey-shaded box and replace it with the following: The Contract is available with or without the premium payment credit rider (this rider may not be available through all broker dealers). ================================================================================ THE CONTRACT Delete the first paragraph under the sub-heading "Premium Payment Credit Rider", which appears in the grey-shaded box on page 19 of your Prospectus, and replace it with the following: You may elect a premium payment credit rider at the time the Contract is issued. The premium payment credit rider may not be available in all states or through all broker dealers and may be subject to additional restrictions. We may withdraw or prospectively restrict the availability of this rider at any time. You may contact your representative or contact the annuity servicing center (1-800-852-4450) for availability of this rider. If the premium payment credit rider is elected, the following provisions apply to the contract: SUPPLEMENT DATED JUNE 4, 2007 TO THE PRINCIPAL INVESTMENT PLUS VARIABLE ANNUITY/SM/ PROSPECTUS DATED MAY 1, 2007 Please keep this Supplement with your Principal Investment Plus Variable Annuitysm prospectus dated May 1, 2007 and retain it for reference. This Supplement is to add additional available investment options for the Investment Protector Plus Rider and to add a new optional Investment Protector Plus 2 Rider. INVESTMENT PROTECTOR PLUS RIDER Effective June 1, 2007, the following Strategic Asset Management Portfolios are available for investment under the Investment Protector Plus Rider - Strategic Asset Management Balanced Account Portfolio, Strategic Asset Management Conservative Balanced Portfolio and Strategic Asset Management Flexible Income Portfolio. THE CONTRACT-INVESTMENT PROTECTOR PLUS RIDER The following description of the investment options available when utilizing the Investment Protector Plus Rider replaces the description beginning on page 27 in your Prospectus. INVESTMENT OPTION RESTRICTIONS While this rider is in effect, the investment options you may select are restricted. The Company reserves the right to modify the list of available investment options, from time to time, at its sole discretion. If the Company modifies the investment options, it will give holders of this rider prior written notice of the modifications and an opportunity to opt out of the modifications and to continue their existing rider investment options. You may allocate your Separate Account divisions to: . one of the GMWB Select Models or Self-Build Models shown below; or . the Principal LifeTime 2010 Account; or . the Principal LifeTime 2020 Account; or . the Principal LifeTime Strategic Income Account; or . Strategic Asset Management Balanced Account Portfolio; or . Strategic Asset Management Conservative Balanced Portfolio; or . Strategic Asset Management Flexible Income Portfolio. For more information about the Principal LifeTime Accounts and the Strategic Asset Management (SAM) Portfolios, please see their respective prospectuses in this Prospectus. This rider does not restrict allocations to the Fixed or DCA Accounts. You may transfer from one available investment option to another by moving 100% of the accumulated value in the separate account divisions to any of the other investment options available with this rider: GMWB Select or Self-Build Models or Principal LifeTime Accounts or SAM Portfolios. You may make a transfer by providing us notice (the change is effective on the next valuation period after we receive your notice). The limited investment options available under this rider are intended to support the rider guarantees with balanced investment objectives. If Your investment goal is aggressive growth, this rider may not be appropriate for you. 1 RF 1042 S-5 INVESTMENT PROTECTOR PLUS 2 RIDER Purchasers of Contracts issued on or after June 1, 2007, may elect the optional Investment Protector Plus 2 Rider, which provides guaranteed minimum withdrawal benefits. Availability of this rider is subject to state approval. This rider does not replace the current Investment Protector Plus Rider and may not be used if the Investment Protector Plus Rider has been elected. SUMMARY OF EXPENSE INFORMATION - PERIODIC EXPENSES TABLE Add the following new table immediately after the Investment Protector Plus Rider section of the Periodic Expense table found on page 7 of the Prospectus.
PERIODIC EXPENSES ----------------------------------------------------------------------------- .Investment Protector Plus 2 rider . . guaranteed maximum 0.25% of the average quarterly Investment Back remaining withdrawal benefit base** .current .0.1875% of the average quarterly Investment Back remaining withdrawal benefit base** -----------------------------------------------------------------------------
** The Investment Back withdrawal benefit base is equal to the total of all premiums paid, adjusted for Excess Withdrawals, GMWB Bonuses or GMWB Step-Ups, and is recalculated on each contract anniversary. It is the amount on which the withdrawal benefit is based (see THE CONTRACT - Investment Protector Plus 2 Rider --Withdrawal Benefit Base Calculation). On page 13 of the Prospectus, insert the following new Example 4 after Example 3 and before SUMMARY: Example 4. Contract with Investment Protector Plus 2, premium payment credit and enhanced death benefit riders. This Example reflects the charges imposed if you were to purchase the Contract with the Investment Protector Plus 2 Rider as well as the premium payment credit rider and the enhanced death benefit rider. This Example also reflects the minimum and maximum annual underlying mutual fund operating expenses (as of December 31, 2006) for the limited array of underlying mutual funds available when utilizing the Investment Protector Plus 2 Rider (see the rider description for more details). This Example assumes: . a $10,000 investment in the Contract for the time periods indicated; . a 5% return each year; . an annual contract fee of $30 (expressed as a percentage of the average accumulated value); . that the Investment Protector Plus 2 Rider was added to the Contract at issue; . that the premium payment credit rider was added to the Contract at issue and the premium payment credit rider surrender charge schedule is applied; . that the enhanced death benefit rider was added to the Contract at issue; and . the maximum and minimum fees and expenses (without voluntary fee waivers, if any) of the underlying mutual funds available when utilizing the Investment Protector Plus 2 Rider. This Example shows the current fees of the Contract.
IF YOU FULLY IF YOU SURRENDER YOUR CONTRACT IF YOU DO NOT ANNUITIZE YOUR CONTRACT AT THE END OF THE APPLICABLE SURRENDER AT THE END OF THE TIME PERIOD YOUR CONTRACT APPLICABLE TIME PERIOD ----------------------------------------------------------------------------------------------------------------------------------- 1 YR. 3 YRS. 5 YRS. 10 YRS. 1 YR. 3 YRS. 5 YRS. 10 YRS. 1 YR. 3 YRS. 5 YRS. 10 YRS. ----------------------------------------------------------------------------------------------------------------------------------- Maximum Total Underlying Mutual Fund 1,160 1,885 2,524 4,036 390 1,193 2,024 4,036 890 1,693 2,024 4,036 Operating Expenses (0.92%) ----------------------------------------------------------------------------------------------------------------------------------- Minimum total Underlying Mutual Fund 1,122 1,772 2,326 3,656 349 1,072 1,826 3,656 849 1,572 1,826 3,656 Operating Expenses (0.52%) -----------------------------------------------------------------------------------------------------------------------------------
2 RF 1042 S-5 THE CONTRACT-INVESTMENT PROTECTOR PLUS 2 RIDER On page 31 of the prospectus, insert the following description of the Investment Protector Plus 2 Rider preceding the section titled Death Benefit. INVESTMENT PROTECTOR PLUS 2 RIDER You may elect to purchase the optional Investment Protector Plus 2 Rider at an additional charge. The Contract is available with or without this rider. This rider provides protection against market risk by allowing you to make certain annual withdrawals (i.e., partial surrenders and partial annuitizations), regardless of your Contract's accumulated value. Election of this rider may or may not be to your benefit. If you do not intend to make any partial surrenders or partial annuitizations, this rider may not be appropriate for you. Please review the terms of this rider and consult your sales representative to determine whether this rider is appropriate for you. We guarantee that you may withdraw certain guaranteed minimum withdrawal benefit (GMWB) amounts each contract year, regardless of your accumulated value, subject to the terms and conditions of this rider. This rider: . Provides the flexibility of two separate measures of withdrawal benefits without requiring you to elect either measure (as long as the accumulated value is greater than zero); . Limits the investment options available under the Contract; and . Has a charge which is discussed in this Supplement. This rider is available only at the time the Contract is issued and only if the owner(s) is at least age 45 and younger than age 81. (If the owner is not a natural person, then this rider is available only if the annuitant(s) is at least age 45 and younger than age 81.) You may not terminate this rider during the first five contract years. This rider does not restrict or change your right to make partial surrenders and partial annuitizations under the Contract, including your right to elect scheduled partial surrenders. You must notify us if you want to make a partial surrender or partial annuitization. This rider provides two alternative withdrawal benefit measures - For Life and Investment Back measures. . The For Life measure guarantees that, regardless of the accumulated value, you may withdraw a fixed annual percentage of the For Life withdrawal benefit base (see Calculation of the For Life Withdrawal Benefit for applicable percentages) for the rest of your life or until the For Life withdrawal benefit base is zero. NOTE: Your right to the For Life benefit does not commence until the contract year after the oldest owner (oldest annuitant if the owner is not a natural person) attains age 59 1/2. . The Investment Back measure guarantees that, regardless of the accumulated value, you may withdraw 7% annually of the Investment Back withdrawal benefit base until the Investment Back remaining withdrawal benefit base is zero. Your right to the Investment Back benefit commences immediately. You are not required to elect a withdrawal benefit measure (except in the event that the Contract accumulated value is zero). We tell you each contract year the amount of the For Life withdrawal benefit and the Investment Back withdrawal benefit. NOTE: This rider is designed to permit you to recover at least your premium payments by allowing periodic withdrawals of specified amounts for the duration of the rider. Withdrawal amounts that exceed the withdrawal benefit under a measure will have a negative effect on the benefits of this rider and may result in termination of this rider for lack of value in the withdrawal benefit base. Please refer to the examples in Appendix B so that you may better understand how withdrawals affect the benefits available under this rider. 3 RF 1042 S-5 Definitions ----------- Some important terms in understanding this rider are: . Excess Withdrawal - the portion of a withdrawal that exceeds the withdrawal benefit under either measure. . GMWB Bonus - an amount equal to the total premium payments as of a contract anniversary multiplied by the applicable percentage (see Investment Protector Plus 2 GMWB Bonus). . GMWB Step-Up - if the accumulated value of the Contract is greater than a withdrawal benefit base, then the withdrawal benefit base and the remaining withdrawal benefit base for that measure will be stepped up to the accumulated value on the contract anniversary (see Investment Protector Plus 2 GMWB Step-Up). . Remaining withdrawal benefit base - the amount that is available for future withdrawal benefits. . Withdrawal benefit - the amount that we guarantee you may withdraw each year under the For Life and the Investment Back measures. . Withdrawal benefit base - the basis for determining the withdrawal benefit available each year under the For Life and Investment Back measures. Calculation of the For Life Withdrawal Benefit ---------------------------------------------- We determine the For Life withdrawal benefit on the contract date and each contract anniversary as follows: . The For Life withdrawal benefit is not available until the contract year commencing after the oldest owner (oldest annuitant if the owner is not a natural person) attains age 59 1/2. Any withdrawal that you make prior to the contract year after the oldest owner (oldest annuitant if the owner is not a natural person) attains age 59 1/2 and the portion of any withdrawals that exceed the For Life withdrawal benefit in any year is an Excess Withdrawal that reduces the For Life withdrawal benefit base. . Thereafter, the For Life benefit is a fixed percentage* of the For Life withdrawal benefit base until the earlier to occur of: . The date the For Life withdrawal benefit base is zero; or . The date of your death. At your death (annuitant's death if the owner is not a natural person), the surviving joint owner, if any, or your beneficiary(ies) elects to receive the Investment Back benefit (a series of benefits) or the death benefit under the Contract. * The percentage for the For Life withdrawal measure is locked in at the time of your first withdrawal and is determined based on the age of the youngest owner (youngest annuitant if the owner is not a natural person) on the date of the first partial surrender or partial annuitization, as set forth below:
AGE OF YOUNGEST OWNER* AT FOR LIFE WITHDRAWAL FIRST WITHDRAWAL BENEFIT PERCENTAGE -------------------------------- ------------------- 45-49 3.50% 50-54 4.00% 55-59 4.50% 60-69 5.00% 70-74 5.50% 75-79 6.00% 80+ 6.50% * Youngest annuitant if the owner is not a natural person.
Calculation of the Investment Back Withdrawal Benefit ----------------------------------------------------- We determine the Investment Back withdrawal benefit on the contract date and each contract anniversary as follows: . The Investment Back withdrawal benefit starts on the contract date. . The benefit is 7% of the Investment Back withdrawal benefit base until the Investment Back remaining withdrawal benefit base is zero. . The portion of any withdrawal that exceeds the Investment Back withdrawal benefit in any year is an Excess Withdrawal that reduces the Investment Back withdrawal benefit base. 4 RF 1042 S-5 Calculation of the Withdrawal Benefit Base ------------------------------------------ We calculate the withdrawal benefit base for the Investment Back and the For Life measures separately on the contract date and each contract anniversary. On the contract date, the withdrawal benefit base for both measures equals your total premium payments. On succeeding contract anniversaries, the withdrawal benefit base equals total premium payments, plus any applicable GMWB bonus, minus Excess Withdrawals (as computed for the particular measure). Excess Withdrawal is the greater of (a) or (b) where: (a) is the amount of the partial surrender (and surrender charge, if any) or the partial annuitization that exceeds the withdrawal benefit remaining prior to the surrender or annuitization; and (b) is the result of ((1) divided by (2)) multiplied by (3) where: 1) is the amount of the partial surrender (and surrender charge, if any) or partial annuitization that exceeds the withdrawal benefit remaining prior to the partial surrender or partial annuitization; and 2) is the accumulated value after the withdrawal benefit is deducted but prior to deducting the amount of the partial surrender (and surrender charge, if any) or the amount of the partial annuitization that exceeds the withdrawal benefit; and 3) is the withdrawal benefit base prior to the adjustment for the excess withdrawal amount. Calculation of the Remaining Withdrawal Benefit Base ---------------------------------------------------- We calculate the remaining withdrawal benefit base for the Investment Back and For Life measures separately. We adjust the remaining withdrawal benefit base whenever a premium payment, partial surrender or partial annuitization is made, and when any applicable GMWB bonus is credited. On the contract date, the remaining withdrawal benefit base for both measures equals the withdrawal benefit base; i.e., total premium payments. After the contract date, the remaining withdrawal benefit base is the total of all premium payments and GMWB bonuses minus an amount that is the result of (a) plus (b) where: (a) is the actual amount surrendered or annuitized that does not exceed the withdrawal benefit remaining prior to the surrender; and (b) is the Excess Withdrawal amount, which is the greater of (1) and (2) where: (1) is the amount of the partial surrender (and surrender charge, if any) or the partial annuitization that exceeds the withdrawal benefit remaining prior to the partial surrender or partial annuitization; and (2) is the result of ((i) divided by (ii)) multiplied by (iii) where: (i) is the amount of the surrender (and surrender charge, if any) or the partial annuitization greater than the withdrawal benefit remaining prior to the surrender or annuitization; (ii) is the accumulated value after the withdrawal benefit amount is deducted but prior to the surrender or annuitization of the excess amount; and (iii) is the remaining withdrawal benefit base after the withdrawal benefit amount is deducted but prior to the adjustment for the excess amount. NOTE: The Excess Withdrawal amount deducted from the withdrawal benefit base and remaining withdrawal benefit base may be more than dollar-for-dollar if the accumulated value is less than the withdrawal benefit bases or the remaining withdrawal benefit bases. The calculation of the proportionate deductions to the withdrawal benefit base and remaining withdrawal benefit base are described above. 5 RF 1042 S-5 EFFECT OF ACCUMULATED VALUE If the accumulated value of your Contract is zero and if you have an Investment Back remaining withdrawal benefit base or a For Life withdrawal benefit base, or both, you must elect either the For Life or the Investment Back withdrawal benefit. We will pay the rider benefits under the measure you have elected. NOTE: If the Contract accumulated value is zero, the withdrawal benefits under this rider will continue, but all other rights and benefits under the rider and Contract, including the death benefits, will terminate; and no additional premium payments will be accepted. . The Investment Back measure will provide a series of withdrawal benefits until the Investment Back remaining withdrawal benefit base is zero. . The For Life measure will provide a series of withdrawal benefits until the later to occur of: (i) the date the For Life remaining withdrawal benefit base is zero; or (ii) the date of your death. If there is any remaining withdrawal benefit base at the time of your death, we will pay it as described in the Rider Death Provisions section below. EFFECT OF REACHING ANNUITIZATION DATE You must elect one of the following Contract or rider payment options on or before the annuitization date: Contract Provisions: . Payments resulting from applying the accumulated value to an annuity benefit payment option. . Payment of the accumulated value as a lump sum. Rider Provisions: . Series of withdrawal benefits until the Investment Back remaining withdrawal benefit base is zero. . Series of withdrawal benefits until the later to occur of: (i) the date the For Life remaining withdrawal benefit base is zero; or (ii) the date of your death (annuitant's death if the owner is not a natural person). GMWB BONUS On each of the first three contract anniversaries, we will credit the GMWB bonus to the withdrawal benefit base and the remaining withdrawal benefit base for each withdrawal measure provided you have not made any partial surrender or partial annuitization since the Contract Date. The GMWB bonus is equal to the total premium payments as of the contract anniversary multiplied by the applicable percentage below:
CONTRACT ANNIVERSARY GMWB BONUS PERCENTAGE -------------------------- --------------------- 1 7.00% 2 6.00% 3 5.00%
The GMWB bonus is no longer available after you make a partial surrender or partial annuitization. NOTE: The GMWB bonus is used only for purposes of calculating the withdrawal benefit base and the remaining withdrawal benefit base. It is not included in your Contract's accumulated value. GMWB STEP-UP Subject to the following terms and conditions, on each contract anniversary, we will automatically increase ("Step-Up") Your remaining withdrawal benefit base and withdrawal benefit base if your Contract accumulated value is greater than the applicable withdrawal benefit base. Each time there is a Step-Up your rider charge will be the then current rider charge. You may choose to opt out of the Step-Up feature of this rider if the charge for your rider will increase. This can happen since the rider charge in effect at the time of the Step-Up may be higher than your rider charge. We will send you advance notice if the charge for your rider will increase in order to give you the opportunity to opt out of the Step-Up feature. Once you opt out, the Step-Up feature may not be added back to the rider. The automatic Step-Up is available until the later of the contract anniversary following Your (oldest annuitant's if the owner is not a natural person) 80th birthday or 10 years after the Contract Date. 6 RF 1042 S-5 We will automatically reset (Step-Up) the For Life remaining withdrawal benefit base and For Life withdrawal benefit base to the accumulated value on the contract anniversary if the For Life withdrawal benefit base calculated on the contract anniversary is less than the accumulated value on that contract anniversary. We will automatically reset (Step-Up) the Investment Back remaining withdrawal benefit base and Investment Back withdrawal benefit base to the accumulated value on the contract anniversary if the Investment Back withdrawal benefit base calculated on the contract anniversary is less than the accumulated value on that contract anniversary. If your surviving spouse continues your Contract as a result of the spousal continuation election (described in THE CONTRACT), your surviving spouse may elect a special GMWB Step-Up at the time of making the spousal election provided you did not previously opt out of the Step-Up feature. If your spouse elects the special Step-Up, we will automatically reset (Step-Up) the remaining withdrawal benefit base and withdrawal benefit base to the accumulated value on the spousal election date if the withdrawal benefit base calculated on the spousal election date is less than the accumulated value. After the special election date, the GMWB Step-Up continues according to the terms of the rider and charges then in effect. INVESTMENT OPTION RESTRICTIONS While this rider is in effect, the investment options you may select are restricted. The Company reserves the right to modify the list of available investment options, from time to time, at its sole discretion. You may allocate your Separate Account divisions to: . one of the GMWB Select Models or Self-Build Models shown below, or . the Principal LifeTime 2010 Account, or . the Principal LifeTime 2020 Account, or . the Principal LifeTime Strategic Income Account; or . Strategic Asset Management Balanced Account Portfolio; or . Strategic Asset Management Conservative Balanced Portfolio; or . Strategic Asset Management Flexible Income Portfolio. For more information about the Principal LifeTime Accounts and the Strategic Asset Management (SAM) Portfolios, please see their respective prospectuses in this Prospectus. This rider does not restrict allocations to the Fixed or DCA Accounts. You may transfer from one available investment option to another by moving 100% of the accumulated value in the separate account divisions to any of the other investment options available with this rider: GMWB Select or Self-Build Models or Principal LifeTime Accounts or SAM Portfolios. You may make a transfer by providing us notice (the change is effective on the next valuation period after we receive your notice). The limited investment options available under this rider are intended to support the rider guarantees with balanced investment objectives. If your investment goal is aggressive growth, this rider may not be appropriate for you. GMWB MODELS You may use one of the three GMWB Select Models shown below. Alternatively, you may use one of the three GMWB Self-Build Models, which afford you limited investment option selections. For example, if you choose Self-Build Model A, you must allocate 30% of your division assets into the "stable divisions." You choose how you will allocate that 30% between the Money Market and the Short-Term Bond divisions (for example: 15% in each of Money Market and Short-Term bond; or 10% in Money Market and 20% in Short-Term Bond). 7 RF 1042 S-5 The Select Models are rebalanced each calendar quarter to the percentages shown in the Select Models chart below. The Self-Build Models are rebalanced each calendar quarter to the percentages you have selected. SELECT MODELS
INVESTMENT ADVISOR GMWB MODEL A GMWB MODEL B GMWB MODEL C ------------------------------------------------------------------------------------------ STABLE DIVISIONS 30% 20% 10% Short-Term Bond Principal Global 30% 20% 10% Investors, LLC ------------------------------------------------------------------------------------------ CONSERVATIVE DIVISIONS 40% 30% 20% American Century VP American Century Inflation Protection Investment Management, Inc. 10% 5% 10% Bond Principal Global Investors, LLC 15% 15% 10% Government & High Principal Global Quality Bond Investors, LLC 15% 10% N/A MODERATE DIVISIONS 20% 30% 45% Large Cap Blend 10% 10% 10% LargeCap Blend T. Rowe Price 10% 10% 10% Associates, Inc. ------------------------------------------------------------------------------------------ Large Cap Value 0% 5% 10% LargeCap Value AllianceBernstein L.P. N/A 5% 10% ------------------------------------------------------------------------------------------ Balanced 10% 15% 20% Equity Income Principal Global 10% 15% 20% Investors, LLC ------------------------------------------------------------------------------------------ Mid Cap Value 0% 0% 5% MidCap Value Neuberger Berman N/A N/A 5% Management, Inc. ------------------------------------------------ -------------- AGGRESSIVE DIVISIONS 10% 15% 20% Large Cap Growth 10% 10% 10% American Century VP American Century Ultra Investment Management, 10% 10% 10% Inc. -------------- MidCap Blend 0% 5% 5% MidCap Principal Global N/A 5% 5% Investors, LLC ------------------------------------------------------------------------------------------ Small Cap Value 0% 0% 5% SmallCap Value JP Morgan Investment Management, Inc. and Mellon Equity Associates, LLP N/A N/A 5% DYNAMIC DIVISIONS 0% 5% 5% Fidelity VIP Overseas Fidelity Management & N/A 5% 5% Research Company ------------------------------------------------------------------------------------------
8 RF 1042 S-5 SELF-BUILD MODELS
INVESTMENT ADVISOR GMWB MODEL A GMWB MODEL B GMWB MODEL C ------------------------------------------------------------------------------------------ STABLE DIVISIONS 30% 20% 10% ------------------------------------------------------------------------------------------ Short-Term Bond Principal Global Investors, LLC ------------------------------------------------------------------------------------------ Money Market Principal Global Investors, LLC ------------------------------------------ CONSERVATIVE DIVISIONS 40% 30% 20% ------------------------------------------------------------------------------------------ Bond Principal Global Investors, LLC Government & High Principal Global Quality Bond Investors, LLC American Century VP American Century Inflation Protection Investment Management, Inc. ------------------------------------------------------------------------------------------ MODERATE DIVISIONS 20% 30% 45% ------------------------------------------------------------------------------------------ Large Cap Blend 10% 10% 10% LargeCap Blend T. Rowe Price Associates, Inc. LargeCap Stock Index Principal Global Investors, LLC Neuberger Berman AMT Neuberger Berman Socially Responsive Management, Inc. ------------------------------------------------------------------------------------------ Large Cap Value 0% 5% 10% Capital Value Principal Global Investors, LLC N/A Equity Value American Century Investment Management, Inc. N/A LargeCap Value AllianceBernstein L.P. N/A ------------------------------------------------------------------------------------------ Balanced 10% 15% 20% Asset Allocation Morgan Stanley Asset Management Equity Income Principal Global Investors, LLC Principal LifeTime Principal Global 2010 Investors, LLC and Principal Management Corporation Principal LifeTime Principal Global 2020 Investors, LLC and Principal Management Corporation Principal LifeTime Principal Global Strategic Income Investors, LLC and Principal Management Corporation ------------------------------------------------------------------------------------------ Mid Cap Value 0% 0% 5% MidCap Value Neuberger Berman Management, Inc. N/A N/A 5% AGGRESSIVE DIVISIONS 10% 15% 20% ------------------------------------------------------------------------------------------ Large Cap Growth 10% 10% 10% American Century VP American Century Ultra Investment Management, Inc. Fidelity VIP Fidelity Management & Contrafund Research Company T. Rowe Price Health T. Rowe Price Sciences Associates, Inc. ------------------------------------------------------------------------------------------ Mid Cap Blend 0% 5% 5% MidCap Principal Global N/A 5% 5% Investors, LLC ------------------------------------------------------------------------------------------ Small Cap Value N/A N/A 5% SmallCap Value JP Morgan Investment Management, Inc. and Mellon Equity N/A N/A 5% Associates, LLP ----------------------------------------------------------------------------------------------- DYNAMIC DIVISIONS 0% 5% 5% ------------------------------------------------------------------------------------------ Diversified Principal Global International Investors, LLC N/A Fidelity VIP Overseas Fidelity Management & N/A Research Company ------------------------------------------------------------------------------------------
TERMINATION OF THE RIDER You may not terminate this rider prior to the fifth contract anniversary. However, the rider terminates upon the earliest to occur of . You send us notice to terminate the rider (after the fifth contract anniversary). (This will terminate the rider, not your Contract.) . You terminate the Contract. . The Investment Back remaining withdrawal benefit base and the For Life withdrawal benefit base are both zero. . The contract owner is changed (annuitant is changed if the owner is not a natural person). NOTE: We do not deem it a change of owner if a surviving spouse elects to continue the Contract. If this rider is attached to the Contract, the surviving spouse may elect to continue the Contract with or without this rider. If the rider is continued, only the Investment Back benefit continues; the For Life benefit terminates upon the death of the deceased spouse. . Once terminated, the rider may not be reinstated. 9 RF 1042 S-5 EFFECT OF NOT TAKING AVAILABLE BENEFITS You are not required to take any or all of the withdrawal benefit in a contract year. If you choose not to take any or all of a withdrawal benefit in a contract year, that benefit amount is not carried over to the next year. There will be no reduction in the For Life and the Investment Back withdrawal benefit bases and remaining withdrawal benefit bases. RIDER DEATH PROVISION . For Life measure - the For Life measure terminates on the original owner's death (annuitant's death, if the owner is not a natural person). If at the time of the owner's death (annuitant's death if the owner is not a natural person) the accumulated value is greater than zero, the surviving joint owner, if any, or your beneficiary(ies) must elect to receive either: . The Investment Back withdrawal benefit - We will make payments in an amount and frequency acceptable to us. If a surviving joint owner or beneficiary chooses a periodic payment, it must be at least $100 per payment until the Investment Back remaining withdrawal benefit base is zero; or . The death benefit under the Contract. . Investment Back measure - If at the time of the owner's death (annuitant's death if the owner is not a natural person) the accumulated value is greater than zero, the surviving joint owner, if any, or your beneficiary(ies) must elect to receive either: . The Investment Back withdrawal benefit - We will make payments in an amount and frequency acceptable to us. If a surviving joint owner or beneficiary chooses a periodic payment, it must be at least $100 per payment until the Investment Back remaining withdrawal benefit base is zero; or . The death benefit under the Contract. FOR EXAMPLES OF HOW THE RIDER FEATURES OPERATE, PLEASE SEE APPENDIX B. CHARGES AND DEDUCTIONS - CHARGES FOR OPTIONAL RIDERS Insert the following description of the charge for the Investment Protector Plus 2 Rider on page 36 of the Prospectus, immediately preceding Premium Payment Credit Rider: INVESTMENT PROTECTOR PLUS 2 RIDER. . The current annual charge for the rider is 0.75% of the average quarterly Investment Back withdrawal benefit base. The current quarterly charge is equal to 0.1875% of the average quarterly Investment Back withdrawal benefit base during the calendar quarter. We reserve the right to increase the quarterly charge up to a maximum of 0.25% of the average quarterly Investment Back withdrawal benefit base. At the end of each calendar quarter, the charge is deducted through the redemption of units from the accumulated value in the same proportion as the surrender allocation percentages. If the rider is purchased after the beginning of a calendar quarter, the charge is prorated according to the number of days it is in effect during the quarter. Upon termination of the rider or upon Your death (death of the Annuitant if the owner is not a natural person), the rider charge will be based on the number of days the rider is in effect during the calendar quarter. We reserve the right to increase the rider charge up to the maximum. We will send you advance notice if the charge for your rider will increase. If the charge for your rider will increase, you have the following options: 1. Accept the increased rider charge and continue to receive the automatic Step-Up at each contract anniversary; or 2. Decline the increased rider charge by sending us notice that you are opting out of the automatic Step-Up feature of this rider, remain at your current rider charge, and receive no further Step-Ups. Once you opt out of the Step-Up feature, it may not be added back to the rider. The rider charge is intended to reimburse us for the cost of the protection provided by the rider. 10 RF 1042 S-5 APPENDIX B - INVESTMENT PROTECTOR PLUS 2 (GMWB2) EXAMPLES These examples are provided to assist you in understanding the various features of the GMWB2 rider and the guarantees associated with each GMWB2 option. Please note that, for the purpose of the following examples, a partial annuitization has the same effect as a partial surrender. EXAMPLES WITHOUT EXCESS WITHDRAWALS The examples without excess withdrawals assume the following: . the client is age 62. . initial premium payment = $100,000. . withdrawal benefit base prior to partial surrender = $100,000. . remaining withdrawal benefit base prior to partial surrender = $100,000. . Investment Back (7%) withdrawal benefit payment = $7,000. . For Life (5%) withdrawal benefit payment = $5,000, if withdrawals started prior to age 70. EXAMPLE 1. In contract year one, no partial surrenders are made. (Partial annuitizations are not permitted in contract year one.) On the first contract anniversary: . a 7% GMWB bonus is credited to the withdrawal benefit base. The credit is $100,000 x 0.07% = $7,000; . Investment Back: . the new withdrawal benefit base is base is $100,000 + 7,000 = $107,000; and . the new withdrawal benefit payment is $107,000 x 0.07% = $7,490 . For Life: . the new withdrawal benefit base is base is $100,000 + 7,000 = $107,000; and . the new withdrawal benefit payment is $107,000 x 0.05% = $5,350 EXAMPLE 2. In contract year one: . no partial surrenders are made; and . the client makes a premium payment of $50,000. On the first contract anniversary: . a 7% GMWB bonus is credited to the withdrawal benefit base. The credit is ($100,000 + $50,000) x 0.07% = $10,500; . Investment Back: . the new withdrawal benefit base is $100,000 + $50,000 + $10,500 = $160,500; and . the new withdrawal benefit payment is $160,500 x 7% = $11,235 . For Life: . the new withdrawal benefit base is $100,000 + $50,000 + $10,500 = $160,500; and . the new withdrawal benefit payment is $160,500 x 5% = $8,025 11 RF 1042 S-5 EXAMPLE 3. In contract year one, the client makes a partial surrender of $5,000. The For Life withdrawal benefit percentage is locked-in at 5%. On the first contract anniversary, . Investment Back: . the new remaining withdrawal benefit base is $100,000 - $5,000 = $95,000. . the withdrawal benefit base remains the same ($100,000). . the withdrawal benefit payment for the next contract year remains the same ($100,000 x 0.07% = $7,000). . For Life . the new remaining withdrawal benefit base is $100,000 - $5,000 = $95,000. . the withdrawal benefit base remains the same ($100,000). . the withdrawal benefit payment for the next contract year remains the same ($100,000 x 0.05% = $5,000). EXAMPLE 4. In contract year one, no partial surrenders are made. On the first contract anniversary: . a 7% GMWB bonus is credited to the withdrawal benefit base. The credit is $100,000 x 0.07% = $7,000, and . the new withdrawal benefit base is $100,000 + $7,000 = $107,000. In contract year two: . the client makes a partial surrender of $5,000 and locks-in the For Life withdrawal percent at 5%. . no GMWB bonus is credited as the client made a partial surrender. In contract year three: . the client does not make any partial surrenders. . no GMWB bonus is credited as the client had taken a partial surrender (in contract year two). . For Life withdrawal percent remains locked-in at 5%. EXAMPLE 5. In each of the first two contract years, a partial surrender of $5,000 is made. Assume there is no automatic step-up received on the first contract anniversary. On the 2nd contract anniversary, you will receive an automatic step-up if the accumulated value is greater than the withdrawal benefit base.
THE ACCUMULATED VALUE ON THE $95,000 $110,000 SECOND CONTRACT ANNIVERSARY IS: INVESTMENT BACK Prior to step-up Withdrawal Benefit Base = $100,000 = $100,000 Withdrawal Benefit $ 100,000 $ 100,000 Payment = x 0.07% = $7,000 = x 0.07% = $7,000 Remaining Withdrawal Benefit Base = $90,000 = $90,000 After step-up Withdrawal Benefit Base = $100,000 = $110,000 Withdrawal Benefit $ 100,000 $ 110,000 Payment = x 0.07% = $7,000 = x 0.07% = $7,700 Remaining Withdrawal = $90,000 = $110,000 Benefit Base ------------------------------------------------------------------------------------------------- FOR LIFE Prior to step-up Withdrawal Benefit Base = $100,000 = $100,000 Withdrawal Benefit $ 100,000 $ 100,000 Payment = x 0.05% = $5,000 = x 0.05% = $5,000 Remaining Withdrawal Benefit Base = $90,000 = $90,000 After step-up Withdrawal Benefit Base = $100,000 = $110,000 Withdrawal Benefit $ 100,00 0 $ 110,000 Payment = x 0.05% = $5,000 = x 0.05% = $5,500 Remaining Withdrawal = $90,000 = $110,000 Benefit Base ------------------------------------------------------------------------------------
12 RF 1042 S-5 EXAMPLES WITH EXCESS WITHDRAWALS The excess withdrawal examples assume the following: . the client is age 62 at first withdrawal and therefore, locks-in the For Life withdrawal benefit payment at 5%. . the initial premium payment is $100,000. . withdrawal benefit base prior to partial surrender = $100,000. . remaining withdrawal benefit base prior to partial surrender = $100,000. . Investment Back (7%) withdrawal benefit payment = $7,000. . For Life (5%) withdrawal benefit payment = $5,000 partial surrender amount = $8,000 (excess amount for "Investment Back" is $1,000; excess amount for "For Life" is $3,000). EXAMPLE 1. In the first example, the accumulated value prior to partial surrender is $90,000. Withdrawal Benefit Base Calculation ----------------------------------- On the contract anniversary following the partial surrender, the withdrawal benefit base is adjusted for any excess withdrawals. INVESTMENT BACK. . The amount of the adjustment* is $1,204.82. The new withdrawal benefit base is $100,000 - 1,204.82 = $98,795.18. * The amount of the adjustment is the greater of (a) or (b) where: (a) is $1,000 (the amount of the excess withdrawal); and (b) is $1,204.82 (the result of ((1) divided by (2)) multiplied by (3)) where: (1) is the amount of the surrender greater than the withdrawal benefit payment remaining prior to the partial surrender ($1,000); (2) is the accumulated value after the withdrawal benefit payment is deducted but prior to the surrender of the excess amount ($90,000 - $7,000); and (3) is the withdrawal benefit base prior to the adjustment for the excess amount ($100,000). 13 RF 1042 S-5 FOR LIFE. . The amount of the adjustment* is $3,529.41. The new withdrawal benefit base is $100,000 - $3,529.41 = $96,470.59. * The amount of the adjustment is the greater of (a) or (b) where: (a) is $3,000 (the amount of the excess withdrawal); and (b) is $3,529.41 (the result of ((1) divided by (2)) multiplied by (3)) where: (1) is the amount of the surrender greater than the withdrawal benefit payment remaining prior to the partial surrender ($3,000); (2) is the accumulated value after the withdrawal benefit payment is deducted but prior to the surrender of the excess amount ($90,000 - $5,000); and (3) is the withdrawal benefit base prior to the adjustment for the excess amount ($100,000). Remaining withdrawal Benefit Base Calculation --------------------------------------------- The remaining withdrawal benefit base is adjusted when partial surrenders are made. INVESTMENT BACK. . The amount of the adjustment* is $8,120.48 (the amount of the withdrawal benefit payment plus the excess withdrawal). The new remaining withdrawal benefit base is $100,000 - $8,120.48 = $91,879.52. * The amount of the adjustment is (a) plus (b) where: (a) is $7,000 (the actual amount surrendered that does not exceed the withdrawal benefit payment); and (b) is $1,120.48 (a proportionate reduction for the excess withdrawal). The amount of the proportionate reduction is the greater of (1) or (2) where: (1) is $1,000 (the amount of the excess withdrawal); and (2) is $1,120.48 (the result of ((i) divided by (ii)) multiplied by (iii)) where; (i) is the amount of the surrender greater than the withdrawal benefit payment remaining prior to the partial surrender ($1,000); (ii) is the accumulated value after the withdrawal benefit payment is deducted but prior to the surrender of the excess amount ($90,000 - $7,000); and (iii) is the remaining withdrawal benefit base after the withdrawal benefit payment is deducted but prior to the adjustment for the excess amount ($100,000 - $7,000). FOR LIFE. . The amount of the adjustment* is $8,352.94 (the amount of the withdrawal benefit payment plus the excess withdrawal). The new remaining withdrawal benefit base is $100,000 - $8,352.94 = $91,647.06. * The amount of the adjustment is (a) plus (b) where: (a) is $5,000 (the actual amount surrendered that does not exceed the withdrawal benefit payment); and (b) is $3,352.94 (a proportionate reduction for the excess withdrawal). The amount of the proportionate reduction is the greater of (1) or (2) where: (1) is $3,000 (the amount of the excess withdrawal); and (2) is $3,352.94 (the result of ((i) divided by (ii)) multiplied by (iii)) where; (i) is the amount of the surrender greater than the withdrawal benefit payment remaining prior to the partial surrender ($3,000); (ii) is the accumulated value after the withdrawal benefit payment is deducted but prior to the surrender of the excess amount ($90,000 - $5,000); and (iii) is the remaining withdrawal benefit base after the withdrawal benefit payment is deducted but prior to the adjustment for the excess amount ($100,000 - $5,000). Withdrawal Benefit Payment Calculation (for the next contract year) ------------------------------------------------------------------- The withdrawal benefit payment is the new withdrawal benefit base (calculated on the contract anniversary) multiplied by the associated percentage. The For Life withdrawal benefit percentage is locked-in at 5%. INVESTMENT BACK. . The new withdrawal benefit payment $98,795.18 x 0.07% = $6,915.66. FOR LIFE. . The new withdrawal benefit payment $96,470.59 x 0.05% = $4,823.53. 14 RF 1042 S-5 EXAMPLE 2. In this example, the accumulated value prior to partial surrender is $110,000. Withdrawal Benefit Base Calculation ----------------------------------- On the contract anniversary following the partial surrender, the withdrawal benefit base is adjusted for any excess withdrawals. INVESTMENT BACK. . The amount of the adjustment* is $1,000 (the amount of the excess withdrawal). The new withdrawal benefit base is $100,000 - $1,000 = $99,000. * The amount of the adjustment is the greater of (a) or (b) where: (a) is $1,000 (the amount of the excess withdrawal); and (b) is $970.87 (the result of ((1) divided by (2)) multiplied by (3)) where: (1) is the amount of the surrender greater than the withdrawal benefit payment remaining prior to the partial surrender ($1,000); (2) is the accumulated value after the withdrawal benefit payment is deducted but prior to the surrender of the excess amount ($110,000 minus $7,000); and (3) is the withdrawal benefit base prior to the adjustment for the excess amount ($100,000). FOR LIFE. . The amount of the adjustment* is $3,000 (the amount of the excess withdrawal). The new withdrawal benefit base is $100,000 - $3,000 = $97,000. * The amount of the adjustment is the greater of (a) or (b) where: (a) is $3,000 (the amount of the excess withdrawal); and (b) is $2,857.14 (the result of ((1) divided by (2)) multiplied by (3)) where: (1) is the amount of the surrender greater than the withdrawal benefit payment remaining prior to the partial surrender ($3,000); (2) is the accumulated value after the withdrawal benefit payment is deducted but prior to the surrender of the excess amount ($110,000 minus $5,000); and (3) is the withdrawal benefit base prior to the adjustment for the excess amount ($100,000). Remaining withdrawal Benefit Base Calculation --------------------------------------------- The remaining withdrawal benefit base is adjusted when partial surrenders are made. INVESTMENT BACK. . The amount of the adjustment* is $8,000 (the amount of the withdrawal benefit payment plus the excess withdrawal). The new remaining withdrawal benefit base is $100,000 - $8,000 = $92,000. * The amount of the adjustment is (a) plus (b) where: (a) is $7,000 (the actual amount surrendered that does not exceed the withdrawal benefit payment); and (b) is $1,000 (a proportionate reduction for the excess withdrawal). The amount of the proportionate reduction is the greater of (1) or (2) where: (1) is $1,000 (the amount of the excess withdrawal); and (2) is $902.91 (the result of ((i) divided by (ii)) multiplied by (iii)) where: (i) is the amount of the surrender greater than the withdrawal benefit payment remaining prior to the partial surrender ($1,000); (ii) is the accumulated value after the withdrawal benefit payment is deducted but prior to the surrender of the excess amount ($110,000 - $7,000); and (iii) is the remaining withdrawal benefit base after the withdrawal benefit payment is deducted but prior to the adjustment for the excess amount ($100,000 - $7,000). 15 RF 1042 S-5 FOR LIFE. . The amount of the adjustment* is $8,000 (the amount of the withdrawal benefit payment plus the excess withdrawal). The new remaining withdrawal benefit base is $100,000 - $8,000 = $92,000. * The amount of the adjustment is (a) plus (b) where: (a) is $5,000 - the actual amount surrendered that does not exceed the withdrawal benefit payment; and (b) is $3,000 - a proportionate reduction for the excess withdrawal. The amount of the proportionate reduction is the greater of (1) or (2) where: (1) is $3,000 (the amount of the excess withdrawal); and (2) is $2,714.28 (the result of ((i) divided by (ii)) multiplied by (iii)) where: (i) is the amount of the surrender greater than the withdrawal benefit payment remaining prior to the partial surrender ($3,000); (ii) is the accumulated value after the withdrawal benefit payment is deducted but prior to the surrender of the excess amount ($110,000 - $5,000); and (iii) is the remaining withdrawal benefit base after the withdrawal benefit payment is deducted but prior to the adjustment for the excess amount ($100,000 - $5,000). Withdrawal Benefit Payment Calculation (for the next contract year) ------------------------------------------------------------------- The withdrawal benefit payment is the new withdrawal benefit base (calculated on the contract anniversary) multiplied by the associated percentage. The For Life withdrawal benefit percentage is locked-in at 5%. INVESTMENT BACK. . The new withdrawal benefit payment is $99,000 x 0.07% = $6,930. FOR LIFE. . The new withdrawal benefit payment $97,000 x 0.05% = $4,850. 16 RF 1042 S-5 PRINCIPAL INVESTMENT PLUS VARIABLE ANNUITY/SM/ the "Contract" Issued by Principal Life Insurance Company (the "Company"). This prospectus is dated May 1, 2007. This prospectus provides information about the Contract and the Principal Life Insurance Company Separate Account B ("Separate Account") that you, as owner, should know before investing. The prospectus should be read and retained for future reference. Additional information about the Contract is included in the Statement of Additional Information ("SAI"), dated May 1, 2007, 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 at the end of this prospectus. You may obtain a free copy of the SAI by writing or telephoning: Principal Investment Plus Variable Annuity/sm/, 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. The individual deferred annuity contract ("Contract") described in this prospectus is funded with the Separate Account, dollar cost averaging fixed accounts ("DCA Plus Accounts") and a Fixed Account. The DCA Plus Accounts and the Fixed Account are a part of the General Account of the Company. The assets of the Separate Account Divisions ("divisions") are invested in the following underlying mutual funds:
Neuberger Berman AIM V.I. Basic Value Fund Advisers Management Principal Variable - Series I Trust Contracts Fund AIM V.I. Small Cap Equity Fasciano Portfolio - MidCap Value Account - Fund - Series I S Class Class 1 AllianceBernstein Partners Portfolio - Money Market Account - Variable Products Series I Class Class 1 Fund AllianceBernstein Small Socially Responsive Principal LifeTime 2010 Cap Growth Portfolio - Portfolio-I Class Account - Class 1 Class A American Century Variable Principal Variable Principal LifeTime 2020 Portfolios II, Inc. Contracts Fund Account - Class 1 Inflation Protection Fund Asset Allocation Principal LifeTime 2030 - Class II Account - Class 1 Account - Class 1 American Century Variable Bond Account - Class Principal LifeTime 2040 Portfolios, Inc. 1 Account - Class 1 Ultra Fund - Class II Capital Value Account Principal LifeTime 2050 - Class 1 Account - Class 1 Vista Fund - Class I Diversified Principal LifeTime International Account Strategic Income Account - - Class 1 Class 1 Dreyfus Investment Equity Growth Account Real Estate Securities Portfolios - Class 1 Account - Class 1 Technology Growth Equity Income Account Short-Term Bond Account - Portfolio-Service Shares I - Class 1/(1)/ Class 1 Fidelity Variable Equity Value Account SmallCap Growth Account - Insurance Products - Class 1 Class 1 Contrafund Portfolio - Government & High SmallCap Value Account - Service Class 2 Quality Bond Account Class 1 - Class 1 Equity-Income Portfolio - Growth Account - Strategic Asset Management Service Class 2 Class 1 Portfolios Growth Portfolio - International Balanced Account Service Class 2 Emerging Markets Portfolio - Class 1 Account - Class 1 Mid Cap Portfolio - International Conservative Balanced Service Class 2 SmallCap Account - Portfolio - Class 1 Class 1 Overseas Portfolio - LargeCap Blend Conservative Growth Service Class 2 Account - Class 1 Portfolio - Class 1 Goldman Sachs Variable LargeCap Stock Index Flexible Income Portfolio Insurance Trust Account - Class 1 - Class 1 Structured Small Cap LargeCap Value Strategic Growth Equity Fund Account - Class 1 Portfolio - Class 1 MidCap Value Fund MidCap Account - West Coast Equity Account Class 1 - Class 1 Lehman Brothers Asset MidCap Growth Account T. Rowe Price Blue Chip Management, LLC/(2)/ - Class 1 Growth Portfolio - II Lehman Brothers High Income Bond Portfolio - S T. Rowe Price Health Class/(3)/ Sciences Portfolio - II
/ //(1)// /On January 5, 2007, Equity Income Account assets merged into the Equity Income Account I. / //(2)// /On May 1, 2007, Neuberger Berman Advisers Management Trust re-branded the trust name to Lehman Brothers Asset Management, LLC. / //(3)// /On May 1, 2007, Neuberger Berman AMT High Income Bond Portfolio re-branded under the name of Lehman Brothers High Income Bond Portfolio. The Contract is available with or without the premium payment credit rider. The amount of the credit may be more than offset by the charges associated with it (increased surrender charge and surrender charge period and annual expenses). Expenses for a Contract with the rider are higher than expenses for a Contract without the rider. You should review your own circumstances to determine whether the rider is suitable for you. To assist you in making that determination, we have highlighted in gray boxes those portions of this prospectus pertaining to the rider. Please note that we recapture the premium payment credit if you request full annuitization of the Contract prior to the third contract anniversary. The credit is recovered from your investment options. Potentially, the amount we would recover could be more than the then current value of the credit if the investment options have experienced negative investment performance and you would be worse off than if you had not purchased the credit option. Subject to state availability, if you purchase the Contract on or after May 20, 2006 you have the right to partially annuitize a portion of your accumulated value. These securities have not been approved or disapproved by the SEC or any state securities commission nor has the SEC or any state securities commission passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense. 1 This prospectus is valid only when accompanied by the current prospectuses for the underlying mutual funds. These prospectuses should be kept for future reference. 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. TABLE OF CONTENTS GLOSSARY................................................................ SUMMARY OF EXPENSE INFORMATION.......................................... SUMMARY................................................................. Investment Limitations................................................. Transfers.............................................................. Surrenders............................................................. Charges and Deductions................................................. Annuity Benefit Payments............................................... Death Benefit.......................................................... Examination Offer Period (Free-Look)................................... THE PRINCIPAL INVESTMENT PLUS VARIABLE ANNUITY.......................... THE COMPANY............................................................. THE SEPARATE ACCOUNT.................................................... THE UNDERLYING MUTUAL FUNDS............................................. THE CONTRACT............................................................ To Buy a Contract...................................................... Premium Payments....................................................... Right to Examine the Contract (Free-Look).............................. Premium Payment Credit Rider........................................... The Accumulation Period................................................ Automatic Portfolio Rebalancing (APR).................................. Telephone and Internet Services........................................ Surrenders............................................................. Investment Protector Plus Rider........................................ Death Benefit.......................................................... Enhanced Death Benefit Rider........................................... The Annuitization Period............................................... CHARGES AND DEDUCTIONS.................................................. Annual Fee............................................................. Mortality and Expense Risks Charge..................................... Charges for Optional Riders............................................ Transaction Fee........................................................ Transfer Fee........................................................... Premium Taxes.......................................................... Surrender Charge....................................................... Free Surrender Privilege............................................... Administration Charge.................................................. Special Provisions for Group or Sponsored Arrangements................. FIXED ACCOUNT AND DCA PLUS ACCOUNTS..................................... Fixed Account.......................................................... Fixed Account Accumulated Value........................................ Fixed Account Transfers, Total and Partial Surrenders.................. Dollar Cost Averaging Plus Program (DCA Plus Program).................. GENERAL PROVISIONS...................................................... The Contract........................................................... Delay of Payments...................................................... Misstatement of Age or Gender.......................................... Assignment............................................................. Change of Owner or Annuitant........................................... Beneficiary............................................................ Contract Termination................................................... Reinstatement.......................................................... Reports................................................................ Important Information about Customer Identification Procedures ......... RIGHTS RESERVED BY THE COMPANY.......................................... Frequent Trading and Market Timing (Abusive Trading Practices)......... DISTRIBUTION OF THE CONTRACT............................................ PERFORMANCE CALCULATION................................................. VOTING RIGHTS........................................................... FEDERAL TAX MATTERS..................................................... Non-Qualified Contracts................................................ Required Distributions for Non-Qualified Contracts..................... IRA, SEP and SIMPLE-IRA................................................ Rollover IRAs.......................................................... Withholding............................................................ MUTUAL FUND DIVERSIFICATION............................................. STATE REGULATION........................................................ GENERAL INFORMATION..................................................... FINANCIAL STATEMENTS.................................................... TABLE OF SEPARATE ACCOUNT DIVISIONS..................................... TABLE OF CONTENTS OF THE STATEMENT OF ADDITIONAL INFORMATION............ CONDENSED FINANCIAL INFORMATION......................................... APPENDIX A- GMWB EXAMPLES ............................................... GLOSSARY ACCUMULATED VALUE - an amount equal to the DCA Plus Account(s) accumulated value plus the Fixed Account accumulated value plus the Separate Account division accumulated 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 benefit payment is based. This person may or may not be the owner. ANNUITIZATION - application of a portion or all of the accumulated value to an annuity benefit payment option to make income payments. ANNUITIZATION DATE - the date all of the owner's accumulated value is applied to an annuity benefit payment option. 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, 2006, the first contract year ends on June 4, 2007, and the first contract anniversary falls on June 5, 2007.) DATA PAGE - that portion of the Contract which contains the following: owner and annuitant data (names, gender, annuitant age); the contract issue date; maximum annuitization date; contract charges and limits; benefits; and a summary of any optional benefits chosen by the contract owner. DOLLAR COST AVERAGING PLUS (DCA PLUS) ACCOUNT - an account which earns guaranteed interest for a specific amount of time. 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 premium payments are transferred from a DCA Plus Account to the investment options over a specified period of time. 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 - an annuitant whose life determines the annuity benefit under this Contract. Any reference to the death of the annuitant means the death of the first annuitant to die. JOINT OWNER - an owner who has an undivided interest with the right of survivorship in this Contract with another owner. Any reference to the death of the owner means the death of the first owner to die. 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 communication received by us, at the annuity service office, either in writing or in another form approved by us in advance. Your notices may be mailed to us at: Principal Life Insurance Company P O Box 9382 Des Moines, Iowa 50306-9382 OWNER - the person, including joint owner, who owns all the rights and privileges of this Contract. PREMIUM PAYMENTS - the gross amount you contributed to the Contract. QUALIFIED PLANS - retirement plans which receive favorable tax treatment under Section 401 or 403(a) of the Internal Revenue Code. SEPARATE ACCOUNT DIVISION (DIVISION(S)) - a part of the Separate Account which invests in shares of an underlying mutual fund. (Referred to in the marketing materials as "sub-accounts.") SEPARATE ACCOUNT DIVISION ACCUMULATED VALUE - the amount of your accumulated value in all divisions. SURRENDER CHARGE - the charge deducted upon certain partial surrenders or total surrender of the Contract before the annuitization date. SURRENDER VALUE - accumulated value less any applicable surrender charge, rider fee, annual fee, transaction fee and any premium or other taxes. TRANSFER - moving all or a portion of your accumulated value to or among one investment option or another. Simultaneous transfers are considered to be one transfer for purposes of calculating the transfer fee, if any. UNDERLYING MUTUAL FUND - a registered open-end investment company, or a separate division or portfolio thereof, in which a division invests. UNIT - the accounting measure used to calculate the value of a division. 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 for trading and trading is not restricted. 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., 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 following tables describe the fees and expenses that you will pay when buying, owning and surrendering the Contract. The first table describes the fees and expenses that you will pay at the time that you buy the Contract, surrender the Contract or transfer cash value between investment options.The expenses in the shaded box reflect the expenses associated with the premium payment credit rider. These expenses are higher than the expenses for the Contract without the premium payment credit rider.
CONTRACT OWNER TRANSACTION EXPENSES ------------------------------------------------------------------------------ Sales charge imposed on premium payments (as a .none percentage of premium payments) ------------------------------------------------------------------------------ Maximum surrender charge (as a percentage of .6% amount surrendered)/(1)/ ------------------------------------------------------------------------------ Maximum deferred surrender charge for Contracts with the premium payment credit rider (as a percentage of amount .8% surrendered)/(2)/ ------------------------------------------------------------------------------ Transaction Fees for each unscheduled partial .The lesser of $ surrender 25 or 2% of each unscheduled . guaranteed maximum partial surrender after the 12th in a contract year .zero .current ------------------------------------------------------------------------------ Transaction Fee/(3)/ for each unscheduled .The lesser of $ transfer 30 or 2% of each unscheduled . guaranteed maximum transfer after the first in a contract year .current .zero ------------------------------------------------------------------------------ State Premium Taxes (vary by state) . 3.5% of premiums paid . guaranteed maximum .zero .current ------------------------------------------------------------------------------
/ //(1)/ Surrender charge without the premium payment credit rider (as a percentage of amounts surrendered):
TABLE OF SURRENDER CHARGES WITHOUT THE PREMIUM PAYMENT CREDIT RIDER -------------------------------------------------------------------- NUMBER OF COMPLETED CONTRACT YEARS SURRENDER CHARGE APPLIED TO ALL SINCE EACH PREMIUM PAYMENT PREMIUM PAYMENTS RECEIVED IN WAS MADE THAT CONTRACT YEAR ---------------------------------- ------------------------------- 0 (year of premium payment) 6% 1 6% 2 6% 3 5% 4 4% 5 3% 6 2% 7 and later 0%
///(2)/ SURRENDER CHARGE WITH THE PREMIUM PAYMENT CREDIT RIDER (AS A PERCENTAGE OF AMOUNTS SURRENDERED):
TABLE OF SURRENDER CHARGES WITH THE PREMIUM PAYMENT CREDIT RIDER ------------------------------------------------------------------- NUMBER OF COMPLETED CONTRACT YEARS SURRENDER CHARGE APPLIED TO ALL SINCE EACH PREMIUM PAYMENT PREMIUM PAYMENTS RECEIVED IN WAS MADE THAT CONTRACT YEAR ---------------------------------- ------------------------------- 0 (year of premium payment) 8% 1 8% 2 7% 3 6% 4 5% 5 4% 6 3% 7 2% 8 1% 9 and later 0%
/ //(3)/ Please note that in addition to the fees shown, the Separate Account and/or sponsors of the underlying mutual funds may adopt requirements pursuant to rules and/or regulations adopted by federal and/or state regulators which require us to collect additional transfer fees and/or impose restrictions on transfers. The next table describes the fees and expenses that are deducted periodically during the time that you own the Contract, not including underlying mutual fund fees and expenses.
PERIODIC EXPENSES ----------------------------------------------------------------------------- Annual Fee (waived for Contracts the lesser of $30 with accumulated value of $30,000 or 2% of the accumulated value or more) ----------------------------------------------------------------------------- Separate Account Annual Expenses (as a percentage of average separate account accumulated value) . guaranteed maximum Mortality and Expense Risks Charge 1.25% Administration Charge 0.15% Total Separate Account Annual ----- Expense 1.40% .current 1.25% Mortality and Expense Risks Charge 0.00% Administration Charge ----- Total Separate Account Annual 1.25% Expense ----------------------------------------------------------------------------- Optional Riders ----------------------------------------------------------------------------- . Enhanced Death Benefit rider . guaranteed maximum .0.075% of average quarterly .current accumulated value .0.0625% of average quarterly accumulated value ----------------------------------------------------------------------------- . Investment Protector Plus rider .0.2125% of the average quarterly . guaranteed maximum Investment Back remaining withdrawal benefit base* .current .0.15% of the average quarterly Investment Back remaining withdrawal benefit base* ----------------------------------------------------------------------------- .an annual charge of 0.60 % of accumulated value in the . Premium Payment Credit rider divisions deducted daily plus a . guaranteed maximum reduction of up to 0.60% of the Fixed Account interest rate . an annual charge of 0.60 .current % of accumulated value in the divisions deducted daily (with no reduction of the Fixed Account interest rate) -----------------------------------------------------------------------------
* The Investment Back remaining withdrawal benefit base is the total amount that is available for future withdrawal benefit payments (see THE CONTRACT - Surrenders - Investment Protector Plus Rider). --------------------------------- The next item shows the minimum and maximum total operating expenses charged by the underlying mutual funds that you may pay periodically during the time that you own the contract. More detail concerning the fees and expenses of each underlying mutual fund is contained in its prospectus. .
MINIMUM AND MAXIMUM ANNUAL UNDERLYING MUTUAL FUND OPERATING EXPENSES AS OF DECEMBER 31, 2006 ------------------------------------------------------------------------------ MINIMUM MAXIMUM ------------------------------------------------------------------------------ Total annual underlying mutual fund operating expenses (expenses that are deducted from underlying mutual fund assets, including management fees, distribution and/or service 0.26% 1.44% (12b-1) fees and other expenses) ------------------------------------------------------------------------------
Annual expenses of the underlying mutual funds (as a percentage of average net assets) as of December 31, 2006:
ANNUAL UNDERLYING MUTUAL FUND EXPENSES ACQUIRED FUND ("UNDERLYING FUND") TOTAL CONTRACTUAL MANAGEMENT 12B-1 OTHER FEES AND GROSS NET UNDERLYING MUTUAL FUNDS FEES FEES/(1)/ EXPENSES EXPENSES EXPENSES/(//2)/ EXPENSES ----------------------- ---------- --------- -------- ------------ ---------------- ---------------- AIM V.I. Basic Value Fund - Series 1.02%/(3)(4)/ I 0.72% N/A% 0.30% AIM V.I. Small Cap Equity Fund - Series I 0.75 N/A 0.53 0.01%/ 1.29 1.15/(5)(6)/ AllianceBernstein Small Cap Growth Portfolio - Class A 0.75 N/A 0.41 1.16 American Century VP II Inflation Protection Fund - Class II 0.49/(7)/ 0.25 0.01 / 0.75 American Century VP Ultra - Class II 0.90/(7)/ 0.25 0.00/(8)/ 1.15 American Century VP Vista Fund - Class I 1.00 N/A 0.00/(8)/ 1.00 Dreyfus IP Technology Growth - Service Shares 0.75 0.25 0.12/(9)/ / 1.12 Fidelity VIP Contrafund - Service Class 2 0.57 0.25 0.09 / 0.91 0.90/(//10//)/ Fidelity VIP Equity-Income - Service Class 2 0.47 0.25 0.10 / 0.82 / Fidelity VIP Growth - Service Class 2 0.57 0.25 0.12 0.94 0.92/(//10//)/ Fidelity VIP Mid Cap - Service Class 2 0.57 0.25 0.11 0.93 0.91/(//10//)/ Fidelity VIP Overseas - Service Class 2 0.72 0.25 0.16 1.13 1.06/(//10//)/ Goldman Sachs VIT Structured Small Cap Equity Fund - Institutional Class 0.75 N/A 0.12 0.87 0.75/(1//1//)/ Goldman Sachs VIT Mid Cap Value Fund - Institutional Class 0.80 N/A 0.06 0.86 0.80/(1//2//)/ Neuberger Berman AMT Fasciano Portfolio - S Class 1.15 0.25 0.60 2.00 1.40/(1//3//)/ Lehman Brothers High Income Bond Portfolio- S Class 0.78 0.25 2.41 3.44 1.10/(1//3//)/ Neuberger Berman AMT Partners Portfolio - I Class 0.83 N/A 0.08 0.91 Neuberger Berman AMT Socially Responsive Portfolio - I Class 0.85 N/A 0.13 0.98 / Principal VCF Asset Allocation, Class 1 0.80 N/A 0.03 0.83 Principal VCF Bond, Class 1 0.43 N/A 0.09 0.52 Principal VCF Capital Value, Class 1 0.60 N/A 0.00 0.60 Principal VCF Diversified International, Class 1 0.84 N/A 0.07 0.91/(//1//4//)/ Principal VCF Equity Growth, Class 1 0.76 N/A 0.00 0.76 / Principal VCF Equity Income I Account - Class 1 0.49 N/A 0.04 0.53/(15)/ Principal VCF Equity Value, Class 1 0.85 N/A 0.23 1.08 0.90/(1//6//)/ Principal VCF Government & High Quality Bond, Class 1 0.45 N/A 0.11 0.56 Principal VCF Growth, Class 1 0.68 N/A 0.01 0.69/(17)/ / Principal VCF International Emerging Markets, Class 1 1.25 N/A 0.19 1.44 / Principal VCF International SmallCap Account - Class 1 1.18 N/A 0.09 1.27 Principal VCF LargeCap Blend, Class 1 0.75 N/A 0.01 0.76/(18)/ / Principal VCF LargeCap Stock Index, Class 1 0.25 N/A 0.01 0.26 / Principal VCF LargeCap Value, Class 1 0.75 N/A 0.01 0.76 / Principal VCF MidCap, Class 1 0.57 N/A 0.00 0.57 Principal VCF MidCap Growth, Class 1 0.90 N/A 0.02 0.92 Principal VCF MidCap Value, Class 1 1.05 N/A 0.01 1.06 / Principal VCF Money Market, Class 1 0.48 N/A 0.01 0.49/(19//)/ Principal VCF Principal LifeTime 2010 Account - Class 1 0.12 N/A 0.04 0.62 0.78 0.78/(//20//)/ Principal VCF Principal LifeTime 2020 Account - Class 1 0.12 N/A 0.02 0.63 0.77 0.76/(//20//)/ Principal VCF Principal LifeTime 2030 Account - Class 1 0.12 N/A 0.09 0.67 0.88 0.83/(//20//)/ Principal VCF Principal LifeTime 2040 Account - Class 1 0.12 N/A 0.20 0.69 1.01 0.82/(//20//)/ Principal VCF Principal LifeTime 2050 Account - Class 1 0.12 N/A 0.32 0.71 1.15 0.83/(//20//)/ Principal VCF Principal LifeTime Strategic IncomeAccount - Class 1 0.12 N/A 0.09 0.58 0.79 0.72/(//20//)/ Principal VCF Real Estate Securities, Class 1 0.87 N/A 0.00 0.87/(21)/ Principal VCF Short-Term Bond, Class 1 0.50 N/A 0.14 0.64 Principal VCF SmallCap Growth, Class 1 1.00 N/A 0.02 1.02/(22)/ / Principal VCF SmallCap Value, Class 1 1.08 N/A 0.03 1.11/(23)/ Principal VCF Strategic Asset Management Balanced Portfolio - Class 1 0.25 N/A 0.01 0.66 0.92/(24)/ Principal VCF Strategic Asset Management Conservative Balanced Portfolio - Class 1 0.25 N/A 0.01 0.62 0.88/(24)/ Principal VCF Strategic Asset Management Conservative Growth Portfolio - Class 1 0.25 N/A 0.01 0.69 0.95/(24)/ Principal VCF Strategic Asset Management Flexible Income Portfolio - Class 1 0.25 N/A 0.01 0.59 0.85/(24)/ Principal Strategic Asset Management Strategic Growth Portfolio - Class 1 0.25 N/A 0.01 0.73 0.99/(24)/ Principal VCF West Coast Equity, Class 1 0.63 N/A 0.02 0.65/(2//5)/ T. Rowe Price Blue Chip Growth Portfolio - II 0.85 0.25 N/A 1.10 T. Rowe Price Health Sciences Portfolio - II 0.95 0.25 N/A 1.20
/ //(1)/ Because the 12b-1 fee is charged as an ongoing fee, over time the fee will increase the cost of your investment and may cost you more than paying other types of sales charges. / //(2)/ The Company and Princor Financial Services Corporation may receive a portion of the underlying fund expenses for record keeping, marketing and distribution services. / //(3)/ Through December 31, 2009, the Fund's advisor has contractually agreed to waive a portion of its advisory fees to the extent necessary so that the advisory fees payable by the Fund does not exceed a specified maximum annual advisory fee rate, wherein the fee rate includes breakpoints and is based upon net asset levels. The fund's maximum annual advisory fee rate ranges from 0.695% (for average net assets up to $250 million) to 0.52% (for average net assets over $10 billion). / //(4)/ The Fund's advisor has contractually agreed to waive advisory fees and/or reimburse expenses of Series I shares to the extent necessary to limit Total Annual Fund Operating Expenses of Series I shares to 1.30% of average daily net assets. The expense limitation agreement is in effect through April 30, 2007. / //(5) /Through April 30, 2008, the Fund's advisor has contractually agreed to waive a portion of its advisory fees to the extent necessary so that the advisory fees payable by the Fund does not exceed a specified maximum annual advisory fee rate, wherein the fee rate includes breakpoints and is based upon net asset levels. The Fund's maximum annual advisory fee rate ranges from 0.745% (for average net assets up to $250 million) to 0.64% (for average net assets over $10 billion). / //(6)/ As a result of reorganization which will occur on or about May 1, 2007, the Fund's Total Annual Fund Operating Expenses have been restated to reflect such reorganization. The advisor for AIM V.I. Small Cap Equity Fund has contractually agreed to waive advisory fees and/or reimburse expenses of Series I shares to the extent necessary to limit Total Annual fund Operating Expenses of Series I shares to 1.15% of average daily net assets. This expense limitation agreement is in effect through at least April 30, 2008./ / / //(//7//)/ The fund has a stepped fee schedule. As a result, the fund's management fee rate generally decreases as the fund's assets increase and increases as the fund's assets decrease. / //(8)/ Other expenses, which include the fees and expenses of the fund's independent directors and their legal counsel, interest, and fees and expenses incurred indirectly by the fund as a result of investment in shares of one or more mutual funds, hedge funds, private equity funds or other pooled investment vehicles, were less than 0.005% for the most recent fiscal year. / //(//9//)/ / //(10)/ A portion of the brokerage commissions that the fund pays may be reimbursed and used to reduce the fund's expenses. In addition, through arrangements with the fund's custodian, credits realized as a result of uninvested cash balances are used to reduce the fund's custodian expenses. Including these reductions, the total class operating expenses would have been VIP Contrafund 0.90%; VIP Growth 0.92%; VIP Mid Cap 0.91%; and VIP Overseas 1.06%. These offsets may be discontinued at any time. / //(1//1//)/ Goldman Sachs, has voluntarily agreed to waive a portion of its management fee equal to 0.02% of the Fund's average daily net assets. Goldman Sachs has entered into the following fee reduction commitment for the Funds which was implemented on a voluntary basis beginning July 1, 2005 and on a contractual basis as of the date of this Prospectus equal to 0.75%. Management fee annual rate on the first $2 billion in average daily net assets and 0.68% Management fee annual over $2 billion in average daily net assets. / //(1//2//)/ Goldman Sachs has entered into the following fee reduction commitment for the Funds which was implemented on a voluntary basis beginning July 1, 2005 and on a contractual basis as of the date of this Prospectus equal to 0.80%. Management fee annual rate on the first $2 billion in average daily net assets and 0.72% Management fee annual over $2 billion in average daily net assets. / / / //(1//3//) /Neuberger Berman Management, Inc. (NBMI) has undertaken through December 31, 2010, to waive fees and/or reimburse certain operating expenses, including the compensation of NBMI and excluding taxes, interest, extraordinary expenses, brokerage commissions and transaction costs, that exceed, in aggregate, 1.10% of average daily net asset value of the Lehman Brothers High Income Bond Portfolio, 1.40% of the average daily net asset value of the Fasciano Portfolio, and 1.30% of the average daily net asset value of the Socially Responsive Portfolio.The expense limitation arrangements for the Portfolios are contractual and any excess expenses can be repaid to NBMI within three years of the year incurred, provided such recoupment would not cause a Portfolio to exceed its respective limitation. / //(14)// /Principal has contractually agreed to limit the Account's expenses attributable to Class 1 and 2 shares and, if necessary, pay expenses normally payable by the Account, through the period ending April 29, 2008. The expense limits will maintain a total level of operating expenses (expressed as a percent of average net assets on an annualized basis) not to exceed 1.04% for Class 1 shares and 1.29% for Class 2 shares. / //(15)/ Principal has contractually agreed to limit the Account's expenses attributable to Class 1 and 2 shares and, if necessary, pay expenses normally payable by the Account, through the period ending April 29, 2008. The expense limits will maintain a total level of operating expenses (expressed as a percent of average net assets on an annualized basis) not to exceed 0.66% for Class 1 shares and 0.91% for Class 2 shares. The estimated expenses shown in the table are intended to reflect those that will be in effect on an ongoing basis. / //(16)/ Principal has contractually agreed to limit the Account's expenses attributable to Class 1 shares and, if necessary, pay expenses normally payable by the Account through the period ending April 29, 2008. The expense limit will maintain a total level of operating expenses (expressed as a percent of average net asset on an annualized basis) not to exceed 0.90%. / //(17)/ Principal has contractually agreed to limit the Account's expenses attributable to Class 1 and 2 shares and, if necessary, pay expenses normally payable by the Account, through the period ending April 29, 2008. The expense limits will maintain a total level of operating expenses (expressed as a percent of average net assets on an annualized basis) not to exceed 0.80% for Class 1 shares and 1.05% for Class 2 shares. / //(18)/ Principal has contractually agreed to limit the Account's expenses attributable to Class 1 and 2 shares and, if necessary, pay expenses normally payable by the Account, through the period ending April 29, 2008. The expense limits will maintain a total level of operating expenses (expressed as a percent of average net assets on an annualized basis) not to exceed 0.78% for Class 1 shares and 1.03% for Class 2 shares. The expenses shown for Class 2 are estimated. The estimated expenses shown in the table are intended to reflect those that will be in effect on an ongoing basis. / //(19)/ Principal has contractually agreed to limit the Account's expenses attributable to Class 1 and 2 shares and, if necessary, pay expenses normally payable by the Account, through the period ending April 29, 2008. The expense limits will maintain a total level of operating expenses (expressed as a percent of average net assets on an annualized basis) not to exceed 0.72% for Class 1 shares and 0.97% for Class 2 shares. The expenses shown for Class 2 are estimated. The estimated expenses shown in the table are intended to reflect those that will be in effect on an ongoing basis. / //(20)/ Principal has contractually agreed to limit the Account's expenses (not including underlying fund expenses) and if necessary, pay expenses normally payable by the Accounts, through the period ending April 29, 2008. The expense limits will maintain a total level of operating expenses (expressed as a percent of average net assets on an annualized basis) not to exceed 0.16% for the Principal LifeTime 2010 Account, 0.13% for the Principal LifeTime 2020 Account, 0.16% for the Principal LifeTime 2030 Account, 0.13% for the Principal LifeTime 2040 Account, 0.12% for the Principal LifeTime 2050 Account and 0.14% for the Principal Strategic Income Account. / //(21)/ Principal has contractually agreed to limit the Account's expenses attributable to Class 1 and 2 shares and, if necessary, pay expenses normally payable by the Account, through the period ending April 29, 2008. The expense limits will maintain a total level of operating expenses (expressed as a percent of average net assets on an annualized basis) not to exceed 0.90% for Class 1 shares and 1.15% for Class 2 shares. The expenses shown for Class 2 are estimated. The estimated expenses shown in the table are intended to reflect those that will be in effect on an ongoing basis. / //(22)/ Principal has contractually agreed to limit the Account's expenses attributable to Class 1 and 2 shares and, if necessary, pay expenses normally payable by the Account, through the period ending April 29, 2008. The expense limits will maintain a total level of operating expenses (expressed as a percent of average net assets on an annualized basis) not to exceed 1.02% for Class 1 shares and 1.27% for Class 2 shares. The expenses shown for Class 2 are estimated. The estimated expenses shown in the table are intended to reflect those that will be in effect on an ongoing basis. / //(23)/ Principal has contractually agreed to limit the Account's expenses attributable to Class 1 and 2 shares and, if necessary, pay expenses normally payable by the Account, through the period ending April 29, 2008. The expense limits will maintain a total level of operating expenses (expressed as a percent of average net assets on an annualized basis) not to exceed 1.01% for Class 1 shares and 1.26% for Class 2 shares. The expenses shown for Class 2 are estimated. The estimated expenses shown in the table are intended to reflect those that will be in effect on an ongoing basis. / //(24)/ The estimated expenses shown in the table are intended to reflect those that will be in effect on an ongoing basis. Principal has contractually agreed to limit the Portfolios' expenses (not including underlying fund expenses) and, if necessary, pay expenses normally payable by the Portfolios, through the period ending April 29, 2008. The expense limits will maintain a total level of operating expenses (expressed as a percent of average net assets on an annualized basis) not to exceed 0.30% for the Class 1 shares and 0.55% for the Class 2 shares of the Flexible Income Portfolio, 0.35% for the Class 1 shares and 0.60% for the Class 2 shares of the Conservative Balanced Portfolio, 0.28% for the Class 1 shares and 0.53% for the Class 2 shares of the Balanced Portfolio, 0.29% for the Class 1 shares and 0.54% for the Class 2 shares of the Conservative Growth Portfolio and 0.30% for the Class 1 shares and 0.55% for the Class 2 shares of the Strategic Growth Portfolio. / //(25)/ Principal has contractually agreed to limit the Account's expenses attributable to Class 1 and Class 2 shares an, if necessary, pay expenses normally payable by the Account through the period ending April 29, 2008. The expense limits will maintain a total level of operating expenses (expressed as a percent of average net assets on an annualized basis) not to exceed 0.68% for Class 1 shares and 0.93% for Class 2 shares. The estimated expenses shown in the table are intended to reflect those that will be in effect on an ongoing basis. EXAMPLE These Examples are intended to help you compare the cost of investing in the Contract with the cost of investing in other variable annuity contracts. These costs include contract owner transaction expenses, contract fees, Separate Account annual expenses, and underlying mutual fund fees and expenses. The shaded areas show charges that apply to Contracts with the premium payment credit rider. The unshaded areas show charges that apply to Contracts without the premium payment credit rider. Although your actual costs may be higher or lower, based on these assumptions, your costs would be as shown below. EXAMPLE 1. CONTRACT WITHOUT RIDERS. This Example reflects the maximum charges imposed if you were to purchase the Contract without any riders. The Example also reflects the minimum and maximum annual underlying mutual fund operating expenses (as of December 31, 2006). The Example assumes: . a $10,000 investment in the Contract for the time periods indicated; . a 5% return each year; . an annual contract fee of $30 (expressed as a percentage of the average accumulated value); . that the Contract has been purchased without optional riders; and . the maximum and minimum fees and expenses (without voluntary fee waivers, if any) of any of the underlying mutual funds. This Example shows the current fees of the Contract.
IF YOU FULLY IF YOU SURRENDER YOUR CONTRACT IF YOU DO NOT ANNUITIZE YOUR CONTRACT AT THE END OF THE APPLICABLE SURRENDER AT THE END OF THE TIME PERIOD YOUR CONTRACT APPLICABLE TIME PERIOD ----------------------------------------------------------------------------------------------------------------------------------- 1 YR. 3 YRS. 5 YRS. 10 YRS. 1 YR. 3 YRS. 5 YRS. 10 YRS. 1 YR. 3 YRS. 5 YRS. 10 YRS. ----------------------------------------------------------------------------------------------------------------------------------- Maximum Total Underlying Mutual Fund 821 1,402 1,799 2,964 268 820 1,399 2,964 268 820 1,399 2,964 Operating Expenses (1.44%) ----------------------------------------------------------------------------------------------------------------------------------- Minimum total Underlying Mutual Fund 713 1,071 1,212 1,773 152 471 812 1,773 152 471 812 1,773 Operating Expenses (0.26%) -----------------------------------------------------------------------------------------------------------------------------------
EXAMPLE 2. CONTRACT WITH PREMIUM PAYMENT CREDIT AND ENHANCED DEATH BENEFIT RIDERS. This Example reflects the maximum charges imposed if you were to purchase the Contract with the premium payment credit and enhanced death benefit riders. The Example also reflects the minimum and maximum annual underlying mutual fund operating expenses (as of December 31, 2006). The Example assumes: . a $10,000 investment in the Contract for the time periods indicated; . a 5% return each year; . an annual contract fee of $30 (expressed as a percentage of the average accumulated value); . that the premium payment credit rider was added to the Contract at issue and the premium payment credit rider surrender charge schedule is applied; . that the enhanced death benefit rider was added to the Contract at issue; and . the maximum and minimum fees and expenses (without voluntary fee waivers, if any) of any of the underlying mutual funds. . This Example shows the current fees of the Contract.
IF YOU FULLY IF YOU SURRENDER YOUR CONTRACT IF YOU DO NOT ANNUITIZE YOUR CONTRACT AT THE END OF THE APPLICABLE SURRENDER AT THE END OF THE TIME PERIOD YOUR CONTRACT APPLICABLE TIME PERIOD ----------------------------------------------------------------------------------------------------------------------------------- 1 YR. 3 YRS. 5 YRS. 10 YRS. 1 YR. 3 YRS. 5 YRS. 10 YRS. 1 YR. 3 YRS. 5 YRS. 10 YRS. ----------------------------------------------------------------------------------------------------------------------------------- Maximum Total Underlying Mutual Fund 1,141 1,819 2,396 3,794 369 1,122 1,896 3,794 869 1,622 1,896 3,794 Operating Expenses (1.44%) ----------------------------------------------------------------------------------------------------------------------------------- Minimum total Underlying Mutual Fund 1,030 1,461 1,802 2,631 248 761 1,302 2,631 748 1,261 1,302 2,631 Operating Expenses (0.26%) -----------------------------------------------------------------------------------------------------------------------------------
EXAMPLE 3. CONTRACT WITH INVESTMENT PROTECTOR PLUS, PREMIUM PAYMENT CREDIT AND ENHANCED DEATH BENEFIT RIDERS. This Example reflects the charges imposed if you were to purchase the Contract with the Investment Protector Plus rider. The Example also reflects the minimum and maximum annual underlying mutual fund operating expenses (as of December 31, 2006) for the limited array of underlying mutual funds available when utilizing the Investment Protector Plus rider (see the rider description for more details). The Example assumes: . a $10,000 investment in the Contract for the time periods indicated; . a 5% return each year; . an annual contract fee of $30 (expressed as a percentage of the average accumulated value); . that the Investment Protector Plus rider was added to the Contract at issue; . that the premium payment credit rider was added to the Contract at issue and the premium payment credit rider surrender charge schedule is applied; . that the enhanced death benefit rider was added to the Contract at issue; and . the maximum and minimum fees and expenses (without voluntary fee waivers, if any) of the underlying mutual funds available when utilizing the Investment Protector Plus rider. . This Example shows the current fees of the Contract.
IF YOU FULLY IF YOU SURRENDER YOUR CONTRACT IF YOU DO NOT ANNUITIZE YOUR CONTRACT AT THE END OF THE APPLICABLE SURRENDER AT THE END OF THE TIME PERIOD YOUR CONTRACT APPLICABLE TIME PERIOD ----------------------------------------------------------------------------------------------------------------------------------- 1 YR. 3 YRS. 5 YRS. 10 YRS. 1 YR. 3 YRS. 5 YRS. 10 YRS. 1 YR. 3 YRS. 5 YRS. 10 YRS. ----------------------------------------------------------------------------------------------------------------------------------- Maximum Total Underlying Mutual Fund 1,143 1,821 2,396 3,774 371 1,124 1,896 3,774 871 1,624 1,896 3,774 Operating Expenses (0.88%) ----------------------------------------------------------------------------------------------------------------------------------- Minimum total Underlying Mutual Fund 1,109 1,715 2,217 3,424 334 1,015 1,717 3,424 834 1,515 1,717 3,424 Operating Expenses (0.52%) -----------------------------------------------------------------------------------------------------------------------------------
SUMMARY This prospectus describes a flexible variable annuity offered by the Company. The Contract is designed to provide individuals with retirement benefits, including: . non-qualified retirement programs; and . 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 (see Federal Tax Matters - IRA, SEP and SIMPLE-IRA and Rollover IRAs). THE CONTRACT DOES NOT PROVIDE ANY ADDITIONAL TAX DEFERRAL IF YOU PURCHASE IT TO FUND AN IRA OR OTHER INVESTMENT VEHICLE THAT ALREADY PROVIDES TAX DEFERRAL. For information on how to purchase the Contract, please see THE CONTRACT - To Buy a Contract. This is a brief summary of the Contract's features. More detailed information follows later in this prospectus. INVESTMENT LIMITATIONS . Initial premium payment must be $5,000 or more for non-qualified contracts. . Initial premium payment must be $2,000 for all other contracts. . Each subsequent payment must be at least $500. . If you are a member of a retirement plan covering three or more persons and payments are made through an automatic investment program, the initial and subsequent premium payments for the Contract must average at least $100 and not be less than $50. You may allocate your net premium payments to the investment options. . A complete list of the divisions may be found in the Table of Separate Account Divisions later in this prospectus. 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 investment options also include the Fixed Account and the DCA Plus Accounts. TRANSFERS (See 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: . a dollar amount or percentage of transfer must be specified; . a transfer may occur on a scheduled or unscheduled basis; . transfers to the Fixed Account are not permitted if a transfer has been made from the Fixed Account to a division within six months; and . transfers into DCA Plus Accounts are not permitted. During the annuity benefit 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: . a dollar amount must be specified; . surrendered amounts may be subject to surrender charge; .for Contracts without the premium payment credit rider, the maximum surrender charge is 6% of the amount(s) surrendered. .for Contracts with the premium payment credit rider, the maximum surrender charge is 8% of the amount(s) surrendered. . total surrenders may be subject to an annual Contract fee; . during a contract year, partial surrenders less than the Contract's earnings or 10% of premium payments are not subject to a surrender charge; and . surrenders before age 591/2 may involve an income tax penalty (see FEDERAL TAX MATTERS). CHARGES AND DEDUCTIONS (see CHARGES AND DEDUCTIONS) . There is no sales charge on premium payments. . A contingent deferred surrender charge is imposed on certain total or partial surrenders. . An annual mortality and expense risks charge equal to 1.25% of amounts in the Separate Account divisions is imposed daily. . The daily Separate Account administration charge currently is zero but we reserve the right to assess a charge not to exceed 0.15% of Separate Account division value(s) annually. . The optional riders are available at an additional charge (see CHARGES AND DEDUCTIONS). . Contracts with an accumulated value of less than $30,000 are subject to an annual 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 Variable Annuity Contract with us, then all the Contracts you own or jointly own may be aggregated on each Contract's anniversary, to determine if the $30,000 minimum has been met and whether that Contract will be charged. . Certain states and local governments impose a premium tax. The Company reserves the right to deduct the amount of the tax from premium payments or accumulated values. ANNUITY BENEFIT PAYMENTS . You may choose from several fixed annuity benefit payment options which are described in The Annuitization Period - Annuity Benefit Payment Options. . Payments are made to the owner (or beneficiary depending on the annuity benefit payment option selected). You should carefully consider the tax implications of each annuity benefit payment option (see Annuity Benefit Payment Options and FEDERAL TAX MATTERS). DEATH BENEFIT . If the owner dies before the annuitization date, a death benefit is payable (see Death Benefit). . The death benefit may be paid as either a single sum cash benefit or under an annuity benefit payment option (see Death Benefit). . If the annuitant dies on or after the annuitization date, the beneficiary will receive only any continuing payments which may be provided by the annuity benefit payment option in effect. EXAMINATION OFFER PERIOD (FREE-LOOK) (see Right to Examine the Contract (Free-Look)) .You may return the Contract during the examination offer period which is generally 10 days from the date you receive the Contract. The examination offer period may be longer in certain states. .We return all premium payments if required by state law. Otherwise we return accumulated value. . We keep the full amount of any premium payment credit. THE PRINCIPAL INVESTMENT PLUS VARIABLE ANNUITY The Principal Investment Plus 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 Company. The Separate Account division accumulated 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 premium 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 50392 and is authorized to transact life and annuity business in all states of the United States and the District of Columbia. The Company is a wholly owned indirect subsidiary of Principal Financial Group, Inc., a publicly-traded company. In 1879, the Company was incorporated under Iowa law as a mutual assessment life insurance company named Bankers Life Association. It became a legal reserve life insurance company and 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 insurance holding company structure took place in 1998, when the Company became a stock life insurance company. In 2001, the mutual insurance holding company converted to a stock company through a process called demutualization, resulting in the current organizational structure. THE SEPARATE ACCOUNT Separate Account B was established under Iowa law on January 12, 1970 and 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 benefit 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 underlying mutual fund. New divisions may be added and made available. Divisions may also be eliminated from the Separate Account following SEC approval. THE UNDERLYING MUTUAL FUNDS The underlying mutual funds are registered under the Investment Company Act of 1940 as open-end investment management companies. The underlying mutual funds provide the investment vehicles for the Separate Account. A full description of the underlying 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 WITHOUT CHARGE FROM A SALES REPRESENTATIVE OR OUR ANNUITY SERVICE OFFICE (CALL 1-800-852-4450). The Company purchases and sells underlying mutual fund shares for the Separate Account at their net asset value. Shares represent interests in the underlying mutual fund available for investment by the Separate Account. Each underlying 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 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 and qualified plans. 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. The Table of Separate Account Divisions later in this prospectus contains a brief summary of the investment objectives of, the advisor and, if applicable, sub-advisor for, each division. 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 premium payment. If you are buying the Contract to fund a SIMPLE-IRA or SEP, an initial premium 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. If the completed application is received in proper order, the initial premium payment is credited within two valuation days after the later of receipt of the application or receipt of the initial premium payment at the annuity service office. If the initial premium payment is not credited within five valuation days, it is refunded unless we have received your permission to retain the premium 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. Tax-qualified retirement arrangements, such as IRAs, SEPs, and SIMPLE-IRAs, are tax-deferred. You derive no additional benefit from the tax deferral feature of the annuity. Consequently, an annuity should be used to fund an IRA, or other tax qualified retirement arrangement to benefit from the annuity's features other than tax deferral. These features may include guaranteed lifetime income, death benefits without surrender charges, guaranteed caps on fees, and the ability to transfer among investment options without sales or withdrawal charges. PREMIUM PAYMENTS . The initial premium payment must be at least $5,000 for non-qualified retirement programs. . All other initial premium payments must be at least $2,000. . If you are making premium payments through a payroll deduction plan or through a bank (or similar financial institution) account under an automated investment program, your initial and subsequent premium payments must be at least $100. . All premium payments are subject to a surrender charge period that begins in the contract year each payment is received. . Subsequent payments must be at least $500 and can be made until the annuitization date. . If you are a member of a retirement plan covering three or more persons, the initial and subsequent premium payments for the Contract must average at least $100 and cannot be less than $50. . The total of all premium payments may not be greater than $2,000,000 without our prior approval. .In the state of Washington, for contracts with the Premium Payment Credit Rider no premium are allowed after the first contract year. RIGHT TO EXAMINE THE CONTRACT (FREE-LOOK) Under state law, you have the right to return the Contract for any reason during the examination offer period. The examination offer period is 10 days after the Contract is delivered to you in all states, unless your Contract is issued in: . Arizona and you are age 65 and over (30 day examination offer period), . California and you are age 60 and over (30 day examination offer period), . Idaho (20 day examination offer period), or . North Dakota (20 day examination offer period). Some states require us to return the initial premium payment while other states require us to return the accumulated value. Though we currently allocate your initial premium to the investment options you have selected, we reserve the right to allocate initial premiums to the Money Market Division during the examination offer period. In addition, we are required to allocate initial premium payments to the Money Market Division if the contract is issued in California and the owner is age 65 or older. After the examination offer period, the current value of the Money Market Division will be reallocated according to your allocation instructions. The states in which purchase payments are returned are:
Georgia Louisiana Nebraska Rhode Island Hawaii Maine New Hampshire South Carolina Idaho Maryland North Carolina Utah Iowa Michigan Oklahoma Virginia Kentucky Missouri Pennsylvania West Virginia
Please note that we recapture the premium payment credit if you decide to return the Contract during the examination offer period. We recover the full amount of the premium payment credit and you could receive less than your initial premium payment. If the purchase of this Contract is a replacement for another annuity contract or a life insurance policy, different examination offer periods may apply. The Company reserves the right to keep the initial premium payment in the Money Market Division longer than 10 days to correspond to the examination offer periods of a particular state's replacement requirements. If you are purchasing this Contract to fund an IRA, SIMPLE-IRA, or SEP-IRA and you return it on or before the seventh day of the free-look period, we will return the greater of: . total premium payments; or . 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 offer 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 offer period has expired. Specific information is available from your sales representative or the annuity service office (1-800-852-4450). Exchange Credit --------------- If you own a Single Premium Deferred Annuity ("SPDA") or a Single Premium Deferred Annuity Plus ("SPDA+") issued by us and are no longer subject to surrender charges, 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 premium payment. We reserve the right to change or discontinue the exchange credit. Both SPDA and SPDA+ are annuities which provide a fixed rate of accumulation. The values in the Separate Account divisions in this Contract vary with the investment experience and objectives of the various underlying mutual funds. Thus, the value of your Contract may increase or decrease with the investment holdings of the Separate Account 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: . a Contract application, . a SPDA/SPDA+ surrender form, . a replacement form (based on state written), and . 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" may not be available in all states. 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 premium payment. The credit is treated as earnings. We recover the 1% credit if you exercise your right to return the Contract during the examination offer period (see Right to Examine the Contract). PREMIUM PAYMENT CREDIT RIDER You may elect a premium payment credit rider at the time the Contract is issued (the rider may not be available in all states; consult your sales representative or the annuity service office for availability). If the premium payment credit rider is elected, the following provisions apply to the Contract: . A credit of 5% will be applied to premium payments received during your first contract year. For example, if you make premium 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 premium payment of $5,000 is made in your second contract year, no credit is added as a result of the $5,000 premium payment. .The credit is allocated among the investment options according to your then current premium payment allocations. .If you exercise your right to return the Contract during the examination offer period, the amount returned to you is reduced by any credits. You could receive less than your initial premium payment. .We recapture the premium payment credit if you request full annuitization of the Contract prior to the third contract anniversary or if you decide to return the Contract during the examination offer period. The credit is recovered from your investment options according to your surrender allocation percentages (if surrender allocation percentages are not specified, we would use your premium allocation percentages). Potentially, the amount we would recover could be more than the current value of the credit. If the investment options have experienced negative investment performance you would bear the loss for the difference between the original value of the credit (the amount recaptured) and the current (lower) value of that credit. .During each of contract years two and three, the amount of the partial annuitization is limited to no more than 10% of the accumulated value as of the most recent contract anniversary. . Credits are considered earnings under the Contract. .All premium payments are subject to the 9-year surrender charge table (see Surrender Charge). .The premium payment credit rider may not be cancelled and the associated 9-year surrender charge period cannot be changed. . You may not participate in the DCA Plus Program. The current annual charge for the rider is 0.60% of the average daily net assets of the Separate Account divisions. The charge is assessed until completion of your 8th contract year (and only prior to the annuitization date) even if the credit has been recovered. You should carefully examine the premium payment credit rider to decide if the premium payment credit rider is suitable as there are circumstances under which you would be worse off for having received the credit. In making this determination, you should consider the following factors: .the length of time you plan to own the Contract (the rider increases the amount and duration of the surrender charges); .the frequency, amount and timing of any partial surrenders (the rider increases the amount and duration of the surrender charges); .the amount and timing of your premium payment(s). If you elect the rider and anticipate making additional premium payments after the first contract year, please note that premium payments after the first contract year will be assessed higher Separate Account charges though no credit is applied to those premium payments; and .the higher Separate Account charges have a negative impact on investment performance. The charges used to recoup our expense of payment the premium payment credit include the surrender charge and the premium payment credit rider charge. We expect to make a profit from these charges. The following tables demonstrate hypothetical values but do not show the impact of partial surrenders or partial annuitizations. The tables are based on: . a $25,000 initial premium payment and no additional premium payments; . the deduction of total Separate Account annual expenses: . Contracts with the premium payment credit rider: . 1.85% annually for the first eight contract years . 1.25% annually after the first eight contract years . Contracts without the premium payment credit rider: . 1.25% annually for all contract years. .the deduction of the arithmetic average of the underlying mutual fund expenses as of December 31, 2006; . 0%, 5% and 10% annual rates of return before charges; and .payment of the $30 annual contract fee (while the Contract's value is less than $30,000).
0% ANNUAL RETURN 5% ANNUAL RETURN 10% ANNUAL RETURN -------------------------------- -------------------------------- -------------------------------- SURRENDER VALUE SURRENDER VALUE SURRENDER VALUE SURRENDER VALUE SURRENDER VALUE SURRENDER VALUE WITHOUT WITH WITHOUT WITH WITHOUT WITH CONTRACT PREMIUM PAYMENT PREMIUM PAYMENT PREMIUM PAYMENT PREMIUM PAYMENT PREMIUM PAYMENT PREMIUM PAYMENT YEAR CREDIT RIDER CREDIT RIDER CREDIT RIDER CREDIT RIDER CREDIT RIDER CREDIT RIDER -------- --------------- --------------- --------------- --------------- --------------- --------------- 1 $23,120.68 $23,662.52 $24,295.68 $24,870.02 $ 25,470.68 $ 26,127.74 2 $22,602.66 $22,993.83 $24,959.88 $25,401.84 $ 27,526.18 $ 28,171.95 3 $22,095.67 $22,559.10 $25,643.13 $26,234.47 $ 29,809.85 $ 30,614.73 4 $21,802.69 $22,128.39 $26,618.05 $27,089.05 $ 32,523.18 $ 33,216.86 5 $21,509.95 $21,701.77 $27,637.20 $27,957.33 $ 35,430.31 $ 35,989.94 6 $21,217.57 $21,279.33 $28,678.39 $28,839.63 $ 38,546.50 $ 38,946.39 7 $20,925.64 $20,861.11 $29,772.28 $29,766.27 $ 41,888.19 $ 42,099.53 8 $20,817.44 $20,447.18 $31,140.37 $30,708.26 $ 45,723.12 $ 45,463.66 9 $20,343.52 $20,161.23 $32,033.34 $31,853.18 $ 49,320.43 $ 49,329.90 10 $19,879.72 $19,875.90 $32,951.93 $33,023.77 $ 53,200.76 $ 53,480.64 15 $17,704.88 $17,701.46 $37,955.41 $38,038.17 $ 77,691.37 $ 78,100.09 20 $15,752.25 $15,749.18 $43,718.64 $43,813.95 $113,456.06 $114,052.93
The higher the rate of return, the more advantageous the premium payment credit rider becomes. However, Contracts with the premium payment credit rider are subject to both a greater surrender charge and a longer surrender charge period than Contracts issued without the premium payment credit rider. If you surrender your Contract with the premium payment credit rider while subject to a surrender charge, your surrender value may be less than the surrender value of a Contract without the premium payment credit rider. THE ACCUMULATION PERIOD The Value of Your Contract -------------------------- The accumulated value of your Contract is the total of the Separate Account division accumulated value plus the DCA Plus Account(s) accumulated value plus the Fixed Account accumulated 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 division accumulated value. The value reflects the investment experience of the divisions that you choose and also reflects your premium payments, partial surrenders, surrender charges, partial annuitizations and the Contract expenses deducted from the Separate Account. The Separate Account division accumulated 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: . the number of units you have in a division multiplied by . the value of a unit in the division. The number of units is the total of units purchased by allocations to the division from: . your initial premium payment; . subsequent investments; . premium payment credits; and . transfers from another investment option. minus units sold: . for partial surrenders and/or partial annuitizations from the division; . as part of a transfer to another division or the Fixed Account; and . to pay contract charges and fees. Unit values are calculated each valuation date at the close of normal trading of the NYSE. 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 (((a) plus (b)) divided by (c)) minus (d) where: . (a) is the share price (net asset value) of the underlying mutual fund at the end of the valuation period; . (b) is the per share amount of any dividend* (or other distribution) made by the mutual fund during the valuation period; . (c) is the share price (net asset value) of the underlying mutual fund at the end of the previous valuation period; and . (d) are the total Separate Account annual expenses. * When an investment owned by an underlying mutual fund pays a dividend, the dividend increases the net asset value of a share of the underlying mutual fund as of the date the dividend is recorded. As the net asset value of a share of an underlying 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. Premium Payments ---------------- . On your application, you direct your premium payments to be allocated to the investment options. . Allocations may be in percentages. . Percentages must be in whole numbers and total 100%. . Subsequent premium payments are allocated according to your then current allocation instructions. . Changes to the allocation instructions are made without charge. . A change is effective on the next valuation period after we receive your new instructions. . You can change the current allocations and future allocation instructions by: . mailing your instructions to us; . calling us at 1-800-852-4450 (if telephone privileges apply); . faxing your instructions to us at 1-866-894-2087; or . visiting www.principal.com. . Changes to premium payment allocations do not automatically result in the transfer of any existing investment option accumulated values. You must provide specific instructions to transfer existing accumulated values. . Premium payments are credited on the basis of unit value next determined after we receive a premium payment. . If no premiums are paid during two consecutive calendar years and the accumulated value is less than $2,000, we reserve the right to terminate the Contract (see GENERAL INFORMATION - Reservation of Rights). Division Transfers ------------------ . 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 (1-866-894-2087). . You must specify the dollar amount or percentage to transfer from each division. . The minimum transfer amount is the lesser of $100 or the value of your division. . In states where allowed, we reserve the right to reject transfer instructions from someone providing them for multiple contracts for which he or she is not the owner. You may not make a transfer to the Fixed Account if: . a transfer has been made from the Fixed Account to a division within six months; or . following the transfer, the Fixed Account value would be greater than $1,000,000. Unscheduled Transfers --------------------- . You may make unscheduled division transfers from a division to another division or to the Fixed Account by: . mailing your instructions to us; . calling us at 1-800-852-4450 (if telephone privileges apply); . faxing your instructions to us at 1-866-894-2087; or . visiting www.principal.com. . Transfers are not permitted into DCA Plus Accounts. . The transfer is made, and values determined, as of the end of the valuation period in which we receive your request. . We reserve the right to impose a fee of $ 30 on each unscheduled transfer after the first in a contract year. LIMITATIONS ON UNSCHEDULED TRANSFERS . We reserve the right to reject excessive exchanges or purchases if the trade would disrupt the management of the Separate Account, any division of the Separate Account or any underlying mutual fund. In addition, we may suspend or modify transfer privileges in our sole discretion at any time to prevent market timing efforts that could disadvantage other owners. These modifications could include, but not be limited to: . requiring a minimum time period between each transfer; . imposing a transfer fee; . limiting the dollar amount that an owner may transfer at any one time; or . not accepting transfer requests from someone providing requests for multiple Contracts for which he or she is not the owner. Scheduled Transfers (Dollar Cost Averaging) ------------------------------------------- . You may elect to have transfers made on a scheduled basis. . There is no charge for scheduled transfers and no charge for participating in the scheduled transfer program. . You must specify the dollar amount of the transfer. . You select the transfer date (other than the 29th, 30th or 31st) and the transfer period (monthly, quarterly, semi-annually or annually). . If the selected date is not a valuation date, the transfer is completed on the next valuation date. . Transfers are not permitted into DCA Plus Accounts. . If you want to stop a scheduled transfer, you must provide us notice prior to the date of the scheduled transfer. . Transfers continue until your value in the division is zero or we receive notice to stop the transfers. . 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. Scheduled transfers are designed to reduce the risks that result from market fluctuations. They do this by spreading out the allocation of your money to investment options over a longer period of time. This allows you to reduce the risk of investing most of your money at a time when market prices are high. The success of this strategy depends on market trends and is not guaranteed. Example:
MONTH AMOUNT INVESTED SHARE PRICE SHARES PURCHASED ----- --------------- ----------- ---------------- January $ 100 $ 25.00 4 February $ 100 $ 20.00 5 March $ 100 $ 20.00 5 April $ 100 $ 10.00 10 May $ 100 $ 25.00 4 June $ 100 $ 20.00 5 -------- ------- - Total $ 600 $120.00 33
In the example above, the average share price is $20.00 (total of share prices ($120.00) divided by number of purchases (6)). The average share cost is $18.18 (amount invested ($600.00) divided by number of shares purchased (33)). AUTOMATIC PORTFOLIO REBALANCING (APR) . APR allows you to maintain a specific percentage of your Separate Account division accumulated value in specified divisions over time. . You may elect APR at any time after the examination offer period has expired. . APR is not available for values in the Fixed Account or the DCA Plus Accounts. . APR is not available if you have arranged scheduled transfers from the same division. . There is no charge for APR transfers and no charge for participating in the APR program. . APR may be done on the frequency you specify: . quarterly (on a calendar year or contract year basis); or . semiannually or annually (on a contract year basis). . 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 (1-866-894-2087). (Divisions are rebalanced at the end of the next valuation period following your request.) Example: You elect APR to maintain your Separate Account division accumulated value with 50% in the Capital Value Division and 50% in the Bond Division. At the end of the specified period, 60% of the values are in the Capital Value Division, with the remaining 40% in the Bond Division. By rebalancing, units from the Capital Value Division are sold and applied to the Bond Division so that 50% of the Separate Account division accumulated value is once again in each Division. TELEPHONE AND INTERNET SERVICES These services permit you to: . make premium payment allocation changes; . make redemptions; . set up DCA scheduled transfers; . make transfers; and . make changes to APR. Instructions received via our telephone services 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 or internet transaction requests. We reserve the right to refuse telephone service or internet transaction requests. You assume the risk of loss caused by fraudulent telephone service or internet transactions we reasonably believe to be genuine. We follow procedures in an attempt to assure genuine telephone service or internet transactions. If these procedures are not followed, we may be liable for loss caused by unauthorized or fraudulent transactions. The procedures may include recording telephone service transactions, requesting personal identification (name, address, security phrase, password, daytime telephone number, social security number and/or birth date) and sending written confirmation to your address of record. If the Contract is owned by a business entity or a trust, an authorized individual (with the proper password) may use these services. Instructions provided by the authorized individual are binding on the owner. We reserve the right to modify or terminate telephone service or internet transaction procedures at any time. Telephone Services ------------------ 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 in good order by us before the close of normal trading of the NYSE. 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. Internet -------- Internet access is available for both you and your sales representative at www.principal.com. You may elect Internet authorization for your sales representative by providing us written notice. SURRENDERS You may surrender your Contract by providing us notice. Surrender requests may be sent to us at: Principal Life Insurance Company P O Box 9382 Des Moines, Iowa 50306-9382 Surrenders result in the cancellation of units and your receipt of the value of the canceled unit minus any applicable fee and surrender charge. The values are determined as of the end of the valuation period in which we receive your request. 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 591/2 may involve an income tax penalty (see FEDERAL TAX MATTERS). You may specify surrender allocation percentages with each partial surrender request. If you do not provide us with specific percentages, we will use your premium payment allocation percentages for the partial surrender. Surrenders may be subject to a surrender charge (see Surrender Charge). Total Surrender --------------- . You may surrender the Contract at any time before the annuitization date. . You receive the cash surrender value at the end of the valuation period during which we receive your surrender request. . The cash surrender value is your accumulated value minus any applicable surrender charges and fee(s) (contract fee and/or prorated share of the charge(s) for optional rider(s)). . The written consent of all collateral assignees and irrevocable beneficiaries must be obtained prior to surrender. . 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 ----------------------------- . Prior to the annuitization date, you may surrender a part of the accumulated value. . You must specify the dollar amount of the surrender (which must be at least $100). . The surrender is effective at the end of the valuation period during which we receive your written request for surrender. . The surrender is deducted from your investment options according to your surrender allocation percentages. . If surrender allocation percentages are not specified, we use your premium payment allocation percentages. . We surrender units from your investment options to equal the dollar amount of the surrender request plus any applicable surrender charge and transaction fee, if any. . 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 --------------------------- . You may elect partial surrenders from any of the investment options on a scheduled basis. . Your accumulated value must be at least $5,000 when the scheduled surrenders begin. . You may specify monthly, quarterly, semi-annually or annually and choose a surrender date (other than the 29th, 30th or 31st). . If the selected date is not a valuation date, the surrender is completed on the next valuation date. . We surrender units from your investment options to equal the dollar amount of the surrender request plus any applicable surrender charge. . The surrenders continue until your value in the investment option is zero or we receive written notice to stop the surrenders. INVESTMENT PROTECTOR PLUS RIDER You may elect to purchase the optional Investment Protector Plus Rider at an additional charge. The Contract is available with or without the rider. The rider provides protection against market risk by allowing you to make certain annual withdrawals (partial surrenders and partial annuitizations), regardless of your accumulated value. Election of this rider may or may not be to your benefit. If you do not intend to make any partial surrenders or partial annuitizations, the rider is not appropriate for you. Please review the rider terms and consult your sales representative to determine whether the rider is appropriate for you. We guarantee that you may withdraw certain guaranteed minimum withdrawal benefit (GMWB) amounts each contract year, regardless of your accumulated value, subject to the terms and conditions of the rider. The rider: . Provides the flexibility of two separate measures of withdrawal benefits without requiring you to elect either measure (as long as the accumulated value is greater than zero); . Limits the investment options available under the Contract; and . Has a charge which is discussed in the section CHARGES AND DEDUCTIONS -Charges for Optional Riders The rider is available only at the time the Contract is issued and only if the older owner is younger than age 81. (If the owner is not a natural person, then the rider is available only if the older annuitant is younger than age 81.) You may not terminate the rider during the first five contract years. The rider does not restrict or change your partial surrender or partial annuitization rights under the Contract, including your right to elect scheduled partial surrenders. You must notify us if you want to make a withdrawal. The rider provides two alternative withdrawal benefit measures - For Life and Investment Back measures. . The For Life measure guarantees that, regardless of the accumulated value, you may withdraw 5% of the For Life withdrawal benefit base for the rest of your life (annuitant's life if the owner is not a natural person) or until the For Life withdrawal benefit base is zero. Your right to the 5% annual For Life benefit does not commence until the contract year after the older owner (older annuitant if the owner is not a natural person) attains age 59 1/2. . The Investment Back measure guarantees that, regardless of the accumulated value, you may withdraw 7% annually of the Investment Back withdrawal benefit base until the Investment Back remaining withdrawal benefit base is zero. Your right to the 7% annual Investment Back benefit commences immediately. You are not required to elect a withdrawal benefit measure (as long as the accumulated value is greater than zero). We tell you each contract year the amount of the For Life withdrawal benefit and the Investment Back withdrawal benefit. NOTE: The rider is designed to permit you to recover at least your premium payments by allowing periodic withdrawals of specified amounts for the duration of the rider. Withdrawal amounts that exceed the withdrawal benefit under a measure will have a negative effect on the benefits of this rider and may result in termination of the rider for lack of value in the withdrawal benefit base. Please refer to the examples in Appendix A so that you may better understand how withdrawals affect the benefits available under this rider. Definitions ----------- Some important terms in understanding this rider are: . Excess Withdrawal - the portion of a withdrawal that exceeds the withdrawal benefit under either measure. . GMWB Bonus - an amount equal to 5% of total premium payments (see GMWB Bonus). . GMWB Step-Up - if the accumulated value of the Contract is greater than the Investment Back remaining withdrawal benefit base, you may increase ("step-up") the remaining withdrawal benefit base for both measures to the accumulated value in certain years (see GMWB Step-Up). . Remaining withdrawal benefit base - the amount that is available for future withdrawal benefits. . Withdrawal benefit- the amount that we guarantee you may withdraw each year under the For Life and the Investment Back measures. . Withdrawal benefit base - the basis for determining the withdrawal benefit available each year under the For Life and Investment Back measures. Calculation of the For Life Withdrawal Benefit ---------------------------------------------- We determine the For Life withdrawal benefit on the contract date and each contract anniversary as follows: . The For Life withdrawal benefit is not available until the contract year commencing after the older owner (older annuitant if the owner is not a natural person) attains age 59 1/2. Any withdrawal that you make prior to the contract year after the older owner attains age 59 1/2 and the portion of any withdrawals that exceed the For Life withdrawal benefit in any year thereafter is an Excess Withdrawal that reduces the For Life withdrawal benefit base. . Thereafter, the For Life benefit is 5% of the For Life withdrawal benefit base until the earlier to occur of: (i) the date the For Life withdrawal benefit base is zero; or (ii) the date of your death (annuitant's death if the owner is not a natural person). At your death, your beneficiary(ies) elects to receive the Investment Back benefit (a series of benefits) or the death benefit under the Contract (as a lump sum). Calculation of the Investment Back Withdrawal Benefit ----------------------------------------------------- We determine the Investment Back withdrawal benefit on the contract date and each contract anniversary as follows: . The Investment Back withdrawal benefit starts on the contract date. . The benefit is 7% of the Investment Back withdrawal benefit base until the Investment Back remaining withdrawal benefit base is zero. . The portion of any withdrawals that exceed the Investment Back withdrawal benefit in any year is an Excess Withdrawal that reduces the Investment Back withdrawal benefit base. Calculation of the Withdrawal Benefit Base ------------------------------------------ We calculate the withdrawal benefit base for the Investment Back and the For Life measures separately on the contract date and each contract anniversary. On the contract date, the withdrawal benefit base for both measures equals your total premium payments. On succeeding contract anniversaries, the withdrawal benefit base equals total premium payments minus Excess Withdrawals (as computed for the particular measure). Excess Withdrawal is the greater of (a) or (b) where: (a) is the amount of the partial surrender (and surrender charge, if any) or the partial annuitization that exceeds the withdrawal benefit remaining prior to the surrender or annuitization; and (b) is the result of ((1) divided by (2)) multiplied by (3) where: (1) is the amount of the partial surrender (and surrender charge, if any) or partial annuitization that exceeds the withdrawal benefit remaining prior to the partial surrender or partial annuitization; and (2) is the accumulated value after the withdrawal benefit is deducted but prior to deducting the amount of the partial surrender (and surrender charge, if any) or the amount of the partial annuitization that exceeds the withdrawal benefit; and (3) is the withdrawal benefit base prior to the adjustment for the excess withdrawal amount. Calculation of the Remaining Withdrawal Benefit Base ---------------------------------------------------- We calculate the remaining withdrawal benefit base for the Investment Back and For Life measures separately. We adjust the remaining withdrawal benefit base whenever a premium payment, partial surrender or partial annuitization occurs. On the contract date, the remaining withdrawal benefit base for both measures equals the withdrawal benefit base; i.e., total premium payments. After the contract date, the remaining withdrawal benefit base is the total of all premium payments minus an amount that is the result of (a) plus (b) where: (a) is the actual amount surrendered or annuitized that does not exceed the withdrawal benefit remaining prior to the surrender; and (b) is the greater of (1) and (2) where: (1) is the amount of the partial surrender (and surrender charge, if any) or the partial annuitization that exceeds the withdrawal benefit remaining prior to the partial surrender or partial annuitization; and (2) is the result of ((i) divided by (ii)) multiplied by (iii) where: (i) is the amount of the surrender (and surrender charge, if any) or the partial annuitization greater than the withdrawal benefit remaining prior to the surrender or annuitization; (ii) is the accumulated value after the withdrawal benefit amount is deducted but prior to the surrender or annuitization of the excess amount; and (iii) is the remaining withdrawal benefit base after the withdrawal benefit amount is deducted but prior to the adjustment for the excess amount. The Excess Withdrawal amount deducted from the withdrawal benefit base and remaining withdrawal benefit base may be more than dollar-for-dollar if the accumulated value is less than the benefit bases. The calculation of the proportionate deductions to the withdrawal benefit base and remaining withdrawal benefit base are described above. EFFECT OF ACCUMULATED VALUE If the accumulated value of your Contract is zero and if you have an Investment Back remaining withdrawal benefit base or a For Life withdrawal benefit base, or both, you must elect either the For Life or the Investment Back withdrawal benefit. We will pay the rider benefits under the measure you have elected. If the accumulated value is zero, the withdrawal benefits under this rider will continue, but all other rights and benefits under the rider and Contract, including the death benefits, will terminate; and no additional premium payments will be accepted. . The Investment Back measure will provide a series of withdrawal benefits until the Investment Back remaining withdrawal benefit base is zero. . The For Life measure will provide a series of withdrawal benefits until the later to occur of: (i) the date the For Life remaining withdrawal benefit base is zero; or (ii) the date of your death. If there is any remaining withdrawal benefit base at the time of your death, we will pay it to your beneficiaries, as described in the Rider Death Provisions section below. EFFECT OF REACHING ANNUITIZATION DATE. On the annuitization date you must elect one of the following payment options: Contract Provisions: . Payments resulting from applying the accumulated value to an annuity benefit payment option. . Payment of the accumulated value as a lump sum. Rider Provisions: . Series of withdrawal benefits until the Investment Back remaining withdrawal benefit base is zero. . Series of withdrawal benefits until the later to occur of: I. the date the For Life remaining withdrawal benefit base is zero; or II. the date of your death. GMWB BONUS If no partial surrenders or partial annuitizations are made in a given contract year, a GMWB bonus of 5% of the premium payments is credited to the withdrawal benefit base and the remaining withdrawal benefit base on the next contract anniversary. The GMWB bonus ends the earlier of: . the fifth contract anniversary; or . the date you make a partial surrender or partial annuitization. The amount of the GMWB bonus, if any, is added to the withdrawal benefit base and the remaining withdrawal benefit base.The GMWB bonus is used only to calculate the benefit bases for this rider and is not included in the accumulated value of your Contract. GMWB STEP-UP Beginning with the fifth contract anniversary, if the accumulated value is greater than the Investment Back remaining withdrawal benefit base, you may elect the GMWB Step-Up. The GMWB Step-Up increases the remaining withdrawal benefit base for both the For Life and Investment Back measures and will reset the withdrawal benefit base for both the For Life and Investment Back measures to the accumulated value on the most recent contract anniversary. To elect the GMWB Step-Up, you must notify us within 30 days after your fifth contract anniversary. If you do not elect to step-up at that time, you may make a step-up election within the 30-day period following any subsequent contract anniversary. Once you have elected to step-up, you must wait five contract years to make another step-up election. If you elect a GMWB Step-Up, you will be subject to any limitations on investment options and to the rider charge then in effect. A person who owns the contract as a result of spousal continuation (described in THE CONTRACT) may elect a GMWB Step-Up at the time of electing to continue the Contract. INVESTMENT OPTION RESTRICTIONS While this rider is in effect, the investment options you may select are restricted. Those investment options are determined at the time the rider is issued. The Company reserves the right to modify the available investment options from time-to-time at its sole discretion. If the Company modifies the investment options, it will give holders of this rider prior written notice of the modifications and an opportunity to opt out of the modifications and to continue their existing rider investment options. You may allocate your Separate Account divisions to . one of the GMWB Select or Self-Build models shown below, or . the Principal LifeTime 2010 Account, or . the Principal LifeTime 2020 Account, or . the Principal LifeTime Strategic Income Account. The rider does not impose restrictions on allocations to the Fixed or DCA Accounts. For more information about the Principal LifeTime Accounts, please see the attached prospectus for the Principal Variable Contracts Fund, Inc. You may transfer from one investment option available under this rider to another; e.g., you may transfer from the Principal LifeTime 2020 account to the Select Model C and later, to Self-Build Model C. Any such transfers must total 100% of the accumulated value in the separate account divisions. You make a transfer by providing us notice (the change is effective on the next valuation period after we receive your notice). The GMWB models and Principal LifeTime Accounts are designed to support the rider guarantees with balanced investment options. The rider may not be suitable if your goal is aggressive growth. GMWB MODELS You may use one of the three GMWB select models shown below. Alternatively, you may use one of the three GMWB self-build models, which afford you limited investment option selections. For example, if you choose self-build model A, you must allocate 30% of your division assets into the "stable divisions". You choose how you will allocate that 30% between the Money Market and the Short-Term Bond divisions (for example: 15% in each of Money Market and Short-Term Bond; or 10% in Money Market and 20% in Short-Term Bond). The select models are rebalanced each calendar quarter to the percentages shown in the Select Models chart below. The self-build models are rebalanced each calendar quarter to the percentages you have selected. SELECT MODELS
INVESTMENT ADVISOR GMWB MODEL A GMWB MODEL B GMWB MODEL C ------------------------------------------------------------------------------------------ STABLE DIVISIONS 30% 20% 10% Short-Term Bond Principal Global 30% 20% 10% Investors, LLC ------------------------------------------------------------------------------------------ CONSERVATIVE DIVISIONS 40% 30% 20% American Century VP American Century Inflation Protection Investment Management, Inc. 10% 5% 10% Bond Principal Global Investors, LLC 15% 15% 10% Government & High Principal Global Quality Bond Investors, LLC 15% 10% N/A MODERATE DIVISIONS 20% 30% 45% Large Cap Blend 10% 10% 10% LargeCap Blend T. Rowe Price 10% 10% 10% Associates, Inc. ------------------------------------------------------------------------------------------ Large Cap Value 0% 5% 10% LargeCap Value AllianceBernstein L.P. N/A 5% 10% ------------------------------------------------------------------------------------------ Balanced 10% 15% 20% Equity Income Principal Global 10% 15% 20% Investors, LLC ------------------------------------------------------------------------------------------ Mid Cap Value 0% 0% 5% MidCap Value Neuberger Berman N/A N/A 5% Management, Inc. ------------------------------------------------ -------------- AGGRESSIVE DIVISIONS 10% 15% 20% Large Cap Growth 10% 10% 10% American Century VP American Century Ultra Investment Management, 10% 10% 10% Inc. -------------- MidCap Blend 0% 5% 5% MidCap Principal Global N/A 5% 5% Investors, LLC ------------------------------------------------------------------------------------------ Small Cap Value 0% 0% 5% SmallCap Value JP Morgan Investment Management, Inc. and Mellon Equity Associates, LLP N/A N/A 5% DYNAMIC DIVISIONS 0% 5% 5% Fidelity VIP Overseas Fidelity Management & N/A 5% 5% Research Company ------------------------------------------------------------------------------------------
SELF-BUILD MODELS
INVESTMENT ADVISOR GMWB MODEL A GMWB MODEL B GMWB MODEL C ------------------------------------------------------------------------------------------ STABLE DIVISIONS 30% 20% 10% ------------------------------------------------------------------------------------------ Short-Term Bond Principal Global Investors, LLC ------------------------------------------------------------------------------------------ Money Market Principal Global Investors, LLC ------------------------------------------ CONSERVATIVE DIVISIONS 40% 30% 20% ------------------------------------------------------------------------------------------ Bond Principal Global Investors, LLC Government & High Principal Global Quality Bond Investors, LLC American Century VP American Century Inflation Protection Investment Management, Inc. ------------------------------------------------------------------------------------------ MODERATE DIVISIONS 20% 30% 45% ------------------------------------------------------------------------------------------ Large Cap Blend 10% 10% 10% LargeCap Blend T. Rowe Price Associates, Inc. LargeCap Stock Index Principal Global Investors, LLC Neuberger Berman AMT Neuberger Berman Socially Responsive Management, Inc. ------------------------------------------------------------------------------------------ Large Cap Value 0% 5% 10% Capital Value Principal Global Investors, LLC N/A Equity Value American Century Investment Management, Inc. N/A LargeCap Value AllianceBernstein L.P. N/A ------------------------------------------------------------------------------------------ Balanced 10% 15% 20% Asset Allocation Morgan Stanley Asset Management Equity Income Principal Global Investors, LLC Principal LifeTime Principal Global 2010 Investors, LLC and Principal Management Corporation Principal LifeTime Principal Global 2020 Investors, LLC and Principal Management Corporation Principal LifeTime Principal Global Strategic Income Investors, LLC and Principal Management Corporation ------------------------------------------------------------------------------------------ Mid Cap Value 0% 0% 5% MidCap Value Neuberger Berman Management, Inc. N/A N/A 5% AGGRESSIVE DIVISIONS 10% 15% 20% ------------------------------------------------------------------------------------------ Large Cap Growth 10% 10% 10% American Century VP American Century Ultra Investment Management, Inc. Fidelity VIP Fidelity Management & Contrafund Research Company T. Rowe Price Health T. Rowe Price Sciences Associates, Inc. ------------------------------------------------------------------------------------------ Mid Cap Blend 0% 5% 5% MidCap Principal Global N/A 5% 5% Investors, LLC ------------------------------------------------------------------------------------------ Small Cap Value N/A N/A 5% SmallCap Value JP Morgan Investment Management, Inc. and Mellon Equity N/A N/A 5% Associates, LLP ----------------------------------------------------------------------------------------------- DYNAMIC DIVISIONS 0% 5% 5% ------------------------------------------------------------------------------------------ Diversified Principal Global International Investors, LLC N/A Fidelity VIP Overseas Fidelity Management & N/A Research Company ------------------------------------------------------------------------------------------
TERMINATION OF THE RIDER You may not terminate the rider prior to the fifth contract anniversary. However, the rider terminates upon the earliest to occur of . You send us notice to terminate the rider (after the fifth contract anniversary). This will terminate the rider, not the Contract. . You terminate the Contract. . The Investment Back remaining withdrawal benefit base and the For Life withdrawal benefit base are zero. . The contract owner is changed (or annuitant is changed if the owner is not a natural person). Note: We do not consider it a change of owner if a surviving spouse elects to continue the Contract. The surviving spouse may elect to continue the Contract with or without the rider. If the rider is continued, only the Investment Back benefit continues; the For Life benefit terminates upon the death of the deceased spouse. . Once terminated, the rider may not be reinstated. EFFECT OF NOT TAKING AVAILABLE BENEFITS If you choose not to take any or all of a withdrawal benefit in a contract year, that benefit amount is not carried over to the next year. There will be no reduction in the For Life and the Investment Back withdrawal benefit bases and remaining withdrawal benefit bases. RIDER DEATH PROVISION . For Life measure - the For Life measure terminates on the original owner's death (annuitant's death, if the owner is not a natural person). If at the time of the owner's death (annuitant's death if the owner is not a natural person) the accumulated value is greater than zero, your beneficiary(ies) must elect to receive either: . the Investment Back withdrawal benefit - we will make payments in an amount and frequency acceptable to us. If a beneficiary chooses a periodic payment, it must be at least $100 per payment until the Investment Back remaining withdrawal benefit base is zero; or . the death benefit under the Contract (as a lump sum) If you elected the For Life measure when the accumulated value was zero, your beneficiary(ies) receives any For Life remaining withdrawal benefit base as a series of payments. . Investment Back measure - If at the time of the owner's death (annuitant's death if the owner is not a natural person) the accumulated value is greater than zero, your beneficiary(ies) must elect to receive either: . the Investment Back withdrawal benefit - we will make payments in an amount and frequency acceptable to us. If a beneficiary chooses a periodic payment, it must be at least $100 per payment until the Investment Back remaining withdrawal benefit base is zero; or . the death benefit under the Contract (as a lump sum). If you elected the Investment Back measure when the accumulated value was zero, your beneficiary(ies) receives any Investment Back remaining withdrawal benefit base as a series of payments. FOR EXAMPLES ON HOW THE RIDER FEATURES OPERATE AND ARE CALCULATED, PLEASE SEE APPENDIX A. Death Benefit ----------------- If you die before the annuitization date, we pay a death benefit as follows:
Upon death of the owner if there is one owner .if the spouse is named beneficiary, the death benefit is paid or the surviving spouse may elect to continue the Contract. .if someone other than the spouse is named beneficiary, the death benefit is paid to the beneficiary. If no beneficiary survives the owner, the death benefit is paid to the owner's estate. .if there are multiple beneficiaries named (which may or may not include the spouse of the owner), death benefits are paid to the beneficiaries. If no beneficiary survives the owner, the death benefit is paid to the owner's estate. if there are joint owners . .the death benefit is paid or the if the joint owners are spouses surviving spouse may elect to continue the Contract. .if the joint owners are not .the death benefit is paid to the spouses surviving owner. if the owner is a corporation, Upon death of the annuitant the death trust or other entity benefit is paid to the named beneficiary(ies). If no beneficiary(ies) survives the annuitant, the death benefit is paid to the owner.
Before the annuitization 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). The beneficiary(ies) may elect to apply the death benefit under an annuity benefit payment option or receive the death benefit as a single payment. Generally, unless the beneficiary(ies) elects otherwise we pay the death benefit in a single sum, subject to proof of your death. 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. No surrender charge applies when a death benefit is paid. If you die before the annuitization date 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. Standard Death Benefit Formula ---------------------------------- The amount of the standard death benefit is the greatest of (1), (2) or (3) where: . (1) is the accumulated value on the date we receive proof of death and all required documents; . (2) is the total of premium payments minus an adjustment for each partial surrender (and any applicable fees and charges) and each partial annuitization made prior to the date we receive proof of death and all required documents; and . (3) is the highest accumulated value (on any prior contract anniversary that is divisible by seven) plus any premium payments and minus an adjustment for each partial surrender (and any applicable fees and charges) and each partial annuitization made after that contract anniversary. The adjustment for each partial surrender and for each partial annuitization is equal to ((a) divided by (b)) multiplied by the amounts determined in (2) or (3) above immediately prior to the partial surrender or partial annuitization where: . (a) is the amount of the partial surrender (and any applicable fees and charges) or the amount of the partial annuitization; and . (b) is the accumulated value immediately before the partial surrender or partial annuitization. Example: Your accumulated value is $10,000 and you take a partial surrender of $2,000 (20% of the accumulated value). For purposes of calculating the death benefit, we adjust the amounts determined in (2) or (3) above by 20%. Enhanced Death Benefit Rider ---------------------------- This rider provides you with the greater of the enhanced death benefit or the standard death benefit (described above). The enhanced death benefit rider can only be purchased at the time the Contract is issued. You may terminate the rider at any time. Once the rider is terminated, it cannot be reinstated. The rider charge is discussed in the section CHARGES AND DEDUCTIONS - Charges for Optional Riders. Prior to the annuitization date and prior to the lock-in date (the later of the contract anniversary following the oldest owner's 75th birthday or five years after the rider effective date), the enhanced death benefit is the greater of (a) or (b) where: . (a) is (1) minus (2) where: . (1) is the total of premium payments made since the rider effective date increased at a 5% effective annual interest rate; and . (2) is an adjustment for each partial surrender and each partial annuitization made since the rider effective date increased at a 5% effective annual interest rate. . (b) is (1) plus (2) minus (3) where: . (1) is the highest accumulated value on any contract anniversary since the rider effective date; . (2) are the premium payments received since that contract anniversary; and . (3) is an adjustment for each partial surrender and each partial annuitization made since that contract anniversary. After the lock-in date, (a) and (b) are only: . increased by any premium payment since the lock-in date; and . decreased by an adjustment for each partial surrender and each partial annuitization since the lock-in date. The adjustment for each partial surrender or partial annuitization is ((1) divided by (2)) multiplied by (3) where: . (1) is the amount of the partial surrender (plus surrender charge, if any) or the amount of the partial annuitization; . (2) is the accumulated value immediately prior to the partial surrender or partial annuitization; and . (3) is the amounts determined in (a) or (b) above immediately prior to the partial surrender or partial annuitization. NOTE: For contracts issued in New York and Washington - under this rider, if the original owner dies before the annuitization date, the death benefit payable to the beneficiary is the greater of the standard death benefit or the death benefit calculated in (b) of the enhanced death benefit description above. 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 (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 benefit 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 ANNUITIZATION PERIOD Annuitization Date ------------------ You may specify an annuitization date in your application. You may change the annuitization date with our prior approval. The request must be in writing. You may not select an annuitization date later than the maximum annuitization date found on the data pages. If you do not specify an annuitization date, the annuitization date is the maximum annuitization date shown on the data pages. Full Annuitization ---------------------- You may annuitize your Contract at any time by electing to receive payments under an annuity benefit payment option. If the accumulated value on the annuitization date is less than $2,000.00 or if the amount applied under an annuity benefit payment option is less than the minimum requirement, we may pay out the entire amount in a lump sum. The contract would then be canceled. You may select when you want the payments to begin (within the period that begins the business day following our receipt of your instruction and ends one year after our receipt of your instructions). Once payments begin under the benefit option you choose, the option may not be changed. In addition, once payments begin, you may not surrender or otherwise liquidate or commute any of the portion of your accumulated value that has been annuitized. Depending on the type of annuity benefit payment option selected, payments that are initiated either before or after the annuitization date may be subject to penalty taxes (see FEDERAL TAX MATTERS). You should consider this carefully when you select or change the annuity benefit payment commencement date. Partial Annuitization --------------------- If you purchased your Contract prior to May 20, 2006 or your Contract is issued in a state which has not yet approved the partial annuitization endorsement, partial annuitization is not available and all references to "partial annuitization" within this prospectus do not apply to your Contract. Subject to state availability, if you purchase the Contract on or after May 20, 2006 you have the right to partially annuitize a portion of your accumulated value. A full list of states in which partial annuitization is available may be obtained from your sales representative or our annuity service office. After the first contract year and prior to the annuitization date, you may annuitize a portion of your accumulated value by sending us a notice. If you have elected the premium payment credit rider, the amount of the partial annuitization during each of contract years two and three is limited to no more than 10% of the accumulated value as of the most recent contract anniversary. The minimum partial annuitization amount is $2,000. Any partial annuitization request that reduces the accumulated value to less than $5,000 will be treated as a request for full annuitization. You may select one of the annuity benefit payment options listed below. Once payments begin under the option you select, the option may not be changed. In addition, once payments begin you may not surrender or otherwise liquidate or commute any of the portion of your accumulated value that has been annuitized. Annuity Benefit Payment Options ------------------------------- We offer fixed annuity benefit payments only. No surrender charge is imposed on any portion of your accumulated value that has been annuitized. You may choose from several fixed annuity benefit payment options. Payments will be made on the frequency you choose. You may elect to have your annuity benefit 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 surrenders after the annuitization date. The amount of the fixed annuity benefit payment depends on: . amount of accumulated value applied to the annuity benefit payment option; . annuity benefit payment option selected; and . age and gender of annuitant (unless fixed income option is selected). Annuity benefit payments are determined in accordance with annuity tables and other provisions contained in the Contract. The annuity benefit payment tables contained in this Contract are based on the Annuity 2000 Mortality Table. These tables are guaranteed for the life of the Contract. The amount of the initial payment is determined by applying all or a portion of the accumulated value as of the date of the application to the annuity table for the annuitant's annuity benefit option, gender, and age. Annuity benefit 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, gender discriminations is prohibited by law. You may select an annuity benefit payment option by written request only. Your selection of an annuity benefit payment option for a partial annuitization must be in writing and may not be changed after payments begin. Your selection of an annuity benefit payment option for any portion not annuitized may be changed by written request prior to the annuitization date. If an annuity benefit payment option is not selected, we will automatically apply: . for Contracts with one annuitant - Life Income with payments guaranteed for a period of 10 years. . for Contracts with joint annuitants - Joint and Full Survivor Life Income with payments guaranteed for a period of 10 years. The available annuity benefit payment options for both full and partial annuitizations include: FIXED PERIOD INCOME . Level payments are made for a fixed period. You may select a range from 5 to 30 years. If the annuitant dies before the selected period expires, payments continue to you or the person(s) you designate until the end of period. Payments stop after all guaranteed payments are made. LIFE INCOME . Level payments continue for the annuitant's lifetime. It is possible that you would only receive one payment under this option if the annuitant dies before the second payment is due. If you defer the first payment date, it is possible that you would receive no payments if the annuitant dies before the first payment date. LIFE INCOME WITH PERIOD CERTAIN . Level payments continue during the annuitant's lifetime with a guaranteed payment period of 5 to 30 years. If the annuitant dies before all of the guaranteed payments have been made, the guaranteed payments continue to you or the person(s) you designate until the end of the guaranteed payment period. JOINT AND SURVIVOR . Payments continue as long as either the annuitant or the joint annuitant is alive. You may also choose an option that lowers the amount of income after the death of a joint annuitant. It is possible that you would only receive one payment under this option if both annuitants die before the second payment is due. If you defer the first payment date, it is possible that you would receive no payments if both the annuitants die before the first payment date. JOINT AND SURVIVOR WITH PERIOD CERTAIN . Payments continue as long as either the annuitant or the joint annuitant is alive with a guaranteed payment period of 5 to 30 years. You may choose an option that lowers the amount of income after the death of a joint annuitant. If both annuitants die before all guaranteed payments have been made, the guaranteed payments continue to you or the person(s) you designate until the end of the guaranteed payment period. Other annuity benefit payment options may be available. SUPPLEMENTARY CONTRACT When you annuitize all or a portion of your Contract's accumulated value, we issue a supplementary fixed annuity contract that provides an annuity benefit payment based on the amount you have annuitized and the annuity benefit payment option that you have selected. The date of the first payment under the supplementary contract is the effective date of that supplementary contract unless you select a date for the first payment that is later than the supplementary contract effective date. The first annuity benefit payment must be made within one year of the supplementary contract effective date. TAX CONSIDERATIONS REGARDING ANNUITY BENEFIT PAYMENT OPTIONS If you own one or more tax qualified annuity contracts, you may avoid tax penalties if payments from at least one of your tax qualified contracts begin no later than April 1 following the calendar year in which you turn age 70 1/2. The required minimum distribution payment must be in equal (or substantially equal) amounts over your life or over the joint lives of you and your designated beneficiary. These required minimum distribution payments must be made at least once a year. Tax penalties may apply at your death on certain excess accumulations. You should confer with your tax advisor about any potential tax penalties before you select an annuity benefit payment option or take other distributions from the Contract. Additional rules apply to distributions under non-qualified contracts (see Required Distributions for Non-Qualified Contracts). DEATH OF ANNUITANT (DURING THE ANNUITY BENEFIT PAYMENT PERIOD) If the annuitant dies during the annuity benefit payment period, remaining payments are made to the owner throughout the guarantee period, if any, or for the life of any joint annuitant, if any. If the owner is the annuitant, remaining payments are made to the contingent owner. In all cases the person entitled to receive payments also receives any rights and privileges under the annuity benefit payment option. CHARGES AND DEDUCTIONS Certain charges are deducted under the Contract. If the charge is not sufficient to cover our costs, we bear the loss. If the expense is more than our costs, the excess is profit to the Company. We expect a profit from all the fees and charges listed below, except the Annual Fee and Premium Tax. In addition to the charges under the Contract, there are also deductions from and expenses paid out of the assets of the underlying mutual funds which are described in the underlying mutual funds' prospectuses. ANNUAL FEE 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, 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 and whether that Contract will be charged. The fee is deducted from the investment option that has the greatest value. The fee is deducted on each contract anniversary and upon total surrender of the Contract. The fee assists in covering administration costs. The administration costs include costs associated with: . issuing Contracts; . establishing and maintaining the records which relate to Contracts; . making regulatory filings and furnishing confirmation notices; . preparing, distributing and tabulating voting materials and other communications; . providing computer, actuarial and accounting services; and . 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 divisions. We agree not to increase this charge for the duration of the Contract. This charge is assessed only prior to the annuitization 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 benefit 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 administration 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. CHARGES FOR OPTIONAL RIDERS Subject to certain conditions, you may add one or more of the following optional riders to your Contract. Detailed information concerning the optional riders may be obtained from your sales representative or the annuity service office (1-800-852-4450). ENHANCED DEATH BENEFIT RIDER . The annual charge for the rider is 0.25% of the accumulated value (0.15% in New York and Washington). The charge is equal to 0.0625% (0.0375% in New York and Washington) of the average accumulated value during the calendar quarter. We reserve the right to increase the charge to 0.075% of the average accumulated value during the calendar quarter. The charge is deducted through the redemption of units from the accumulated value in the same proportion as the surrender allocation percentages. If the rider is purchased after the beginning of a quarter, 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 rider charge is intended to reimburse us for the cost of the potentially greater death benefit provided by the rider. INVESTMENT PROTECTOR PLUS RIDER . The annual charge for the rider is 0.60% of the average quarterly Investment Back remaining withdrawal benefit base. The current quarterly charge is equal to 0.15% of the average quarterly Investment Back remaining withdrawal benefit base during the calendar quarter. We reserve the right to increase the charge to 0.2125% of the average quarterly Investment Back remaining withdrawal benefit base. At the end of each calendar quarter, the charge is deducted through the redemption of units from the accumulated value in the same proportion as the surrender allocation percentages. If the rider is purchased after the beginning of a quarter, 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 rider charge is intended to reimburse us for the cost of the protection provided by the rider. PREMIUM PAYMENT CREDIT RIDER . The current charge for the rider is 0.60% of the average daily net assets of the Separate Account divisions. In addition, we reserve the right to reduce the Fixed Account interest rate by up to 0.60%. The charge is assessed until completion of your 8th contract year and only prior to the annuitization date. This charge is assessed daily when the value of a unit is calculated. The rider charge is intended to cover the cost of the credit. TRANSACTION FEE We reserve the right to charge a transaction fee of the lesser of $25 or 2% of each unscheduled partial surrender after the 12th unscheduled partial surrender in a contract year. The transaction fee would be deducted from the accumulated value remaining in the investment option(s) from which the amount is surrendered, on a pro rata basis. We also reserve the right to charge a transaction fee on each unscheduled transfer after the first unscheduled transfer in a contract year. The transfer fee would be deducted from the investment option(s) from which the amount is 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 premium payment when we receive it, or the accumulated value when you request a surrender (total or partial) or you request application of the accumulated value (full or partial) to an annuity benefit 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 premium 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 premium 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 premium payments paid during each contract year is determined by the following tables.
NUMBER OF COMPLETED CONTRACT YEARS SURRENDER CHARGE APPLIED TO ALL SINCE EACH PREMIUM PAYMENT PREMIUM PAYMENTS RECEIVED IN WAS MADE THAT CONTRACT YEAR ------------------------------------ ------------------------------- 0 (year of premium payment)* 6% 1 6% 2 6% 3 5% 4 4% 5 3% 6 2% 7 and later 0%
Surrender Charge with the premium payment credit rider (as a percentage of amounts surrendered)
NUMBER OF COMPLETED CONTRACT YEARS SURRENDER CHARGE APPLIED TO ALL SINCE EACH PREMIUM PAYMENT PREMIUM PAYMENTS RECEIVED IN WAS MADE THAT CONTRACT YEAR ---------------------------------- ------------------------------- 0 (year of premium payment)* 8% 1 8% 2 7% 3 6% 4 5% 5 4% 6 3% 7 2% 8 1% 9 and later 0%
* Each premium payment begins in year 0 for purposes of calculating the percentage applied to that payment. However, premium payments are added together by contract year for purposes of determining the applicable surrender charge. If your contract year begins April 1 and ends March 31 the following year, all premium payments received during that period are considered to have been made in that contract year. NOTE regarding Contracts written in the states of Alabama, Massachusetts, and Washington: For contracts without the Premium Payment Credit Rider, surrender charges are applicable to premiums deposited in the first three contract years. For Contracts with the Premium Payment Credit Rider, surrender charges are applicable only to premiums deposited in the first contract year. For purpose of calculating surrender charges, we assume that surrenders and transfers are made in the following order: . first from premium payments no longer subject to a surrender charge; . then from the free surrender privilege (first from the earnings, then from the oldest premium payments (first-in, first-out)) described below; and . then from premium payments subject to a surrender charge on a first-in, first-out basis. NOTE: Partial surrenders may be subject to both the surrender charge and the transaction fee, if any. 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: . earnings in the Contract (earnings = accumulated value less unsurrendered premium payments as of the date of the surrender or partial annuitization); or . 10% of the premium payments, decreased by any partial surrenders and partial annuitizations 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: . amounts applied under an annuity benefit payment option; or . payment of any death benefit, however, the surrender charge does apply to premium payments made by a surviving spouse after an owner's death; or . amounts distributed to satisfy the minimum distribution requirement of Section 401(a)9 of the Internal Revenue 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 . 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. Waiver of Surrender Charge Rider -------------------------------- This rider is automatically made a part of the Contract at issue. There is no charge for the rider. This rider waives the surrender charge on surrenders 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: . original owner or original annuitant has a critical need; and . the critical need did not exist before the contract date. . For the purposes of this section, the following definitions apply: . 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. . 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. . 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. In Texas and New Jersey, terminal illness is not included in the criteria for critical need. . 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, a different definition of total and permanent disability applies. In Oregon, total and permanent disability is not included in the criteria for critical need. Contact us at 1-800-852-4450 for additional information. NOTE: The waiver of surrender charge rider is not available in Massachusetts. Specific information is available from your sales representative or the annuity service office (1-800-852-4450). ADMINISTRATION CHARGE Currently, we do not impose a separate account administration charge. However, we reserve the right to assess each division with a daily separate account administration charge not to exceed the annual rate of 0.15% of the average daily net value of the division. This charge would only be imposed before the annuitization date. Separate account administration includes issuing the Contract, clerical, recordkeeping and bookkeeping services, keeping the required financial and accounting records, communicating with owners, and making regulatory filings. SPECIAL PROVISIONS FOR GROUP OR SPONSORED ARRANGEMENTS Where permitted by state law, Contracts may be purchased under group or sponsored arrangements as well as on an individual basis. GROUP ARRANGEMENT - program under which a trustee, employer or similar entity purchases Contracts covering a group of individuals on a group basis. SPONSORED ARRANGEMENT - program under which an employer permits group solicitation of its employees or an association permits group solicitation of its members for the purchase of Contracts on an individual basis. The charges and deductions described above may be reduced or eliminated for Contracts issued in connection with group or sponsored arrangements. The rules in effect at the time the application is approved will determine if reductions apply. Reductions may include but are not limited to sales of Contracts without, or with reduced, mortality and expense risks charges, annual fees or surrender charges. 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 premium payments, total assets under management for the 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 administration 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 owners and other 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 and contains only 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. We reserve the right to refuse premium payment allocations and transfers from the other investment options to the Fixed Account and premium payment allocations to the DCA Plus Accounts. We will send you a written notice at least 30 days prior to the date we exercise this right. We will also notify you if we lift such restrictions. FIXED ACCOUNT The Company guarantees that premium payments allocated and amounts transferred to the Fixed Account earn interest at the interest rate in effect on the date it is received or transferred. This rate applies to each premium payment or amount transferred through the end of the contract year. Each contract anniversary, we declare a renewal interest rate that 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. We reserve the right to reduce the Fixed Account interest rate by up to 0.60% if you elect the premium payment credit rider. FIXED ACCOUNT ACCUMULATED VALUE Your Fixed Account accumulated value on any valuation date is equal to: . premium payments or credits allocated to the Fixed Account; . plus any transfers to the Fixed Account from the other investment options; . plus interest credited to the Fixed Account; . minus any surrenders or applicable surrender charges or partial annuitizations from the Fixed Account; . 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 annuitization date and as provided below. The transfer is effective on the valuation date following our receipt of 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: . transfer an amount not to exceed 25% of your Fixed Account accumulated value; or . transfer up to 100% of your Fixed Account accumulated value if: . your Fixed Account accumulated value is less than $1,000; or . (a) minus (b) is greater than 1% where: . (a) is the weighted average of your Fixed Account interest rates for the preceding contract year; and . (b) is the renewal interest rate for the Fixed Account. 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: . You may establish scheduled transfers by sending a written request or by telephoning the annuity service office at 1-800-852-4450. . Transfers occur on a date you specify (other than the 29th, 30th or 31st of any month). . If the selected date is not a valuation date, the transfer is completed on the next valuation date. . Scheduled transfers are only available if the Fixed Account accumulated value is $5,000 or more at the time the scheduled transfers begin. . 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 accumulated value will continue until the Fixed Account accumulated value is zero or until you notify us to discontinue the transfers. . The minimum transfer amount is $100. . If the Fixed Account accumulated value is less than $100 at the time of transfer, the entire Fixed Account accumulated value will be transferred. . If you stop the transfers, you may not start transfers again without our prior approval. DOLLAR COST AVERAGING PLUS PROGRAM (DCA PLUS PROGRAM) Premium payments allocated to the DCA Plus Accounts earn the interest rate in effect at the time each premium payment is received. A portion of your DCA Plus Account accumulated value is periodically transferred (on the 28th of each month) to Separate Account divisions or to the Fixed Account. If the 28th is not a valuation date, 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. There is no charge for participating in the DCA Plus Program. If you elect the premium payment credit rider, you may not participate in the DCA Plus Program. DCA Plus Premium Payments ------------------------- You may enroll in the DCA Plus Program by allocating a minimum premium payment of $1,000 into a DCA Plus Account and selecting investment options into which transfers will be made. Subsequent premium 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 premium payments receive the fixed rate of return in effect on the date each premium payment is received by us. The rate of return remains in effect for the remainder of the 6-month or 12-month DCA Plus 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 investment options in no more than 6 months. Under the 12-month transfer program, all payments and accrued interest must be transferred to the selected investment options 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 four scheduled transfers remain in the six-month transfer program and the DCA Plus Account accumulated value is $4,000, the transfer amount would be $1,000 ($4,000 / 4). Scheduled DCA Plus Transfers ---------------------------- Transfers are made from DCA Plus Accounts to the investment options according to your allocation instructions. The transfers begin after we receive your premium 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 the investment options. 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. Premium 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, amendments, riders and endorsements and data pages. 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 or death, annuitization of the accumulated value 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: . trading on the NYSE is restricted as determined by the SEC or when the NYSE is closed for other than weekends and holidays; or . an emergency exists, as determined by the SEC, as a result of which: . disposal by a mutual fund of securities owned by it is not reasonably practicable; . it is not reasonably practicable for a mutual fund to fairly determine the value of its net assets; or . the SEC permits suspension for the protection of security holders. If payments are delayed and your surrender, annuitization or transfer is not canceled by your written instruction, the amount to be surrendered, annuitized or transferred will be determined the first valuation date following the expiration of the permitted delay. The surrender, annuitization or transfer will be made within seven days thereafter. In addition, payments on surrenders attributable to a premium 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 benefit 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 OR ANNUITANT You may change the owner and/or annuitant of your non-qualified Contract 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, 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 While this Contract is in force, 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. Unless you have named an irrevocable beneficiary, you may change your beneficiary designation by sending us notice. 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. Termination of the Contracts will not unfairly discriminate against any owner. REINSTATEMENT If you have replaced this Contract with an annuity contract from another company and want to reinstate this Contract, the following apply: . we reinstate the Contract effective on the original surrender date; .if you had the premium payment credit rider on the original Contract, the 9-year surrender charge period applies to the reinstated Contract. The remaining surrender charge period, if any, is calculated based on the number of years since the original contract date; .we apply the amount received from the other company and the amount of the surrender charge you paid when you surrendered the Contract; .these amounts are priced on the valuation date the money from the other company is received by us; . commissions are not paid on the reinstatement amounts; and . 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 annuitization date. After the annuitization date, any reports will be mailed to the person receiving the annuity benefit payments. Quarterly statements reflect purchases and surrenders occurring during the quarter as well as the balance of units owned and accumulated values. IMPORTANT INFORMATION ABOUT CUSTOMER IDENTIFICATION PROCEDURES To help the government fight the funding of terrorism and money laundering activities, Federal law requires financial institutions to obtain, verify, and record information that identifies each person who applies for a Contract. When you apply for a Contract, we will ask for your name, address, date of birth, and other information that will allow us to verify your identity. We may also ask to see your driver's license or other identifying documents. If concerns arise with verification of your identification, no transactions will be permitted while we attempt to reconcile the concerns. If we are unable to verify your identity within 30 days of our receipt of your original premium payment, the Contract will be terminated and any value surrendered in accordance with normal redemption procedures. 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: . transfer assets in any division to another division or to the Fixed Account; . add, combine or eliminate a division(s); . substitute the units of a division for the units of another division; . if units of a division are no longer available for investment; or . if in our judgment, investment in a division becomes inappropriate considering the purposes of the Separate Account. FREQUENT TRADING AND MARKET-TIMING (ABUSIVE TRADING PRACTICES) This Contract is not designed for frequent trading or market timing activity of the investment options. If you intend to trade frequently and/or use market timing investment strategies, you should not purchase this Contract. The Company does not accommodate market timing. We consider frequent trading and market timing activities to be abusive trading practices because they: . Disrupt the management of the underlying mutual funds by; . forcing the fund to hold short-term (liquid) assets rather than investing for long term growth, which results in lost investment opportunities for the fund; and . causing unplanned portfolio turnover; . Hurt the portfolio performance of the underlying mutual funds; and . Increase expenses of the underlying mutual fund and separate account due to; . increased broker-dealer commissions; and . increased recordkeeping and related costs. If we are not able to identify such abusive trading practices, the abuses described above will negatively impact the Contract and cause investors to suffer the harms described. We have adopted policies and procedures to help us identify and prevent abusive trading practices. In addition, the underlying mutual funds monitor trading activity to identify and take action against abuses. While our policies and procedures are designed to identify and protect against abusive trading practices, there can be no certainty that we will identify and prevent abusive trading in all instances. When we do identify abusive trading, we will apply our policies and procedures in a fair and uniform manner. If we, or an underlying mutual fund that is an investment option with the Contract, deem abusive trading practices to be occurring, we will take action that may include, but is not limited to: . Rejecting transfer instructions from a Contract owner or other person authorized by the owner to direct transfers; . Restricting submission of transfer requests by, for example, allowing transfer requests to be submitted by 1/st/ class U.S. mail only and disallowing requests made via the internet, by facsimile, by overnight courier or by telephone; . Limiting the number of unscheduled transfer during a Contract year to no more than 12; . Prohibiting you from requesting a transfer among the divisions for a minimum of thirty days where there is evidence of at least one round-trip transaction (exchange or redemption of shares that were purchased within 30 days of the exchange/redemption) by you; and . Taking such other action as directed by the underlying mutual fund. The underlying mutual funds have reserved the right to accept or reject, without prior written notice, any transfer requests. In some instances, a transfer may be completed prior to a determination of abusive trading. In those instances, we will reverse the transfer (within two business days of the transfer) and return the Contract to the investment option holdings it had prior to the transfer. We will give you notice in writing in this instance. DISTRIBUTION OF THE CONTRACT The Company has appointed Princor Financial Services Corporation ("Princor") (Des Moines, Iowa 50392-0200), a broker-dealer registered under the Securities Exchange Act of 1934, a member of the National Association of Securities Dealers, Inc. and affiliate of the Company, as the distributor and principal underwriter of the Contract. Princor is paid 6.5% of premium payments by the Company for the distribution of the Contract. Princor also may receive 12b-1 fees in connection with purchases and sales of mutual funds underlying the Contracts. The 12b-1 fees for the underlying mutual funds are shown in this Contract prospectus in Summary of Expense, Annual Underlying Mutual Fund Expenses. Applications for the Contracts are solicited by registered representatives of Princor or such other broker-dealers as have entered into selling agreements with Princor. Such registered representatives act as appointed agents of the Company under applicable state insurance law and must be licensed to sell variable insurance products. The Company intends to offer the Contract in all jurisdictions where it is licensed to do business and where the Contract is approved. 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 underlying mutual fund in which the division invests was first offered. The hypothetical performance from the date of the inception of the underlying 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 underlying mutual funds 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 underlying mutual fund shares in which you have a voting interest is determined by your investments in an underlying mutual fund as of a "record date." The record date is set by the underlying mutual fund within the requirements of the laws of the state which govern the various mutual funds. The number of underlying 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 underlying mutual fund. Shares for which owners are entitled to give voting instructions, but for which none are received, and shares of the underlying 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 underlying mutual fund shares held in Separate Account B need not be voted pursuant to instructions received from owners, the Company may vote underlying 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 Internal Revenue Code governs the income taxation of annuities in general. . Premium payments made under non-qualified Contracts are not excludable or deductible from your gross income or any other person's gross income. . 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. . 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. . Surrenders or partial surrenders are taxed as ordinary income to the extent of the accumulated income or gain under the Contract. . The value of the Contract pledged or assigned is taxed as ordinary income to the same extent as a partial surrender. . Annuity benefit payments: . The "investment in the contract" is generally the total of the premium payments made. . The basic rule for taxing annuity benefit payments is that part of each annuity benefit payment is considered a nontaxable return if the investment in the contract and part taxable income. An "exclusion ratio" is applied to each annuity benefit payment to determine how much of the payment is excludable from gross income. The remainder of the annuity benefit payment is includable in gross income for the year received. . After the premium payment(s) in the Contract is paid out, the full amount of any annuity benefit 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. Transfer of ownership may have tax consequences to the owner. Please consult with your tax advisor before changing ownership of your Contract. 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 Internal Revenue Code requires: . If the person receiving payments dies on or after the annuitization 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. . If you die prior to the annuitization date, the entire interest in the Contract will be distributed: . within five years after the date of your death; or . as annuity benefit 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. . If you take a distribution from the Contract before you are 591/2, you may incur an income tax penalty. Generally, unless the beneficiary elects otherwise, the above requirements are satisfied prior to the annuitization 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 benefit 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 Internal Revenue Code. Where the owner or other person receiving payments is not a natural person, the required distributions provided for in the Internal Revenue 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. . IRA - An Individual Retirement Annuity (IRA) is a retirement savings annuity. Contributions grow tax deferred. . 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. . 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, premium payments made under a retirement program recognized under the Internal Revenue Code are excluded from the participant's gross income for tax purposes prior to the annuity benefit payment date (subject to applicable state law). The portion, if any, of any premium 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. Tax-qualified retirement arrangements, such as IRAs, SEPs, and SIMPLE-IRAs, are tax-deferred. You derive no additional benefit from the tax deferral feature of the annuity. Consequently, an annuity should be used to fund an IRA, or other tax qualified retirement arrangement to benefit from the annuity's features other than tax deferral. These features may include guaranteed lifetime income, death benefits without surrender charges, guaranteed caps on fees, and the ability to transfer among investment options without sales or withdrawal charges. 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 Internal Revenue 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: . made on or after you reach age 591/2; . made to a beneficiary on or after your death; . made upon your disability; . part of a series of substantially equal periodic payments for the life or life expectancy of you or you and the beneficiary; . made to pay certain medical expenses; . for health insurance premiums while employed; . for first home purchases (up to $10,000); . for qualified higher education expenses; . for qualified hurricane distributions (up to $100,000); or . for qualified reservist distributions. ROLLOVER IRAS If you receive a lump-sum distribution from a qualified retirement plan, tax-sheltered annuity or governmental 457(b) plan, you may maintain the tax-deferred status of the distribution by rolling it over into an eligible retirement plan or IRA. You can accomplish this by electing a direct rollover from the plan, or you can receive the distribution and roll it over into an eligible retirement plan or IRA within 60 days. However, if you do not elect a direct rollover from the plan, the plan is required to withhold 20% of the distribution. This amount is sent to the IRS as income tax withholding to be credited against your taxes. Amounts received prior to age 59 1/2 and not rolled over may be subject to an additional 10% excise tax. ROTH IRAS The Contract may be purchased to fund a Roth IRA. Contributions to a Roth IRA are not deductible from taxable income. Subject to certain limitations, a traditional IRA, SIMPLE-IRA or SEP may be converted into a Roth IRA or a distribution from such an arrangement may be rolled over to a Roth IRA. However, a conversion or a rollover to a Roth IRA is not excludable from gross income. If certain conditions are met, qualified distributions from a Roth IRA are tax-free. For more information, please contact your tax advisor. WITHHOLDING Annuity benefit 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 Internal Revenue Code which establishes standards of diversification for the investments underlying the Contracts. Under this Internal Revenue 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 an underlying mutual fund to meet the diversification requirements could result in tax liability to non-qualified Contract holders. The investment opportunities of the underlying 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 the Commissioner's 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. GENERAL INFORMATION RESERVATION OF RIGHTS The Company reserves the right to: . increase the minimum amount for each premium payment to not more than $1,000; and . 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 premium 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. 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 Executive 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. CUSTOMER INQUIRIES Your questions should be directed to: Principal Investment Plus Variable Annuity, Principal Financial Group, P.O. Box 9382, Des Moines, Iowa 50306-9382, 1-800-852-4450. PAYMENTS TO FINANCIAL INTERMEDIARIES The Company pays compensation to broker-dealers, financial institutions, and other parties ("Financial Intermediaries") for the sale of the Contract according to schedules in the sales agreements and other agreements reached between the Company and the Financial Intermediaries. Such compensation generally consists of commissions on premiums paid on the Contract. The Company and/or its affiliates may also pay other amounts ("Additional Payments") that include, but are not limited to, marketing allowances, expense reimbursements, and educational payments. These Additional Payments are designed to provide incentives for the sale of the Contracts as well as other products sold by the Company and may influence the Financial intermediary or its sales representative to recommend the purchase of this Contract over competing annuity contracts or other investment options. You may ask your sales representative about these differing and divergent interests, how your sales representative is personally compensated, and how your sales representative's broker-dealer is compensated for soliciting applications for the Contract. SERVICE ARRANGEMENTS AND COMPENSATION The Company has entered into agreements with the distributors, advisers, and/or the affiliates of some of the mutual funds underlying the Contract and receives compensation for providing certain services including, but not limited to, distribution and operational support services, to the underlying mutual fund. Fees for these services are paid periodically (typically, quarterly or monthly) based on the average daily net asset value of shares of each fund held by the Separate Account and purchased at the Contract owners' instructions. Because the Company receives such fees, it may be subject to competing interests in making these funds available as investment options under the Contract. The Company takes into consideration the anticipated payments from underlying mutual funds when it determines the charges assessed under the Contract. Without these payments, charges under the Contract are expected to be higher. INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM 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 registered public accounting firm, 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. TABLE OF SEPARATE ACCOUNT DIVISIONS The following is a brief summary of the investment objectives of each division. There is no guarantee that the objectives will be met. AIM V.I. BASIC VALUE DIVISION INVESTS IN: AIM V.I. Basic Value Fund - Series I INVESTMENT ADVISOR: A I M Advisors, Inc. INVESTMENT OBJECTIVE: seeks long-term growth of capital. AIM V.I. SMALL CAP EQUITY DIVISION INVESTS IN: AIM V.I. Small Cap Equity Fund - Series I Shares INVESTMENT ADVISOR: A I M Advisors, Inc. INVESTMENT OBJECTIVE: seeks long-term growth of capital. ALLIANCEBERNSTEIN SMALL CAP GROWTH DIVISION INVESTS IN: AllianceBernstein Variable Products Series Fund, Inc. - AllianceBernstein Small Cap Growth Portfolio - Class A INVESTMENT ADVISOR: AllianceBernstein L.P. INVESTMENT OBJECTIVE: seeks growth of capital by pursuing aggressive investment policies. AMERICAN CENTURY VP INFLATION PROTECTION DIVISION INVESTS IN: American Century Variable Portfolios II, Inc. Inflation Protection Fund - Class II INVESTMENT ADVISOR: American Century Investment Management, Inc. INVESTMENT OBJECTIVE: seeks long-term total return using a strategy that seeks to protect against U.S. inflation. AMERICAN CENTURY VP ULTRA DIVISION INVESTS IN: American Century VP Ultra Fund - Class II INVESTMENT ADVISOR: American Century Investment Management, Inc. INVESTMENT OBJECTIVE: seeks long-term capital growth by investing primarily in stocks of U.S. companies. AMERICAN CENTURY VP VISTA DIVISION INVESTS IN: American Century VP Vista Fund - Class I INVESTMENT ADVISOR: American Century Investment Management, Inc. INVESTMENT OBJECTIVE: seeks long-term capital growth. DREYFUS IP TECHNOLOGY GROWTH DIVISION INVESTS IN: Dreyfus Investment Portfolios Technology Growth Portfolio - Service Class INVESTMENT ADVISOR: The Dreyfus Corporation INVESTMENT OBJECTIVE: seeks capital appreciation. FIDELITY VIP CONTRAFUND DIVISION INVESTS IN: Fidelity VIP Contrafund Portfolio - Service Class 2 INVESTMENT ADVISOR: Fidelity Management & Research Company INVESTMENT OBJECTIVE: seeks long-term capital appreciation. FIDELITY VIP EQUITY-INCOME DIVISION INVESTS IN: Fidelity VIP Equity-Income Portfolio - Service Class 2 INVESTMENT ADVISOR: Fidelity Management & Research Company INVESTMENT OBJECTIVE: seeks reasonable income. The fund will also consider the potential for capital appreciation. The fund's goal is to achieve a yield which exceeds the composite yield on the securities comprising the Standard & Poor's 500/SM/ Index (S&P 500/(R)/). FIDELITY VIP GROWTH DIVISION INVESTS IN: Fidelity VIP Growth Portfolio - Service Class 2 INVESTMENT ADVISOR: Fidelity Management & Research Company INVESTMENT OBJECTIVE: seeks to achieve capital appreciation. FIDELITY VIP MID CAP DIVISION INVESTS IN: Fidelity VIP Mid Cap Portfolio - Service Class 2 INVESTMENT ADVISOR: Fidelity Management & Research Company INVESTMENT OBJECTIVE: seeks long-term growth of capital. FIDELITY VIP OVERSEAS DIVISION INVESTS IN: Fidelity VIP Overseas Portfolio - Service Class 2 INVESTMENT ADVISOR: Fidelity Management & Research Company INVESTMENT OBJECTIVE: seeks long-term growth of capital. GOLDMAN SACHS STRUCTURED SMALL CAP EQUITY DIVISION INVESTS IN: Goldman Sachs VIT - Goldman Sachs Structured Small Cap Equity Fund - Institutional Class INVESTMENT ADVISOR: Goldman Sachs Asset Management, L.P. INVESTMENT OBJECTIVE: seeks long-term growth of capital. GOLDMAN SACHS VIT MID CAP VALUE DIVISION INVESTS IN: Goldman Sachs VIT Mid Cap Value Fund - Institutional Class INVESTMENT ADVISOR: Goldman Sachs Asset Management, L.P. INVESTMENT OBJECTIVE: seeks long-term capital appreciation. LEHMAN BROTHERS HIGH INCOME BOND DIVISION (F/K/A NEUBERGER BERMAN AMT HIGH INCOME BOND DIVISION) INVESTS IN: Lehman Brothers High Income Bond Account - S Class (f/k/a Neuberger Berman AMT High Income Bond Portfolio - S Class) INVESTMENT ADVISOR: Lehman Brothers Asset Management, LLC INVESTMENT OBJECTIVE: The fund seeks high total returns consistent with capital preservation. NEUBERGER BERMAN AMT FASCIANO DIVISION INVESTS IN: Neuberger Berman AMT Fasciano Portfolio - Class S INVESTMENT ADVISOR: Neuberger Berman Management Inc. INVESTMENT OBJECTIVE: seeks long-term capital growth. NEUBERGER BERMAN AMT PARTNERS DIVISION INVESTS IN: Neuberger Berman AMT Partners Portfolio - Class I INVESTMENT ADVISOR: Neuberger Berman Management Inc. INVESTMENT OBJECTIVE: seeks growth of capital. NEUBERGER BERMAN AMT SOCIALLY RESPONSIVE DIVISION INVESTS IN: Neuberger Berman AMT Socially Responsive Portfolio - I Class INVESTMENT ADVISOR: Neuberger Berman Management Inc. INVESTMENT OBJECTIVE: seeks long-term growth of capital by investing primarily in securities of companies that meet the fund's financial criteria and social policy. ASSET ALLOCATION DIVISION INVESTS IN: Principal Variable Contracts Fund Asset Allocation Account - Class 1 INVESTMENT ADVISOR: Morgan Stanley Investment Management, Inc. (doing business as Van Kampen) through a sub-advisory agreement with Principal Management Corporation INVESTMENT OBJECTIVE: to generate a total investment return consistent with the preservation of capital. The Account intends to pursue a flexible investment policy in seeking to achieve this investment objective by investing primarily in equity and fixed-income securities. BOND DIVISION INVESTS IN: Principal Variable Contracts Fund Bond Account - Class 1 INVESTMENT ADVISOR: Principal Global Investors, LLC through a sub-advisory agreement with Principal Management Corporation INVESTMENT OBJECTIVE: to provide as high a level of income as is consistent with preservation of capital and prudent investment risk. CAPITAL VALUE DIVISION INVESTS IN: Principal Variable Contracts Fund Capital Value Account - Class 1 INVESTMENT ADVISOR: Principal Global Investors, LLC through a sub-advisory agreement with Principal Management Corporation INVESTMENT OBJECTIVE: to provide long-term capital appreciation and secondarily growth investment income. The Account seeks to achieve its investment objectives through the purchase primarily of common stocks, but the Account may invest in other securities. DIVERSIFIED INTERNATIONAL DIVISION INVESTS IN: Principal Variable Contracts Fund Diversified International Account - Class 1 INVESTMENT ADVISOR: Principal Global Investors, LLC through a sub-advisory agreement with Principal Management Corporation INVESTMENT OBJECTIVE: to seek long-term growth of capital by investing in a portfolio of equity securities domiciled in any of the nations of the world. EQUITY GROWTH DIVISION (LARGECAP GROWTH EQUITY DIVISION MERGED INTO EQUITY GROWTH DIVISION ON MAY 1, 2007) INVESTS IN: Principal Variable Contracts Fund Equity Growth Account - Class 1 (LargeCap Growth Equity Account merged into Equity Growth Account on May 1, 2007) INVESTMENT ADVISOR: T. Rowe Price Associates, Inc. through a sub-advisory agreement with Principal Management Corporation INVESTMENT OBJECTIVE: to provide long-term capital appreciation by investing primarily in growth-oriented common stocks of medium and large capitalization U.S. corporations and, to a limited extent, foreign corporations. EQUITY INCOME I DIVISION (ON JANUARY 5, 2007 THE EQUITY INCOME DIVISION ASSETS MERGED INTO THE EQUITY INCOME I DIVISION) INVESTS IN: Principal Variable Contracts Fund Equity Income Account I - Class 1 (Principal Variable Contracts Fund - Equity Income Account merged into Principal Variable Contracts Fund - Equity Income I Account on January 5, 2007) INVESTMENT ADVISOR: Edge Asset Management, Inc. through a sub-advisory agreement with Principal Management Corporation INVESTMENT OBJECTIVE: to seek to provide a relatively high level of current income and long-term growth of income and capital. EQUITY VALUE DIVISION INVESTS IN: Principal Variable Contracts Fund Equity Value Account - Class 1 INVESTMENT ADVISOR: American Century Investment Management, Inc. through a sub-advisory agreement with Principal Management Corporation INVESTMENT OBJECTIVE: to seek growth of capital. The Account seeks to achieve its objective through the purchase primarily of common stocks, but the Account may invest in other securities. GOVERNMENT & HIGH QUALITY BOND DIVISION INVESTS IN: Principal Variable Contracts Fund Government & High Quality Bond Account - Class 1 INVESTMENT ADVISOR: Principal Global Investors, LLC through a sub-advisory agreement with Principal Management Corporation INVESTMENT OBJECTIVE: to seek a high level of current income, liquidity and safety of principal. GROWTH DIVISION INVESTS IN: Principal Variable Contracts Fund Growth Account - Class 1 INVESTMENT ADVISOR: Columbus Circle Investors through a sub-advisory agreement with Principal Management Corporation INVESTMENT OBJECTIVE: to seek growth of capital. The Account seeks to achieve its objective through the purchase primarily of common stocks, but the Account may invest in other securities. INTERNATIONAL EMERGING MARKETS DIVISION INVESTS IN: Principal Variable Contracts Fund International Emerging Markets Account - Class 1 INVESTMENT ADVISOR: Principal Global Investors, LLC through a sub-advisory agreement with Principal Management Corporation INVESTMENT OBJECTIVE: seeks long-term growth of capital by investing in equity securities of issuers in emerging market countries. INTERNATIONAL SMALLCAP DIVISION INVESTS IN: Principal Variable Contracts Fund International SmallCap Account - Class 1 INVESTMENT ADVISOR: Principal Global Investors, LLC through a sub-advisory agreement with Principal Management Corporation INVESTMENT OBJECTIVE: to seek long-term growth of capital. The Account will attempt to achieve its objective by investing primarily in equity securities of non-U.S. companies with comparatively smaller market capitalizations. LARGECAP BLEND DIVISION INVESTS IN: Principal Variable Contracts Fund LargeCap Blend Account - Class 1 INVESTMENT ADVISOR: T. Rowe Price Associates, Inc. through a sub-advisory agreement with Principal Management Corporation INVESTMENT OBJECTIVE: seeks long-term growth of capital. LARGECAP STOCK INDEX DIVISION INVESTS IN: Principal Variable Contracts Fund LargeCap Stock Index Account - Class 1 INVESTMENT ADVISOR: Principal Global Investors, LLC through a sub-advisory agreement with Principal Management Corporation INVESTMENT OBJECTIVE: to seek long-term growth of capital by investing in stocks of large U.S. companies. The Account attempts to mirror the investment results of the Standard & Poor's 500 Index. LARGECAP VALUE DIVISION INVESTS IN: Principal Variable Contracts Fund LargeCap Value Account - Class 1 INVESTMENT ADVISOR: AllianceBernstein, L.P. through a sub-advisory agreement with Principal Management Corporation INVESTMENT OBJECTIVE: to seek long-term growth of capital. MIDCAP DIVISION INVESTS IN: Principal Variable Contracts Fund MidCap Account - Class 1 INVESTMENT ADVISOR: Principal Global Investors, LLC through a sub-advisory agreement with Principal Management Corporation INVESTMENT OBJECTIVE: to achieve capital appreciation by investing primarily in securities of emerging and other growth-oriented companies. MIDCAP GROWTH DIVISION INVESTS IN: Principal Variable Contracts Fund MidCap Growth Account - Class 1 INVESTMENT ADVISOR: Mellon Equity Associates, LLP through a sub-advisory agreement with Principal Management Corporation INVESTMENT OBJECTIVE: to seek long-term growth of capital. The Account will attempt to achieve its objective by investing primarily in growth stocks of medium market capitalization companies. MIDCAP VALUE DIVISION INVESTS IN: Principal Variable Contracts Fund MidCap Value Account - Class 1 INVESTMENT ADVISOR: Neuberger Berman Management, Inc. through a sub-advisory agreement with Principal Management Corporation INVESTMENT OBJECTIVE: seeks long-term growth of capital by investing primarily in equity securities of companies with value characteristics and medium market capitalizations. MONEY MARKET DIVISION INVESTS IN: Principal Variable Contracts Fund Money Market Account - Class 1 INVESTMENT ADVISOR: Principal Global Investors, LLC through a sub-advisory agreement with Principal Management Corporation INVESTMENT OBJECTIVE: to seek as high a level of current income available from short-term securities as is considered consistent with preservation of principal and maintenance of liquidity by investing all of its assets in a portfolio of money market instruments. LIFETIME 2010 DIVISION INVESTS IN: Principal Variable Contracts Fund Principal LifeTime 2010 Account - Class 1 INVESTMENT ADVISOR: Principal Global Investors, LLC through a sub-advisory agreement with Principal Management Corporation INVESTMENT OBJECTIVE: seeks a total return consisting of long-term growth of capital and current income by investing primarily in shares of other Principal Variable Contracts Fund accounts. LIFETIME 2020 DIVISION INVESTS IN: Principal Variable Contracts Fund Principal LifeTime 2020 Account - Class 1 INVESTMENT ADVISOR: Principal Global Investors, LLC through a sub-advisory agreement with Principal Management Corporation INVESTMENT OBJECTIVE: seeks a total return consisting of long-term growth of capital and current income by investing primarily in shares of other Principal Variable Contracts Fund accounts. LIFETIME 2030 DIVISION INVESTS IN: Principal Variable Contracts Fund Principal LifeTime 2030 Account - Class 1 INVESTMENT ADVISOR: Principal Global Investors, LLC through a sub-advisory agreement with Principal Management Corporation INVESTMENT OBJECTIVE: seeks a total return consisting of long-term growth of capital and current income by investing primarily in shares of other Principal Variable Contracts Fund accounts. LIFETIME 2040 DIVISION INVESTS IN: Principal Variable Contracts Fund Principal LifeTime 2040 Account - Class 1 INVESTMENT ADVISOR: Principal Global Investors, LLC through a sub-advisory agreement with Principal Management Corporation INVESTMENT OBJECTIVE: seeks a total return consisting of long-term growth of capital and current income by investing primarily in shares of other Principal Variable Contracts Fund accounts. LIFETIME 2050 DIVISION INVESTS IN: Principal Variable Contracts Fund Principal LifeTime 2050 Account - Class 1 INVESTMENT ADVISOR: Principal Global Investors, LLC through a sub-advisory agreement with Principal Management Corporation INVESTMENT OBJECTIVE: seeks a total return consisting of long-term growth of capital and current income by investing primarily in shares of other Principal Variable Contracts Fund accounts. LIFETIME STRATEGIC INCOME DIVISION INVESTS IN: Principal Variable Contracts Fund Principal LifeTime Strategic Income Account - Class 1 INVESTMENT ADVISOR: Principal Global Investors, LLC through a sub-advisory agreement with Principal Management Corporation INVESTMENT OBJECTIVE: seeks high current income by investing primarily in shares of other Principal Variable Contracts Fund accounts. REAL ESTATE SECURITIES DIVISION INVESTS IN: Principal Variable Contracts Fund Real Estate Securities Account - Class 1 INVESTMENT ADVISOR: Principal Real Estate Investors, LLC through a sub-advisory agreement with Principal Management Corporation INVESTMENT OBJECTIVE: to seek to generate a high total return. The Account will attempt to achieve its objective by investing primarily in equity securities of companies principally engaged in the real estate industry. SHORT-TERM BOND DIVISION INVESTS IN: Principal Variable Contracts Fund Short-Term Bond Account - Class 1 INVESTMENT ADVISOR: Principal Global Investors, LLC through a sub-advisory agreement with Principal Management Corporation INVESTMENT OBJECTIVE: to provide current income. SMALLCAP GROWTH DIVISION INVESTS IN: Principal Variable Contracts Fund SmallCap Growth Account - Class 1 INVESTMENT ADVISOR: Emerald Advisors, Inc. through a sub-advisory agreement; Essex Investment Management Company, LLC through a sub-advisory agreement; and UBS Global Asset Management (Americas) Inc. through a sub-advisory agreement with Principal Management Corporation INVESTMENT OBJECTIVE: to seek long-term growth of capital. The Account will attempt to achieve its objective by investing primarily in equity securities of growth companies with comparatively smaller market capitalizations. SMALLCAP VALUE DIVISION INVESTS IN: Principal Variable Contracts Fund SmallCap Value Account - Class 1 INVESTMENT ADVISOR: J.P. Morgan Investment Management, Inc. through a sub-advisory agreement and Mellon Equity Associates, LLP through a sub-advisory agreement with Principal Management Corporation INVESTMENT OBJECTIVE: to seek long-term growth of capital by investing primarily in equity securities of small companies with value characteristics and comparatively smaller market capitalizations. STRATEGIC ASSET MANAGEMENT BALANCED PORTFOLIO DIVISION INVESTS IN: Principal Variable Contracts Fund Strategic Asset Management Balanced Portfolio - Class 1 INVESTMENT ADVISOR: Edge Asset Management, Inc. through a sub-advisory agreement with Principal Management Corporation INVESTMENT OBJECTIVE: seeks to provide as high a level of total return (consisting of reinvested income and capital appreciation) as is consistent with reasonable risk. STRATEGIC ASSET MANAGEMENT CONSERVATIVE BALANCED PORTFOLIO DIVISION INVESTS IN: Principal Variable Contracts Fund Strategic Asset Management Conservative Balanced Portfolio - Class 1 INVESTMENT ADVISOR: Edge Asset Management, Inc. through a sub-advisory agreement with Principal Management Corporation INVESTMENT OBJECTIVE: seeks to provide a high level of total return (consisting of reinvestment of income and capital appreciation), consistent with a moderate degree of principal risk. STRATEGIC ASSET MANAGEMENT CONSERVATIVE GROWTH PORTFOLIO DIVISION INVESTS IN: Principal Variable Contracts Fund Strategic Asset Management Conservative Growth Portfolio - Class 1 INVESTMENT ADVISOR: Edge Asset Management, Inc. through a sub-advisory agreement with Principal Management Corporation INVESTMENT OBJECTIVE: seeks to provide long-term capital appreciation. STRATEGIC ASSET MANAGEMENT FLEXIBLE INCOME PORTFOLIO DIVISION INVESTS IN: Principal Variable Contracts Fund Strategic Asset Management Flexible Income Portfolio - Class 1 INVESTMENT ADVISOR: Edge Asset Management, Inc. through a sub-advisory agreement with Principal Management Corporation INVESTMENT OBJECTIVE: seeks to provide a high level of total return (consisting of reinvestment of income with some capital appreciation). STRATEGIC ASSET MANAGEMENT STRATEGIC GROWTH PORTFOLIO DIVISION INVESTS IN: Principal Variable Contracts Fund Strategic Asset Management Strategic Growth Portfolio - Class 1 INVESTMENT ADVISOR: Edge Asset Management, Inc. through a sub-advisory agreement with Principal Management Corporation INVESTMENT OBJECTIVE: seeks to provide long-term capital appreciation. WEST COAST EQUITY DIVISION INVESTS IN: Principal Variable Contracts Fund West Coast Equity Account- Class 1 INVESTMENT ADVISOR: Edge Asset Management, Inc. through a sub-advisory agreement with Principal Management Corporation INVESTMENT OBJECTIVE: seeks long-term growth of capital and willing to accept the risks of investing in common stocks that may have greater risks than stocks of companies with lower potential for earnings growth. T. ROWE PRICE BLUE CHIP GROWTH DIVISION INVESTS IN: T. Rowe Price Blue Chip Growth Portfolio - II INVESTMENT ADVISOR: T. Rowe Price Associates, Inc. INVESTMENT OBJECTIVE: seeks to provide long-term capital growth. T. ROWE PRICE HEALTH SCIENCES DIVISION INVESTS IN: T. Rowe Price Health Sciences Portfolio - II INVESTMENT ADVISOR: T. Rowe Price Associates, Inc. INVESTMENT OBJECTIVE: seeks long-term capital appreciation. 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 home office. By paying the prescribed fees, you may obtain a copy of Part C of the registration statement from: SEC's Public Reference Branch, 100 F Street, NE, Room 1580 Washington, D.C. 20549 Telephone: (202) 551-8090 The filings are also available on the SEC's website at www.sec.gov. The registration number for the Contract is 333-128079. CUSTOMER INQUIRIES Your questions should be directed to: Principal Investment Plus Variable Annuity, Principal Financial Group, P.O. Box 9382, Des Moines, Iowa 50306-9382, 1-800-852-4450. TABLE OF CONTENTS OF THE SAI The table of contents for the Statement of Additional Information is provided below. TABLE OF CONTENTS General Information and History......................................... Independent Registered Public Accounting Firm ........................... Principal Underwriter ................................................... Calculation of Performance Data ......................................... Taxation Under Certain Retirement Plans................................. Principal Life Insurance Company Separate Account B Report of Independent Registered Public Accounting Firm................ Financial Statements ................................................... Principal Life Insurance Company Report of Independent Registered Public Accounting Firm ................ Consolidated Financial Statements ...................................... To obtain a copy of the Statement of Additional Information, free of charge, write or telephone: Princor Financial Services Corporation a company of the Principal Financial Group Des Moines, IA 50392-2080 Telephone: 1-800-852-4450 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 BEGINNING END OF PERCENTAGE OF CHANGE OUTEND OFNG DIVISION OF PERIOD PERIOD FROM PRIOR PERIOD PERIOD -------- --------- ------ -------------------- (IN THOUSANDS) ------------ ABVPSF AllianceBernstein Small Cap Growth 2006 $12.608 $13.782 9.31% 53 2005 12.131 12.608 3.93 18 Period Ended December 31, 2004/(1) / 10.000 12.131 21.31 AIM V.I. Basic Value 2006 11.733 13.118 11.80 49 2005 11.236 11.733 4.42 5 Period Ended December 31, 2004/(1)/ 10.000 11.236 12.36 AIM V.I. SmallCap Equity 2006 12.253 14.212 15.99 25 2005 11.476 12.253 6.77 6 Period Ended December 31, 2004/(1)/ 10.000 11.476 14.76 American Century VP Inflation Protection 2006 10.216 10.250 0.33 3,389 2005 10.191 10.216 0.25 1,227 Period Ended December 31, 2004/(1)/ 10.000 10.191 1.91 American Century VP Ultra 2006 11.296 10.779 -4.58 2,714 2005 11.217 11.296 0.70 911 Period Ended December 31, 2004/(1)/ 10.000 11.217 12.17 American Century VP Vista 2006 12.485 13.441 7.66 39 2005 11.691 12.485 6.79 17 Period Ended December 31, 2004/(1)/ 10.000 11.691 16.91 Dreyfus Investments Portfolios - Technology Growth 2006 11.850 12.176 2.75 25 2005 11.596 11.850 2.19 10 Period Ended December 31, 2004/(1)/ 10.000 11.596 15.96 Fidelity VIP Contrafund 2006 13.098 14.415 10.05 1,240 2005 11.370 13.098 15.20 427 Period Ended December 31, 2004/(1)/ 10.000 11.370 13.70 Fidelity VIP Equity-Income 2006 11.778 13.951 18.45 347 2005 11.297 11.778 4.26 94 Period Ended December 31, 2004/(1)/ 10.268 11.297 10.02 Fidelity VIP Growth 2006 11.446 12.048 5.26 204 2005 10.986 11.446 4.19 59 Period Ended December 31, 2004/(1)/ 10.000 10.986 9.86 Fidelity VIP MidCap 2006 14.052 15.600 11.02 198 2005 12.057 14.052 16.55 36 Period Ended December 31, 2004/(1)/ 10.000 12.057 20.57 Fidelity VIP OverSeas 2006 13.758 16.003 16.32 1,503 2005 11.728 13.758 17.31 581 Period Ended December 31, 2004/(1)/ 10.000 11.728 17.28 Goldman Sachs VIT Structured Small Cap Equity 2006 12.158 13.481 10.88 189 2005 11.607 12.158 4.75 63 Period Ended December 31, 2004/(1)/ 10.000 11.607 16.07 Goldman Sachs VIT Mid Cap Value 2006 12.965 14.863 14.64 550 2005 11.627 12.965 11.42 162 Period Ended December 31, 2004/(1)/ 10.000 11.627 16.27 Neuberger Berman AMT Fasciano 2006 11.137 11.578 3.96 104 2005 10.960 11.137 1.61 35 Period Ended December 31, 2004/(1)/ 10.000 10.960 9.60 Neuberger Berman AMT High Income Bond 2006 10.047 10.664 6.14 127 2005 10.053 10.047 -0.06 39 Period Ended December 31, 2004/(1)/ 10.000 10.053 0.53 Neuberger Berman AMT Partners 2006 13.665 15.148 10.86 209 2005 11.722 13.665 16.58 40 Period Ended December 31, 2004/(1)/ 10.000 11.722 17.22 Neuberger Berman AMT Socially Responsive 2006 12.126 13.617 12.30 144 2005 11.491 12.126 5.53 54 Period Ended December 31, 2004/(1)/ 10.000 11.491 14.91 T. Rowe Price Blue Chip Growth 2006 11.571 12.494 7.98 51 2005 11.091 11.571 4.33 34 Period Ended December 31, 2004/(1)/ 10.000 11.091 10.91 T. Rowe Price Health Sciences 2006 12.721 13.623 7.09 113 2005 11.385 12.721 11.73 34 Period Ended December 31, 2004/(1)/ 10.000 11.385 13.85 Asset Allocation 2006 21.674 24.140 11.38 170 2005 20.746 21.674 4.47 72 Period Ended December 31, 2004/(1)/ 19.143 20.746 8.37 Bond 2006 18.302 18.916 3.36 2,822 2005 18.080 18.302 1.23 1,000 Period Ended December 31, 2004/(1)/ 17.765 18.080 1.77 Capital Value 2006 24.803 29.384 18.47 209 2005 23.514 24.803 5.48 84 Period Ended December 31, 2004/(1)/ 20.929 23.514 12.35 Diversified International 2006 21.416 27.066 26.38 612 2005 17.518 21.416 22.25 184 Period Ended December 31, 2004/(1)/ 14.564 17.518 20.28 Equity Growth 2006 28.639 30.042 4.90 129 2005 26.962 28.639 6.22 40 Period Ended December 31, 2004/(1)/ 23.545 26.962 14.51 Equity Income 2006 11.768 14.098 19.80 4,978 2005 10.965 11.768 7.32 1,954 Period Ended December 31, 2004/(1)/ 9.627 10.965 13.90 Equity Value 2006 11.369 13.425 18.08 194 2005 11.093 11.369 2.49 92 Period Ended December 31, 2004/(//2//)/ 10.000 11.093 10.93 Government & High Quality Bond 2006 17.887 18.413 2.94 1,035 2005 17.755 17.887 0.74 382 Period Ended December 31, 2004/(1)/ 17.591 17.755 0.93 Growth 2006 17.006 18.462 8.56 125 2005 15.362 17.006 10.70 23 Period Ended December 31, 2004/(1)/ 13.752 15.362 11.71 International Emerging Markets 2006 21.709 29.657 36.61 368 2005 16.368 21.709 32.63 131 Period Ended December 31, 2004/(1)/ 12.726 16.368 28.62 International SmallCap 2006 23.945 30.833 28.76 362 2005 18.778 23.945 27.52 146 Period Ended December 31, 2004/(1)/ 15.489 18.778 21.23 LargeCap Blend 2006 11.373 13.010 14.39 3,901 2005 10.996 11.373 3.43 1,448 Period Ended December 31, 2004/(1)/ 9.960 10.996 10.40 LargeCap Stock Index 2006 9.263 10.573 14.14 891 2005 8.978 9.263 3.17 350 Period Ended December 31, 2004/(1)/ 8.129 8.978 10.44 LargeCap Value 2006 12.244 14.699 20.05 3,113 2005 11.759 12.244 4.12 1,132 Period Ended December 31, 2004/(1)/ 10.640 11.759 10.52 MidCap 2006 34.060 38.425 12.81 815 2005 31.580 34.060 7.85 319 Period Ended December 31, 2004/(1)/ 27.676 31.580 14.11 MidCap Growth 2006 11.555 12.513 8.29 185 2005 10.289 11.555 12.30 67 Period Ended December 31, 2004/(1)/ 8.792 10.289 17.03 MidCap Value 2006 15.179 16.981 11.87 1,276 2005 13.903 15.179 9.18 498 Period Ended December 31, 2004/(1)/ 11.817 13.903 17.65 Money Market 2006 13.341 13.786 3.34 371 2005 13.158 13.341 1.39 166 Period Ended December 31, 2004/(1)/ 13.154 13.158 0.03 Principal LifeTime 2010 2006 11.363 12.603 10.91 1,605 2005 10.885 11.363 4.39 904 Period Ended December 31, 2004/(2)/ 10.000 10.885 8.85 Principal LifeTime 2020 2006 11.616 13.212 13.74 5,303 2005 11.016 11.616 5.45 1,657 Period Ended December 31, 2004/(2)/ 10.000 11.016 10.16 Principal LifeTime 2030 2006 11.611 13.168 13.41 677 2005 11.013 11.611 5.43 190 Period Ended December 31, 2004/(2)/ 10.000 11.013 10.13 Principal LifeTime 2040 2006 11.792 13.409 13.71 278 2005 11.131 11.792 5.94 93 Period Ended December 31, 2004/(2)/ 10.000 11.131 11.31 Principal LifeTime 2050 2006 11.820 13.482 14.06 168 2005 11.127 11.820 6.23 27 Period Ended December 31, 2004/(2)/ 10.000 11.127 11.27 Principal LifeTime Strategic Income 2006 11.112 12.101 8.90 851 2005 10.721 11.112 3.65 446 Period Ended December 31, 2004/(2)/ 10.000 10.721 7.21 Real Estate Securities 2006 26.965 36.380 34.92 286 2005 23.567 26.965 14.42 81 Period Ended December 31, 2004/(1)/ 19.952 23.567 18.12 Short-Term Bond 2006 10.017 10.333 3.15 4,270 2005 9.963 10.017 0.54 1,671 Period Ended December 31, 2004/(1)/ 9.976 9.963 0.55 SmallCap Growth 2006 9.995 10.758 7.63 244 2005 9.488 9.995 5.34 65 Period Ended December 31, 2004/(1)/ 7.940 9.488 19.50 SmallCap Value 2006 22.178 25.988 17.18 950 2005 21.143 22.178 4.90 362 Period Ended December 31, 2004/(1)/ 17.898 21.143 18.13
/ //(1)/ Commenced operations on August 20, 2004. / //(2)/ Commenced operations on August 30, 2004.
NUMBER OF ACCUMULATION UNIT VALUE ACCUMULATION UNITS ----------------------------------------- OUTSTANDING BEGINNING END OF PERCENTAGE OF CHANGE END OF PERIOD DIVISION OF PERIOD PERIOD FROM PRIOR PERIOD (IN THOUSANDS) -------- --------- ------ -------------------- -------------------- ABVPSF AllianceBernstein Small Cap Growth 2006 $12.505 $13.589 8.67% 19 2005 12.104 12.505 3.31 4 Period Ended December 31, 2004/(1) / 10.000 12.104 21.04 AIM V.I. Basic Value 2006 11.637 12.933 11.14 33 2005 11.211 11.637 3.80 8 Period Ended December 31, 2004/(1)/ 10.000 11.211 12.11 AIM V.I. SmallCap Equity 2006 12.153 14.012 15.30 30 2005 11.451 12.153 6.13 7 Period Ended December 31, 2004/(1)/ 10.000 11.451 14.51 American Century VP Inflation Protection 2006 10.133 10.106 -0.27 1,377 2005 10.169 10.133 -0.35 560 Period Ended December 31, 2004/(1)/ 10.000 10.169 1.69 American Century VP Ultra 2006 11.204 10.627 -5.15 1,128 2005 11.192 11.204 0.11 468 Period Ended December 31, 2004/(1)/ 10.000 11.192 11.92 American Century VP Vista 2006 12.383 13.252 7.02 13 2005 11.665 12.383 6.16 8 Period Ended December 31, 2004/(1)/ 10.000 11.665 16.65 Dreyfus Investments Portfolios -Technology Growth 2006 11.754 12.005 2.14 12 2005 11.571 11.754 1.58 3 Period Ended December 31, 2004/(1)/ 10.000 11.571 15.71 2006 Fidelity VIP Contrafund 2006 12.991 14.212 9.40 380 2005 11.345 12.991 14.51 101 Period Ended December 31, 2004/(1)/ 10.000 11.345 13.45 Fidelity VIP Equity-Income 2006 11.525 13.570 17.74 144 2005 11.121 11.525 3.63 56 Period Ended December 31, 2004/(1)/ 10.129 11.121 9.79 Fidelity VIP Growth 2006 11.353 11.879 4.63 160 2005 10.962 11.353 3.57 56 Period Ended December 31, 2004/(1)/ 10.000 10.962 9.62 Fidelity VIP MidCap 2006 13.938 15.381 10.35 85 2005 12.031 13.938 15.85 35 Period Ended December 31, 2004/(1)/ 10.000 12.031 20.31 Fidelity VIP OverSeas 2006 13.646 15.779 15.63 694 2005 11.703 13.646 16.60 301 Period Ended December 31, 2004/(1)/ 10.000 11.703 17.03 Goldman Sachs VIT Structured Small Cap Equity 2006 12.059 13.292 10.22 110 2005 11.581 12.059 4.13 31 Period Ended December 31, 2004/(1)/ 10.000 11.581 15.81 Goldman Sachs VIT Mid Cap Value 2006 12.850 14.655 14.04 303 2005 11.602 12.850 10.76 91 Period Ended December 31, 2004/(1)/ 10.000 11.602 16.02 Neuberger Berman AMT Fasciano 2006 11.047 11.415 3.33 71 2005 10.936 11.047 1.01 22 Period Ended December 31, 2004/(1)/ 10.000 10.936 9.36 Neuberger Berman AMT High Income Bond 2006 9.970 10.519 5.50 67 2005 10.035 9.970 -0.65 50 Period Ended December 31, 2004/(1)/ 10.000 10.035 0.35 Neuberger Berman AMT Partners 2006 13.554 14.936 10.19 101 2005 11.696 13.554 15.89 25 Period Ended December 31, 2004/(1)/ 10.000 11.696 16.96 Neuberger Berman AMT Socially Responsive 2006 12.027 13.426 11.63 42 2005 11.465 12.027 4.90 9 Period Ended December 31, 2004/(1)/ 10.000 11.465 14.65 T. Rowe Price Blue Chip Growth 2006 11.477 12.319 7.33 32 2005 11.067 11.477 3.70 22 Period Ended December 31, 2004/(1)/ 10.000 11.067 10.67 T. Rowe Price Health Sciences 2006 12.618 13.432 6.45 49 2005 11.360 12.618 11.07 9 Period Ended December 31, 2004/(1)/ 10.000 11.360 13.60 Asset Allocation 2006 21.020 23.273 10.72 99 2005 20.241 21.020 3.85 25 Period Ended December 31, 2004/(1)/ 18.718 20.241 8.14 Bond 2006 17.751 18.237 2.74 1,157 2005 17.640 17.751 0.63 474 Period Ended December 31, 2004/(1)/ 17.370 17.640 1.55 Capital Value 2006 24.055 28.328 17.76 130 2005 22.942 24.055 4.85 31 Period Ended December 31, 2004/(1)/ 20.464 22.942 12.11 Diversified International 2006 20.770 26.094 25.63 239 2005 17.091 20.770 21.53 64 Period Ended December 31, 2004/(1)/ 14.241 17.091 39.62 Equity Growth 2006 27.776 28.962 4.27 65 2005 26.306 27.776 5.59 18 Period Ended December 31, 2004/(1)/ 23.022 26.306 14.26 Equity Income 2006 11.413 13.591 19.09 1,958 2005 10.699 11.413 6.67 908 Period Ended December 31, 2004/(1)/ 9.412 10.699 13.67 Equity Value 2006 11.279 13.239 17.37 100 2005 11.070 11.279 1.89 41 Period Ended December 31, 2004/(1)/ 10.000 11.070 10.70 Government & High Quality Bond 2006 17.348 17.751 2.33 349 2005 17.323 17.348 0.14 133 Period Ended December 31, 2004/(1)/ 17.201 17.323 0.71 Growth 2006 16.493 17.798 7.91 77 2005 14.988 16.493 10.04 11 Period Ended December 31, 2004/(1)/ 13.447 14.988 11.46 International Emerging Markets 2006 21.055 28.591 35.79 214 2005 15.970 21.055 31.84 64 Period Ended December 31, 2004/(1)/ 12.443 15.970 28.35 International SmallCap 2006 23.223 29.725 28.00 170 2005 18.321 23.223 26.76 68 Period Ended December 31, 2004/(1)/ 15.145 18.321 20.97 LargeCap Blend 2006 11.129 12.654 13.70 1,642 2005 10.824 11.129 2.82 664 Period Ended December 31, 2004/(1)/ 9.826 10.824 10.16 LargeCap Stock Index 2006 8.984 10.193 13.46 446 2005 8.760 8.984 2.56 166 Period Ended December 31, 2004/(1)/ 7.949 8.760 10.20 LargeCap Value 2006 11.981 14.297 19.33 1,312 2005 11.575 11.981 3.51 540 Period Ended December 31, 2004/(1)/ 10.497 11.575 10.27 MidCap 2006 33.033 37.044 12.14 343 2005 30.812 33.033 7.21 147 Period Ended December 31, 2004/(1)/ 27.062 30.812 13.86 MidCap Growth 2006 11.206 12.063 7.65 95 2005 10.038 11.206 11.64 18 Period Ended December 31, 2004/(1)/ 8.596 10.038 16.78 MidCap Value 2006 14.764 16.419 11.21 524 2005 13.604 14.764 8.53 229 Period Ended December 31, 2004/(1)/ 11.588 13.604 17.40 Money Market 2006 12.939 13.291 2.72 370 2005 12.838 12.939 0.79 189 Period Ended December 31, 2004/(1)/ 12.862 12.838 -0.19 Principal LifeTime 2010 2006 11.272 12.428 10.25 436 2005 10.863 11.272 3.77 222 Period Ended December 31, 2004/(2)/ 10.000 10.863 8.63 Principal LifeTime 2020 2006 11.523 13.028 13.06 1,978 2005 10.994 11.523 4.81 602 Period Ended December 31, 2004/(2)/ 10.000 10.994 9.94 Principal LifeTime 2030 2006 11.519 12.985 12.73 234 2005 10.991 11.519 4.80 90 Period Ended December 31, 2004/(2)/ 10.000 10.991 9.91 Principal LifeTime 2040 2006 11.698 13.223 13.03 103 2005 11.109 11.698 5.30 30 Period Ended December 31, 2004/(2)/ 10.000 11.109 11.09 Principal LifeTime 2050 2006 11.726 13.294 13.38 92 2005 11.105 11.726 5.59 39 Period Ended December 31, 2004/(2)/ 10.000 11.105 11.05 Principal LifeTime Strategic Income 2006 11.024 11.933 8.25 184 2005 10.699 11.024 3.04 45 Period Ended December 31, 2004/(2)/ 10.000 10.699 6.99 Real Estate Securities 2006 26.152 35.074 34.12 135 2005 22.994 26.152 13.73 55 Period Ended December 31, 2004/(1)/ 19.130 22.994 20.20 Short-Term Bond 2006 9.860 10.110 2.54 1,751 2005 9.866 9.860 -0.06 805 Period Ended December 31, 2004/(1)/ 9.894 9.866 -0.28 SmallCap Growth 2006 9.694 10.371 6.98 111 2005 9.257 9.694 4.72 32 Period Ended December 31, 2004/(1)/ 7.847 9.257 17.97 SmallCap Value 2006 21.510 25.054 16.48 373 2005 20.629 21.510 4.27 152 Period Ended December 31, 2004/(1)/ 17.518 20.629 17.76
/ //(1)/ Commenced operations on August 20, 2004. / //(2)/ Commenced operations on August 30, 2004. APPENDIX A - GMWB EXAMPLES These examples are provided to assist you in understanding the various features of the GMWB rider and the guarantees associated with each GMWB option. Please note that, for the purpose of the following examples, a partial annuitization has the same effect as a partial surrender. EXAMPLES WITHOUT EXCESS WITHDRAWALS The examples without excess withdrawals assume the following: . the client is age 62. . initial premium payment = $100,000. . withdrawal benefit base prior to partial surrender = $100,000. . remaining withdrawal benefit base prior to partial surrender = $100,000. . Investment Back (7%) withdrawal benefit payment = $7,000. . For Life (5%) withdrawal benefit payment = $5,000. EXAMPLE 1 . . In contract year one, no partial surrenders are made. (Partial annuitizations are not permitted in contract year one.) . On the first contract anniversary, a 5% GMWB bonus is credited to the withdrawal benefit base. The credit is $100,000 x 0.05% = $5,000 . The new withdrawal benefit base is $100,000 + $5,000 = $105,000. . The new withdrawal benefit payment: . Investment Back is $105,000 x 0.07% = $7,350 . For Life is $105,000 x 0.05% = $5,250 EXAMPLE 2 . In contract year one: . no partial surrenders are made; and . the client makes a premium payment of $50,000. On the first contract anniversary: . a 5% GMWB bonus is credited to the withdrawal benefit base. The credit is ($100,000 + $50,000) x 0.05% = $7,500; . Investment Back: . the new withdrawal benefit base is $100,000 + $50,000 + $7,500 = $157,500; and . the new withdrawal benefit payment is $157,500 x 7% = $11,025. . For Life: . the new withdrawal benefit base is $100,000 + $50,000 + $7,500 = $157,500; and . the new withdrawal benefit payment is $157,500 x 5% = $7,875. EXAMPLE 3 . In contract year one, the client makes a partial surrender of $5,000. On the first contract anniversary, . Investment Back: . the new remaining withdrawal benefit base is $100,000 - $5,000 = $95,000. . the withdrawal benefit base remains the same ($100,000). . the withdrawal benefit payment for the next contract year remains the same ($100,000 x 0.07% = $7,000). . For Life: . the new remaining withdrawal benefit base is $100,000 - $5,000 = $95,000. . the withdrawal benefit base remains the same ($100,000). . the withdrawal benefit payment for the next contract year remains the same ($100,000 x 0.05% = $5,000). EXAMPLE 4 . In contract year one, no partial surrenders are made. On the first contract anniversary: . a 5% GMWB bonus is credited to withdrawal benefit base. The credit is $100,000 x 0.05% = $5,000; and . the new withdrawal benefit base is $100,000 + $5,000 = $105,000. In contract year two: . the client makes a partial surrender of $5,000. . no GMWB bonus is credited as the client made a partial surrender. In contract year three: . the client does not make any partial surrenders; . no GMWB bonus is credited as the client had taken a partial surrender (in contract year two). EXAMPLE 5 . In each of the first three contract years, a partial surrender of $5,000 is made. In each of contract years four and five, a partial annuitization of $5,000 is made. On the fifth contract anniversary, you may elect a step-up.
EXAMPLE 5A. EXAMPLE 5B. THE ACCUMULATED VALUE IS: $90,000 $110,000 INVESTMENT BACK Prior to step-up Withdrawal Benefit Base = $100,000 = $100,000 Withdrawal Benefit $ 100,000 $ 100,000 Payment = x 0.07% = $7,000 = x 0.07% = $7,000 Remaining Withdrawal = $75,000 = $75,000 Benefit Base ------------------------------------------------------------------------------------ After step-up Withdrawal Benefit Base = $90,000 = $110,000 Withdrawal Benefit $ 90,000 $ 110,000 Payment = x 0.07% = $6,300 = x 0.07% = $7,700 Remaining Withdrawal = $90,000 = $110,000 Benefit Base ------------------------------------------------------------------------------------ FOR LIFE Prior to step-up Withdrawal Benefit Base = $100,000 = $100,000 Withdrawal Benefit $ 100,000 $ 100,000 Payment = x 0.05% = $5,000 = x 0.05% = $5,000 Remaining Withdrawal = $75,000 = $75,000 Benefit Base ------------------------------------------------------------------------------------ After step-up Withdrawal Benefit Base = $90,000 = $110,000 Withdrawal Benefit $ 90,00 0 $ 110,000 Payment = x 0.05% = $4,500 = x 0.05% = $5,500 Remaining Withdrawal = $90,000 = $110,000 Benefit Base ------------------------------------------------------------------------------------
EXAMPLES WITH EXCESS WITHDRAWALS The excess withdrawal examples assume the following: PAGE> . the client is age 62. . the initial premium payment is $100,000. . withdrawal benefit base prior to partial surrender = $100,000. . remaining withdrawal benefit base prior to partial surrender = $100,000. . Investment Back (7%) withdrawal benefit payment = $7,000. . For Life (5%) withdrawal benefit payment = $5,000. . partial surrender amount = $8,000 (excess amount for "Investment Back" is $1,000; excess amount for "For Life" is $3,000). EXAMPLE 1 . In the first example, the accumulated value prior to partial surrender is $90,000. WITHDRAWAL BENEFIT BASE CALCULATION ----------------------------------- On the contract anniversary following the partial surrender, the withdrawal benefit base is adjusted for any excess withdrawals. INVESTMENT BACK . The amount of the adjustment* is $1,204.82. The new withdrawal benefit base is $100,000 - $1,204.82 = $98,795.18. * The amount of the adjustment is the greater of (a) or (b) where: . (a) is $1,000 (the amount of the excess withdrawal); and . (b) is $1,204.82 (the result of ((1) divided by (2)) multiplied by (3)) where: . (1) is the amount of the surrender greater than the withdrawal benefit payment remaining prior to the partial surrender ($1,000); . (2) is the accumulated value after the withdrawal benefit payment is deducted but prior to the surrender of the excess amount ($90,000 - $7,000); and . (3) is the withdrawal benefit base prior to the adjustment for the excess amount ($100,000). FOR LIFE . The amount of the adjustment* is $3,529.41. The new withdrawal benefit base is $100,000 - $3,529.41 = $96,470.59. * The amount of the adjustment is the greater of (a) or (b) where: . (a) is $3,000 (the amount of the excess withdrawal); and . (b) is $3,529.41 (the result of ((1) divided by (2)) multiplied by (3)) where: . (1) is the amount of the surrender greater than the withdrawal benefit payment remaining prior to the partial surrender ($3,000); . (2) is the accumulated value after the withdrawal benefit payment is deducted but prior to the surrender of the excess amount ($90,000 - $5,000); and . (3) is the withdrawal benefit base prior to the adjustment for the excess amount ($100,000). REMAINING WITHDRAWAL BENEFIT BASE CALCULATION --------------------------------------------- The remaining withdrawal benefit base is adjusted when partial surrenders are made. INVESTMENT BACK . The amount of the adjustment* is $8,120.48 (the amount of the withdrawal benefit payment plus the excess withdrawal). The new remaining withdrawal benefit base is $100,000 - $8,120.48 = $91,879.52. * The amount of the adjustment is (a) plus (b) where: . (a) is $7,000 (the actual amount surrendered that does not exceed the withdrawal benefit payment); and . (b) is $1,120.48 (a proportionate reduction for the excess withdrawal). The amount of the proportionate reduction is the greater of (1) or (2) where: . (1) is $1,000 (the amount of the excess withdrawal); and . (2) is $1,120.48 (the result of ((i) divided by (ii)) multiplied by (iii)) where: . (i) is the amount of the surrender greater than the withdrawal benefit payment remaining prior to the partial surrender ($1,000); . (ii) is the accumulated value after the withdrawal benefit payment is deducted but prior to the surrender of the excess amount ($90,000 - $7,000); and . (iii) is the remaining withdrawal benefit base after the withdrawal benefit payment is deducted but prior to the adjustment for the excess amount ($100,000 - $7,000). FOR LIFE . The amount of the adjustment* is $8,352.94 (the amount of the withdrawal benefit payment plus the excess withdrawal). The new remaining withdrawal benefit base is $100,000 - $8,352.94 = $91,647.06. * The amount of the adjustment is (a) plus (b) where . (a) is $5,000 (the actual amount surrendered that does not exceed the withdrawal benefit payment); and . (b) is $3,352.94 (a proportionate reduction for the excess withdrawal). The amount of the proportionate reduction is the greater of (1) or (2) where: . (1) is $3,000 (the amount of the excess withdrawal); and . (2) is $3,352.94 (the result of ((i) divided by (ii)) multiplied by (iii)) where: . (i) is the amount of the surrender greater than the withdrawal benefit payment remaining prior to the partial surrender ($3,000); . (ii) is the accumulated value after the withdrawal benefit payment is deducted but prior to the surrender of the excess amount ($90,000 - $5,000); and . (iii) is the remaining withdrawal benefit base after the withdrawal benefit payment is deducted but prior to the adjustment for the excess amount ($100,000 - $5,000). WITHDRAWAL BENEFIT PAYMENT CALCULATION (FOR THE NEXT CONTRACT YEAR) ------------------------------------------------------------------- The withdrawal benefit payment is the new withdrawal benefit base (calculated on the contract anniversary) multiplied by the associated percentage. INVESTMENT BACK . The new withdrawal benefit payment $98,795.18. x 0.07% = $6,915.66. FOR LIFE . The new withdrawal benefit payment $96,470.59 x 0.05% = $4,823.53. EXAMPLE 2 . In this example, the accumulated value prior to partial surrender is $110,000. WITHDRAWAL BENEFIT BASE CALCULATION ----------------------------------- On the contract anniversary following the partial surrender, the withdrawal benefit base is adjusted for any excess withdrawals. INVESTMENT BACK . The amount of the adjustment* is $1,000 (the amount of the excess withdrawal). The new withdrawal benefit base is $100,000 - $1,000 = $99,000. * The amount of the adjustment is the greater of (a) or (b) where: . (a) is $1,000 (the amount of the excess withdrawal); and . (b) is $970.87 (the result of ((1) divided by (2)) multiplied by (3)) where: . (1) is the amount of the surrender greater than the withdrawal benefit payment remaining prior to the partial surrender ($1,000); . (2) is the accumulated value after the withdrawal benefit payment is deducted but prior to the surrender of the excess amount ($110,000 minus $7,000); and . (3) is the withdrawal benefit base prior to the adjustment for the excess amount ($100,000) FOR LIFE . The amount of the adjustment* is $3,000 (the amount of the excess withdrawal). The new withdrawal benefit base is $100,000 - $3,000 = $97,000. * The amount of the adjustment is the greater of (a) or (b) where: . (a) is $3,000 (the amount of the excess withdrawal); and . (b) is $2,857.14 (the result of ((1) divided by (2)) multiplied by (3)) where: . (1) is the amount of the surrender greater than the withdrawal benefit payment remaining prior to the partial surrender ($3,000); . (2) is the accumulated value after the withdrawal benefit payment is deducted but prior to the surrender of the excess amount ($110,000 minus $5,000); and . (3) is the withdrawal benefit base prior to the adjustment for the excess amount ($100,000). REMAINING WITHDRAWAL BENEFIT BASE CALCULATION --------------------------------------------- The remaining withdrawal benefit base is adjusted when partial surrenders are made. INVESTMENT BACK . The amount of the adjustment* is $8,000 (the amount of the withdrawal benefit payment plus the excess withdrawal). The new remaining withdrawal benefit base is $100,000 - $8,000 = $92,000. * The amount of the adjustment is (a) plus (b) where: . (a) is $7,000 (the actual amount surrendered that does not exceed the withdrawal benefit payment); and . (b) is $1,000 (a proportionate reduction for the excess withdrawal). The amount of the proportionate reduction is the greater of (1) or (2) where: . (1) is $1,000 (the amount of the excess withdrawal); and . (2) is $902.91 (the result of ((i) divided by (ii)) multiplied by (iii)) where: . (i) is the amount of the surrender greater than the withdrawal benefit payment remaining prior to the partial surrender ($1,000); . (ii) is the accumulated value after the withdrawal benefit payment is deducted but prior to the surrender of the excess amount ($110,000 - $7,000); and . (iii) is the remaining withdrawal benefit base after the withdrawal benefit payment is deducted but prior to the adjustment for the excess amount ($100,000 - $7,000). FOR LIFE . The amount of the adjustment* is $8,000 (the amount of the withdrawal benefit payment plus the excess withdrawal). The new remaining withdrawal benefit base is $100,000 - $8,000 = $92,000. * The amount of the adjustment is (a) plus (b) where . (a) is $5,000 - the actual amount surrendered that does not exceed the withdrawal benefit payment; and . (b) is $3,000 - a proportionate reduction for the excess withdrawal. The amount of the proportionate reduction is the greater of (1) or (2) where: . (1) is $3,000 (the amount of the excess withdrawal); and . (2) is $2,714.28 (the result of ((i) divided by (ii)) multiplied by (iii)) where: . (i) is the amount of the surrender greater than the withdrawal benefit payment remaining prior to the partial surrender ($3,000); . (ii) is the accumulated value after the withdrawal benefit payment is deducted but prior to the surrender of the excess amount ($110,000 - $5,000); and . (iii) is the remaining withdrawal benefit base after the withdrawal benefit payment is deducted but prior to the adjustment for the excess amount ($100,000 - $5,000). WITHDRAWAL BENEFIT PAYMENT CALCULATION (FOR THE NEXT CONTRACT YEAR) ------------------------------------------------------------------- The withdrawal benefit payment is the new withdrawal benefit base (calculated on the contract anniversary) multiplied by the associated percentage. INVESTMENT BACK . The new withdrawal benefit payment is $99,000 x 0.07% = $6,930. FOR LIFE . The new withdrawal benefit payment $97,000 x 0.05% = $4,850. PRINCIPAL LIFE INSURANCE COMPANY SEPARATE ACCOUNT B PRINCIPAL INVESTMENT PLUS VARIABLE ANNUITY/SM// /CONTRACT STATEMENT OF ADDITIONAL INFORMATION DATED MAY 1, 2007 This Statement of Additional Information provides information about the Principal Investment Plus Variable Annuity/sm// / (the "Contract") in addition to the information that is contained in the Contract's Prospectus, dated May 1, 2007. 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: Principal Investment Plus Variable Annuity The Principal Financial Group P.O. Box 9382 Des Moines Iowa 50306-9382 Telephone: 1-800-852-4450 TABLE OF CONTENTS Page General Information and History......................................... Independent Registered Public Accounting Firm........................... Principal Underwriter................................................... Calculation of Performance Data ......................................... Taxation Under Certain Retirement Plans................................. Financial Statements Principal Life Insurance Company Separate Account B Report of Independent Registered Public Accounting Firm............... Principal Life Insurance Company Report of Independent Registered Public Accounting Firm............... Financial Statements.................................................. GENERAL INFORMATION AND HISTORY Principal Life Insurance Company (the "Company") is the issuer of the Principal Investment Plus Variable Annuity (the "Contract") and serves as custodian of its assets. The Company is a stock life insurance company with its home office at: Principal Financial Group, Des Moines, Iowa 50392 and is authorized to transact life and annuity business in all states of the United States and the District of Columbia. The Company is a wholly owned indirect subsidiary of Principal Financial Group, Inc., a publicly-traded company. In 1879, the Company was incorporated under Iowa law as a mutual assessment life insurance company named Bankers Life Association. It became a legal reserve life insurance company and 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 insurance holding company structure took place in 1998, when the Company became a stock life insurance company. In 2001, the mutual insurance holding company converted to a stock company through a process called demutualization, resulting in the current organizational structure. INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Ernst & Young LLP, 801 Grand, Des Moines, Iowa, serves as the independent registered public accounting firm for Principal Life Insurance Company Separate Account B and the Principal Life Insurance Company. PRINCIPAL UNDERWRITER Princor Financial Services Corporation ("Princor") is the principal underwriter of the Contract. Princor is a indirect, wholly owned 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 two fiscal years Princor has received and retained the following commissions:
2006 2005 RECEIVED/RETAINED RECEIVED/RETAINED ----------------- ----------------- $22,386,910/$0 $12,169,228/$0
CALCULATION OF PERFORMANCE DATA The Separate Account may publish advertisements containing information (including graphs, charts, tables and examples) about the performance of one or more of its divisions. Separate performance figures will be shown for the Contract without the premium payment credit rider and for the Contract with the premium payment credit rider. The Contract was not offered prior to January 4, 2005. However, the certain divisions invest in underlying mutual funds which 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 as the Contract was issued on or after the date the underlying mutual fund was first offered. The hypothetical performance from the date of inception of the underlying mutual fund in which the division invests is derived by reducing the actual performance of the underlying mutual fund by the highest level of fees and charges of the Contract as if it had been in existence. In addition, as certain of the underlying mutual funds have added classes since the inception of the fund, performance may be shown for periods prior to the inception date of the new class which represents the historical results of initial class shares and do not include the effects of the subsequent class' annual fees and expenses. 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 the Contract. Both yield figures are based on historical earnings and are not intended to indicate future performance. The "yield" of the division refers to the income generated by an investment under the Contract in the division over a 7-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."
YIELD FOR THE PERIOD ENDED DECEMBER 31, 2006 ------------------------------------------------------------------------------- FOR CONTRACTS: 7-DAY ANNUALIZED YIELD 7-DAY EFFECTIVE YIELD ------------------------------------------------------------------------------- without a surrender charge or a purchase payment credit 3.28% 3.33% rider ------------------------------------------------------------------------------- with a surrender charge but without a purchase payment -2.62% -2.67% credit rider ------------------------------------------------------------------------------- without a surrender charge but with a purchase payment 2.68% 2.74% credit rider -------------------------------------------------------------------------------
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 for the Contract without the premium payment credit rider, the ending value is reduced by a surrender charge that decreases from 6% to 0% over a period of 7 years. For the calculations relating to the Contract with the premium payment credit rider, the ending value is reduced by a surrender charge that decreases from 8% to 0% over a period of 9 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, 2006 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 -------------------------------------------------------------- EFFECTIVE SINCE DIVISION DATE ONE YEAR FIVE YEARS TEN YEARS INCEPTION -------- --------- -------- ---------- --------- --------- AIM V.I. Basic Value September 10, 2001 5.77 4.56 4.88 AIM V.I. SmallCap Equity August 29, 2003 9.95 12.34 AllianceBernstein Small Cap Growth August 15, 1996 3.28 4.36 2.57 3.04 American Century VP Inflation Protection December 31, 2002 -5.71 1.18 American Century VP Ultra May 1, 2001 -10.62 -1.01 / -1.73 American Century VP Vista October 5, 2001 1.62 7.36 / 7.40 Dreyfus IP Technology Growth August 31, 1999 -3.29 -2.44 -5.30 Fidelity VIP Contrafund January 3, 1995 4.02 9.77 9.53 12.51 Fidelity VIP Equity-Income November 3, 1986 12.41 6.96 7.62 9.65 Fidelity VIP Growth October 31, 1986 -0.78 -0.58 4.93 9.00 Fidelity VIP Mid Cap December 28, 1998 4.98 13.65 17.60 Fidelity VIP Overseas January 28, 1987 10.28 10.64 6.05 6.28 Goldman Sachs VIT Structured Small Cap Equity February 13, 1998 4.85 9.57 6.38 Goldman Sachs VIT Mid Cap Value May 1, 1998 8.69 13.22 9.87 Lehman Brothers High Income Bond Portfolio September 15, 2004 0.10 0.64 Neuberger Berman AMT Fasciano July 12, 2002 -2.09 7.60 Neuberger Berman AMT Partners March 22, 1994 4.82 8.18 7.36 10.05 Neuberger Berman AMT Socially Responsive February 18, 1999 6.26 7.65 5.77 Principal VCF Asset Allocation June 1, 1994 5.34 4.60 6.10 7.19 Principal VCF Bond December 18, 1987 -2.68 3.26 4.34 6.14 Principal VCF Capital Value May 13, 1970 12.43 7.41 6.02 10.53 Principal VCF Diversified International May 2, 1994 20.35 14.44 7.24 8.11 Principal VCF Equity Growth June 1, 1994 -1.14 0.65 4.99 9.09 Principal VCF Equity Income I April 28, 1998 10.68 10.18 8.94 Principal VCF Equity Value August 30, 2004 12.04 11.53 Principal VCF Government & High Quality Bond April 9, 1987 -3.10 2.14 4.33 5.76 Principal VCF Growth May 2, 1994 2.52 1.93 2.43 4.90 Principal VCF International Emerging Markets October 24, 2000 30.58 25.60 18.03 Principal VCF International SmallCap May 1, 1998 22.73 21.26 / 13.67 Principal VCF LargeCap Blend May 1, 2002 8.35 / 5.54 Principal VCF LargeCap Stock Index May 3, 1999 8.10 3.90 0.44 Principal VCF LargeCap Value May 1, 2002 14.01 8.55 Principal VCF MidCap December 18, 1987 6.78 10.35 9.50 12.67 Principal VCF MidCap Growth May 1, 1998 2.26 5.74 2.47 Principal VCF MidCap Value May 3, 1999 5.84 11.68 / 12.12 Principal VCF Money Market March 18, 1983 -2.70 0.12 2.17 3.84 Principal VCF Principal LifeTime 2010 August 30, 2004 4.87 8.44 Principal VCF Principal LifeTime 2020 August 30, 2004 7.70 10.74 Principal VCF Principal LifeTime 2030 August 30, 2004 7.37 10.58 Principal VCF Principal LifeTime 2040 August 30, 2004 7.67 11.48 Principal VCF Principal LifeTime 2050 August 30, 2004 8.02 11.74 Principal VCF Principal LifeTime Strategic Income August 30, 2004 2.86 6.49 Principal VCF Real Estate Securities May 1, 1998 28.88 24.20 15.98 Principal VCF Short-Term Bond May 1, 2003 -2.88 -0.16 Principal VCF SmallCap Growth May 1, 1998 1.59 -1.60 0.79 Principal VCF SmallCap Value May 1, 1998 11.14 14.45 11.55 Principal VCF SAM Balanced June 3,1997 3.20 5.76 7.56 Principal VCF SAM Conservative Balanced April 23, 1998 1.41 5.19 4.23 Principal VCF SAM Conservative Growth June 3,1997 4.79 5.96 8.18 Principal VCF SAM Flexible Income September 9, 1997 -0.51 4.46 5.57 Principal VCF SAM Strategic Growth June 3, 1997 5.61 5.86 9.15 Principal VCF West Coast Equity April 28, 1998 4.62 6.93 10.50 T. Rowe Price Blue Chip Growth December 29, 2000 1.94 2.15 -0.50 T. Rowe Price Heath Sciences December 29, 2000 1.06 4.77 2.53
CONTRACT WITHOUT PURCHASE PAYMENT CREDIT RIDER WITHOUT SURRENDER CHARGE -------------------------------------------------------------- EFFECTIVE SINCE DIVISION DATE ONE YEAR FIVE YEARS TEN YEARS INCEPTION -------- --------- -------- ---------- --------- --------- AIM V.I. Basic Value September 10, 2001 11.77 5.06 5.19 AIM V.I. SmallCap Equity August 29, 2003 15.95 13.24 AllianceBernstein Small Cap Growth August 15, 1996 9.28 4.86 2.57 3.04 American Century VP Inflation Protection December 31, 2002 0.29 2.13 American Century VP Ultra May 1, 2001 -4.62 -0.39 / -1.35 American Century VP Vista October 5, 2001 7.62 7.81 / 7.68 Dreyfus IP Technology Growth August 31, 1999 2.71 -1.79 -5.30 Fidelity VIP Contrafund January 3, 1995 10.02 10.18 9.53 12.51 Fidelity VIP Equity-Income November 3, 1986 18.41 7.41 7.62 9.65 Fidelity VIP Growth October 31, 1986 5.22 0.03 4.93 9.00 Fidelity VIP Mid Cap December 28, 1998 10.98 14.01 / 17.60 Fidelity VIP Overseas January 28, 1987 16.28 11.04 6.05 6.28 Goldman Sachs VIT Structured Small Cap Equity February 13, 1998 10.85 9.99 6.38 Goldman Sachs VIT Mid Cap Value May 1, 1998 14.69 13.58 9.87 Lehman Brothers High Income Bond Portfolio September 15, 2004 6.10 2.77 Neuberger Berman AMT Fasciano July 12, 2002 3.91 8.11 Neuberger Berman AMT Partners March 22, 1994 10.82 8.61 7.36 10.05 Neuberger Berman AMT Socially Responsive February 18, 1999 12.26 8.09 5.77 Principal VCF Asset Allocation June 1, 1994 11.34 5.09 6.10 7.19 Principal VCF Bond December 18, 1987 3.32 3.79 4.34 6.14 Principal VCF Capital Value May 13, 1970 18.43 7.85 6.02 10.53 Principal VCF Diversified International May 2, 1994 26.35 14.79 7.24 8.11 Principal VCF Equity Growth June 1, 1994 4.86 1.23 4.99 9.09 Principal VCF Equity Income I April 28, 1998 16.68 10.58 8.94 Principal VCF Equity Value August 30, 2004 18.04 13.36 Principal VCF Government & High Quality Bond April 9, 1987 2.90 2.68 4.33 5.76 Principal VCF Growth May 2, 1994 8.52 2.48 2.43 4.90 Principal VCF International Emerging Markets October 24, 2000 36.58 25.84 18.03 Principal VCF International SmallCap May 1, 1998 28.73 21.53 13.67 Principal VCF LargeCap Blend May 1, 2002 14.35 6.07 Principal VCF LargeCap Stock Index May 3, 1999 14.10 4.41 0.44 Principal VCF LargeCap Value May 1, 2002 20.01 9.02 Principal VCF MidCap December 18, 1987 12.78 10.75 9.50 12.67 Principal VCF MidCap Growth May 1, 1998 8.26 6.21 2.47 Principal VCF MidCap Value May 3, 1999 11.84 12.06 12.12 Principal VCF Money Market March 18, 1983 3.30 0.71 2.17 3.84 Principal VCF Principal Lifetime 2010 August 30, 2004 10.87 10.34 Principal VCF Principal Lifetime 2020 August 30, 2004 13.70 12.59 Principal VCF Principal Lifetime 2030 August 30, 2004 13.37 12.43 Principal VCF Principal Lifetime 2040 August 30, 2004 13.67 13.31 Principal VCF Principal Lifetime 2050 August 30, 2004 14.02 13.57 Principal VCF Principal Lifetime Strategic Income August 30, 2004 8.86 8.43 Principal VCF Real Estate Securities May 1, 1998 34.88 24.45 15.98 Principal VCF Short-Term Bond May 1, 2003 3.12 0.92 Principal VCF SmallCap Growth May 1, 1998 7.59 -0.97 0.79 Principal VCF SmallCap Value May 1, 1998 17.14 14.80 11.55 Principal VCF SAM Balanced June 3,1997 9.20 6.23 7.56 Principal VCF SAM Conservative Balanced April 23, 1998 7.41 5.68 4.23 Principal VCF SAM Conservative Growth June 3,1997 10.79 6.44 8.18 Principal VCF SAM Flexible Income September 9, 1997 5.49 4.96 5.57 Principal VCF SAM Strategic Growth June 3, 1997 11.61 6.33 9.15 Principal VCF West Coast Equity April 28, 1998 10.62 7.39 10.50 T. Rowe Price Blue Chip Growth December 29, 2000 7.94 2.69 -0.50 T. Rowe Price Heath Sciences December 29, 2000 7.06 5.26 2.53
CONTRACT WITH PURCHASE PAYMENT CREDIT RIDER WITH SURRENDER CHARGE -------------------------------------------------------------- EFFECTIVE SINCE DIVISION DATE ONE YEAR FIVE YEARS TEN YEARS INCEPTION -------- --------- -------- ---------- --------- --------- AIM V.I. Basic Value September 10, 2001 3.10 3.75 4.09 AIM V.I. SmallCap Equity August 29, 2003 7.26 11.41 AllianceBernstein Small Cap Growth August 15, 1996 0.63 3.55 1.95 2.42 American Century VP Inflation Protection December 31, 2002 -8.30 0.30 American Century VP Ultra May 1, 2001 -13.19 -1.84 -2.53 American Century VP Vista October 5, 2001 -1.02 6.55 6.60 Dreyfus IP Technology Growth August 31, 1999 -5.90 -3.27 -6.07 Fidelity VIP Contrafund January 3, 1995 1.36 8.96 8.87 11.83 Fidelity VIP Equity-Income November 3, 1986 9.70 6.15 6.98 8.99 Fidelity VIP Growth October 31, 1986 -3.41 -1.41 4.30 8.34 Fidelity VIP Mid Cap December 28, 1998 2.31 12.84 16.90 Fidelity VIP Overseas January 28, 1987 7.59 9.83 5.41 5.64 Goldman Sachs VIT Structured Small Cap Equity February 13, 1998 2.18 8.76 5.74 Goldman Sachs VIT Mid Cap Value May 1, 1998 6.01 12.40 9.21 Lehman Brothers High Income Bond Portfolio September 15, 2004 -2.53 -0.43 Neuberger Berman AMT Fasciano July 12, 2002 -4.71 6.76 Neuberger Berman AMT Partners March 22, 1994 2.16 7.37 6.72 9.39 Neuberger Berman AMT Socially Responsive February 18, 1999 3.59 6.84 5.05 Principal VCF Asset Allocation June 1, 1994 2.68 3.78 5.47 6.55 Principal VCF Bond December 18, 1987 -5.30 2.45 3.72 5.50 Principal VCF Capital Value May 13, 1970 9.73 6.60 5.38 9.87 Principal VCF Diversified International May 2, 1994 17.59 13.63 6.60 7.46 Principal VCF Equity Growth June 1, 1994 -3.76 -0.17 4.36 8.44 Principal VCF Equity Income I April 28, 1998 7.98 9.36 8.29 Principal VCF Equity Value August 30, 2004 9.34 10.47 Principal VCF Government & High Quality Bond April 9, 1987 -5.71 1.32 3.70 5.13 Principal VCF Growth May 2, 1994 -0.12 1.11 1.82 4.28 Principal VCF International Emerging Markets October 24, 2000 27.76 24.76 17.18 Principal VCF International SmallCap May 1, 1998 19.96 20.43 12.99 Principal VCF LargeCap Blend May 1, 2002 5.67 4.72 Principal VCF LargeCap Stock Index May 3, 1999 5.42 3.08 -0.29 Principal VCF LargeCap Value May 1, 2002 11.29 7.72 Principal VCF MidCap December 18, 1987 4.11 9.54 8.85 11.99 Principal VCF MidCap Growth May 1, 1998 -0.39 4.93 1.85 Principal VCF MidCap Value May 3, 1999 3.17 10.87 11.39 Principal VCF Money Market March 18, 1983 -5.32 -0.71 1.56 3.21 Principal VCF Principal Lifetime 2010 August 30, 2004 2.21 7.38 Principal VCF Principal Lifetime 2020 August 30, 2004 5.02 9.68 Principal VCF Principal Lifetime 2030 August 30, 2004 4.69 9.52 Principal VCF Principal Lifetime 2040 August 30, 2004 4.99 10.41 Principal VCF Principal Lifetime 2050 August 30, 2004 5.34 10.68 Principal VCF Principal Lifetime Strategic Income August 30, 2004 0.21 5.43 Principal VCF Real Estate Securities May 1, 1998 26.08 23.36 15.28 Principal VCF Short-Term Bond May 1, 2003 -5.50 -1.06 Principal VCF SmallCap Growth May 1, 1998 -1.05 -2.43 0.19 Principal VCF SmallCap Value May 1, 1998 8.44 13.63 10.88 Principal VCF SAM Balanced June 3,1997 0.55 4.95 6.92 Principal VCF SAM Conservative Balanced April 23, 1998 -1.23 4.38 3.60 Principal VCF SAM Conservative Growth June 3,1997 2.12 5.15 7.53 Principal VCF SAM Flexible Income September 9, 1997 -3.14 3.65 4.94 Principal VCF SAM Strategic Growth June 3, 1997 2.95 5.06 8.49 Principal VCF West Coast Equity April 28, 1998 1.96 6.12 9.83 T. Rowe Price Blue Chip Growth December 29, 2000 -0.70 1.33 -1.45 T. Rowe Price Heath Sciences December 29, 2000 -1.58 3.95 1.61
CONTRACT WITH PURCHASE PAYMENT CREDIT RIDER WITHOUT SURRENDER CHARGE -------------------------------------------------------------- EFFECTIVE SINCE DIVISION DATE ONE YEAR FIVE YEARS TEN YEARS INCEPTION -------- --------- -------- ---------- --------- --------- AIM V.I. Basic Value September 10, 2001 11.10 4.43 4.56 AIM V.I. SmallCap Equity August 29, 2003 15.26 12.56 AllianceBernstein Small Cap Growth August 15, 1996 8.63 4.23 1.95 2.42 American Century VP Inflation Protection December 31, 2002 -0.30 1.52 American Century VP Ultra May 1, 2001 -5.19 -0.99 -1.94 American Century VP Vista October 5, 2001 6.98 7.16 7.03 Dreyfus IP Technology Growth August 31, 1999 2.10 -2.38 -5.87 Fidelity VIP Contrafund January 3, 1995 9.36 9.52 8.87 11.83 Fidelity VIP Equity-Income November 3, 1986 17.70 6.77 6.98 8.99 Fidelity VIP Growth October 31, 1986 4.59 -0.57 4.30 8.34 Fidelity VIP Mid Cap December 28, 1998 10.31 13.32 16.90 Fidelity VIP Overseas January 28, 1987 15.59 10.37 5.41 5.64 Goldman Sachs VIT Structured Small Cap Equity February 13, 1998 10.18 9.33 5.74 Goldman Sachs VIT Mid Cap Value May 1, 1998 14.01 12.90 9.21 Lehman Brothers High Income Bond Portfolio September 15, 2004 5.47 2.16 Neuberger Berman AMT Fasciano July 12, 2002 3.29 7.47 Neuberger Berman AMT Partners March 22, 1994 10.16 7.96 6.72 9.39 Neuberger Berman AMT Socially Responsive February 18, 1999 11.59 7.45 5.14 Principal VCF Asset Allocation June 1, 1994 10.68 4.46 5.47 6.55 Principal VCF Bond December 18, 1987 2.70 3.16 3.72 5.50 Principal VCF Capital Value May 13, 1970 17.73 7.21 5.38 9.87 Principal VCF Diversified International May 2, 1994 25.59 14.10 6.60 7.46 Principal VCF Equity Growth June 1, 1994 4.24 0.62 4.36 8.44 Principal VCF Equity Income I April 28,1998 15.98 9.92 8.29 Principal VCF Equity Value August 30, 2004 17.34 12.69 Principal VCF Government & High Quality Bond April 9, 1987 2.29 2.07 3.70 5.13 Principal VCF Growth May 2, 1994 7.88 1.86 1.82 4.28 Principal VCF International Emerging Markets October 24, 2000 35.76 25.09 17.32 Principal VCF International SmallCap May 1, 1998 27.96 20.81 12.99 Principal VCF LargeCap Blend May 1, 2002 13.67 5.43 Principal VCF LargeCap Stock Index May 3, 1999 13.42 3.78 -0.16 Principal VCF LargeCap Value May 1, 2002 19.29 8.37 Principal VCF MidCap December 18, 1987 12.11 10.09 8.85 11.99 Principal VCF MidCap Growth May 1, 1998 7.61 5.58 1.85 Principal VCF MidCap Value May 3, 1999 11.17 11.39 11.45 Principal VCF Money Market March 18, 1983 2.68 0.10 1.56 3.21 Principal VCF Principal Lifetime 2010 August 30, 2004 10.21 9.68 Principal VCF Principal Lifetime 2020 August 30, 2004 13.02 11.92 Principal VCF Principal Lifetime 2030 August 30, 2004 12.69 11.76 Principal VCF Principal Lifetime 2040 August 30, 2004 12.99 12.63 Principal VCF Principal Lifetime 2050 August 30, 2004 13.34 12.89 Principal VCF Principal Lifetime Strategic Income August 30, 2004 8.21 7.79 Principal VCF Real Estate Securities May 1, 1998 34.08 23.70 15.28 Principal VCF Short-Term Bond May 1, 2003 2.50 0.31 Principal VCF SmallCap Growth May 1, 1998 6.95 -1.56 0.19 Principal VCF SmallCap Value May 1, 1998 16.44 14.11 10.88 Principal VCF SAM Balanced June 3,1997 8.55 5.60 6.92 Principal VCF SAM Conservative Balanced April 23, 1998 6.77 5.04 3.60 Principal VCF SAM Conservative Growth June 3,1997 10.12 5.80 7.53 Principal VCF SAM Flexible Income September 9, 1997 4.86 4.33 4.94 Principal VCF SAM Strategic Growth June 3, 1997 10.95 5.71 8.49 Principal VCF West Coast Equity April 28, 1998 9.96 6.75 9.83 T. Rowe Price Blue Chip Growth December 29, 2000 7.30 2.08 -1.10 T. Rowe Price Heath Sciences December 29, 2000 6.42 4.63 1.91
TAXATION UNDER CERTAIN RETIREMENT PLANS INDIVIDUAL RETIREMENT ANNUITIES Contributions. Individuals may make contributions for individual retirement -------------- annuity (IRA) contracts. Individuals may make deductible contributions (for any year) up to the lesser of the amount shown in the chart or 100% of compensation. Individuals age 50 or over are also permitted to make additional "catch-up" contributions. The additional contribution is $1,000 in 2006 and beyond. Such individuals may establish a traditional IRA for a non-working spouse. The annual contribution for both spouses' contracts cannot exceed the lesser of the amount shown in the chart or 100% of the working spouse's compensation. No more than the individual IRA limit may be contributed to either spouse's IRA for any year.
IRA - MAXIMUM ANNUAL CONTRIBUTION ---------------------------------------------------------- YEAR INDIVIDUAL IRA INDIVIDUAL IRA + SPOUSAL IRA ---- -------------- ---------------------------- 2006 $4,000 $ 8,000 2007 $4,000 $ 8,000 2008 $5,000 $10,000
Starting in 2009, limits are indexed for cost-of-living. Contributions may be tax deductible. If an individual and his/her spouse do not participate in a qualified retirement plan, the contributions to an IRA are fully tax deductible regardless of income. If an individual is an active participant in a qualified retirement plan, his/her ability to deduct the contributions depends upon his/her income level. For individuals who are not active participants but whose spouses are, deductibility of traditional IRA contributions is phased out if the couple files a joint return and the Adjusted Gross Income is between $156,000 and $166,000 in 2007.
DEDUCTIBILITY OF TRADITIONAL IRA CONTRIBUTIONS FOR ACTIVE PARTICIPANTS ------------------------------------------------------------------------------------------------------------ MARRIED INDIVIDUALS (FILING JOINTLY) SINGLE INDIVIDUAL ----------------------------------------------------------------------- --------------------------------- LIMITED NO LIMITED NO YEAR DEDUCTION DEDUCTION YEAR DEDUCTION DEDUCTION ---- --------- --------- ---- --------- --------- 2006 $75,000 $ 85,000 2006 $50,000 $60,000 2007 $83,000 $103,000 2007 $52,000 $62,000
An individual may make non-deductible IRA contributions to the extent of the excess of: 1) The lesser of maximum annual contribution 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 591/2 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 701/2, and such distributions must be made over a period that does not exceed the uniform life distribution period established by the IRS. A penalty tax of 50% may 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 retirement plan, tax-deferred annuity plan or governmental 457(b) 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, tax-deferred annuity plan, or governmental 457(b) 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 Contributions. 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 100% of compensation or $45,000 for 2007. 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. The amount that an employee chooses to defer and contribute to the SAR/SEP is referred to as an elective deferral. These elective deferrals are subject to the same cap as elective deferrals to IRC Section 401(k) plans, see table below. In addition to the elective deferrals, SAR/SEP may permit additional elective deferrals by individuals age 50 or over, referred to as "catch-up contributions". No new SAR/SEP are permitted after 1996 for any employer, but those in effect prior to 1997 may continue to operate, receive contributions, and add new employees. Employees of tax-exempt organizations and state and local government agencies are not eligible for SAR/SEPs.
SALARY REDUCTION SIMPLIFIED EMPLOYEE PENSION PLAN (SAR-SEP) -------------------------------------------------------------- YEAR ELECTIVE DEFERRAL CATCH-UP CONTRIBUTION ---- ----------------- --------------------- 2006 $15,000 $5,000 2007 $15,500. $5,000
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) Contributions. 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. The amount that an employee chooses to defer and contribute to the SIMPLE IRA is referred to as an elective deferral. These elective deferrals cannot exceed the amounts shown in the chart. In addition to the elective deferrals, SIMPLE IRA may permit additional elective deferrals by individuals age 50 or over, referred to as "catch-up contributions". Elective contribution amounts made under the salary reduction portions (i.e., those subject to the $7,000 limit in 2002) of a SIMPLE IRA plan are counted in the overall limit on elective deferrals by any individual. For example, an individual under age 50 who defers the maximum of $7,000 to a SIMPLE IRA of one employer and participates in a 401(k) plan of another employer would be limited to an elective deferral of $4,000 in 2002 ($11,000 - $7,000) to the 401(k) plan. The employer generally must match either 100% of the employee's elective deferral, up to 3% of the employee's compensation or fixed nonelective contributions of 2% of compensation.
SAVINGS INCENTIVE MATCH PLAN FOR EMPLOYEES (SIMPLE IRA) ----------------------------------------------------------------------------------------------- YEAR ELECTIVE DEFERRAL CATCH-UP CONTRIBUTION OVERALL LIMIT ON ELECTIVE DEFERRALS ---- ----------------- --------------------- ----------------------------------- 2006 $10,000 $2,500 $15,000 2007 and beyond $10,500 $2,500 $15,500
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) Contribution. Under Section 408A of the Code, individuals may contribute to a ------------- Roth IRA on his/her own behalf up to the lesser of maximum annual contribution limit as shown in the chart or 100% of compensation. In addition, the contribution must be reduced by the amount of any contributions made to other IRAs for the benefit of the same individual. Individuals age 50 or over are also permitted to make additional "catch-up" contributions. The additional contribution is $500 for 2004 and 2005 and $1,000 in 2006 and beyond.
ROTH IRA - MAXIMUM ANNUAL CONTRIBUTION ------------------------------------------------ YEAR INDIVIDUAL ROTH IRA CATCH-UP CONTRIBUTION ---- ------------------- --------------------- 2006 $4,000 $1,000 2007 $4,000 $1,000 2008 $5,000 $1,000
Starting in 2009, individual Roth IRA limits are indexed for cost-of-living. The maximum 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 (see chart below). If taxable income is recognized on the traditional IRA, and IRA owner (with adjusted gross income of less than $100,000) may convert a traditional IRA into a Roth IRA. All IRA income will need to be recognized in the year of conversion. No IRS 10% tax penalty will apply to the conversion.
MODIFIED ADJUSTED GROSS INCOME ------------------------------------------------------------------------------------------------------------------------ SINGLE MARRIED FILING JOINT ROTH IRA CONTRIBUTION ------ -------------------- --------------------- $99,000 or less $156,000 Full Contribution $99,000 - $114,000 $156,000 - $166,0000 Partial Contribution* $114,000 & over $166,000 & over No Contribution *Those entitled to only a partial contribution should check with a tax advisor to determine the allowable contribution.
A person whose filing status is "married, filing separately" may not make a full Roth IRA contribution, unless the couple are separated and have been living apart for the entire year. Only a partial contribution is allowed if the Modified Adjusted Gross Income is less than $10,000. 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 591/2, 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. FINANCIAL STATEMENTS Report of Independent Registered Public Accounting Firm The Board of Directors and Participants Principal Life Insurance Company We have audited the accompanying statements of assets and liabilities of each of the divisions of Principal Life Insurance Company Separate Account B [comprised of the AIM V.I. Basic Value Series 1, AIM V.I. Capital Appreciation Series I, AIM V.I. Core Equity Series I, AIM V.I. Dynamics Series I, AIM V.I. Global Health Care Series I, AIM V.I. Small Cap Equity Series I, AIM V.I. Small Cap Growth Series I (formerly AIM V.I. Small Company Growth Series I), AIM V.I. Technology Series I, Alliance Bernstein VP Series Small Cap Growth Class A, American Century VP Income & Growth Class I, American Century VP Inflation Protection Class II, American Century VP Ultra Class I, American Century VP Ultra Class II, American Century VP Value Class II, American Century VP Vista Class I, Asset Allocation, Balanced, Bond, Capital Value, Diversified International, Dreyfus IP Founders Discovery Initial Shares, Dreyfus IP Technology Service Shares, Equity Growth, Equity Income, Equity Value, Fidelity VIP Equity-Income Service Class 2, Fidelity VIP Growth Service Class, Fidelity VIP Growth Service Class 2, Fidelity VIP Overseas Service Class 2, Fidelity VIP II Contrafund Service Class, Fidelity VIP II Contrafund Service Class 2, Fidelity VIP III Mid Cap Service Class 2, Goldman Sachs VIT Mid Cap Value Fund Service Class I, Goldman Sachs Structured Small Cap Equity Service Class I (formerly Goldman Sachs CORE Small Cap Equity Fund Service Class I), Government & High Quality Bond, Growth, International Emerging Markets, International SmallCap, Janus Aspen Mid Cap Growth Service Shares, LargeCap Blend, LargeCap Growth Equity, LargeCap Stock Index, LargeCap Value, MidCap, MidCap Growth, MidCap Value, Money Market, Neuberger Berman AMT Fasciano S Class, Neuberger Berman AMT High Income Bond S Class, Neuberger Berman AMT Partners I Class, Neuberger Berman AMT Socially Responsive I Class, Principal LifeTime Strategic Income, Principal LifeTime 2010, Principal LifeTime 2020, Principal LifeTime 2030, Principal LifeTime 2040, Principal LifeTime 2050, Real Estate Securities, Short-Term Bond, SmallCap, SmallCap Growth, SmallCap Value, T. Rowe Price Blue Chip Growth II, T. Rowe Price Health Science II, and Templeton Growth Securities Class 2 Divisions] as of December 31, 2006, and the related statements of operations and changes in net assets for the periods 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 the standards of the Public Company Accounting Oversight Board (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. We were not engaged to perform an audit of the Separate Account's internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Separate Account's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. Our procedures included confirmation of securities owned as of December 31, 2006 by correspondence with the transfer agents. 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 financial position of each of the respective divisions of Principal Life Insurance Company Separate Account B at December 31, 2006, and the results of their operations and the changes in their net assets for the periods described above, in conformity with U.S. generally accepted accounting principles. /s/ Ernst & Young LLP April 23, 2007
Principal Life Insurance Company Separate Account B Statements of Assets and Liabilities December 31, 2006 AIM V.1. AIM V.1. Capital Basic Value Appreciation Series I Series I Division Division Assets Investments in shares of mutual funds, at markel $ 1,072,800 $ 15,581,818 Liabilities Net assets $ 1,072,800 $ 15,581,818 - --------- ------------ Net assets Accumulation units: Bankers Flexible Annuity $ - $ - Pension Builder Plus - - Pension Builder Plus - Rollover IRA - - Personal Variable - - Premier Variable - - Principal Freedom Variable Annuity - - Principal Freedom 2 Variable Annuity - - The Principal Variable Annuity - 13,225,032 The Principal Variable Annuity With Purchase Payment Credit - 2,356,786 Rider Principal Investment Plus Variable Annuity 647,422 - Principal Investment Plus Variable Annuity With Purchase Rider 425,378 - Contracts in annuitization period: Bankers Flexible Annuity - - Pension Builder Plus - Rollover IRA - - - - Total net assets $ 1,072,800 $ 15,581,818 - --------- ------------ Investments in shares of mutual funds, at cost $ 1,040,800 $ 15,593,879 Shares ofmutual fund owned 80,299 594,272 Accumulation units outstanding: Bankers Flexible Annuity - - Pension Builder Plus - - Pension Builder Plus - Rollover IRA - - Personal Variable - - Premier Variable - - Principal Freedom Variable Annuity - - Principal Freedom 2 Variable Annuity - - The Principal Variable Annuity - 1,339,103 The Principal Variable Annuity With Purchase Payment Credit - 239,604 Rider Principal Investment Plus Variable Annuity 49,357 - Principal Investment Plus Variable Annuity With Purchase Rider 32,891 - Accumulation unit value: Bankers Flexible Annuity $ - $ - Pension Builder Plus - - Pension Builder Plus - Rollover IRA - - Personal Variable - - Premier Variable - - Principal Freedom Variable Annuity - - Principal Freedom 2 Variable Annuity - - The Principal Variable Annuity - 9.88 The Principal Variable Annuity With Purchase Payment Credit - 9.84 Rider Principal Investment Plus Variable Annuity 13.12 - Principal Investment Plus Variable Annuity With Purchase Rider 12.93 - Annuitized units outstanding: Bankers Flexible Annuity - - Pension Builder Plus - Rollover IRA - - Annuitized unit value: Bankers Flexible Annuity $ - $ - Pension Builder Plus - Rollover IRA - - See accompanying notes.
AIM V.I. AIM V.I. AIM V.L AIM V.L AIM V.I. Global Small Cap Small Cap AIM V.I. Core Equity Dynamics Health Care Equity Growth Technology Series I Series I Series I Series I Series I Series I Division Division Division Division Division Division -------- -------- -------- -------- -------- -------- ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------ $ 61,827,860 $ 3,067,981 $ 13,857,021 $ 774,825 $ 4,430,627 $ 6,147,933 ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------ $ 61,827,860 $ 3,067,981 $ 13,857,021 $ 774,825 $ 4,430,627 $ 6,147,933 - ---------- ----------- ------------ --------- ------------- --------- ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------ 47,804,740 1,748,048 8,446,568 - 2,994,033 3,788,705 14,023,120 1,319,933 5,410,453 - 1,436,594 2,359,228 - - - 356,159 - - 418,666 - - ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------ $ 61,827,860 $ 3,067,981 $ 13,857,021 $ 774,825 $ 4,430,627 (k,147,933 - ---------- ----------- ------------ --------- ----------- ---------- ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------ $ 58,252,864 $ 2,290,194 $ 10,957,723 $ 751,934 $ 3,332,105 $ 5,062,436 2,271,413 178,891 644,213 51,009 239,493 438,512 4,649,179 170,364 769,608 _ 300,366 625,345 1,414,651 133,054 509,879 _ 149,066 402,767 _ _ _ 25,062 _ _ 29,880 _ _ 10.28 10.26 10.98 _ 9.97 6.06 9.91 9.92 10.61 _ 9.64 5.86 _ _ _ 14.21 _ _ 14.01 _ _
Principal Life Insurance Company Separate Account B Statements of Assets and Liabilities (continued) December 31, 2006 Alliance Bernstein American VP Series Century VP Small Cap Income & Growth Growth Class A Class I Division Division -------- -------- Assets Investments in shares of mutual funds, at markel $ 994,036 $ 38,340,900 Liabilities Net assets $ 994,036 $ 38,340,900 - ------- ------------ Net assets Accumulation units: Bankers Flexible Annuity $ - $ - Pension Builder Plus - - Pension Builder Plus - Rollover IRA - - Personal Variable - - Premier Variable - - Principal Freedom Variable Annuity - 7,170,058 Principal Freedom 2 Variable Annuity - - The Principal Variable Annuity - 20,501,043 The Principal Variable Annuity With Purchase Payment Credit - 10,669,799 Rider Principal Investment Plus Variable Annuity 731,498 - Principal Investment Plus Variable Annuity With Purchase Rider 262,538 - Contracts in annuitization period: Bankers Flexible Annuity - - Pension Builder Plus - Rollover IRA - - - - Total net assets $ 994,036 $ 38,340,900 - ------- ------------ Investments in shares of mutual funds, at cost $ 921,900 $ 28,201,779 Shares ofmutual fund owned 73,252 4,442,746 Accumulation units outstanding: Bankers Flexible Annuity - - Pension Builder Plus - - Pension Builder Plus - Rollover IRA - - Personal Variable - - Premier Variable - - Principal Freedom Variable Annuity - 579,156 Principal Freedom 2 Variable Annuity - - The Principal Variable Annuity - 1,686,051 The Principal Variable Annuity With Purchase Payment Credit - 907,598 Rider Principal Investment Plus Variable Annuity 53,078 - Principal Investment Plus Variable Annuity With Purchase Rider 19,321 - Accumulation unit value: Bankers Flexible Annuity $ - $ - Pension Builder Plus - - Pension Builder Plus - Rollover IRA - - Personal Variable - - Premier Variable - - Principal Freedom Variable Annuity - 12.38 Principal Freedom 2 Variable Annuity - 11.25 The Principal Variable Annuity - 12.16 The Principal Variable Annuity With Purchase Payment Credit - 11.76 Rider Principal Investment Plus Variable Annuity 13.78 - Principal Investment Plus Variable Annuity With Purchase Rider 13.59 - Annuitized units outstanding: Bankers Flexible Annuity - - Pension Builder Plus - Rollover IRA - - Annuitized unit value: Bankers Flexible Annuity $ - $ - Pension Builder Plus - Rollover IRA - - See accompanying notes.
American Century VP American American American American Inflation Century VP Century VP Century VP Century VP Protection Ultra Ultra Value Vista Asset Class II Class I Class II Class II Class I Allocation Division Division Division Division Division Division -------- -------- -------- -------- -------- -------- ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------ $ 48,661,365 $ 9,446,138 $ 41,242,582 $ 50,565,063 $ 693,886 $ 84,221,248 ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------ $ 48,661,365 $ 9,446,138 $ 41,242,582 $ 50,565,063 $ 693,886 $ 84,221,248 - ---------- ----------- ------------ ------------ - --------- ---------- ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------ 2,684 _ 6,080,473 _ 33,115,958 _ 65,323,874 - 3,365,665 - 17,449,105 - 12,467,513 34,741,530 - 29,256,287 - 519,933 4,113,723 13,919,835 _ 11,986,295 _ 173,953 2,313,454 ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------ $ 48,661,365 $ 9,446,138 $ 41,242,582 $ 50,565,063 $ 693,886 - ---------- ----------- ------------ ------------ - ------- ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------ $ 49,357,651 $ 8,456,198 $ 41,023,836 $ 44,479,303 $ 643,203 $ 70,968,084 4,827,516 940,850 4,132,523 5,792,104 44,084 5,968,905 2,008 _ 672,286 _ 2,266,362 _ 2,706,025 _ 384,888 _ 1,227,739 _ 535,713 3,389,498 _ 2,714,276 _ 38,683 170,410 1,377,420 - 1,127,888 - 13,127 99,406 - - - - - 1.34 - 9.04 - 14.61 _ 24.14 - 8.74 - 14.21 _ 23.27 10.25 _ 10.78 _ 13.44 24.14 10.11 _ 10.63 _ 13.25 23.27
Principal Life Insurance Company Separate Account B Statements of Assets and Liabilities (continued) December 31, 2006 Balanced Bond Division Division Assets Investments in shares of mutual funds, at markel $ 92,320,337 $ 319,793,402 Liabilities Net assets $ 92,320,337 $ 319,793,402 - ---------- ------------- Net assets Accumulation units: Bankers Flexible Annuity $ - $ - Pension Builder Plus - - Pension Builder Plus - Rollover IRA - - Personal Variable 1,028,047 351,190 Premier Variable 3,730,855 3,055,802 Principal Freedom Variable Annuity - 15,130,770 Principal Freedom 2 Variable Annuity - 53,305 The Principal Variable Annuity 72,548,350 164,144,798 The Principal Variable Annuity With Purchase Payment Credit 15,013,085 62,581,173 Rider Principal Investment Plus Variable Annuity - 53,374,227 Principal Investment Plus Variable Annuity With Purchase Rider - 21,102,137 Contracts in annuitization period: Bankers Flexible Annuity - - Pension Builder Plus - Rollover IRA Total net assets $ 92,320,337 $ 319,793,402 - ---------- ------------- Investments in shares of mutual funds, at cost $ 82,673,782 $ 312,027,449 Shares ofmutual fund owned 5,684,750 26,451,067 Accumulation units outstanding: Bankers Flexible Annuity - - Pension Builder Plus - - Pension Builder Plus - Rollover IRA - - Personal Variable 474,221 171,287 Premier Variable 1,675,268 1,450,978 Principal Freedom Variable Annuity - 1,099,132 Principal Freedom 2 Variable Annuity - 5,148 The Principal Variable Annuity 3,525,538 8,677,485 The Principal Variable Annuity With Purchase Payment Credit 756,763 3,431,617 Rider Principal Investment Plus Variable Annuity - 2,821,626 Principal Investment Plus Variable Annuity With Purchase Rider - 1,157,131 Accumulation unit value: Bankers Flexible Annuity $ - $ - Pension Builder Plus - - Pension Builder Plus - Rollover IRA - - Personal Variable 1.95 2.05 Premier Variable 2.17 2.11 Principal Freedom Variable Annuity - 13.77 Principal Freedom 2 Variable Annuity - 10.36 The Principal Variable Annuity 20.58 18.92 The Principal Variable Annuity With Purchase Payment Credit 19.84 18.24 Rider Principal Investment Plus Variable Annuity - 18.92 Principal Investment Plus Variable Annuity With Purchase Rider - 18.24 Annuitized units outstanding: Bankers Flexible Annuity - - Pension Builder Plus - Rollover IRA - - Annuitized unit value: Bankers Flexible Annuity $ - $ - Pension Builder Plus - Rollover IRA - - See accompanying notes.
Dreyfus IP Founders Dreyfus IP Capital Diversified Discovery Technology Equity Value International Initial Shares Service Shares Growth Division Division Division Division Division ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------ $ 213,650,385 $ 290,731,308 $ 17,583,895 $ 451,722 $ 179,749,917 ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------ $ 213,650,385 $ 290,731,308 $ 17,583,895 $ 451,722 $ 179,749,917 - ----------- ------------- ------------ --------- - ----------- ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------ $ 2,439,807 - - - - 3,086,246 - - - - 277,653 - - - - 1,575,016 984,958 - - - 13,650,606 6,554,555 - - 2,214 7,981,412 9,353,333 - - - 22,697 72,978 - - - 149,483,317 195,794,392 11,219,916 - 151,078,953 25,046,661 55,159,610 6,363,979 - 22,911,297 6,154,360 16,563,735 - 307,975 3,873,868 3,670,918 6,247,747 - 143,747 1,883,585 9,232 - - - - 252,460 ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------ $ 213,650,385 $ 290,731,308 $ 17,583,895 $ 451,722 $ 179,749,917 - ----------- ------------- ------------ --------- - ----------- ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------ $ 178,045,665 $ 184,408,871 $ 14,700,220 $ 432,226 $ 172,565,077 5,721,756 14,085,819 1,697,287 48,677 9,822,400 57,383 - - - - 422,047 - - - - 32,920 - - - - 445,767 338,042 - - - 3,743,094 2,190,324 - - 2,092 651,626 574,978 - - - 2,009 6,064 - - - 5,087,290 7,233,866 1,281,517 - 5,028,952 884,166 2,113,901 751,818 - 791,083 209,449 611,970 - 25,294 128,949 129,587 239,435 - 11,974 65,037 $ 42.52 $ - $ - $ - $ - 7.31 - - - - 8.43 - - - - 3.53 2.91 - - - 3.65 2.99 - - 1.06 12.25 16.27 - - - 11.30 12.03 - - - 29.38 27.07 8.76 - 30.04 28.33 26.09 8.46 - 28.96 29.38 27.07 - 12.18 30.04 28.33 26.09 - 12.01 28.96 217 - - - - 29,934 - - - - $ 42.54 $ - $ - $ - $ - 8.43 - - - -
Principal Life Insurance Company Separate Account B Statements of Assets and Liabilities (continued) December 31, 2006 Equity Equity Income Value Division Division Assets Investments in shares of mutual funds, at markel $ 155,519,274 $ 3,927,407 Liabilities Net assets $ 155,519,274 $ 3,927,407 - ----------- ----------- Net assets Accumulation units: Bankers Flexible Annuity $ - $ - Pension Builder Plus - - Pension Builder Plus - Rollover IRA - - Personal Variable - - Premier Variable 171,342 - Principal Freedom Variable Annuity - - Principal Freedom 2 Variable Annuity - - The Principal Variable Annuity 44,276,994 - The Principal Variable Annuity With Purchase Payment Credit 14,278,889 - Rider Principal Investment Plus Variable Annuity 70,179,659 2,603,080 Principal Investment Plus Variable Annuity With Purchase Rider 26,612,390 1,324,327 Contracts in annuitization period: Bankers Flexible Annuity - - Pension Builder Plus - Rollover IRA Total net assets $ 155,519,274 $ 3,927,407 - ----------- ----------- Investments in shares of mutual funds, at cost $ 132,960,423 $ 3,530,619 Shares ofmutual fund owned 13,441,597 304,686 Accumulation units outstanding: Bankers Flexible Annuity - - Pension Builder Plus - - Pension Builder Plus - Rollover IRA - - Personal Variable - - Premier Variable 141,326 - Principal Freedom Variable Annuity - - Principal Freedom 2 Variable Annuity - - The Principal Variable Annuity 3,140,718 - The Principal Variable Annuity With Purchase Payment Credit 1,050,595 - Rider Principal Investment Plus Variable Annuity 4,978,096 193,898 Principal Investment Plus Variable Annuity With Purchase Rider 1,958,060 100,035 Accumulation unit value: Bankers Flexible Annuity $ - $ - Pension Builder Plus - - Pension Builder Plus - Rollover IRA - - Personal Variable - - Premier Variable 1.21 - Principal Freedom Variable Annuity - - Principal Freedom 2 Variable Annuity - - The Principal Variable Annuity 14.10 - The Principal Variable Annuity With Purchase Payment Credit 13.59 - Rider Principal Investment Plus Variable Annuity 14.10 13.43 Principal Investment Plus Variable Annuity With Purchase Rider 13.59 13.24 Annuitized units outstanding: Bankers Flexible Annuity - - Pension Builder Plus - Rollover IRA - - Annuitized unit value: Bankers Flexible Annuity $ - $ - Pension Builder Plus - Rollover IRA - - See accompanying notes.
Fidelity VIP Fidelity VIP Fidelity VIP Fidelity VIP Fidelity VIP II Equity-Income Growth Growth Overseas Contrafund Service Service Service Service Service Class 2 Class Class 2 Class 2 Class Division Division Division Division Division ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------ $ 77,174,324 $ 33,789,156 $ 4,364,661 $ 35,000,168 $ 118,477,727 ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------ $ 77,174,324 $ 33,789,156 $ 4,364,661 $ 35,000,168 $ 1184 7727 - ---------- ------------ ----------- ------------ - --------- ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------ 46,024,503 26,117,838 _ _ 92,142,440 24,346,731 7,671,318 - - 26,335,287 4,845,009 - 2,462,473 24,057,213 - 1,958,081 _ 1,902,188 10,942,955 - ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------ $ 77,174,324 $ 33,789,156 $ 4,364,661 $ 35,000,168 $ 118,477,727 - ---------- ------------ ----------- ------------ - ----------- ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------ $ 67,544,087 $ 39,935,409 $ 4,132,386 $ 29,884,103 $ 93,740,805 2,983,159 945,945 123,226 1,473,691 3,775,581 3,298,929 2,980,810 _ _ 6,229,617 1,794,179 908,170 _ - 1,846,847 347,281 _ 204,390 1,503,271 _ 144,297 _ 160,135 693,537 _ 13.95 8.76 _ _ 14.79 13.57 8.45 _ _ 14.26 13.95 _ 12.05 16.00 _ 13.57 _ 11.88 15.78 _
Principal Life Insurance Company Separate Account B Statements of Assets and Liabilities (continued) December 31, 2006 Fidelity VIP Fidelity VIP III II Contrafund Mid Cap Service Service Class 2 Class 2 Division Division Assets Investments in shares of mutual funds, at markel $ 23,281,029 $ 4,393,054 Liabilities Net assets $ 23,281,029 $ 4,393,054 - ---------- ----------- Net assets Accumulation units: Bankers Flexible Annuity $ - $ - Pension Builder Plus - - Pension Builder Plus - Rollover IRA - - Personal Variable - - Premier Variable - - Principal Freedom Variable Annuity - - Principal Freedom 2 Variable Annuity - - The Principal Variable Annuity - - The Principal Variable Annuity With Purchase Payment Credit - - Rider Principal Investment Plus Variable Annuity 17,880,716 3,086,991 Principal Investment Plus Variable Annuity With Purchase Rider 5,400,313 1,306,063 Contracts in annuitization period: Bankers Flexible Annuity - - Pension Builder Plus - Rollover IRA Total net assets $ 23,281,029 $ 4,393,054 - ---------- ----------- Investments in shares of mutual funds, at cost $ 23,059,803 $ 4,222,272 Shares ofmutual fund owned 748,345 128,264 Accumulation units outstanding: Bankers Flexible Annuity - - Pension Builder Plus - - Pension Builder Plus - Rollover IRA - - Personal Variable - - Premier Variable - - Principal Freedom Variable Annuity - - Principal Freedom 2 Variable Annuity - - The Principal Variable Annuity - - The Principal Variable Annuity With Purchase Payment Credit - - Rider Principal Investment Plus Variable Annuity 1,240,432 197,882 Principal Investment Plus Variable Annuity With Purchase Rider 379,971 84,914 Accumulation unit value: Bankers Flexible Annuity $ - $ - Pension Builder Plus - - Pension Builder Plus - Rollover IRA - - Personal Variable - - Premier Variable - - Principal Freedom Variable Annuity - - Principal Freedom 2 Variable Annuity - - The Principal Variable Annuity - - The Principal Variable Annuity With Purchase Payment Credit - - Rider Principal Investment Plus Variable Annuity 14.41 15.60 Principal Investment Plus Variable Annuity With Purchase Rider 14.21 15.38 Annuitized units outstanding: Bankers Flexible Annuity - - Pension Builder Plus - Rollover IRA - - Annuitized unit value: Bankers Flexible Annuity $ - $ - Pension Builder Plus - Rollover IRA - - See accompanying notes.
Goldman Sachs Goldman Sachs VIT Mid Cap Structured Value Fund Small Cap Government International Service Equity Service & High Emerging Class I Class I Quality Bond Growth Markets Division Division Division Division Division ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------ $ 12,621,326 $ 4,000,632 $ 276,598,302 $ 96,085,309 $ 104,347,151 ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------ $ 12,621,326 $ 4,000,632 $ 276,598,302 $ 96,085,309 $ 104,347,151 - ---------- ----------- ------------- ------------ - ----------- ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------ _ _ 152,304 _ _ _ _ 53,221 _ _ _ _ 370,079 1,158,524 _ - - 3,031,448 6,054,302 254,998 - - 7,567,716 - - _ _ 3,506 _ _ _ _ 179,537,833 77,146,750 59,746,465 - - 60,622,772 8,044,509 27,306,727 8,180,457 2,543,710 19,062,184 2,316,225 10,920,772 4,440,869 1,456,922 6,197,239 1,364,999 6,118,189 ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------ $ 12,621,326 $ 4,000,632 $ 276,598,302 $ 96,085,309 $ 104,347,151 - ---------- ----------- ------------- ------------ - ----------- ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------ $ 12,912,416 $ 4,074,501 $ 275,146,055 $ 101,918,518 $ 71,075,601 784,420 277,052 24,348,442 6,594,736 4,871,483 _ _ 54,132 _ _ _ _ 17,147 _ _ _ _ 175,534 608,844 _ _ _ 1,392,916 3,097,575 80,375 _ _ 709,414 _ _ _ _ 340 _ _ _ _ 9,750,649 4,178,663 2,014,594 _ _ 3,415,089 451,981 955,067 550,376 188,684 1,035,264 125,460 368,239 303,035 109,609 349,113 76,693 213,987 _ _ 2.81 _ _ _ _ 3.10 _ _ _ _ 2.11 1.90 - _ _ 2.18 1.95 3.17 _ _ 10.67 _ _ _ _ 10.33 - - _ _ 18.41 18.46 29.66 _ _ 17.75 17.80 28.59 14.86 13.48 18.41 18.46 29.66 14.65 13.29 17.75 17.80 28.59
Principal Life Insurance Company Separate Account B Statements of Assets and Liabilities (continued) December 31, 2006 Janus Aspen Mid Cap International Growth SmallCap Service Shares Division Division Assets Investments in shares of mutual funds, at markel $ 127,550,577 $ 19,322,587 Liabilities Net assets $ 127,550,577 $ 19,322,587 - ----------- ------------ Net assets Accumulation units: Bankers Flexible Annuity $ - $ - Pension Builder Plus - - Pension Builder Plus - Rollover IRA - - Personal Variable - - Premier Variable 135,445 - Principal Freedom Variable Annuity - - Principal Freedom 2 Variable Annuity - - The Principal Variable Annuity 83,817,333 12,075,899 The Principal Variable Annuity With Purchase Payment Credit 27,370,902 7,246,688 Rider Principal Investment Plus Variable Annuity 11,165,145 - Principal Investment Plus Variable Annuity With Purchase Rider 5,061,752 - Contracts in annuitization period: Bankers Flexible Annuity - - Pension Builder Plus - Rollover IRA Total net assets $ 127,550,577 $ 19,322,587 - ----------- ------------ Investments in shares of mutual funds, at cost $ 80,597,771 $ 14,254,808 Shares ofmutual fund owned 5,153,559 600,267 Accumulation units outstanding: Bankers Flexible Annuity - - Pension Builder Plus - - Pension Builder Plus - Rollover IRA - - Personal Variable - - Premier Variable 54,634 - Principal Freedom Variable Annuity - - Principal Freedom 2 Variable Annuity - - The Principal Variable Annuity 2,718,465 1,559,221 The Principal Variable Annuity With Purchase Payment Credit 920,810 970,582 Rider Principal Investment Plus Variable Annuity 362,122 - Principal Investment Plus Variable Annuity With Purchase Rider 170,287 - Accumulation unit value: Bankers Flexible Annuity $ - $ - Pension Builder Plus - - Pension Builder Plus - Rollover IRA - - Personal Variable - - Premier Variable 2.48 - Principal Freedom Variable Annuity - - Principal Freedom 2 Variable Annuity - - The Principal Variable Annuity 30.83 7.74 The Principal Variable Annuity With Purchase Payment Credit 29.72 7.47 Rider Principal Investment Plus Variable Annuity 30.83 - Principal Investment Plus Variable Annuity With Purchase Rider 29.72 - Annuitized units outstanding: Bankers Flexible Annuity - - Pension Builder Plus - Rollover IRA - - Annuitized unit value: Bankers Flexible Annuity $ - $ - Pension Builder Plus - Rollover IRA $ - $ - See accompanying notes.
LargeCap LargeCap LargeCap Growth Stock LargeCap Blend Equity Index Value MidCap Division Division Division Division Division -------- -------- -------- -------- -------- $ 192,106,445 $ 19,396,503 $ 152,650,034 $ 173,682,669 $ 367,161,013 $ 192,106,445 $ 19,396,503 $ 152,650,034 $ 173,682,669 $ 367,161,013 - ----------- ------------ ------------- ------------- - ----------- _ _ _ _ 1,812,069 - 2,709 773,353 - 7,988,655 - 2,793,503 20,103,518 - 6,517,146 _ 21,572 88,894 _ 11,872 80,831,763 10,762,371 85,094,495 77,635,254 254,405,357 39,746,843 5,816,348 32,620,886 31,528,136 52,376,009 50,749,045 - 9,422,159 45,756,562 31,325,702 20,778,794 _ 4,546,729 18,762,717 12,724,203 $ 192,106,445 $ 19,396,503 $ 152,650,034 $ 173,682,669 $ 367,161,013 - ----------- ------------ ------------- ------------- - ----------- $ 160,281,158 $ 17,908,609 $ 125,704,060 $ 134,746,693 $ 294,630,220 15,405,489 3,966,565 14,621,651 11,855,472 8,688,145 _ _ _ _ 446,879 - 3,473 632,387 - 1,917,776 _ 228,851 1,843,926 _ 321,758 _ 2,148 8,018 _ 1,073 6,213,213 1,892,712 8,048,208 5,281,587 6,620,901 3,141,077 1,061,039 3,200,277 2,205,179 1,413,882 3,900,883 _ 891,147 3,112,861 815,254 1,642,091 _ 446,059 1,312,328 343,489 4.05 - 0.78 1.22 _ 4.17 _ 12.21 10.90 _ 20.25 - 10.04 11.09 - 11.07 13.01 5.69 10.57 14.70 38.42 12.65 5.48 10.19 14.30 37.04 13.01 _ 10.57 14.70 38.42 12.65 _ 10.19 14.30 37.04
Principal Life Insurance Company Separate Account B Statements of Assets and Liabilities (continued) December 31, 2006 MidCap MidCap Growth Value Division Division Assets Investments in shares of mutual funds, at markel $ 57,787,473 $ 119,378,462 Liabilities Net assets $ 57,787,473 $ 119,378,462 - ---------- ------------- Net assets Accumulation units: Bankers Flexible Annuity $ - $ - Pension Builder Plus - - Pension Builder Plus - Rollover IRA - - Personal Variable - - Premier Variable 18,099 184,079 Principal Freedom Variable Annuity 1,938,457 10,681,587 Principal Freedom 2 Variable Annuity 10,663 21,777 The Principal Variable Annuity 36,775,105 52,636,985 The Principal Variable Annuity With Purchase Payment Credit 15,577,891 25,577,193 Rider Principal Investment Plus Variable Annuity 2,317,664 21,669,612 Principal Investment Plus Variable Annuity With Purchase Rider 1,149,594 8,607,229 Contracts in annuitization period: Bankers Flexible Annuity - - Pension Builder Plus - Rollover IRA Total net assets $ 57,787,473 $ 119,378,462 - ---------- ------------- Investments in shares of mutual funds, at cost $ 44,421,846 $ 101,574,455 Shares of mutual fund owned 4,835,772 7,118,573 Accumulation units outstanding: Bankers Flexible Annuity - - Pension Builder Plus - - Pension Builder Plus - Rollover IRA - - Personal Variable - - Premier Variable 13,813 100,849 Principal Freedom Variable Annuity 140,455 420,021 Principal Freedom 2 Variable Annuity 1,038 1,995 The Principal Variable Annuity 2,938,872 3,099,666 The Principal Variable Annuity With Purchase Payment Credit 1,291,325 1,557,819 Rider Principal Investment Plus Variable Annuity 185,216 1,276,075 Principal Investment Plus Variable Annuity With Purchase Rider 95,296 524,238 Accumulation unit value: Bankers Flexible Annuity $ - $ - Pension Builder Plus - - Pension Builder Plus - Rollover IRA - - Personal Variable - - Premier Variable 1.31 1.83 Principal Freedom Variable Annuity 13.80 25.43 Principal Freedom 2 Variable Annuity 10.27 10.91 The Principal Variable Annuity 12.51 16.98 The Principal Variable Annuity With Purchase Payment Credit 12.06 16.42 Rider Principal Investment Plus Variable Annuity 12.51 16.98 Principal Investment Plus Variable Annuity With Purchase Rider 12.06 16.42 Annuitized units outstanding: Bankers Flexible Annuity - - Pension Builder Plus - Rollover IRA - - Annuitized unit value: Bankers Flexible Annuity $ - $ - Pension Builder Plus - Rollover IRA - - See accompanying notes.
Neuberger Neuberger Neuberger Berman AMT Neuberger Berman AMT Berman AMT High Income Berman AMT Socially Money Fasciano Bond Partners Responsive Market S Class S Class I Class I Class Division Division Division Division Division -------- -------- -------- -------- -------- $ 94,506,379 $ 2,008,034 $ 2,063,611 $ 4,671,743 $ 2,519,107 $ 94,506,379 $ 2,008,034 $ 2,063,611 $ 4,671,743 $ 2,519,107 - ---------- ----------- ----------- ----------- - --------- 173,077 7,385 374,609 4,643,291 6,202,831 56,336,207 16,748,008 - - - - 5,108,202 1,200,273 1,354,544 3,161,736 1,955,849 4,912,769 807,761 709,067 1,510,007 563,258 $ 94,506,379 $ 2,008,034 $ 2,063,611 $ 4,671,743 $ 2,519,107 - ---------- ----------- ----------- ----------- - --------- $ 94,506,378 $ 1,976,187 $ 2,093,600 $ 4,693,978 $ 2,276,876 94,506,378 138,199 209,504 220,782 150,754 77,874 3,052 _ _ _ _ 241,428 _ _ _ _ 2,897,796 _ _ _ _ 525,746 _ _ _ _ 4,089,737 1,261,134 _ _ _ _ 370,831 103,672 127,025 208,718 143,632 369,935 70,763 67,413 101,101 41,953 2.22 _ _ _ _ 2.42 _ _ _ _ 1.55 _ _ _ _ 1.60 - - - - 11.81 10.32 - - - - 13.79 _ _ _ _ 13.29 _ _ _ _ 13.79 11.58 10.66 15.15 13.62 13.29 11.42 10.52 14.94 13.43
Principal Life Insurance Company Separate Account B Statements of Assets and Liabilities (continued) December 31, 2006 Principal LifeTime Principal Strategic LifeTime Income 2010 Division Division -------- -------- Assets Investments in shares of mutual funds, at markel $ 12,491,385 $ 26,166,066 Liabilities Net assets $ 12,491,385 $ 26,166,066 - ---------- ------------ Net assets Accumulation units: Bankers Flexible Annuity $ - $ - Pension Builder Plus - - Pension Builder Plus - Rollover IRA - - Personal Variable - - Premier Variable - - Principal Freedom Variable Annuity - - Principal Freedom 2 Variable Annuity - 512,558 The Principal Variable Annuity - - The Principal Variable Annuity With Purchase Payment Credit - - Rider Principal Investment Plus Variable Annuity 10,295,433 20,231,603 Principal Investment Plus Variable Annuity With Purchase Rider 2,195,952 5,421,905 Contracts in annuitization period: Bankers Flexible Annuity - - Pension Builder Plus - Rollover IRA Total net assets $ 12,491,385 $ 26,166,066 - ---------- ------------ Investments in shares of mutual funds, at cost $ 11,442,702 $ 23,580,736 Shares ofmutual fund owned 1,028,098 2,050,632 Accumulation units outstanding: Bankers Flexible Annuity - - Pension Builder Plus - - Pension Builder Plus - Rollover IRA - - Personal Variable - - Premier Variable - - Principal Freedom Variable Annuity - - Principal Freedom 2 Variable Annuity - 47,224 The Principal Variable Annuity - - The Principal Variable Annuity With Purchase Payment Credit - - Rider Principal Investment Plus Variable Annuity 850,780 1,605,358 Principal Investment Plus Variable Annuity With Purchase Rider 184,022 436,282 Accumulation unit value: Bankers Flexible Annuity $ - $ - Pension Builder Plus - - Pension Builder Plus - Rollover IRA - - Personal Variable - - Premier Variable - - Principal Freedom Variable Annuity - - Principal Freedom 2 Variable Annuity 10.71 10.85 The Principal Variable Annuity - - The Principal Variable Annuity With Purchase Payment Credit - - Rider Principal Investment Plus Variable Annuity 12.10 12.60 Principal Investment Plus Variable Annuity With Purchase Rider 11.93 12.43 Annuitized units outstanding: Bankers Flexible Annuity - - Pension Builder Plus - Rollover IRA - - Annuitized unit value: Bankers Flexible Annuity $ - $ - Pension Builder Plus - Rollover IRA - - See accompanying notes.
Principal Principal Principal Principal LifeTime LifeTime LifeTime LifeTime Real Estate 2020 2030 2040 2050 Securities Division Division Division Division Division -------- -------- -------- -------- -------- $ 95,944,655 $ 11,981,587 $ 5,191,353 $ 3,485,174 $ 181,645,070 $ 95,944,655 $ 11,981,587 $ 5,191,353 $ 3,485,174 $ 181,645,070 - ---------- ------------ ----------- ----------- - ----------- _ 642,260 109,372 34,182 99,508 _ 10,832 _ _ _ _ 114,151,469 - - - - 51,711,695 70,061,734 8,910,411 3,728,292 2,260,799 10,410,804 25,773,549 3,036,994 1,363,553 1,224,375 4,718,010 $ 95,944,655 $ 11,981,587 $ 5,191,353 $ 3,485,174 $ 181,645,070 - ---------- ------------ ----------- ----------- - ----------- $ 86,400,066 $ 10,808,094 $ 4,680,947 $ 3,214,755 $ 106,220,348 7,176,115 897,497 381,717 254,764 6,962,249 - - - - 201,900 9,906 3,106 9,037 _ 872 _ _ _ _ 3,137,709 _ _ _ _ 1,474,353 5,303,081 676,655 278,049 167,695 286,166 1,978,309 233,877 103,123 92,097 134,516 - - - - 3.18 11.04 11.01 11.01 11.02 12.42 _ _ _ _ 36.38 _ _ _ _ 35.07 13.21 13.17 13.41 13.48 36.38 13.03 12.99 13.22 13.29 35.07
Principal Life Insurance Company Separate Account B Statements of Assets and Liabilities (continued) December 31, 2006 Short-Term Bond SmallCap Division Division Assets Investments in shares of mutual funds, at markel $ 117,594,191 $ 71,751,761 Liabilities Net assets $ 117,594,191 $ 71,751,761 - ----------- ------------ Net assets Accumulation units: Bankers Flexible Annuity $ - $ - Pension Builder Plus - - Pension Builder Plus - Rollover IRA - - Personal Variable - - Premier Variable - 61,892 Principal Freedom Variable Annuity 5,151,694 6,794,350 Principal Freedom 2 Variable Annuity - - The Principal Variable Annuity 36,629,585 48,257,837 The Principal Variable Annuity With Purchase Payment Credit 13,983,289 16,637,682 Rider Principal Investment Plus Variable Annuity 44,122,654 - Principal Investment Plus Variable Annuity With Purchase Rider 17,706,969 - Contracts in annuitization period: Bankers Flexible Annuity - - Pension Builder Plus - Rollover IRA Total net assets $ 117,594,191 $ 71,751,761 - ----------- ------------ Investments in shares of mutual funds, at cost $ 114,741,416 $ 55,526,097 Shares ofmutual fund owned 11,439,124 6,656,007 Accumulation units outstanding: Bankers Flexible Annuity - - Pension Builder Plus - - Pension Builder Plus - Rollover IRA - - Personal Variable - - Premier Variable - 47,125 Principal Freedom Variable Annuity 491,407 401,917 Principal Freedom 2 Variable Annuity - - The Principal Variable Annuity 3,545,010 3,600,804 The Principal Variable Annuity With Purchase Payment Credit 1,383,056 1,287,720 Rider Principal Investment Plus Variable Annuity 4,270,198 - Principal Investment Plus Variable Annuity With Purchase Rider 1,751,361 - Accumulation unit value: Bankers Flexible Annuity $ - $ - Pension Builder Plus - - Pension Builder Plus - Rollover IRA - - Personal Variable - - Premier Variable - 1.31 Principal Freedom Variable Annuity 10.48 16.90 Principal Freedom 2 Variable Annuity 10.33 10.46 The Principal Variable Annuity 10.33 13.40 The Principal Variable Annuity With Purchase Payment Credit 10.11 12.92 Rider Principal Investment Plus Variable Annuity 10.33 - Principal Investment Plus Variable Annuity With Purchase Rider 10.11 - Annuitized units outstanding: Bankers Flexible Annuity - - Pension Builder Plus - Rollover IRA - - Annuitized unit value: Bankers Flexible Annuity $ - $ - Pension Builder Plus - Rollover IRA - - See accompanying notes.
Templeton T. Rowe Price T. Rowe Price Growth SmallCap SmallCap Blue Chip Health Securities Growth Value Growth H Science Class 2 Division Division Division H Division Division -------- -------- -------- ---------- -------- $ 48,773,224 $ 126,059,611 $ 1,028,135 $ 2,196,760 $ 3,028,725 $ 48,773,224 $ 126,059,611 $ 1,028,135 $ 2,196,760 $ 3,028,725 - ---------- ------------- ----------- ----------- - --------- 21,118 208,430 - - - 1,546,101 _ _ _ 3,028,725 10,698 19,534 _ _ _ 34,865,845 65,746,378 _ _ _ 8,551,657 26,045,485 - - - 2,629,046 24,693,527 631,459 1,541,750 - 1,148,759 9,346,257 396,676 655,010 - $ 48,773,224 $ 126,059,611 $ 1,028,135 $ 2,196,760 $ 3,028,725 - ---------- ------------- ----------- ----------- - --------- $ 56,135,363 $ 98,293,024 $ 927,351 $ 2,026,963 $ 2,370,806 4,511,862 6,755,606 98,764 174,346 190,127 26,490 103,681 160,031 _ _ _ 159,700 1,075 1,803 _ _ _ 3,241,061 2,529,921 _ _ _ 824,604 1,039,572 _ _ _ 244,392 950,210 50,543 113,169 _ 110,771 373,045 32,203 48,765 _ 0.80 2.01 - - - 9.66 _ _ - 18.97 9.96 10.84 _ _ _ 10.76 25.99 10.37 25.05 _ _ _ 10.76 25.99 12.49 13.62 - 10.37 25.05 12.32 13.43 -
Principal Life Insurance Company Separate Account B Statements of Assets and Liabilities (continued) December 31, 2006 AIM V.1. AIM V.I. Capital Basic Value Appreciation Series I Series I Division Division (1) Investment income (loss) Income: Dividends $ 2,949 $ 8,964 Expenses: Mortality and expense risks 5,141 134,487 Separate account rider charges 1,467 9,405 ----- ----- Net investment income (loss) (3,659) (134,928) ------- --------- Realized gains (losses) on investments Realized gains (losses) on sale of fund shares 331 (124,545) Capital gains distributions 32,602 - ------ - Total realized gains (losses) on investments 32,933 (124,545) Change in net unrealized appreciation or depreciation of investments 28,074 (12,061) ------ -------- Net increase (decrease) in net assets resulting from $ 57,348 $ (271,534) -------- ----------- operations (1) Commenced operations April 28, 2006 (2) Represented the operations of AIM V.I. Small Company Growth Series I Division until November 21, 2006 name change. See accompanying notes.
AIM V.1. AIM V.1. AIM V.1. AIM V.I. AIM V.I. Global Small Cap Small Cap AIM V.I. Core Equity Dynamics Health Care Equity Growth Technology Series I Series I Series I Series I Series I Series I Division Division Division Division Division (2) Division -------- -------- -------- -------- ------------ -------- ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------ $ 334,375 $ - $ - $ - $ - $ - 653,092 35,510 176,717 4,189 52,875 77,346 68,370 7,404 32,792 1,018 8,267 14,034 ------ ----- ------ ----- ----- ------ ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------ (387,087) (42,914) (209,509) (5,207) (61,142) (91,380) --------- -------- --------- ------- -------- -------- ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------ (195,530) 182,101 404,387 858 182,363 188,539 - - - 29,245 - - - - - ------ - - ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------ (195,530) 182,101 404,387 30,103 182,363 188,539 7,447,457 234,675 302,110 16,481 376,390 375,772 --------- ------- ------- ------ ------- ------- ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------ $ 6,864,840 $ 373,862 $ 496,988 $ 41,377 $ 497,611 $ 472,931 ------------- --------- --------- -------- --------- ------- ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------
Principal Life Insurance Company Separate Account B Statements of Operations (continued) For the Year Ended December 31, 2006 Alliance American Bernstein Century VP VP Series Small Cap Income & Growth Growth Class A Class I Division Division Investment income (loss) Income: Dividends $ - $ 650,417 Expenses: Mortality and expense risks 7,963 421,546 Separate account rider charges 879 60,774 --- ------ Net investment income (loss) (8,842) 168,097 ------- ------- Realized gains (losses) on investments Realized gains (losses) on sale of fund shares 929 823,225 Capital gains distributions - - - - Total realized gains (losses) on investments 929 823,225 Change in net unrealized appreciation or depreciation of investments 55,846 4,264,066 ------ --------- Net increase (decrease) in net assets resulting from operations $ 47,933 $ 5,255,388 ---------- --------- See accompanying notes.
American Century VP American American American American Inflation Century VP Century VP Century VP Century VP Protection Ultra Ultra Value Vista Asset Class II Class I Class II Class II Class I Allocation Division Division Division Division Division Division -------- -------- -------- -------- -------- -------- ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------ $ 1,113,086 $ - $ - $ 535,887 $ - $ 644,867 414,097 120,688 342,819 564,624 6,840 1,035,899 59,445 20,290 49,954 93,372 834 81,022 ------ ------ ------ ------ --- ------ ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------ 639,544 (140,978) (392,773) (7,674) (472,054) ------- --------- --------- ------- --------- (122,109) --------- ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------ (8,042) 163,057 (7,464) 102,307 (83) 1,512,207 - - - 3,801,384 1,292 1,132,258 - - - --------- ----- --------- ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------ (8,042) 163,057 (7,464) 3,903,691 1,209 2,644,465 (488,574) (499,141) (279,227) 3,397,417 37,166 6,670,543 --------- --------- --------- --------- ------ --------- ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------ $ 142,928 $ (477,062) $ (679,464) $ 7,178,999 $ 30,701 $ 8,842,954 ----------- ----------- ----------- --------- ---------- ---------
Principal Life Insurance Company Separate Account B Statements of Operations (continued) For the Year Ended December 31, 2006 Balanced Bond Division Division Investment income (loss) Income: Dividends $ 2,344,551 $ 11,414,865 Expenses: Mortality and expense risks 1,133,327 3,593,198 Separate account rider charges 86,374 452,150 ------ ------- Net investment income (loss) 1,124,850 7,369,517 --------- --------- Realized gains (losses) on investments Realized gains (losses) on sale of fund shares 809,832 (232,926) Capital gains distributions - - - - Total realized gains (losses) on investments 809,832 (232,926) Change in net unrealized appreciation or depreciation of investments 6,941,213 2,580,027 --------- --------- Net increase (decrease) in net assets resulting from operations $ 8,875,895 $ 9,716,618 ------------- --------- See accompanying notes.
Dreyfus IP Founders Dreyfus IP Capital Diversified Discovery Technology Equity Value International Initial Shares Service Shares Growth Division Division Division Division Division ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------ $ 3,204,877 $ 3,072,388 $ - $ - $ 2,235 2,373,109 3,111,638 207,493 4,058 2,254,890 150,975 314,077 35,766 515 136,900 ------- ------- ------ --- ------- ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------ 680,793 (353,327) (243,259) (4,573) (2,389,555) ------- --------- --------- ------- ----------- ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------ 3,024,007 7,519,959 186,316 (2,435) (806,811) 16,935,476 7,053,511 - - - ---------- --------- - - - ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------ 19,959,483 14,573,470 186,316 (2,435) (806,811) 13,835,149 45,587,524 780,163 13,971 11,159,020 ---------- ---------- ------- ------ ---------- ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------ $ 34,475,425 $ 59,807,667 $ 723,220 $ 6,963 $ 7,962,654 ------------ -------------- --------- ------- --------- ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------
Principal Life Insurance Company Separate Account B Statements of Operations (continued) For the Year Ended December 31, 2006 Equity Equity Income Value Division Division Investment income (loss) Income: Dividends $ 2,225,364 $ 46,348 Expenses: Mortality and expense risks 1,451,933 32,617 Separate account rider charges 186,043 4,764 ------- ----- Net investment income (loss) 587,388 8,967 ------- ----- Realized gains (losses) on investments Realized gains (losses) on sale of fund shares 826,373 6,180 Capital gains distributions - 39,842 - ------ Total realized gains (losses) on investments 826,373 46,022 Change in net unrealized appreciation or depreciation of investments 19,701,800 411,946 ---------- ------- Net increase (decrease) in net assets resulting from operations $ 21,115,561 $ 466,935 -------------- ------- See accompanying notes.
Fidelity VIP Fidelity VIP Fidelity VIP Fidelity VIP Fidelity VIP II Equity-Income Growth Growth Overseas Contrafund Service Service Service Service Service Class 2 Class Class 2 Class 2 Class Division Division Division Division Division ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------ $ 2,001,645 $ 104,964 $ 2,466 $ 99,476 $ 1,266,562 830,684 443,015 33,699 275,312 1,418,363 138,427 46,914 7,427 43,121 147,290 ------- ------ ----- ------ ------- ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------ 1,032,534 (384,965) (38,660) (218,957) (299,091) --------- --------- -------- --------- --------- ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------ 484,982 (1,687,364) 3,267 99,286 2,009,324 8,346,679 - - 86,213 9,439,876 --------- - - ------ --------- ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------ 8,831,661 (1,687,364) 3,267 185,499 11,449,200 1,495,173 3,854,234 186,391 3,744,132 (364,828) --------- --------- ------- --------- --------- ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------ $ 11,359,368 $ 1,781,905 $ 150,998 $ 3,710,674 $ 10,785,281 -------------- ----------- --------- ----------- ---------- ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------
Principal Life Insurance Company Separate Account B Statements of Operations (continued) For the Year Ended December 31, 2006 Fidelity VIP II Fidelity VIP III Contrafund Mid Cap Service Service Class 2 Class 2 Division Division Investment income (loss) Income: Dividends $ 164,362 $ 2,388 Expenses: Mortality and expense risks 174,615 31,640 Separate account rider charges 18,166 5,817 ------ ----- Net investment income (loss) (28,419) (35,069) -------- -------- Realized gains (losses) on investments Realized gains (losses) on sale of fund shares 17,861 (7,634) Capital gains distributions 1,695,870 159,199 --------- ------- Total realized gains (losses) on investments 1,713,731 151,565 Change in net unrealized appreciation or depreciation of investments (230,403) 107,362 --------- ------- Net increase (decrease) in net assets resulting from $ 1,454,909 $ 223,858 ----------- --------- operations
(1) Represented the operations of Goldman Sachs CORE Small Cap Equity Fund Service Class I Division until May 1, 2006 name change. See accompanying notes.
Goldman Sachs Goldman Sachs VIT Mid Cap Structured Government Value Fund Small Cap & High International Service Equity Service Quality Emerging Class I Class I Bond Growth Markets Division Division (1) Division Division Division -------- ------------ -------- -------- -------- ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------ $ 110,758 $ 25,532 $ 11,522,714 $ 265,891 $ - 90,237 32,135 3,395,215 1,146,343 1,037,801 15,917 5,515 388,953 47,844 160,320 ------ ----- ------- ------ ------- ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------ 4,604 (12,118) 7,738,546 (928,296) (1,198,121) ----- -------- --------- --------- ----------- ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------ (2,199) 102 (1,063,572) (2,538,476) 1,783,787 1,220,169 278,688 - - 2,426,233 --------- ------- - - --------- ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------ 1,217,970 278,790 (1,063,572) (2,538,476) 4,210,020 (136,992) (7,396) 814,645 11,298,287 22,245,938 --------- ------- ------- ---------- ---------- ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------ $ 1,085,582 $ 259,276 $ 7,489,619 $ 7,831,515 $ 25,257,837 ------------- --------- ----------- ----------- ---------- ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------
Principal Life Insurance Company Separate Account B Statements of Operations (continued) For the Year Ended December 31, 2006 Janus Aspen Mid Cap International Growth SmallCap Service Shares Division Division Investment income (loss) Income: Dividends $ 607,271 $ - Expenses: Mortality and expense risks 1,422,252 233,911 Separate account rider charges 167,269 41,028 ------- ------ Net investment income (loss) (274,939) --------- (982,250) Realized gains (losses) on investments Realized gains (losses) on sale of fund shares 5,178,605 682,671 Capital gains distributions 16,642,491 - ---------- - Total realized gains (losses) on investments 21,821,096 682,671 Change in net unrealized appreciation or depreciation of investments 7,745,584 1,671,571 --------- --------- Net increase (decrease) in net assets resulting from operations $ 28,584,430 $ 2,079,303 ------------ ----------- See accompanying notes.
LargeCap LargeCap LargeCap Growth Stock LargeCap Blend Equity Index Value MidCap Division Division Division Division Division ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------ $ 985,122 $ 397 $ 1,888,564 $ 1,329,514 $ 3,619,232 1,946,254 225,102 1,679,082 1,717,117 4,218,338 297,121 35,282 206,046 240,859 348,090 ------- ------ ------- ------- ------- ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------ (1,258,253) (259,987) 3,436 (628,462) (947,196) ----------- --------- ----- --------- --------- ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------ 795,506 96,102 2,482,860 1,105,086 7,087,013 4,037,942 - - 2,353,820 41,164,114 --------- - - --------- ---------- ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------ 4,833,448 96,102 2,482,860 3,458,906 48,251,127 18,223,956 413,343 16,248,616 22,939,744 (5,429,630) ---------- ------- ---------- ---------- ----------- ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------ $ 21,799,151 $ 249,458 $ 18,734,912 $ 25,770,188 $ 41,874,301 -------------- --------- ------------ ------------ ---------- ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------
Principal Life Insurance Company Separate Account B Statements of Operations (continued) For the Year Ended December 31, 2006 MidCap MidCap Growth Value Division Division Investment income (loss) Income: Dividends $ - $ 254,035 Expenses: Mortality and expense risks 696,401 1,272,336 Separate account rider charges 94,934 178,920 ------ ------- Net investment income (loss) (791,335) (1,197,221) --------- ----------- Realized gains (losses) on investments Realized gains (losses) on sale of fund shares 1,467,405 1,282,307 Capital gains distributions 1,501,987 10,378,946 --------- ---------- Total realized gains (losses) on investments 2,969,392 11,661,253 Change in net unrealized appreciation or depreciation of investments 2,147,445 1,515,777 --------- --------- Net increase (decrease) in net assets resulting from operations $ 4,325,502 $ 11,979,809 ------------- ---------- See accompanying notes.
Neuberger Neuberger Neuberger Berman AMT Neuberger Berman AMT Berman AMT High Income Berman AMT Socially Money Fasciano Bond Partners Responsive Market S Class S Class I Class I Class Division Division Division Division Division ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------ $ 3,965,867 $ - $ 107,061 $ 26,162 $ 2,297 1,019,389 15,885 15,259 31,181 19,624 119,424 3,056 3,332 5,541 1,974 ------- ----- ----- ----- ----- ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------ 2,827,054 (18,941) 88,470 (10,560) (19,301) --------- -------- ------ -------- -------- ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------ - 577 (2,604) (3,503) 6,882 - 42,308 - 402,956 16,311 - ------ - ------- ------ ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------ - 42,885 (2,604) 399,453 23,193 - 15,744 269 (48,810) 210,791 - ------ --- -------- ------- ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------ $ 2,827,054 $ 39,688 $ 86,135 $ 340,083 $214,683 ------------- -------- -------- --------- ------- ------------------------------------------------------------------------------------------------------------------------
Principal Life Insurance Company Separate Account B Statements of Operations (continued) For the Year Ended December 31, 2006 Principal LifeTime Principal Strategic LifeTime Income 2010 Division Division Investment income (loss) Income: Dividends $ 12,743 $ 9,224 Expenses: Mortality and expense risks 114,930 245,231 Separate account rider charges 7,830 24,008 ----- ------ Net investment income (loss) (110,017) (260,015) --------- --------- Realized gains (losses) on investments Realized gains (losses) on sale of fund shares 35,968 152,772 Capital gains distributions 3,277 128 ----- --- Total realized gains (losses) on investments 39,245 152,900 Change in net unrealized appreciation or depreciation of investments 890,547 2,249,381 ------- --------- Net increase (decrease) in net assets resulting from operations $ 819,775 $ 2,142,266 ----------- --------- See accompanying notes.
Principal Principal Principal Principal LifeTime LifeTime LifeTime LifeTime Real Estate 2020 2030 2040 2050 Securities Division Division Division Division Division ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------ $ - $ 846 $ 675 $ 227 $ 2,533,583 - - 698,243 89,548 37,838 21,404 1,937,680 94,207 11,582 4,997 4,143 286,480 ------ ------ ----- ----- ------- ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------ (792,450) (100,284) (42,160) (25,320) 309,423 --------- --------- -------- -------- ------- ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------ 22,096 85,632 11,774 9,899 5,932,195 - 391 338 73 7,183,688 - --- --- -- --------- ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------ 22,096 86,023 12,112 9,972 13,115,883 8,696,024 1,078,553 454,131 251,174 32,582,342 --------- --------- ------- ------- ---------- ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------ $ 7,925,670 $ 1,064,292 $ 424,083 $ 235,826 $ 46,007,648 ------------- ----------- --------- --------- ---------- ------------------------------------------------------------------------------------------------------------------------
Principal Life Insurance Company Separate Account B Statements of Operations (continued) For the Year Ended December 31, 2006 Short-Term Bond SmallCap Division Division Investment income (loss) Income: Dividends $ 2,231,910 $ 114,798 Expenses: Mortality and expense risks 1,208,466 864,845 Separate account rider charges 161,091 97,940 ------- ------ Net investment income (loss) 862,353 (847,987) ------- --------- Realized gains (losses) on investments Realized gains (losses) on sale of fund shares 12,952 1,714,779 Capital gains distributions - 4,658,605 - --------- Total realized gains (losses) on investments 12,952 6,373,384 Change in net unrealized appreciation or depreciation of investments 2,210,032 1,961,967 --------- --------- Net increase (decrease) in net assets resulting from operations $ 3,085,337 $ 7,487,364 ------------- --------- See accompanying notes.
Templeton T. Rowe Price T. Rowe Price Growth SmallCap SmallCap Blue Chip Health Securities Growth Value Growth 11 Science Class 2 Division Division Division II Division Division ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------ $ - $ 324,271 $ 1,968 $ - $ 32,756 610,217 1,372,397 9,892 17,264 21,407 56,496 183,933 1,980 2,442 - ------ ------- ----- ----- - ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------ (666,713) (1,232,059) (9,904) (19,706) 11,349 --------- ----------- ------- -------- ------ ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------ (1,332,510) 2,281,083 6,716 8,932 83,460 - 10,590,501 - - 91,257 - ---------- - - ------ ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------ (1,332,510) 12,871,584 6,716 8,932 174,717 5,430,781 5,413,590 76,937 129,496 303,044 --------- --------- ------ ------- ------- ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------ $ 3,431,558 $ 17,053,115 $ 73,749 $ 118,722 $ 489,110 ------------- ------------ -------- --------- ------- ------------------------------------------------------------------------------------------------------------------------
Principal Life Insurance Company Separate Account B Statements of Changes in Net Assets For the Year Ended December 31, 2006 and 2005, Except as Noted AIM V.I. Basic Value Series I Division (1) 2006 2005 ---- ---- Increase (decrease) in net assets from Operations: Net investment income (loss) $ (3,659) $ (562) Total realized gains (losses) on investments 32,933 1,299 Change in net unrealized appreciation or depreciation of investments 28,074 3,926 ------ ----- Net increase (decrease) in net assets resulting from operations 57,348 4,663 Changes from principal transactions: Purchase payments, less sales charges, per payment fees and applicable premium taxes 868,110 166,075 Administration charges - - Contingent sales charges (90) (5) Contract terminations (2,061) (139) Death benefit payments - - Flexible withdrawal option payments (1,240) - Transfer payments to other contracts (3,441) (16,420) Annuity payments - - - - Increase (decrease) in net assets from principal transactions 861,278 149,511 ------- ------- Total increase (decrease) 918,626 154,174 Net assets at beginning of period 154,174 - ------- - Net assets at end of period $ 1,072,800 $ 154,174 ------------- -------
(1) Commenced operations January 4, 2005. (2) Commenced operations April 28, 2006. See accompanying notes.
AIM V.1. Capital AIM V.I. AIM V.I. Appreciation Core Equity Dynamics Series I Series I Series I Division (2) Division Division ------------ -------- -------- 2006 2006 2005 2006 2005 ---- ---- ---- ---- ---- $ (134,928) $ (387,087) $ 28,719 $ (42,914) $ (36,161) (124,545) (195,530) (867,129) 182,101 116,490 (12,061) 7,447,457 2,086,682 234,675 130,333 -------- --------- --------- ------- ------- (271,534) 6,864,840 1,248,272 373,862 210,662 18,577,053 33,298,037 2,255,284 1,153,356 581,922 (2,245) (15,934) (10,169) (501) (359) (19,606) (74,585) (43,836) (1,985) (3,375) (1,480,327) (5,631,607) (2,926,767) (149,874) (171,346) (30,769) (179,214) (200,784) (4,814) - (164,626) (863,943) (603,415) (38,676) (23,921) (1,026,128) (4,856,530) (3,168,007) (821,442) (571,960) 15,853,352 21,676,224 (4,697,694) 136,064 (189,039) ---------- ---------- ----------- ------- --------- 15,581,818 28,541,064 (3,449,422) 509,926 21,623 - 33,286,796 36,736,218 2,558,055 2,536,432 - ---------- ---------- --------- --------- $ 15,581,818 $ 61,827,860 $ 33,286,796 $ 3,067,981 $ 2,558,055 -------------- ------------ ------------ ----------- ---------
Principal Life Insurance Company Separate Account B Statements of Changes in Net Assets (continued) For the Year Ended December 31, 2006 and 2005, Except as Noted AIM V.I. Global Health Care Series I Division 2006 2005 ---- ---- Increase (decrease) in net assets from Operations: Net investment income (loss) $ (209,509) $ (204,674) Total realized gains (losses) on investments 404,387 293,216 Change in net unrealized appreciation or depreciation of investments 302,110 810,312 ------- ------- Net increase (decrease) in net assets resulting from operations 496,988 898,854 Changes from principal transactions: Purchase payments, less sales charges, per payment fees and applicable premium taxes 1,935,468 1,941,412 Administration charges (3,518) (3,180) Contingent sales charges (11,055) (12,501) Contract terminations (834,732) (674,530) Death benefit payments (22,442) (168,998) Flexible withdrawal option payments (139,277) (109,315) Transfer payments to other contracts (1,840,171) (2,052,427) Annuity payments - - - - Increase (decrease) in net assets from principal transactions (915,727) (1,079,539) --------- ----------- Total increase (decrease) (418,739) (180,685) Net assets at beginning of period 14,275,760 14,456,445 ---------- ---------- Net assets at end of period $ 13,857,021 $ 14,275,760
(1) Commenced operations January 4, 2005. (2) Represented the operations of AIM V.I. Small Company Growth Series I Division until November 21, 2006 name change. See accompanying notes.
AIM V.I. AIM V.I. Small Cap Small Cap AIM V.I. Equity Growth Technology Series I Series I Series I Division Division Division (1) (2) --- --- ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------ 2006 2005 2006 2005 2006 2005 ---- ---- ---- ---- ---- ---- ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------ $ (5,207) $ (898) $ (61,142) $ (52,543) $ (91,380) $ (87,616) 30,103 93 182,363 88,370 188,539 96,061 16,481 6,410 376,390 100,668 375,772 (47) ------ ----- ------- ------- ------- ---- ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------ 41,377 5,605 497,611 136,495 472,931 8,398 598,904 155,320 1,047,203 827,753 1,511,964 1,538,179 (30) - (737) (554) (712) (623) (239) (34) (2,616) (2,696) (6,352) (9,089) (5,463) (1,012) (197,517) (198,444) (479,588) (417,850) - - (840) (8,307) (1,831) (12,726) (159) - (23,525) (14,678) (85,125) (93,415) (19,431) (13) (832,331) (698,764) (1,508,546) (1,505,905) ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------ 573,582 154,261 (10,363) (95,690) (570,190) (501,429) ------- ------- -------- -------- --------- --------- ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------ 614,959 159,866 487,248 40,805 (97,259) (493,031) 159,866 - 3,943,379 3,902,574 6,245,192 6,738,223 ------- - --------- --------- --------- --------- ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------ $ 774,825 $ 159,866 $ 4,430,627 $ 3,943,379 $ 6,147,933 $ 6,245,192 ----------- --------- ----------- ----------- ----------- --------- ------------------------------------------------------------------------------------------------------------------------
Principal Life Insurance Company Separate Account B Statements of Changes in Net Assets (continued) For the Year Ended December 31, 2006 and 2005, Except as Noted Alliance Bernstein VP Series Small Cap Growth Class A Division (1) 2006 2005 ---- ---- Increase (decrease) in net assets from Operations: Net investment income (loss) $ (8,842) $ (1,594) Total realized gains (losses) on investments 929 8,917 Change in net unrealized appreciation or depreciation of investments 55,846 16,290 ------ ------ Net increase (decrease) in net assets resulting from operations 47,933 23,613 Changes from principal transactions: Purchase payments, less sales charges, per payment fees and applicable premium taxes 750,260 381,090 Administration charges (25) - Contingent sales charges (286) - Contract terminations (6,534) - Death benefit payments (2,264) - Flexible withdrawal option payments (1,468) - Transfer payments to other contracts (64,650) (133,633) Annuity payments - - - - Increase (decrease) in net assets from principal transactions 675,033 247,457 ------- ------- Total increase (decrease) 722,966 271,070 Net assets at beginning of period 271,070 - ------- - Net assets at end of period $ 994,036 $ 271,070 ----------- -------
(1) Commenced operations January 4, 2005. See accompanying notes.
American American Century VP Century VP American Income & Inflation Century VP Growth Protection Ultra Class I Class II Class I Division Division (1) Division ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------ 2006 2005 2006 2005 2006 2005 ---- ---- ---- ---- ---- ---- ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------ $ 168,097 $ 206,125 $ 639,544 $ 235,250 $ (140,978) $ (150,361) 823,225 519,344 (8,042) (834) 163,057 155,591 4,264,066 401,647 (488,574) (207,7121 (499,141) 79,821 --------- ------- --------- --------- --------- ------ ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------ 5,255,388 1,127,116 142,928 26,704 (477,062) 85,051 4,209,364 6,188,005 37,947,828 19,722,757 1,209,485 1,866,477 (4,492) (4,995) (132,824) (11,481) (1,489) (1,275) (23,586) (35,148) (22,616) (697) (7,775) (9,065) (2,396,157) (2,587,800) (517,029) (20,840) (587,082) (489,596) (215,894) (131,054) (20,676) (35,080) (15,892) (17,559) (517,452) (471,975) (370,537) (46,556) (111,017) (100,565) (3,234,795) (2,675,022) (6,579,874) (1,420,642) (1,175,202) (1,413,386) ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------ (2,183,012) 282,011 30,304,272 18,187,461 (688,972) (164,969) ----------- ------- ---------- ---------- --------- --------- ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------ 3,072,376 1,409,127 30,447,200 18,214,165 (1,166,034) (79,918) 35,268,524 33,859,397 18,214,165 - 10,612,172 10,692,090 ---------- ---------- ---------- - ---------- ---------- ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------ $ 38,340,900 $ 35,268,524 $ 48,661,365 $ 18,214,165 $ 9,446,138 $ 10,612,172 -------------- ------------ ------------ ------------ ----------- ---------- ------------------------------------------------------------------------------------------------------------------------
Principal Life Insurance Company Separate Account B Statements of Changes in Net Assets (continued) For the Year Ended December 31, 2006 and 2005, Except as Noted American Century VP Ultra Class II Division (1) 2006 2005 ---- ---- Increase (decrease) in net assets from Operations: Net investment income (loss) $ (392,773) $ (72,331) Total realized gains (losses) on investments (7,464) 2,157 Change in net unrealized appreciation or depreciation of investments (279,227) 497,973 --------- ------- Net increase (decrease) in net assets resulting from operations (679,464) 427,799 Changes from principal transactions: Purchase payments, less sales charges, per payment fees and applicable premium taxes 34,022,878 16,409,114 Administration charges (123,722) (10,890) Contingent sales charges (17,642) (219) Contract terminations (403,333) (6,540) Death benefit payments (7,302) (6,524) Flexible withdrawal option payments (317,125) (44,519) Transfer payments to other contracts (6,767,373) (1,232,556) Annuity payments - - - - Increase (decrease) in net assets from principal transactions 26,386,381 15,107,866 ---------- ---------- Total increase (decrease) 25,706,917 15,535,665 Net assets at beginning of period 15,535,665 - ---------- - Net assets at end of period $ 41,242,582 $ 15,535,665 -------------- ----------
(1) Commenced operations January 4, 2005. See accompanying notes.
American American Century VP Century VP Value Vista Asset Class II Class I Allocation Division Division Division (1) ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------ 2006 2005 2006 2005 2006 2005 ---- ---- ---- ---- ---- ---- ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------ $ (122,109) $ (293,234) $ (7,674) $ (1,827) $ (472,054) $ 271,485 3,903,691 3,448,329 1,209 9,157 2,644,465 390,088 3,397,417 (1,759,872) 37,166 13,517 6,670,543 2,826,388 --------- ----------- ------ ------ --------- --------- ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------ 7,178,999 1,395,223 30,701 20,847 8,842,954 3,487,961 9,032,918 14,104,314 500,357 427,004 10,651,493 11,129,277 (8,861) (6,094) (9) - (32,578) (26,759) (33,303) (28,682) (524) - (126,352) (122,751) (2,514,552) (1,539,280) (11,987) - (9,622,485) (9,250,097) (157,182) (149,960) - - (322,443) (497,406) (415,415) (292,018) (1,840) - (1,757,125) (1,777,991) (4,239,478) (3,330,949) (136,073) (134,590) (7,657,393) (6,201,456) ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------ 1,664,127 8,757,331 349,924 292,414 (8,866,883) (6,747,183) --------- --------- ------- ------- ----------- ----------- ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------ 8,843,126 10,152,554 380,625 313,261 (23,929) (3,259,222) 41,721,937 31,569,383 313,261 - 84,245,177 87,504,399 ---------- ---------- ------- - ---------- ---------- ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------ $ 50,565,063 $ 41J21 937 $ 693,886 $ 313,261 $ 84,221,248 $ 84,245,177 -------------- ----------- --------- --------- ------------ ---------- ------------------------------------------------------------------------------------------------------------------------
Principal Life Insurance Company Separate Account B Statements of Changes in Net Assets (continued) For the Year Ended December 31, 2006 and 2005, Except as Noted Balanced Division 2006 2005 ---- ---- Increase (decrease) in net assets from Operations: Net investment income (loss) $ 1,124,850 $ 1,372,487 Total realized gains (losses) on investments 809,832 (201,841) Change in net unrealized appreciation or depreciation of investments 6,941,213 4,102,459 --------- --------- Net increase (decrease) in net assets resulting from operations 8,875,895 5,273,105 Changes from principal transactions: Purchase payments, less sales charges, per payment fees and applicable premium taxes 8,056,522 9,726,564 Administration charges (33,736) (45,131) Contingent sales charges (152,196) (137,291) Contract terminations (14,018,307) (18,037,134) Death benefit payments (785,944) (838,994) Flexible withdrawal option payments (1,970,221) (2,212,371) Transfer payments to other contracts (6,153,158) (4,730,178) Annuity payments - - - - Increase (decrease) in net assets from principal transactions (15,057,040) (16,274,535) ------------ ------------ Total increase (decrease) (6,181,145) (11,001,430) Net assets at beginning of period 98,501,482 109,502,912 ---------- ----------- Net assets at end of period $ 92,320,337 $ 98,501,482 -------------- ---------- See accompanying notes.
Capital Diversified Bond Value International Division Division Division ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------ 2006 2005 2006 2005 2006 2005 ---- ---- ---- ---- ---- ---- ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------ $ 7,369,517 $ 8,003,599 $ 680,793 $ (2,459,869) $ (353,327) $ (548,474) (232,926) 272,134 19,959,483 3,293,587 14,573,470 2,783,395 2,580,027 (5,313,482) 13,835,149 9,895,511 45,587,524 39,090,117 --------- ----------- ---------- --------- ---------- ---------- ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------ 9,716,618 2,962,251 34,475,425 10,729,229 59,807,667 41,325,038 94,706,932 80,647,948 24,644,269 22,371,876 60,826,753 45,089,775 (227,906) (91,568) (85,479) (80,024) (109,174) (81,611) (311,922) (302,013) (281,880) (256,948) (272,126) (207,692) (25,211,017) (26,804,906) (27,460,698) (33,656,312) (24,718,759) (21,403,532) (1,095,212) (1,547,143) (758,218) (1,190,772) (810,450) (864,314) (6,089,439) (5,680,552) (3,000,399) (2,974,530) (2,417,251) (1,876,646) (32,179,147) (21,188,674) (12,343,306) (10,800,882) (29,752,655) (17,805,731) - - (29,273) (28,499) - - - - -------- -------- - - ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------ 29,592,289 25,033,092 (19,314,984) (26,616,091) 2,746,338 2,850,249 ---------- ---------- ------------ ------------ --------- --------- ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------ 39,308,907 27,995,343 15,160,441 (15,886,862) 62,554,005 44,175,287 280,484,495 252,489,152 198,489,944 214,376,806 228,177,303 184,002,016 ----------- ----------- ----------- ----------- ----------- ----------- ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------ $ 319,793,402 $ 280,484,495 $ 213,650,385 $ 198,489,944 $ 290,731,308 $ 228,177 ,303 --------------- ----------- --------------- ------------- ------------- ------------ ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------
Principal Life Insurance Company Separate Account B Statements of Changes in Net Assets (continued) For the Year Ended December 31, 2006 and 2005, Except as Noted Dreyfus IP Founders Discovery Initial Shares Division 2006 2005 ---- ---- Increase (decrease) in net assets from Operations: Net investment income (loss) $ (243,259) $ (209,131) Total realized gains (losses) on investments 186,316 67,047 Change in net unrealized appreciation or depreciation of investments 780,163 29,224 ------- ------ Net increase (decrease) in net assets resulting from operations 723,220 (112,860) Changes from principal transactions: Purchase payments, less sales charges, per payment fees and applicable premium taxes 3,774,853 4,291,439 Administration charges (2,959) (1,802) Contingent sales charges (10,985) (9,232) Contract terminations (829,410) (450,825) Death benefit payments (60,329) (61,296) Flexible withdrawal option payments (102,797) (80,600) Transfer payments to other contracts (1,723,172) (1,078,447) Annuity payments - - - - Increase (decrease) in net assets from principal transactions 1,045,201 2,609,237 --------- --------- Total increase (decrease) 1,768,421 2,496,377 Net assets at beginning of period 15,815,474 13,319,097 ---------- ---------- Net assets at end of period $ 17,583,895 $ 15,815,474 -------------- ---------- (1) Commenced operations January 4, 2005. See accompanying notes.
Dreyfus IP Technology Equity Equity Service Shares Growth Income Division (1) Division Division ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------ 2006 2005 2006 2005 2006 2005 --------- ---- ---- ---- ---- ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------ $ (4,573) $ (570) $ (2,389,555) $ (2,529,058) $ 587,388 $ (738,442) (2,435) 181 (806,811) (2,880,009) 826,373 (10,370) 13,971 5,525 11,159,020 16,472,887 19,701,800 4,969,431 ------ ----- ---------- ---------- ---------- --------- ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------ 6,963 5,136 7,962,654 11,063,820 21,115,561 4,220,619 333,208 166,332 16,402,557 16,841,624 83,438,344 50,183,704 (30) - (58,784) (70,129) (281,701) (32,928) (215) - (291,847) (252,379) (97,952) (44,272) (4,904) - (21,927,878) (21,069,830) (5,545,007) (2,936,671) - - (629,787) (762,328) (294,040) (310,642) - - (2,048,902) (2,201,679) (1,754,716) (975,769) (42,742) (12,026) (14,876,321) (15,648,411) (24,194,286) (7,403,409) ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------ 285,317 154,306 (23,430,962) (23,163,132) 51,270,642 38,480,013 ------- ------- ------------ ------------ ---------- ---------- ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------ 292,280 159,442 (15,468,308) (12,099,312) 72,386,203 42,700,632 159,442 - 195,218,225 207,317,537 83,133,071 40,432,439 ------- - ----------- ----------- ---------- ---------- ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------ $ 451,722 $ 159,442 $ 179,749,917 $195,218,225 $ 155,519,274 $ 83,133,071 ----------- ------- ---------------------------- ------------- ---------- ------------------------------------------------------------------------------------------------------------------------
Principal Life Insurance Company Separate Account B Statements of Changes in Net Assets (continued) For the Year Ended December 31, 2006 and 2005, Except as Noted Equity Value Division (1) 2006 2005 ---- ---- Increase (decrease) in net assets from Operations: Net investment income (loss) $ 8,967 $ 6,546 Total realized gains (losses) on investments 46,022 34,821 Change in net unrealized appreciation or depreciation of investments 411,946 (15,158) ------- -------- Net increase (decrease) in net assets resulting from operations 466,935 26,209 Changes from principal transactions: Purchase payments, less sales charges, per payment fees and applicable premium taxes 2,659,094 1,545,224 Administration charges (8,122) (573) Contingent sales charges (467) (108) Contract terminations (10,680) (3,225) Death benefit payments - - Flexible withdrawal option payments (17,393) (1,679) Transfer payments to other contracts (672,960) (54,848) Annuity payments - - - - Increase (decrease) in net assets from principal transactions 1,949,472 1,484,791 --------- --------- Total increase (decrease) 2,416,407 1,511,000 Net assets at beginning of period 1,511,000 - --------- - Net assets at end of period $ 3,927,407 $ 1,511,000 ------------- --------- (1) Commenced operations January 4, 2005. See accompanying notes.
Fidelity VIP Fidelity VIP Fidelity VIP Equity-Income Growth Growth Service Service Service Class 2 Class Class 2 Division Division Division (1) -------- -------- ------------ ----------------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------------------- 2006 2005 2006 2005 2006 2005 ---- ---- ---- ---- ---- ---- ----------------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------------------- $ 1,032,534 $ (70,588) $ (384,965) $ (370,688) $ (38,660) $ (5,931) 8,831,661 1,957,131 (1,687,364) (2,091,900) 3,267 297 1,495,173 543,923 3,854,234 3,944,207 186,391 45,884 --------- ------- --------- --------- ------- ------ ----------------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------------------- 11,359,368 2,430,466 1,781,905 1,481,619 150,998 40,250 15,284,014 16,009,135 3,066,061 3,849,771 3,075,629 1,286,274 (13,052) (7,822) (9,332) (8,311) (315) (15) (47,741) (52,470) (49,910) (45,929) (3,691) (143) (3,464,029) (2,575,966) (3,768,487) (3,342,498) (84,384) (4,283) (211,352) (159,120) (89,237) (73,823) - - (656,130) (487,764) (394,785) (455,142) (3,699) (150) (4,984,308) (3,865,193) (4,985,354) (4,539,911) (78,955) (12,855) ----------------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------------------- 5,907,402 8,860,800 (6,231,044) (4,615,843) 2,904,585 1,268,828 --------- --------- ----------- ----------- --------- --------- ----------------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------------------- 17,266,770 11,291,266 (4,449,139) (3,134,224) 3,055,583 1,309,078 59,907,554 48,616,288 38,238,295 41,372,519 1,309,078 - ---------- ---------- ---------- ---------- --------- - ----------------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------------------- $ 77,174,324 $ 59,907,554 $ 33,789,156 $ 38,238,295 $ 4,364,661 $ 1,309,078 -------------- ------------ ------------ ------------ ----------- --------- -----------------------------------------------------------------------------------------------------------------------
Principal Life Insurance Company Separate Account B Statements of Changes in Net Assets (continued) For the Year Ended December 31, 2006 and 2005, Except as Noted Fidelity VIP Overseas Service Class 2 Division (1) 2006 2005 ---- ---- Increase (decrease) in net assets from Operations: Net investment income (loss) $ (218,957) $ (53,381) Total realized gains (losses) on investments 185,499 3,267 Change in net unrealized appreciation or depreciation of investments 3,744,132 1,371,933 --------- --------- Net increase (decrease) in net assets resulting from operations 3,710,674 1,321,819 Changes from principal transactions: Purchase payments, less sales charges, per payment fees and applicable premium taxes 24,282,769 11,768,680 Administration charges (65,330) (5,646) Contingent sales charges (18,630) (1,119) Contract terminations (425,913) (33,477) Death benefit payments (14,761) (8,799) Flexible withdrawal option payments (198,989) (23,776) Transfer payments to other contracts (4,366,018) (921,316) Annuity payments - - - - Increase (decrease) in net assets from principal transactions 19,193,128 10,774,547 ---------- ---------- Total increase (decrease) 22,903,802 12,096,366 Net assets at beginning of period 12,096,366 - ---------- - Net assets at end of period $ 35,000,168 $ 12,096,366 -------------- ---------- (1) Commenced operations January 4, 2005. See accompanying notes.
Fidelity VIP II Fidelity VIP II Fidelity VIP III Contrafund Contrafund Mid Cap Service Service Service Class Class 2 Class 2 Division Division (1) Division (1) -------- ------------ ------------ ----------------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------------------- 2006 2005 2006 2005 2006 2005 ---- ---- ---- ---- ---- ---- ----------------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------------------- $ (299,091) $ (1,098,190) $ (28,419) $ (30,094) $ (35,069) $ (4,460) 11,449,200 549,941 1,713,731 4,878 151,565 354 (364,828) 14,314,763 (230,403) 451,629 107,362 63,420 --------- ---------- --------- ------- ------- ------ ----------------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------------------- 10,785,281 13,766,514 1,454,909 426,413 223,858 59,314 23,146,783 25,822,964 17,924,390 6,783,954 3,515,016 955,913 (34,780) (33,552) (24,218) (1,861) (352) (59) (119,157) (87,565) (12,484) (1,291) (2,324) (110) (8,997,003) (6,000,560) (285,408) (38,609) (53,129) (3,289) (323,928) (261,864) (45,026) (10,839) - (4,562) (1,513,689) (1,150,600) (129,874) (13,687) (11,289) (929) (10,927,456) (8,564,511) (2,503,370) (241,970) (275,288) (9,716) ----------------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------------------- 1,230,770 9,724,312 14,924,010 6,475,697 3,172,634 937,248 --------- --------- ---------- --------- --------- ------- ----------------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------------------- 12,016,051 23,490,826 16,378,919 6,902,110 3,396,492 996,562 106,461,676 82,970,850 6,902,110 - 996,562 - ----------- ---------- --------- - ------- - ----------------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------------------- $ 118,477,727 $ 106,461,676 $ 23,281,029 $ 6,902,110 $ 4,393,054 $ 996,562 --------------- ------------- ------------ ----------- ----------- ------- -----------------------------------------------------------------------------------------------------------------------
Principal Life Insurance Company Separate Account B Statements of Changes in Net Assets (continued) For the Year Ended December 31, 2006 and 2005, Except as Noted Goldman Sachs VIT Mid Cap Value Fund Service Class I Division (1) 2006 2005 ---- ---- Increase (decrease) in net assets from Operations: Net investment income (loss) $ 4,604 $ 313 Total realized gains (losses) on investments 1,217,970 252,331 Change in net unrealized appreciation or depreciation of investments (136,992) (154,098) --------- --------- Net increase (decrease) in net assets resulting from operations 1,085,582 98,546 Changes from principal transactions: Purchase payments, less sales charges, per payment fees and applicable premium taxes 8,936,015 3,230,699 Administration charges (334) (12) Contingent sales charges (5,821) (249) Contract terminations (133,085) (7,458) Death benefit payments - - Flexible withdrawal option payments (20,246) (537) Transfer payments to other contracts (512,372) (49,402) Annuity payments - - - - Increase (decrease) in net assets from principal transactions 8,264,157 3,173,041 --------- --------- Total increase (decrease) 9,349,739 3,271,587 Net assets at beginning of period 3,271,587 - --------- - Net assets at end of period $ 12,621,326 $ 3,271,587 - ------------ ---------- (1) Commenced operations January 4, 2005. (2) Represented the operations of Goldman Sachs CORE Small Cap Equity Fund Service Class I Division until May 1, 2006 name change. See accompanying notes.
Goldman Sachs Government Structured & High Small Cap Equity Quality Service Class I Bond Growth Division Division Division (2) ----------------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------------------- 2006 2005 2006 2005 2006 2005 ---- ---- ---- ---- ---- ---- ----------------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------------------- $ (12,118) $ (2,328) $ 7,738,546 $ 9,113,411 $ (928,296) $ (484,271) 278,790 80,927 (1,063,572) (153,789) (2,538,476) (7,021,906) (7,396) (66,473) 814,645 (7,154,995) 11,298,287 18,191,234 ------- -------- ------- ----------- ---------- ---------- ----------------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------------------- 259,276 12,126 7,489,619 1,804,627 7,831,515 10,685,057 2,846,089 1,147,516 51,237,859 57,099,620 10,786,200 7,997,375 (312) (3) (120,919) (86,623) (27,067) (39,207) (1,765) (72) (336,842) (364,422) (148,948) (150,202) (40,340) (2,166) (27,409,954) (30,056,065) (15,103,459) (24,059,436) - - (1,159,067) (1,882,619) (311,498) (596,270) (8,448) - (7,246,983) (7,728,677) (1,489,018) (1,576,888) (199,644) (11,625) (32,654,568) (38,498,416) (6,652,910) (6,054,382) ----------------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------------------- 2,595,580 1,133,650 (17,690,474) (21,517,202) (12,946,700) (24,479,010) --------- --------- ------------ ------------ ------------ ------------ ----------------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------------------- 2,854,856 1,145,776 (10,200,855) (19,712,575) (5,115,185) (13,793,953) 1,145,776 - 286,799,157 306,511,732 101,200,494 114,994,447 --------- - ----------- ----------- ----------- ----------- ----------------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------------------- $ 4,000,632 $1,145,776 $ 276,598,302 $ 286,799,157 96,085,309 $ 101,200,494 ------------- --------- ----------------- ------------ ----------- -----------------------------------------------------------------------------------------------------------------------
Principal Life Insurance Company Separate Account B Statements of Changes in Net Assets (continued) For the Year Ended December 31, 2006 and 2005, Except as Noted International Emerging Markets Division 2006 2005 ---- ---- Increase (decrease) in net assets from Operations: Net investment income (loss) $ (1,198,121) $ (32,720) Total realized gains (losses) on investments 4,210,020 10,158,649 Change in net unrealized appreciation or depreciation of investments 22,245,938 3,497,252 ---------- --------- Net increase (decrease) in net assets resulting from operations 25,257,837 13,623,181 Changes from principal transactions: Purchase payments, less sales charges, per payment fees and applicable premium taxes 41,174,588 27,318,469 Administration charges (20,871) (11,467) Contingent sales charges (67,950) (40,411) Contract terminations (5,042,649) (2,551,229) Death benefit payments (86,161) (63,062) Flexible withdrawal option payments (659,423) (398,451) Transfer payments to other contracts (18,902,123) (7,424,355) Annuity payments - - - - Increase (decrease) in net assets from principal transactions 16,395,411 16,829,494 ---------- ---------- Total increase (decrease) 41,653,248 30,452,675 Net assets at beginning of period 62,693,903 32,241,228 ---------- ---------- Net assets at end of period $ 104,347,151 $ 62,693,903 --------------- ---------- See accompanying notes.
Janus Aspen Mid Cap Growth LargeCap International SmallCap Service Shares Blend Division Division Division ----------------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------------------- 2006 2005 2006 2005 2006 2005 ---- ---- ---- ---- ---- ---- ----------------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------------------- $ (982,250) $ (708,058) $ (274,939) $ (252,158) $ (1,258,253) $ (1,468,164) 21,821,096 2,846,657 682,671 222,986 4,833,448 546,753 7,745,584 19,453,336 1,671,571 1,755,995 18,223,956 4,879,243 --------- ---------- --------- --------- ---------- --------- ----------------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------------------- 28,584,430 21,591,935 2,079,303 1,726,823 21,799,151 3,957,832 27,541,124 26,030,408 3,209,439 1,786,952 66,986,175 51,631,602 (41,260) (33,312) (7,103) (6,410) (159,044) (26,781) (135,289) (84,485) (18,800) (23,031) (109,857) (76,909) (10,067,558) (5,948,626) (1,419,499) (1,078,285) (6,546,398) (3,916,684) (123,170) (197,758) (52,111) (39,107) (309,469) (435,063) (821,517) (646,486) (136,726) (105,081) (1,739,815) (1,120,809) (19,599,964) (12,975,410) (2,678,105) (1,580,278) (15,947,889) (8,212,523) ----------------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------------------- (3,247,634) 6,144,331 (1,102,905) (1,045,240) 42,173,703 37,842,833 ----------- --------- ----------- ----------- ---------- ---------- ----------------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------------------- 25,336,796 27,736,266 976,398 681,583 63,972,854 41,800,665 102,213,781 74,477,515 18,346,189 17,664,606 128,133,591 86,332,926 ----------- ---------- ---------- ---------- ----------- ---------- ----------------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------------------- $ 127,550,577 $ 102,213,781 $ 19,322,587 $ 18,346,189 $ 192,106,445 $ 128,133,591 --------------- ------------- ---------- - ------------ ------------- ----------- -----------------------------------------------------------------------------------------------------------------------
Principal Life Insurance Company Separate Account B Statements of Changes in Net Assets (continued) For the Year Ended December 31, 2006 and 2005, Except as Noted LargeCap Growth Equity Division 2006 2005 ---- ---- Increase (decrease) in net assets from Operations: Net investment income (loss) $ (259,987) $ (225,126) Total realized gains (losses) on investments 96,102 43,739 Change in net unrealized appreciation or depreciation of investments 413,343 583,363 ------- ------- Net increase (decrease) in net assets resulting from operations 249,458 401,976 Changes from principal transactions: Purchase payments, less sales charges, per payment fees and applicable premium taxes 4,410,753 3,093,201 Administration charges (3,400) (3,229) Contingent sales charges (17,272) (20,926) Contract terminations (1,745,073) (1,169,893) Death benefit payments (48,983) (35,771) Flexible withdrawal option payments (283,765) (238,139) Transfer payments to other contracts (1,985,359) (1,459,657) Annuity payments - - - - Increase (decrease) in net assets from principal transactions 326,901 165,586 ------- ------- Total increase (decrease) 576,359 567,562 Net assets at beginning of period 18,820,144 18,252,582 ---------- ---------- Net assets at end of period $ 19,396,503 $ 18,820,144 -------------- ---------- See accompanying notes.
LargeCap Stock LargeCap Index Value MidCap Division Division Division ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------ 2006 2005 2006 2005 2006 2005 ---- ---- ---- ---- ---- ---- ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------ $ 3,436 $(1,684,395) $ (628,462) $ (1,255,711) $ (947,196) $ (3,873,409) 2,482,860 1,070,226 3,458,906 810,694 48,251,127 11,717,740 16,248,616 4,661,687 22,939,744 4,306,244 (5,429,630) 16,931,983 ---------- --------- ---------- --------- ----------- ---------- ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------ 18,734,912 4,047,518 25,770,188 3,861,227 41,874,301 24,776,314 37,367,616 43,107,446 62,588,396 44,774,499 55,666,505 59,526,310 (37,773) (27,694) (137,843) (22,644) (195,978) (156,432) (128,463) (122,170) (102,324) (66,907) (420,156) (376,440) (11,387,803) (8,860,776) (6,266,471) (3,762,943) (36,371,234) (40,454,130) (325,744) (367,700) (309,860) (345,183) (1,065,007) (1,388,604) (1,754,326) (1,577,994) (1,471,953) (952,378) (4,145,830) (3,706,703) (24,506,917) (28,699,968) (16,166,449) (8,523,366) (27,505,687) (21,546,277) ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------ (773,410) 3,451,144 38,133,496 31,101,078 (14,037,387) (8,102,276) --------- --------- ---------- ---------- ------------ ----------- ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------ 17,961,502 7,498,662 63,903,684 34,962,305 27,836,914 16,674,038 134,688,532 127,189,870 109,778,985 74,816,680 339,324,099 322,650,061 ----------- ----------- ----------- ---------- ----------- ----------- ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------ $ 152,650,034 $ 134,688,532 $ 173,682,669 $ 109,778,985 $ 367,161,013 $ 339,324,099 --------------- ----------- --------------- ------------- ------------- ----------- ------------------------------------------------------------------------------------------------------------------------
Principal Life Insurance Company Separate Account B Statements of Changes in Net Assets (continued) For the Year Ended December 31, 2006 and 2005, Except as Noted MidCap Growth Division 2006 2005 ---- ---- Increase (decrease) in net assets from Operations: Net investment income (loss) $ (791,335) $ (689,415) Total realized gains (losses) on investments 2,969,392 643,728 Change in net unrealized appreciation or depreciation of investments 2,147,445 5,870,968 --------- --------- Net increase (decrease) in net assets resulting from operations 4,325,502 5,825,281 Changes from principal transactions: Purchase payments, less sales charges, per payment fees and applicable premium taxes 11,441,173 7,814,560 Administration charges (12,092) (11,195) Contingent sales charges (57,533) (56,883) Contract terminations (4,744,992) (3,592,508) Death benefit payments (75,590) (148,571) Flexible withdrawal option payments (555,400) (521,690) Transfer payments to other contracts (6,456,363) (4,067,244) Annuity payments - - - - Increase (decrease) in net assets from principal transactions (460,797) (583,531) --------- --------- Total increase (decrease) 3,864,705 5,241,750 Net assets at beginning of period 53,922,768 48,681,018 ---------- ---------- Net assets at end of period $ 57,787,473 $ 53,922,768 -------------- ---------- See accompanying notes.
Neuberger Berman AMT MidCap Money Fasciano Value Market S Class Division Division Division ----------------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------------------- 2006 2005 2006 2005 2006 2005 ---- ---- ---- ---- ---- ---- ----------------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------------------- $ (1,197,221) $ (1,073,726) $ 2,827,054 $ 1,101,944 $ (18,941) $ (2,978) 11,661,253 2,378,591 - - 42,885 2,037 1,515,777 6,041,151 - - 15,744 16,103 --------- --------- - - ------ ------ ----------------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------------------- 11,979,809 7,346,016 2,827,054 1,101,944 39,688 15,162 37,333,121 37,541,464 143,904,826 162,414,404 1,427,520 629,670 (76,671) (20,480) (43,345) (41,581) (58) (3) (87,955) (67,390) (284,219) (268,805) (1,806) (81) (7,300,904) (4,783,714) (28,527,008) (31,469,933) (41,291) (2,425) (247,049) (263,051) (456,823) (1,049,488) - - (1,317,978) (1,036,072) (2,431,149) (2,338,433) (735) (75) (15,808,585) (10,399,192) (102,645,410) (135,791,981) (55,634) (1,898) ----------------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------------------- 12,493,979 20,971,565 9,516,872 (8,545,817) 1,327,996 625,188 ---------- ---------- --------- ----------- --------- ------- ----------------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------------------- 24,473,788 28,317,581 12,343,926 (7,443,873) 1,367,684 640,350 94,904,674 66,587,093 82,162,453 89,606,326 640,350 - ---------- ---------- ---------- ---------- ------- - ----------------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------------------- $ 119,378,462 $ 94,904,674 $ 94,506,379 $ 82,162,453 $ 2,008,034 $ 640,350 --------------- ---------- -------------- ------------ ----------- -------
Principal Life Insurance Company Separate Account B Statements of Changes in Net Assets (continued) For the Year Ended December 31, 2006 and 2005, Except as Noted Neuberger Berman AMT High Income Bond S Class Division 2006 2005 ---- ---- Increase (decrease) in net assets from Operations: Net investment income (loss) $ 88,470 $ 33,176 Total realized gains (losses) on investments (2,604) 3,148 Change in net unrealized appreciation or depreciation of investments 269 (30,258) --- -------- Net increase (decrease) in net assets resulting from operations 86,135 6,066 Changes from principal transactions: Purchase payments, less sales charges, per payment fees and applicable premium taxes 1,271,721 1,047,612 Administration charges (60) - Contingent sales charges (2,768) (43) Contract terminations (63,286) (1,273) Death benefit payments (4,239) - Flexible withdrawal option payments (13,099) (3,486) Transfer payments to other contracts (96,440) (163,229) Annuity payments - - - - Increase (decrease) in net assets from principal transactions 1,091,829 879,581 --------- ------- Total increase (decrease) 1,177,964 885,647 Net assets at beginning of period 885,647 - ------- - Net assets at end of period $ 2,063,611 $ 885,647 ------------- ------- (1) Commenced operations January 4, 2005. See accompanying notes.
Neuberger Neuberger Berman AMT Principal Berman AMT Socially LifeTime Partners Responsive Strategic I Class I Class Income Division Division Division (1) -------- -------- ------------ ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------ 2006 2005 2006 2005 2006 2005 --------- --------- ---- ---- ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------ $ (10,560) $ 733 $ (19,301) $ (3,474) $ (110,017) $ (27,801) 399,453 335 23,193 2,103 39,245 1,775 (48,810) 26,575 210,791 31,440 890,547 158,136 -------- ------ ------- ------ ------- ------- ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------ 340,083 27,643 214,683 30,069 819,775 132,110 3,657,842 870,052 1,962,558 765,889 8,273,419 5,413,476 (108) (5) (4,686) (341) (24,298) (2,350) (2,594) (19) (1,576) (51) (4,582) (1,179) (59,305) (573) (36,029) (1,522) (104,747) (35,256) (7,257) (38) (16,015) (2,218) (232,741) (60,799) (141,255) (12,723) (372,993) (18,661) (1,681,371) (72) ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------ 3,447,323 856,694 1,531,259 743,096 6,225,680 5,313,820 --------- ------- --------- ------- --------- --------- ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------ 3,787,406 884,337 1,745,942 773,165 7,045,455 5,445,930 884,337 - 773,165 - 5,445,930 - ------- - ------- - --------- - ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------ $ 4,671,743 $ 884,337 $ 2,519,107 $ 773,165 $ 12,491,385 $ 5,445 930 ------------- --------- ----------- --------- ------------ --------- ------------------------------------------------------------------------------------------------------------------------
Principal Life Insurance Company Separate Account B Statements of Changes in Net Assets (continued) For the Year Ended December 31, 2006 and 2005, Except as Noted Principal LifeTime 2010 Division (1) 2006 2005 ---- ---- Increase (decrease) in net assets from Operations: Net investment income (loss) $ (260,015) $ (57,359) Total realized gains (losses) on investments 152,900 1,876 Change in net unrealized appreciation or depreciation of investments 2,249,381 335,949 --------- ------- Net increase (decrease) in net assets resulting from operations 2,142,266 280,466 Changes from principal transactions: Purchase payments, less sales charges, per payment fees and applicable premium taxes 18,536,685 12,646,396 Administration charges (81,503) (8,296) Contingent sales charges (12,977) (863) Contract terminations (296,674) (25,813) Death benefit payments (46,991) (15,817) Flexible withdrawal option payments (237,141) (58,655) Transfer payments to other contracts (6,617,950) (37,067) Annuity payments - - - - Increase (decrease) in net assets from principal transactions 11,243,449 12,499,885 ---------- ---------- Total increase (decrease) 13,385,715 12,780,351 Net assets at beginning of period 12,780,351 - ---------- - Net assets at end of period $ 26,166,066 $ 12,780,351 -------------- ---------- (1) Commenced operations January 4, 2005. See accompanying notes.
Principal Principal Principal LifeTime LifeTime LifeTime 2020 2030 2040 Division Division (1) Division (1) --------- ------------ ------------ (1) ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------ 2006 2005 2006 2005 2006 2005 ---- ---- ---- ---- ---- ---- ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------ $ (792,450) $ (118,424) $ (100,284) $ (13,655) $ (42,160) $ (6,059) 22,096 5,507 86,023 3,386 12,112 1,090 8,696,024 848,565 1,078,553 94,940 454,131 56,275 --------- ------- --------- ------ ------- ------ ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------ 7,925,670 735,648 1,064,292 84,671 424,083 51,306 71,870,521 26,175,123 9,214,113 3,233,221 3,572,102 1,444,809 (209,732) (17,487) (1,182) (24) (691) (24) (37,064) (339) (18,824) (36) (5,788) - (847,347) (10,134) (430,338) (1,089) (132,319) - (159,754) - - - - - (450,397) (86,889) (21,307) (6,081) (2,536) - (8,336,536) (606,628) (1,065,887) (69,942) (112,692) (46,897) ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------ 61,829,691 25,453,646 7,676,575 3,156,049 3,318,076 1,397,888 ---------- ---------- --------- --------- --------- --------- ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------ 69,755,361 26,189,294 8,740,867 3,240,720 3,742,159 1,449,194 26,189,294 - 3,240,720 - 1,449,194 - ---------- - --------- - --------- - ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------ $ 95,944,655 $ 26,189,294 $ 11,981,587 $ 3,240,720 $ 5,191,353 $ 1,449,194 -------------- ------------ ------------ ----------- ----------- --------- ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------
Principal Life Insurance Company Separate Account B Statements of Changes in Net Assets (continued) For the Year Ended December 31, 2006 and 2005, Except as Noted Principal LifeTime 2050 Division (1) 2006 2005 ---- ---- Increase (decrease) in net assets from Operations: Net investment income (loss) $ (25,320) $ (2,406) Total realized gains (losses) on investments 9,972 48 Change in net unrealized appreciation or depreciation of investments 251,174 19,245 ------- ------ Net increase (decrease) in net assets resulting from operations 235,826 16,887 Changes from principal transactions: Purchase payments, less sales charges, per payment fees and applicable premium taxes 2,714,081 756,727 Administration charges (210) - Contingent sales charges (2,724) - Contract terminations (62,267) - Death benefit payments - - Flexible withdrawal option payments (151) - Transfer payments to other contracts (172,996) 1 Annuity payments - - - - Increase (decrease) in net assets from principal transactions 2,475,733 756,728 --------- ------- Total increase (decrease) 2,711,559 773,615 Net assets at beginning of period 773,615 - ------- - Net assets at end of period $ 3,485,174 $ 773,615 ------------- ------- (1) Commenced operations January 4, 2005. See accompanying notes.
Real Estate Short-Term Securities Bond Division Division -------- -------- 2006 2005 2006 2005 ---- ---- ---- ---- $ 309,423 $ (1,690,858) $ 862,353 $ 122,773 13,115,883 4,534,634 12,952 (14,016) 32,582,342 13,908,697 2,210,032 206,477 ---------- ---------- --------- ------- 46,007,648 16,752,473 3,085,337 315,234 40,235,845 36,441,344 65,026,561 49,237,781 (46,137) (36,333) (190,796) (26,133) (145,722) (137,763) (70,643) (86,189) (11,311,914) (8,051,131) (4,444,438) (5,277,925) (566,980) (232,728) (237,166) (240,359) (1,726,837) (1,490,965) (2,685,156) (1,968,926) (24,593,554) (25,263,440) (24,418,649) (14,939,228) 1,844,701 1,228,984 32,979,713 26,699,021 --------- --------- ---------- ---------- 47,852,349 17,981,457 36,065,050 27,014,255 133,792,721 115,811,264 81,529,141 54,514,886 ----------- ----------- ---------- ---------- $ 181,645,070 $ 133,792,721 $ 117,594,191 $ 81,529,141 --------------- ----------- --------------- ----------
Principal Life Insurance Company Separate Account B Statements of Changes in Net Assets (continued) For the Year Ended December 31, 2006 and 2005, Except as Noted SmallCap Division 2006 2005 ---- ---- Increase (decrease) in net assets from Operations: Net investment income (loss) $ (847,987) $ (902,834) Total realized gains (losses) on investments 6,373,384 944,344 Change in net unrealized appreciation or depreciation of investments 1,961,967 3,803,135 --------- --------- Net increase (decrease) in net assets resulting from operations 7,487,364 3,844,645 Changes from principal transactions: Purchase payments, less sales charges, per payment fees and applicable premium taxes 8,399,835 12,663,736 Administration charges (12,807) (14,199) Contingent sales charges (65,437) (63,516) Contract terminations (5,714,276) (4,655,966) Death benefit payments (229,622) (133,597) Flexible withdrawal option payments (894,769) (882,813) Transfer payments to other contracts (8,073,020) (6,733,904) Annuity payments - - - - Increase (decrease) in net assets from principal transactions (6,590,096) 179,741 ----------- ------- Total increase (decrease) 897,268 4,024,386 Net assets at beginning of period 70,854,493 66,830,107 ---------- ---------- Net assets at end of period $ 71,751,761 $ 70,854,493 -------------- ---------- See accompanying notes.
SmallCap SmallCap Growth Value Division Division -------- -------- 2006 2005 2006 2005 ---- ---- ---- ---- $ (666,713) $ (601,543) $ (1,232,059) $ (1,142,554) (1,332,510) (2,102,024) 12,871,584 2,553,049 5,430,781 4,985,626 5,413,590 2,740,416 --------- --------- --------- --------- 3,431,558 2,282,059 17,053,115 4,150,911 10,721,896 7,548,846 37,625,778 31,112,444 (8,292) (7,140) (80,677) (22,644) (65,066) (51,282) (113,728) (80,735) (5,175,480) (3,729,551) (8,276,465) (5,107,789) (71,981) (112,852) (263,733) (324,717) (397,314) (394,403) (1,039,781) (855,206) (6,357,486) (5,384,370) (14,222,812) (11,791,879) (1,353,723) (2,130,752) 13,628,582 12,929,474 ----------- ----------- ---------- ---------- 2,077,835 151,307 30,681,697 17,080,385 46,695,389 46,544,082 95,377,914 78,297,529 ---------- ---------- ---------- ---------- $ 48,773,224 $ 46,695,389 $ 126,059,611 $ 95,377,914 -------------- ---------- --------------- ----------
Principal Life Insurance Company Separate Account B Statements of Changes in Net Assets (continued) For the Year Ended December 31, 2006 and 2005, Except as Noted T. Rowe Price Blue Chip Growth II Division 2006 2005 Increase (decrease) in net assets from Operations: Net investment income (loss) $ (9,904) $ (2,321) Total realized gains (losses) on investments 6,716 2,769 Change in net unrealized appreciation or depreciation of investments 76,937 23,847 ------ ------ Net increase (decrease) in net assets resulting from operations 73,749 24,295 Changes from principal transactions: Purchase payments, less sales charges, per payment fees and applicable premium taxes 417,431 682,192 Administration charges (21) - Contingent sales charges (3,617) (339) Contract terminations (82,700) (10,143) Death benefit payments (2,219) - Flexible withdrawal option payments (3,650) (141) Transfer payments to other contracts (14,665) (52,037) Annuity payments - - - - Increase (decrease) in net assets from principal transactions 310,559 619,532 ------- ------- Total increase (decrease) 384,308 643,827 Net assets at beginning of period 643,827 - ------- - Net assets at end of period $ 1,028,135 $ 643,827 ------------- ------- See accompanying notes.
Templeton T. Rowe Price Growth Health Securities Science Class 2 H Division Division ---------- -------- 2006 2005 2006 2005 ---- ---- ---- ---- $ (19,706) $ (2,119) $ 11,349 $ 4,826 8,932 1,933 174,717 39,915 129,496 40,301 303,044 118,794 ------- ------ ------- ------- 118,722 40,115 489,110 163,535 1,908,562 540,074 799,000 616,293 (2,173) (151) - - (748) (114) (1,546) (781) (17,106) (3,402) (359,768) (205,972) - - (5,116) (5,327) (6,446) (459) (26,698) (23,539) (354,679) (25,435) (153,658) (108,350) 1,527,410 510,513 252,214 272,324 --------- ------- ------- ------- 1,646,132 550,628 741,324 435,859 550,628 - 2,287,401 1,851,542 ------- - --------- --------- $ 2,196,760 $ 550,628 $ 3,028,725 $ 2,287,401 ------------- --------- ----------- ---------
Principal Life Insurance Company Separate Account B Notes to Financial Statements 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, 2006, contractholder investment options include the following open-end management investment companies: Principal Variable Contracts Fund, Inc. (1) Asset Allocation Account Balanced Account Bond Account Capital Value Account Diversified International Account Equity Growth Account Equity Income Account Equity Value Account (4) Government & High Quality Bond Account Growth Account International Emerging Markets Account International SmallCap Account LargeCap Blend Account (2) LargeCap Growth Equity Account LargeCap Stock Index Account LargeCap Value Account (2) MidCap Account MidCap Growth Account MidCap Value Account Money Market Account Principal LifeTime Strategic Income Account (4) Principal LifeTime 2010 Account (4) Principal LifeTime 2020 Account (4) Principal LifeTime 2030 Account (4) Principal LifeTime 2040 Account (4) Principal LifeTime 2050 Account(4) Real Estate Securities Account Short-Term Bond Account (3) SmallCap Account SmallCap Growth Account SmallCap Value Account 1. Investment and Accounting Policies (continued) AIM V.I. Basic Value Fund - Series I (4) AIM V.I. Capital Appreciation Fund Series I (5) AIM V.I. Core Equity Fund - Series I AIM V.I. Dynamics Fund - Series I AIM V.I. Global Health Care Fund - Series I AIM V.I. Small Cap Equity Fund - Series I (4) AIM V.I. Small Cap Growth Fund - Series I, formerly AIM V.I. Small Company Growth Fund - Series I, until November 21, 2006 name change AIM V.I. Technology Fund - Series I Alliance Bernstein VP Series Fund, Inc: Small Cap Growth Portfolio - Class A (4) American Century Variable Portfolios, Inc: VP Income & Growth Fund - I VP Inflation Protection Fund - II (4) VP Ultra Fund - I VP Ultra Fund - II (4) VP Value Fund - II (2) VP Vista Fund - I (4) Dreyfus Investment Portfolios: Founders Discovery Portfolio - Initial Shares Technology Growth Portfolio - Service Shares (4) Fidelity Variable Insurance Products Fund: Equity-Income Portfolio - SC2 Growth Portfolio - SC (2) Growth Portfolio - SC2 (4) Overseas Portfolio - SC2 (4) Fidelity Variable Insurance Products Fund II: Contrafund Portfolio - SC Contrafund Portfolio - SC2 (4) Fidelity Variable Insurance Products Fund III: Mid Cap Portfolio - SC2 (4) Franklin Templeton VIP Trust: Templeton Growth Securities Fund - Class 2 Goldman Sachs Variable Insurance Trust: Mid Cap Value Fund - SC I (4) Structured Small Cap Equity Fund - SC I, formerly Goldman Sachs CORE Small Cap Equity, until May 1, 2006 name change (4) Janus Aspen Series Mid Cap Growth Portfolio Neuberger Berman AMT Fasciano Portfolio - S Class (3) Neuberger Berman AMT High Income Bond Portfolio - S Class (4) Neuberger Berman AMT Partners Portfolio - I Class (3) Neuberger Berman AMT Socially Responsive Portfolio - I Class (3) T. Rowe Price Blue Chip Growth Portfolio - II (3) T. Rowe Price Health Sciences Portfolio - II (3) (1) Organized by Principal Life Insurance Company (2) Commenced operations May 18, 2002 (3) Commenced operations May 17, 2003 (4) Commenced operations January 4, 2005 (5) Commenced operations April 28, 2006 Commencement of operations date is the date that the division became available to contractholders. 1. Investment and Accounting Policies (continued) Investments are stated at the closing net asset values per share on December 31, 2006. 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. Separate Account B supports the following variable annuity contracts of Principal Life: Bankers Flexible Annuity; Pension Builder Plus; Pension Builder Plus - Rollover IRA; Personal Variable; Premier Variable; Principal Freedom Variable Annuity; Principal Freedom 2 Variable Annuity; The Principal Variable Annuity; The Principal Variable Annuity with Purchase Payment Credit Rider; Principal Investment Plus Variable Annuity, and Principal Investment Plus Variable Annuity with Purchase Rider. Principal Life no longer accepts contributions for Bankers Flexible Annuity Contracts, Pension Builder Plus Contracts and Pension Builder Plus-Rollover IRA Contracts. Contractholders are being given the option of withdrawing their funds or transferring to another contract. Contributions to the Personal Variable contracts are no longer accepted from new customers, only from existing customers beginning January 1998. Use of Estimates in the Preparation of Financial Statements The preparation of financial statements and accompanying notes of Separate Account B 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 and Related Party Transactions 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 daily charge resulting in a reduction of the unit value 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. Pension Builder Plus and Pension Builder Plus - Rollover IRA Contracts - Mortality and expense risks assumed by Principal Life are compensated for by a daily charge resulting in a reduction of the unit value equivalent to an annual rate of 1.50% (1% 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 ten years of a contract, except for withdrawals related to 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. Personal Variable Contracts - Mortality and expense risks assumed by Principal Life are compensated for by a daily charge resulting in a reduction of the unit value 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. Premier Variable Contracts - Mortality and expense risks assumed by Principal Life are compensated for by a daily charge resulting in a reduction of the unit value equivalent to an annual rate of 0.42% of the asset value of each contract. The Contractholder must also pay contract administration charges. The annual charge ranges from a minimum charge of $2,150 to $7,725 plus 0.03% of account values greater than $30,000,000. The amount varies by Plan document and account balance of contract. Recordkeeping charges are also paid by the Contractholder. The annual charge ranges from $2,250 to $25,316 plus $10 per participant. The amount varies by total plan participants. There were no contingent sales charges provided for in these contracts. Principal Freedom Variable Annuity - Mortality and expenses risk assumed by Principal Life are compensated for by a daily charge resulting in a reduction of the unit value 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 withdrawals related to 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. Principal Freedom 2 Variable Annuity - Mortality and expenses risk assumed by Principal Life are compensated for by a daily charge resulting in a reduction of the unit value equivalent to an annual rate of 0.95% of the asset value of each contract. A contingent sales charge up to 3% may be deducted from the withdrawals made during the first four years of a contract, except for withdrawals related to 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 Principal Variable Annuity - Mortality and expense risks assumed by Principal Life are compensated for by a daily charge resulting in a reduction of the unit value 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 withdrawals related to death, annuitization, permanent disability, confinement in a health care facility, or terminal illness. An annual administration charge of the lesser of 2% 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. Effective November 27, 2000, Principal Life added a purchase payment credit rider to the contract, at an annual rate of 0.6%. For electing participants, the rider is deducted from the daily unit value. The Principal Investment Plus Variable Annuity - Mortality and expense risks assumed by Principal Life are compensated for by a daily charge resulting in a reduction of the unit value 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 withdrawals related to death, annuitization, permanent disability, confinement in a health care facility, or terminal illness. An annual administration charge of the lesser of 2% 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. An optional premium payment credit rider can be added to the product at an annual rate of 0.6%. For electing participants, the rider is deducted from the daily unit value. During the year ended December 31, 2006, management fees were paid indirectly to Principal Management Corporation (wholly owned by Principal Financial Services, Inc.), an affiliate of Principal Life, in its capacity as advisor to Principal Variable Contracts Fund, Inc. Investment advisory and management fees are computed on an annual rate of 0.25% of the average daily net assets of the LargeCap Stock Index Account, 1% of the average daily net assets of the LargeCap Growth Equity Account, and 0.1225% of the average daily net assets of the Principal LifeTime Accounts. The investment advisory and management fees for certain Accounts of the Principal Variable Contracts Fund, Inc. are based on an annual rate of the average daily net assets, which decreases by 0.05% for each $100 million increase in net asset value above the initial $100 million of net assets for each Account, with the final decrease in the annual rate occurring when net assets exceed $400 million. This rate structure applies to the Accounts in the following table, which discloses the fee range for each Account from the first $100 million of net asset value to net asset values of over $400 million:
Account Fee Range ------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------ Bond, Government & High Quality Bond, Money Market, Short-Term Bond 0.50 - 0.30% Balanced, Equity Income 0.60 - 0.40 MidCap 0.65 - 0.45 Asset Allocation, Equity Growth 0.80 - 0.60 Equity Value, SmallCap 0.85 - 0.65 MidCap Growth, Real Estate Securities 0.90 - 0.70 SmallCap Growth 1.00 - 0.80 SmallCap Value 1.10 - 0.90 International SmallCap 1.20 - 1.00
The investment advisory and management fees for certain Accounts of the Principal Variable Contracts Fund, Inc. are based on an annual rate of the average daily net assets, which decreases by 0.05% for each $250 million increase in net asset value above the initial $250 million of net assets for each Account, with the final decrease in the annual rate occurring when net assets exceed $1 billion. This rate structure applies to the Accounts in the following table, which discloses the fee range for each Account from the first $250 million of net asset value to net asset values of over $1 billion: 2. Expenses and Related Party Transactions (continued) Account Fee Range --------------------------------------------------------------------------- --------------------------------------------------------------------------- Capital Value, Growth 0.60 - 0.40% LargeCap Blend, LargeCap Value 0.75 - 0.55 Diversified International 0.85 - 0.65 MidCap Value 1.05 - 0.85 International Emerging Markets 1.25 - 1.05 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 Investments The aggregate cost of purchases and proceeds from sales of investments were as follows during the year ended December 31, 2006:
Division Purchases Sales ---------------------------------------------------------------------------------------------------------- AIM V.I. Basic Value Series I Division: Principal Investment Plus Variable Annuity $ 581,271 $ 7,187 Principal Investment Plus Variable Annuity With Purchase Rider 322,390 6,253 AIM V.I. Capital Appreciation Series I Division: The Principal Variable Annuity 15,973,923 2,640,928 The Principal Variable Annuity With Purchase Payment Credit Rider 2,612,094 226,665 AIM V.I. Core Equity Series I Division: The Principal Variable Annuity 25,845,151 10,341,390 The Principal Variable Annuity With Purchase Payment Credit Rider 7,787,261 2,001,885 AIM V.I. Dynamics Series I Division: The Principal Variable Annuity 698,307 660,004 The Principal Variable Annuity With Purchase Payment Credit Rider 455,049 400,202 AIM V.I. Global Health Care Series I Division: The Principal Variable Annuity 796,129 1,619,267 The Principal Variable Annuity With Purchase Payment Credit Rider 1,139,339 1,441,437 AIM V.I. Small Cap Equity Series I Division: Principal Investment Plus Variable Annuity 296,242 27,665 Principal Investment Plus Variable Annuity With Purchase Rider 331,907 2,864
4. Purchases and Sales of Investments (continued)
Division Purchases Sales ---------------------------------------------------------------------------------------------------------- AIM V.I. Small Cap Growth Series I Division: The Principal Variable Annuity $ 810,852 $ 875,714 The Principal Variable Annuity With Purchase Payment Credit Rider 236,351 242,994 AIM V.I. Technology Series I Division: The Principal Variable Annuity 715,787 1,182,449 The Principal Variable Annuity With Purchase Payment Credit Rider 796,177 991,085 Alliance Bernstein VP Series Small Cap Growth Class A Division: Principal Investment Plus Variable Annuity 527,682 64,578 Principal Investment Plus Variable Annuity With Purchase Rider 222,578 19,491 American Century VP Income & Growth Class I Division: Principal Freedom Variable Annuity 1,545,184 1,348,073 The Principal Variable Annuity 2,315,670 3,686,509 The Principal Variable Annuity With Purchase Payment Credit Rider 998,927 1,840,114 American Century VP Inflation Protection Class II Division: Principal Investment Plus Variable Annuity 28,120,662 5,654,908 Principal Investment Plus Variable Annuity With Purchase Rider 10,940,252 2,462,190 American Century VP Ultra Class I Division: The Principal Variable Annuity 619,575 1,279,418 The Principal Variable Annuity With Purchase Payment Credit Rider 589,910 760,017
4. Purchases and Sales of Investments (continued)
Division Purchases Sales ---------------------------------------------------------------------------------------------------------- American Century VP Ultra Class II Division: Principal Investment Plus Variable Annuity $24,146,907 $ 5,069,747 Principal Investment Plus Variable Annuity With Purchase Rider 9,875,971 2,959,523 American Century VP Value Class II Division: The Principal Variable Annuity 8,284,822 5,282,938 The Principal Variable Annuity With Purchase Payment Credit Rider 5,085,367 2,743,849 American Century VP Vista Class I Division: Principal Investment Plus Variable Annuity 434,852 156,750 Principal Investment Plus Variable Annuity With Purchase Rider 66,797 1,357 Asset Allocation Division: Premier Variable 5,102 133,132 The Principal Variable Annuity 4,978,251 15,576,583 The Principal Variable Annuity With Purchase Payment Credit Rider 2,220,615 3,521,207 Principal Investment Plus Variable Annuity 2,985,375 806,064 Principal Investment Plus Variable Annuity With Purchase Rider 2,239,275 598,311 Balanced Division: Personal Variable 117,879 97,672 Premier Variable 1,125,404 2,455,126 The Principal Variable Annuity 6,448,010 18,826,738 The Principal Variable Annuity With Purchase Payment Credit Rider 2,709,780 2,953,727
4. Purchases and Sales of Investments (continued)
Division Purchases Sales ---------------------------------------------------------------------------------------------------------- Bond Division: Personal Variable $ 46,121 $ 81,925 Premier Variable 1,427,921 2,175,515 Principal Freedom Variable Annuity 3,844,619 3,102,447 Principal Freedom 2 Variable Annuity 53,582 39 The Principal Variable Annuity 28,223,254 39,735,083 The Principal Variable Annuity With Purchase Payment Credit Rider 14,317,420 12,097,429 Principal Investment Plus Variable Annuity 41,615,015 7,953,352 Principal Investment Plus Variable Annuity With Purchase Rider 16,593,865 4,014,201 Capital Value Division: Bankers Flexible Annuity 220,513 158,615 Pension Builder Plus 286,950 257,205 Pension Builder Plus - Rollover IRA 63,175 129,442 Personal Variable 273,814 167,000 Premier Variable 4,219,050 5,170,917 Principal Freedom Variable Annuity 3,078,512 1,619,134 Principal Freedom 2 Variable Annuity 22,734 13 The Principal Variable Annuity 23,307,419 34,723,664 The Principal Variable Annuity With Purchase Payment Credit Rider 6,151,987 3,331,406 Principal Investment Plus Variable Annuity 4,212,848 717,934 Principal Investment Plus Variable Annuity With Purchase Rider 2,947,620 208,007
4. Purchases and Sales of Investments (continued)
Division Purchases Sales ---------------------------------------------------------------------------------------------------------- Diversified International Division: Personal Variable $ 132,357 $ 31,223 Premier Variable 3,167,991 4,050,637 Principal Freedom Variable Annuity 4,562,758 2,741,894 Principal Freedom 2 Variable Annuity 69,708 56 The Principal Variable Annuity 33,341,144 41,552,104 The Principal Variable Annuity With Purchase Payment Credit Rider 12,337,144 10,470,189 Principal Investment Plus Variable Annuity 12,451,383 2,049,443 Principal Investment Plus Variable Annuity With Purchase Rider 4,890,167 610,584 Dreyfus IP Founders Discovery Initial Shares Division: The Principal Variable Annuity 2,456,071 1,932,143 The Principal Variable Annuity With Purchase Payment Credit Rider 1,318,782 1,040,768 Dreyfus IP Technology Service Shares Division: Principal Investment Plus Variable Annuity 229,006 50,217 Principal Investment Plus Variable Annuity With Purchase Rider 104,202 2,247 Equity Growth Division: Premier Variable 5,436 68,938 The Principal Variable Annuity 9,292,390 38,308,380 The Principal Variable Annuity With Purchase Payment Credit Rider 3,102,539 3,587,613 Principal Investment Plus Variable Annuity 2,591,979 141,612 Principal Investment Plus Variable Annuity With Purchase Rider 1,412,448 118,766
4. Purchases and Sales of Investments (continued)
Division Purchases Sales ---------------------------------------------------------------------------------------------------------- Equity Income Division: Premier Variable $ 187,759 $ 115,483 The Principal Variable Annuity 10,936,616 11,163,174 The Principal Variable Annuity With Purchase Payment Credit Rider 3,570,430 3,601,980 Principal Investment Plus Variable Annuity 51,323,389 12,701,526 Principal Investment Plus Variable Annuity With Purchase Rider 19,645,514 6,223,515 Equity Value Division: Principal Investment Plus Variable Annuity 1,758,792 492,877 Principal Investment Plus Variable Annuity With Purchase Rider 986,492 254,126 Fidelity VIP Equity - Income Service Class 2 Division: The Principal Variable Annuity 13,881,397 7,036,128 The Principal Variable Annuity With Purchase Payment Credit Rider 6,375,491 2,945,766 Principal Investment Plus Variable Annuity 4,034,332 324,178 Principal Investment Plus Variable Annuity With Purchase Rider 1,341,118 39,651 Fidelity VIP Growth Service Class Division: The Principal Variable Annuity 2,317,054 8,133,654 The Principal Variable Annuity With Purchase Payment Credit Rider 853,971 1,653,380 Fidelity VIP Growth Service Class 2 Division: Principal Investment Plus Variable Annuity 1,774,828 94,859 Principal Investment Plus Variable Annuity With Purchase Rider 1,303,267 117,311
4. Purchases and Sales of Investments (continued)
Division Purchases Sales ---------------------------------------------------------------------------------------------------------- Fidelity VIP Overseas Service Class 2 Division: Principal Investment Plus Variable Annuity $16,806,159 $ 3,439,659 Principal Investment Plus Variable Annuity With Purchase Rider 7,662,299 1,968,415 Fidelity VIP II Contrafund Service Class Division: The Principal Variable Annuity 24,158,339 18,776,177 The Principal Variable Annuity With Purchase Payment Credit Rider 9,694,882 4,705,489 Fidelity VIP II Contrafund Service Class 2 Division: Principal Investment Plus Variable Annuity 14,782,471 2,421,841 Principal Investment Plus Variable Annuity With Purchase Rider 5,002,151 771,320 Fidelity VIP III Mid Cap Service Class 2 Division: Principal Investment Plus Variable Annuity 2,847,506 325,163 Principal Investment Plus Variable Annuity With Purchase Rider 829,097 54,676 Goldman Sachs VIT Mid Cap Value Fund Service Class I Division: Principal Investment Plus Variable Annuity 6,756,039 617,835 Principal Investment Plus Variable Annuity With Purchase Rider 3,510,903 160,177 Goldman Sachs Structured Small Cap Equity Service Class I Division: Principal Investment Plus Variable Annuity 1,960,300 197,228 Principal Investment Plus Variable Annuity With Purchase Rider 1,190,009 90,931
4. Purchases and Sales of Investments (continued)
Division Purchases Sales ---------------------------------------------------------------------------------------------------------- Government & High Quality Bond Division: Pension Builder Plus $ 6,698 $ 23,509 Pension Builder Plus - Rollover IRA 3,944 3,131 Personal Variable 43,883 83,164 Premier Variable 749,724 1,731,029 Principal Freedom Variable Annuity 2,052,266 1,819,671 Principal Freedom 2 Variable Annuity 3,517 - The Principal Variable Annuity 26,586,641 49,023,949 The Principal Variable Annuity With Purchase Payment Credit Rider 12,838,927 15,263,967 Principal Investment Plus Variable Annuity 15,271,094 3,457,970 Principal Investment Plus Variable Annuity With Purchase Rider 5,203,879 1,306,111 Growth Division: Personal Variable 143,772 185,276 Premier Variable 1,755,226 3,754,563 The Principal Variable Annuity 4,514,433 19,509,132 The Principal Variable Annuity With Purchase Payment Credit Rider 1,480,788 1,219,282 Principal Investment Plus Variable Annuity 1,966,780 200,984 Principal Investment Plus Variable Annuity With Purchase Rider 1,191,092 57,850 International Emerging Markets Division: Premier Variable 249,589 343,767 The Principal Variable Annuity 23,312,726 17,231,656 The Principal Variable Annuity With Purchase Payment Credit Rider 8,472,999 6,633,980 Principal Investment Plus Variable Annuity 7,174,993 1,166,370 Principal Investment Plus Variable Annuity With Purchase Rider 4,390,514 601,525
4. Purchases and Sales of Investments (continued)
Division Purchases Sales ---------------------------------------------------------------------------------------------------------- International SmallCap Division: Premier Variable $ 194,619 $ 394,614 The Principal Variable Annuity 25,305,432 24,788,832 The Principal Variable Annuity With Purchase Payment Credit Rider 8,065,288 5,406,591 Principal Investment Plus Variable Annuity 7,663,350 1,266,610 Principal Investment Plus Variable Annuity With Purchase Rider 3,562,197 521,632 Janus Aspen Mid Cap Growth Service Shares Division: The Principal Variable Annuity 1,740,357 2,864,198 The Principal Variable Annuity With Purchase Payment Credit Rider 1,469,082 1,723,085 LargeCap Blend Division: The Principal Variable Annuity 13,957,226 12,453,871 The Principal Variable Annuity With Purchase Payment Credit Rider 6,900,461 4,605,592 Principal Investment Plus Variable Annuity 36,111,688 6,677,699 Principal Investment Plus Variable Annuity With Purchase Rider 15,039,864 3,318,685 LargeCap Growth Equity Division: Premier Variable 10,901 106,032 Principal Freedom Variable Annuity 921,198 638,980 Principal Freedom 2 Variable Annuity 21,236 18 The Principal Variable Annuity 2,311,247 2,277,517 The Principal Variable Annuity With Purchase Payment Credit Rider 1,146,568 1,321,689
4. Purchases and Sales of Investments (continued)
Division Purchases Sales ---------------------------------------------------------------------------------------------------------- LargeCap Stock Index Division: Premier Variable $ 387,096 $ 340,640 Principal Freedom Variable Annuity 3,739,860 3,806,138 Principal Freedom 2 Variable Annuity 87,250 67 The Principal Variable Annuity 20,532,364 26,115,808 The Principal Variable Annuity With Purchase Payment Credit Rider 4,386,303 7,433,810 Principal Investment Plus Variable Annuity 6,949,882 1,829,859 Principal Investment Plus Variable Annuity With Purchase Rider 3,173,425 499,832 LargeCap Value Division: The Principal Variable Annuity 14,166,969 12,304,846 The Principal Variable Annuity With Purchase Payment Credit Rider 5,993,718 4,527,962 Principal Investment Plus Variable Annuity 32,523,320 6,233,034 Principal Investment Plus Variable Annuity With Purchase Rider 13,587,723 3,347,034 MidCap Division: Personal Variable 329,151 114,789 Premier Variable 3,180,799 5,161,102 Principal Freedom Variable Annuity 2,065,123 1,722,967 Principal Freedom 2 Variable Annuity 11,908 5 The Principal Variable Annuity 47,296,113 52,934,084 The Principal Variable Annuity With Purchase Payment Credit Rider 14,906,010 8,071,475 Principal Investment Plus Variable Annuity 23,324,468 4,414,541 Principal Investment Plus Variable Annuity With Purchase Rider 9,336,279 1,851,357
4. Purchases and Sales of Investments (continued)
Division Purchases Sales ---------------------------------------------------------------------------------------------------------- MidCap Growth Division: Premier Variable $ 198,287 $ 283,578 Principal Freedom Variable Annuity 608,044 687,379 Principal Freedom 2 Variable Annuity 10,618 9 The Principal Variable Annuity 6,444,216 8,561,126 The Principal Variable Annuity With Purchase Payment Credit Rider 3,026,383 2,821,709 Principal Investment Plus Variable Annuity 1,586,909 183,401 Principal Investment Plus Variable Annuity With Purchase Rider 1,068,703 156,103 MidCap Value Division: Premier Variable 134,438 451,653 Principal Freedom Variable Annuity 3,524,068 2,277,588 Principal Freedom 2 Variable Annuity 21,461 20 The Principal Variable Annuity 15,128,244 14,551,756 The Principal Variable Annuity With Purchase Payment Credit Rider 6,349,436 4,114,660 Principal Investment Plus Variable Annuity 16,461,141 3,477,232 Principal Investment Plus Variable Annuity With Purchase Rider 6,347,314 1,417,489 Money Market Division: Pension Builder Plus 8,132 23,725 Pension Builder Plus - Rollover IRA 338 395 Personal Variable 1,016,462 1,057,094 Premier Variable 4,493,358 5,553,581 Principal Freedom Variable Annuity 11,325,966 10,826,325 Principal Freedom 2 Variable Annuity - 1 The Principal Variable Annuity 80,081,975 71,647,603 The Principal Variable Annuity With Purchase Payment Credit Rider 22,134,228 22,969,391 Principal Investment Plus Variable Annuity 15,642,119 12,794,496 Principal Investment Plus Variable Annuity With Purchase Rider 13,168,115 10,654,156 Neuberger Berman AMT Fasciano S Class Division: Principal Investment Plus Variable Annuity $ 865,378 $ 75,405 Principal Investment Plus Variable Annuity With Purchase Rider 604,450 43,060 Neuberger Berman AMT High Income Bond S Class Division: Principal Investment Plus Variable Annuity 1,095,525 113,174 Principal Investment Plus Variable Annuity With Purchase Rider 283,257 85,309 Neuberger Berman AMT Partners I Class Division: Principal Investment Plus Variable Annuity 2,824,848 179,784 Principal Investment Plus Variable Annuity With Purchase Rider 1,262,112 67,457 Neuberger Berman AMT Socially Responsive I Class Division: Principal Investment Plus Variable Annuity 1,524,684 405,976 Principal Investment Plus Variable Annuity With Purchase Rider 456,482 46,921 Principal LifeTime Strategic Income Division: Principal Investment Plus Variable Annuity 6,359,281 1,816,916 Principal Investment Plus Variable Annuity With Purchase Rider 1,930,158 353,583 Principal LifeTime 2010 Division: Principal Freedom 2 Variable Annuity 510,584 227 Principal Investment Plus Variable Annuity 14,367,646 6,357,953 Principal Investment Plus Variable Annuity With Purchase Rider 3,667,807 1,204,295 Principal LifeTime 2020 Division: Principal Freedom 2 Variable Annuity $ 109,050 $ 49 Principal Investment Plus Variable Annuity 52,350,394 8,130,342 Principal Investment Plus Variable Annuity With Purchase Rider 19,411,077 2,702,889 Principal LifeTime 2030 Division: Principal Freedom 2 Variable Annuity 34,166 10 Principal Investment Plus Variable Annuity 7,187,234 1,371,508 Principal Investment Plus Variable Annuity With Purchase Rider 1,993,950 267,150 Principal LifeTime 2040 Division: Principal Freedom 2 Variable Annuity 99,728 21 Principal Investment Plus Variable Annuity 2,473,943 196,340 Principal Investment Plus Variable Annuity With Purchase Rider 999,444 100,500 Principal LifeTime 2050 Division: Principal Investment Plus Variable Annuity 1,904,960 123,306 Principal Investment Plus Variable Annuity With Purchase Rider 809,421 140,589 Real Estate Securities Division: Premier Variable 534,075 642,746 Principal Freedom 2 Variable Annuity 10,878 5 The Principal Variable Annuity 26,396,502 28,300,308 The Principal Variable Annuity With Purchase Payment Credit Rider 12,398,242 10,350,757 Principal Investment Plus Variable Annuity 7,708,749 1,012,396 Principal Investment Plus Variable Annuity With Purchase Rider 2,904,670 309,092 Short-Term Bond Division: Principal Freedom Variable Annuity $ 1,289,313 $ 1,158,580 The Principal Variable Annuity 10,290,346 10,278,005 The Principal Variable Annuity With Purchase Payment Credit Rider 4,534,631 6,686,402 Principal Investment Plus Variable Annuity 37,035,910 10,742,313 Principal Investment Plus Variable Annuity With Purchase Rider 14,108,271 4,551,105 SmallCap Division: Premier Variable 39,489 135,975 Principal Freedom Variable Annuity 1,849,501 1,859,373 The Principal Variable Annuity 8,092,213 10,870,804 The Principal Variable Annuity With Purchase Payment Credit Rider 3,192,035 3,086,564 SmallCap Growth Division: Premier Variable 187,766 291,381 Principal Freedom Variable Annuity 490,910 509,047 Principal Freedom 2 Variable Annuity 10,618 9 The Principal Variable Annuity 5,549,930 9,763,220 The Principal Variable Annuity With Purchase Payment Credit Rider 1,423,980 1,787,197 Principal Investment Plus Variable Annuity 2,131,737 274,412 Principal Investment Plus Variable Annuity With Purchase Rider 926,955 117,066 SmallCap Value Division: Premier Variable $ 239,066 $ 460,115 Principal Freedom 2 Variable Annuity 19,483 10 The Principal Variable Annuity 17,355,308 15,520,048 The Principal Variable Annuity With Purchase Payment Credit Rider 5,041,278 4,305,359 Principal Investment Plus Variable Annuity 18,598,663 3,611,445 Principal Investment Plus Variable Annuity With Purchase Rider 7,286,752 1,656,549 T. Rowe Price Blue Chip Growth II Division: Principal Investment Plus Variable Annuity 295,362 114,801 Principal Investment Plus Variable Annuity With Purchase Rider 124,037 3,943 T. Rowe Price Health Science II Division: Principal Investment Plus Variable Annuity 1,331,858 334,301 Principal Investment Plus Variable Annuity With Purchase Rider 576,704 66,557 Templeton Growth Securities Class 2 Division: Principal Freedom Variable Annuity 923,013 568,193
5. Changes in Units Outstanding Transactions in units were as follows for each of the years ended December 31:
2006 2005 ----------------------------- ----------------------------- ----------------------------- ----------------------------- Division Purchased Redeemed Purchased Redeemed ---------------------------------------------------------------------------- ----------------------------- AIM V.I. Basic Value Series I Division: Principal Investment Plus Variable Annuity 44,769 299 6,367 1,480 Principal Investment Plus Variable Annuity With Purchase Rider 24,831 261 8,343 22 AIM V.I. Capital Appreciation Series I Division: The Principal Variable Annuity 1,604,644 265,541 - - The Principal Variable Annuity With Purchase Payment Credit Rider 262,395 22,791 - - AIM V.I. Core Equity Series I Division: The Principal Variable Annuity 2,712,521 1,023,089 182,189 700,618 The Principal Variable Annuity With Purchase Payment Credit Rider 817,295 198,050 83,559 112,903 AIM V.I. Dynamics Series I Division: The Principal Variable Annuity 74,055 67,373 39,509 64,943 The Principal Variable Annuity With Purchase Payment Credit Rider 48,257 40,852 30,947 28,819 AIM V.I. Global Health Care Series I Division: The Principal Variable Annuity 75,291 142,787 125,963 216,628 The Principal Variable Annuity With Purchase Payment Credit Rider 107,748 127,105 72,679 89,609 AIM V.I. Small Cap Equity Series I Division: Principal Investment Plus Variable Annuity 20,580 1,631 6,198 85 Principal Investment Plus Variable Annuity With Purchase Rider 23,057 169 6,992 - AIM V.I. Small Cap Growth Series I Division: The Principal Variable Annuity 87,827 89,198 67,178 88,661 The Principal Variable Annuity With Purchase Payment Credit Rider 25,600 24,750 33,757 23,741 AIM V.I. Technology Series I Division: The Principal Variable Annuity 126,710 204,622 127,135 249,894 The Principal Variable Annuity With Purchase Payment Credit Rider 140,942 171,507 169,450 143,422 Alliance Bernstein VP Series Small Cap Growth Class A Division: Principal Investment Plus Variable Annuity 39,842 4,441 28,175 10,498 Principal Investment Plus Variable Annuity With Purchase Rider 16,806 1,340 3,855 - American Century VP Income & Growth Class I Division: Principal Freedom Variable Annuity 127,862 116,010 167,505 117,550 The Principal Variable Annuity 178,512 311,947 307,300 372,721 The Principal Variable Annuity With Purchase Payment Credit Rider 77,006 155,708 134,835 88,797 American Century VP Inflation Protection Class II Division: Principal Investment Plus Variable Annuity 2,686,844 524,266 1,331,568 104,648 Principal Investment Plus Variable Annuity With Purchase Rider 1,045,307 228,269 606,856 46,474 American Century VP Ultra Class I Division: The Principal Variable Annuity 69,732 132,150 141,195 155,232 The Principal Variable Annuity With Purchase Payment Credit Rider 66,394 78,502 65,745 68,046 American Century VP Ultra Class II Division: Principal Investment Plus Variable Annuity 2,246,146 443,055 1,004,732 93,547 Principal Investment Plus Variable Annuity With Purchase Rider 918,663 258,638 495,430 27,567 American Century VP Value Class II Division: The Principal Variable Annuity 428,487 370,493 776,851 340,667 The Principal Variable Annuity With Purchase Payment Credit Rider 263,013 192,426 404,667 106,369 American Century VP Vista Class I Division: Principal Investment Plus Variable Annuity 33,596 12,000 27,608 10,521 Principal Investment Plus Variable Annuity With Purchase Rider 5,161 104 8,075 5 Asset Allocation Division: Premier Variable 1,881 108,196 25,009 28,316 The Principal Variable Annuity 171,970 660,319 311,479 780,567 The Principal Variable Annuity With Purchase Payment Credit Rider 76,710 149,270 127,820 81,637 Principal Investment Plus Variable Annuity 133,369 34,993 73,834 1,800 Principal Investment Plus Variable Annuity With Purchase Rider 100,038 25,974 27,948 2,606 Balanced Division: Personal Variable 46,700 45,001 113,041 805,381 Premier Variable 496,201 1,182,858 584,600 2,936,302 The Principal Variable Annuity 254,827 923,924 308,236 956,929 The Principal Variable Annuity With Purchase Payment Credit Rider 107,091 144,954 164,084 96,787 Bond Division: Personal Variable 15,435 40,495 70,149 484,266 Premier Variable 640,111 1,069,740 805,392 2,707,154 Principal Freedom Variable Annuity 244,757 223,326 330,448 205,777 Principal Freedom 2 Variable Annuity 5,148 - - - The Principal Variable Annuity 1,207,660 2,046,575 1,716,617 1,944,452 The Principal Variable Annuity With Purchase Payment Credit Rider 612,636 623,084 826,795 513,875 Principal Investment Plus Variable Annuity 2,235,096 413,274 1,086,923 87,119 Principal Investment Plus Variable Annuity With Purchase Rider 891,238 208,587 504,530 30,050 Capital Value Division: Bankers Flexible Annuity - 3,981 - 18,260 Pension Builder Plus 213 32,603 6,059 70,218 Pension Builder Plus - Rollover IRA 928 16,173 1,203 9,977 Personal Variable 41,544 49,884 75,619 731,236 Premier Variable 897,758 1,582,528 695,815 3,461,397 Principal Freedom Variable Annuity 219,757 139,854 229,404 144,972 Principal Freedom 2 Variable Annuity 2,009 - - - The Principal Variable Annuity 364,750 1,226,653 491,072 1,308,505 The Principal Variable Annuity With Purchase Payment Credit Rider 96,276 117,686 141,435 128,558 Principal Investment Plus Variable Annuity 150,650 25,014 85,022 1,209 Principal Investment Plus Variable Annuity With Purchase Rider 105,406 7,247 32,906 1,47 Diversified International Division: Personal Variable 38,560 10,259 126,349 720,719 Premier Variable 1,105,938 1,558,734 861,323 2,176,234 Principal Freedom Variable Annuity 296,918 185,717 306,312 166,825 Principal Freedom 2 Variable Annuity 6,064 - - - The Principal Variable Annuity 1,111,032 1,633,791 1,355,902 1,527,468 The Principal Variable Annuity With Purchase Payment Credit Rider 411,113 411,679 543,778 330,883 Principal Investment Plus Variable Annuity 509,038 81,499 195,587 11,156 Principal Investment Plus Variable Annuity With Purchase Rider 199,920 24,281 68,768 4,972 Dreyfus IP Founders Discovery Initial Shares Division: The Principal Variable Annuity 290,476 208,216 351,335 143,259 The Principal Variable Annuity With Purchase Payment Credit Rider 155,970 112,157 183,487 65,615 Dreyfus IP Technology Service Shares Division: Principal Investment Plus Variable Annuity 19,250 4,042 11,135 1,049 Principal Investment Plus Variable Annuity With Purchase Rider 8,759 181 3,396 - Equity Growth Division: Premier Variable 5,464 68,565 40,897 135,796 The Principal Variable Annuity 331,249 1,282,286 421,473 1,386,045 The Principal Variable Annuity With Purchase Payment Credit Rider 110,597 120,087 155,503 112,385 Principal Investment Plus Variable Annuity 92,806 4,109 41,826 1,574 Principal Investment Plus Variable Annuity With Purchase Rider 50,573 3,446 19,669 1,759 Equity Income Division: Premier Variable 168,754 105,755 20,287 23,560 The Principal Variable Annuity 784,428 834,723 895,163 596,865 The Principal Variable Annuity With Purchase Payment Credit Rider 256,089 269,337 441,810 185,311 Principal Investment Plus Variable Annuity 4,022,636 998,950 2,150,107 195,697 Principal Investment Plus Variable Annuity With Purchase Rider 1,539,780 489,467 977,858 70,111 Equity Value Division: Principal Investment Plus Variable Annuity 141,283 39,471 92,205 119 Principal Investment Plus Variable Annuity with Purchase Rider 79,244 20,350 46,570 5,429 Fidelity VIP Equity - Income Service Class 2 Division: The Principal Variable Annuity 576,400 509,443 854,692 448,302 The Principal Variable Annuity With Purchase Payment Credit Rider 264,731 213,285 427,935 186,446 Principal Investment Plus Variable Annuity 274,638 21,680 96,818 2,495 Principal Investment Plus Variable Annuity With Purchase Rider 91,297 2,652 57,001 1,349 Fidelity VIP Growth Service Class Division: The Principal Variable Annuity 266,086 918,686 376,691 967,849 The Principal Variable Annuity With Purchase Payment Credit Rider 98,068 186,747 115,127 112,377 Fidelity VIP Growth Service Class 2 Division: Principal Investment Plus Variable Annuity 152,457 6,576 59,039 530 Principal Investment Plus Variable Annuity With Purchase Rider 111,949 8,131 57,368 1,051 Fidelity VIP Overseas Service Class 2 Division: Principal Investment Plus Variable Annuity 1,159,278 237,005 641,857 60,859 Principal Investment Plus Variable Annuity With Purchase Rider 528,540 135,631 323,473 22,845 Fidelity VIP II Contrafund Service Class Division: The Principal Variable Annuity 1,193,196 1,262,384 1,703,115 1,086,838 The Principal Variable Annuity With Purchase Payment Credit Rider 478,837 316,366 428,550 232,052 Fidelity VIP II Contrafund Service Class 2 Division: Principal Investment Plus Variable Annuity 983,733 169,877 440,469 13,893 Principal Investment Plus Variable Annuity With Purchase Rider 332,880 54,103 112,985 11,791 Fidelity VIP III Mid Cap Service Class 2 Division: Principal Investment Plus Variable Annuity 181,985 20,016 36,744 831 Principal Investment Plus Variable Annuity With Purchase Rider 52,988 3,366 35,863 571 Goldman Sachs VIT Mid Cap Value Fund Service Class I Division: Principal Investment Plus Variable Annuity 427,680 39,535 165,089 2,858 Principal Investment Plus Variable Annuity With Purchase Rider 222,252 10,250 92,978 1,945 Goldman Sachs Structured Small Cap Equity Fund Service Class I Division: Principal Investment Plus Variable Annuity 138,890 13,282 63,166 90 Principal Investment Plus Variable Annuity With Purchase Rider 84,314 6,124 32,490 1,071 Government & High Quality Bond Division: Pension Builder Plus - 7,737 304 21,855 Pension Builder Plus - Rollover IRA 616 851 - 848 Personal Variable 13,491 39,705 56,258 578,611 Premier Variable 288,847 819,544 569,148 2,818,166 Principal Freedom Variable Annuity 169,424 169,553 280,194 116,851 Principal Freedom 2 Variable Annuity 340 - - - The Principal Variable Annuity 1,093,278 2,607,301 1,622,431 2,939,390 The Principal Variable Annuity With Purchase Payment Credit Rider 527,955 811,803 834,862 1,014,630 Principal Investment Plus Variable Annuity 838,711 184,970 400,753 19,230 Principal Investment Plus Variable Annuity With Purchase Rider 285,805 69,865 140,788 7,615 Growth Division: Personal Variable 78,668 101,479 194,981 1,279,611 Premier Variable 953,374 2,027,299 1,102,032 5,423,394 The Principal Variable Annuity 249,369 1,061,354 282,634 1,294,541 The Principal Variable Annuity With Purchase Payment Credit Rider 81,796 66,332 52,287 51,551 Principal Investment Plus Variable Annuity 112,878 10,313 23,468 573 Principal Investment Plus Variable Annuity With Purchase Rider 68,360 2,968 11,366 65 International Emerging Markets Division: Premier Variable 94,190 127,362 159,195 168,123 The Principal Variable Annuity 871,720 670,407 961,914 418,371 The Principal Variable Annuity With Purchase Payment Credit Rider 316,827 258,099 332,500 140,399 Principal Investment Plus Variable Annuity 280,531 42,977 133,420 2,735 Principal Investment Plus Variable Annuity With Purchase Rider 171,662 22,165 68,081 3,591 International SmallCap Division: Premier Variable 75,126 188,136 125,149 89,670 The Principal Variable Annuity 483,213 878,871 807,865 802,049 The Principal Variable Annuity With Purchase Payment Credit Rider 154,009 191,687 236,474 146,635 Principal Investment Plus Variable Annuity 258,596 42,524 169,187 23,137 Principal Investment Plus Variable Annuity With Purchase Rider 120,204 17,513 73,645 6,049 Janus Aspen Mid Cap Growth Service Shares Division: The Principal Variable Annuity 247,057 378,635 184,396 295,219 The Principal Variable Annuity With Purchase Payment Credit Rider 208,548 227,784 99,327 157,240 LargeCap Blend Division: The Principal Variable Annuity 955,434 954,033 1,665,882 788,653 The Principal Variable Annuity With Purchase Payment Credit Rider 472,367 352,813 747,005 282,375 Principal Investment Plus Variable Annuity 2,995,386 542,102 1,595,224 147,625 Principal Investment Plus Variable Annuity With Purchase Rider 1,247,524 269,414 702,911 38,930 LargeCap Growth Equity Division: Premier Variable 14,019 139,639 55,702 23,063 Principal Freedom Variable Annuity 78,448 53,055 68,176 33,441 Principal Freedom 2 Variable Annuity 2,148 - - - The Principal Variable Annuity 425,913 393,275 259,692 307,444 The Principal Variable Annuity With Purchase Payment Credit Rider 211,288 228,225 161,977 163,498 LargeCap Stock Index Division: Premier Variable 336,080 305,759 335,254 324,881 Principal Freedom Variable Annuity 348,082 365,693 530,429 448,641 Principal Freedom 2 Variable Annuity 8,018 - - - The Principal Variable Annuity 1,996,937 2,590,763 2,809,794 3,061,779 The Principal Variable Annuity With Purchase Payment Credit Rider 426,603 737,455 830,251 788,447 Principal Investment Plus Variable Annuity 720,597 179,811 446,472 96,111 Principal Investment Plus Variable Annuity With Purchase Rider 329,036 49,116 183,143 17,004 LargeCap Value Division: The Principal Variable Annuity 923,652 861,982 1,485,373 825,237 The Principal Variable Annuity With Purchase Payment Credit Rider 390,776 317,194 514,417 214,074 Principal Investment Plus Variable Annuity 2,444,235 462,888 1,217,470 85,956 Principal Investment Plus Variable Annuity With Purchase Rider 1,021,162 248,563 571,563 31,834 MidCap Division: Personal Variable 31,499 28,030 85,399 655,393 Premier Variable 515,768 1,355,836 596,852 2,769,980 Principal Freedom Variable Annuity 67,392 89,862 142,979 86,085 Principal Freedom 2 Variable Annuity 1,073 - - - The Principal Variable Annuity 476,213 1,399,632 896,681 1,443,913 The Principal Variable Annuity With Purchase Payment Credit Rider 150,085 213,418 321,974 222,156 Principal Investment Plus Variable Annuity 616,321 120,085 350,636 31,618 Principal Investment Plus Variable Annuity With Purchase Rider 246,700 50,361 156,911 9,761 MidCap Growth Division: Premier Variable 157,010 224,413 104,943 91,265 Principal Freedom Variable Annuity 41,828 51,644 36,431 23,914 Principal Freedom 2 Variable Annuity 1,038 - - - The Principal Variable Annuity 462,986 675,344 434,182 593,647 The Principal Variable Annuity With Purchase Payment Credit Rider 217,431 222,590 168,023 166,202 Principal Investment Plus Variable Annuity 132,342 13,964 68,890 2,052 Principal Investment Plus Variable Annuity With Purchase Rider 89,126 11,886 20,345 2,289 MidCap Value Division: Premier Variable 45,913 268,218 207,570 188,247 Principal Freedom Variable Annuity 105,991 93,429 158,020 76,248 Principal Freedom 2 Variable Annuity 1,995 - - - The Principal Variable Annuity 599,528 877,430 1,164,219 766,731 The Principal Variable Annuity With Purchase Payment Credit Rider 251,626 248,102 418,594 186,157 Principal Investment Plus Variable Annuity 992,839 214,712 559,975 62,027 Principal Investment Plus Variable Annuity With Purchase Rider 382,833 87,527 241,962 13,030 Money Market Division: Pension Builder Plus - 9,633 384 4,082 Pension Builder Plus - Rollover IRA - 134 - 19 Personal Variable 659,980 696,725 718,770 1,356,563 Premier Variable 2,738,336 3,549,757 4,073,127 5,471,646 Principal Freedom Variable Annuity 953,660 929,446 1,437,054 1,473,792 The Principal Variable Annuity 5,774,948 5,280,670 6,730,051 7,295,228 The Principal Variable Annuity With Purchase Payment Credit Rider 1,596,165 1,692,921 2,808,233 2,981,840 Principal Investment Plus Variable Annuity 1,159,710 955,115 480,620 314,384 Principal Investment Plus Variable Annuity With Purchase Rider 976,287 795,338 583,556 394,570 Neuberger Berman AMT Fasciano S Class Division: Principal Investment Plus Variable Annuity 73,912 5,588 35,579 231 Principal Investment Plus Variable Annuity With Purchase Rider 51,626 3,191 22,510 182 Neuberger Berman AMT High Income Bond S Class Division: Principal Investment Plus Variable Annuity 98,304 10,158 46,152 7,273 Principal Investment Plus Variable Annuity With Purchase Rider 25,417 7,657 59,567 9,914 Neuberger Berman AMT Partners I Class Division: Principal Investment Plus Variable Annuity 179,544 10,806 40,729 749 Principal Investment Plus Variable Annuity With Purchase Rider 80,218 4,055 25,255 317 Neuberger Berman AMT Socially Responsive I Class Division: Principal Investment Plus Variable Annuity 120,677 31,429 55,633 1,249 Principal Investment Plus Variable Annuity With Purchase Rider 36,130 3,632 10,187 732 Principal LifeTime Strategic Income Division: Principal Investment Plus Variable Annuity 557,460 152,573 454,594 8,701 Principal Investment Plus Variable Annuity With Purchase Rider 169,199 29,692 44,924 409 Principal LifeTime 2010 Division: Principal Freedom 2 Variable Annuity 47,224 - - - Principal Investment Plus Variable Annuity 1,233,411 532,289 914,472 10,236 Principal Investment Plus Variable Annuity With Purchase Rider 314,868 100,824 225,132 2,894 Principal LifeTime 2020 Division: Principal Freedom 2 Variable Annuity 9,906 - - - Principal Investment Plus Variable Annuity 4,288,239 642,607 1,715,786 58,337 Principal Investment Plus Variable Annuity With Purchase Rider 1,590,042 213,631 607,160 5,262 Principal LifeTime 2030 Division: Principal Freedom 2 Variable Annuity 3,106 - - - Principal Investment Plus Variable Annuity 590,464 103,406 196,380 6,783 Principal Investment Plus Variable Annuity With Purchase Rider 163,812 20,142 90,209 2 Principal LifeTime 2040 Division: Principal Freedom 2 Variable Annuity 9,037 - - - Principal Investment Plus Variable Annuity 198,440 13,605 93,214 - Principal Investment Plus Variable Annuity With Purchase Rider 80,168 6,964 34,291 4,372 Principal LifeTime 2050 Division: Principal Investment Plus Variable Annuity 149,677 8,991 27,009 - Principal Investment Plus Variable Annuity With Purchase Rider 63,599 10,252 38,750 - Real Estate Securities Division: Premier Variable 181,814 247,683 186,305 226,555 Principal Freedom 2 Variable Annuity 872 - - - The Principal Variable Annuity 638,236 860,171 927,650 1,094,905 The Principal Variable Annuity With Purchase Payment Credit Rider 299,775 314,605 421,996 327,487 Principal Investment Plus Variable Annuity 234,136 28,988 97,233 16,215 Principal Investment Plus Variable Annuity With Purchase Rider 88,223 8,850 58,730 3,587 Short-Term Bond Division: Principal Freedom Variable Annuity 113,337 109,009 190,054 105,730 The Principal Variable Annuity 929,646 981,173 1,366,139 1,238,003 The Principal Variable Annuity With Purchase Payment Credit Rider 409,665 638,307 652,853 654,555 Principal Investment Plus Variable Annuity 3,627,110 1,027,928 1,825,846 154,830 Principal Investment Plus Variable Annuity With Purchase Rider 1,381,692 435,493 922,574 117,412 SmallCap Division: Premier Variable 24,204 107,948 133,080 88,492 Principal Freedom Variable Annuity 88,140 113,423 159,787 71,808 The Principal Variable Annuity 397,569 811,665 588,849 790,056 The Principal Variable Annuity With Purchase Payment Credit Rider 156,824 230,457 318,081 205,747 SmallCap Growth Division: Premier Variable 228,895 359,449 81,215 53,534 Principal Freedom Variable Annuity 51,907 52,509 23,002 34,958 Principal Freedom 2 Variable Annuity 1,075 - - - The Principal Variable Annuity 527,387 881,582 549,852 868,199 The Principal Variable Annuity With Purchase Payment Credit Rider 135,315 161,377 127,292 125,921 Principal Investment Plus Variable Annuity 203,913 24,149 66,134 1,506 Principal Investment Plus Variable Annuity With Purchase Rider 88,669 10,302 38,073 5,669 SmallCap Value Division: Premier Variable 104,875 245,405 90,199 111,651 Principal Freedom 2 Variable Annuity 1,803 - - - The Principal Variable Annuity 420,233 608,245 677,136 662,733 The Principal Variable Annuity With Purchase Payment Credit Rider 122,067 168,731 236,261 153,960 Principal Investment Plus Variable Annuity 733,984 146,089 388,912 26,597 Principal Investment Plus Variable Annuity With Purchase Rider 287,567 67,010 162,198 9,710 T. Rowe Price Blue Chip Growth II Division: Principal Investment Plus Variable Annuity 25,266 8,655 37,322 3,390 Principal Investment Plus Variable Annuity With Purchase Rider 10,611 297 24,161 2,272 TT. Rowe Price Health Science II Division: Principal Investment Plus Variable Annuity 103,613 24,937 36,469 1,976 Principal Investment Plus Variable Annuity With Purchase Rider 44,865 4,965 9,438 573 Templeton Growth Securities Class 2 Division: Principal Freedom Variable Annuity 46,421 32,395 41,729 23,338
6. Financial Highlights Principal Life sells a number of variable annuity products, which have unique combinations of features and fees that are charged against the contract owner's account balance. Differences in the fee structures result in a variety of unit values, expense ratios, and total returns. Separate Account B has presented the following disclosures for 2006, 2005, 2004, 2003, and 2002 in accordance with AICPA Audit and Accounting Guide for Investment Companies, which was effective January 1, 2001. Information for years prior to 2002 is not required to be presented. The following table was developed by determining which products issued by Principal Life have the lowest and highest total return. Only product designs within each division that had units outstanding during the respective periods were considered when determining the lowest and highest total return. The summary may not reflect the minimum and maximum contract charges offered by Principal Life as contract owners may not have selected all available and applicable contract options as discussed in Note 2.
Total Return (3) Unit Fair Value Expense Corresponding to Corresponding to Net Investment Ratio (2) Lowest to Units Lowest to Highest Assets Income Lowest to Highest Expense Division (000's) Expense Ratio (000's) Ratio (1) Highest Ratio ------------------------------------------------------------------------------------------------------- AIM V.I. Basic Value Series I Division: 2006 82 $13.12 to $12.93 $ 1,073 0.64% 1.25% to 1.85% 11.80% to 11.13% 2005 (6) 13 11.73 to 11.64 154 0.19 1.25 to 1.85 4.36 to 3.84 AIM V.I. Capital Appreciation Series I Division: 2006 (7) 1,579 9.88 to 9.84 15,582 0.07 1.25 to 1.85 (1.12) to (1.52) AIM V.I. Core Equity Series I Division: 2006 6,064 10.28 to 9.91 61,828 0.61 1.25 to 1.85 15.26 to 14.57 2005 3,755 8.92 to 8.65 33,287 1.45 1.25 to 1.85 3.96 to 3.35 2004 4,303 8.58 to 8.37 36,736 0.95 1.25 to 1.85 7.65 to 7.03 2003 4,760 7.97 to 7.82 37,821 1.03 1.25 to 1.85 22.88 to 22.14 (16.63) to 2002 5,123 6.49 to 6.41 33,171 0.31 1.25 to 1.85 (17.13) AIM V.I. Dynamics Series I Division: 2006 303 10.26 to 9.92 3,068 - 1.25 to 1.85 14.68 to 13.99 2005 289 8.95 to 8.70 2,558 - 1.25 to 1.85 9.41 to 8.61 2004 313 8.18 to 8.01 2,536 - 1.25 to 1.85 11.90 to 11.25 2003 281 7.31 to 7.20 2,039 - 1.25 to 1.85 36.11 to 35.30 (32.75) to 2002 67 5.37 to 5.32 357 - 1.25 to 1.85 (33.15) AIM V.I. Global Health Care Series I Division: 2006 1,279 $10.98 to $10.61 $13,857 -% 1.25% to 1.85% 3.93% to 3.31% 2005 1,366 10.56 to 10.27 14,276 - 1.25 to 1.85 6.77 to 6.20 2004 1,474 9.89 to 9.67 14,456 - 1.25 to 1.85 6.23 to 5.57 2003 1,324 9.31 to 9.16 12,246 - 1.25 to 1.85 26.20 to 25.44 (25.14) to 2002 867 7.38 to 7.30 6,374 0.21 1.25 to 1.85 (25.59) AIM V.I. Small Cap Equity Series I Division: 2006 55 14.21 to 14.01 775 - 1.25 to 1.85 15.98 to 15.29 2005 (6) 13 12.25 to 12.15 160 - 1.25 to 1.85 6.71 to 6.11 AIM V.I. Small Cap Growth Series I Division: 2006 449 9.97 to 9.64 4,431 - 1.25 to 1.85 12.71 to 12.04 2005 450 8.84 to 8.60 3,943 - 1.25 to 1.85 3.88 to 3.24 2004 461 8.51 to 8.33 3,903 - 1.25 to 1.85 12.42 to 11.81 2003 331 7.57 to 7.45 2,497 - 1.25 to 1.85 31.78 to 30.99 (31.97) to 2002 214 5.74 to 5.69 1,224 - 1.25 to 1.85 (32.38) AIM V.I. Technology Series I Division: 2006 1,028 6.06 to 5.86 6,148 - 1.25 to 1.85 9.11 to 8.46 2005 1,137 5.55 to 5.40 6,245 - 1.25 to 1.85 0.91 to 0.37 2004 1,233 5.50 to 5.38 6,738 - 1.25 to 1.85 3.19 to 2.67 2003 1,053 5.33 to 5.24 5,578 - 1.25 to 1.85 43.49 to 42.63 (47.51) to 2002 367 3.71 to 3.68 1,357 - 1.25 to 1.85 (47.82) Alliance Bernstein VP Series Small Cap Growth Class A Division: 2006 72 13.78 to 13.59 994 - 1.25 to 1.85 9.31 to 8.66 2005 (6) 22 12.61 to 12.50 271 - 1.25 to 1.85 3.96 to 3.31 American Century VP Income & Growth Class I Division: 2006 3,173 $12.38 to $11.76 $38,341 1.80% 0.85% to 1.85% 16.10% to 14.95% 2005 3,373 10.66 to 10.23 35,269 1.94 0.85 to 1.85 3.70 to 2.71 2004 3,343 10.28 to 9.96 33,859 1.29 0.85 to 1.85 12.10 to 10.91 2003 2,731 8.98 to 9.12 24,814 1.11 0.85 to 1.85 26.98 to 27.75 (20.05) to 2002 1,905 7.15 to 7.07 13,565 0.72 0.85 to 1.85 (20.85) American Century VP Inflation Protection Class II Division: 2006 4,767 10.25 to 10.11 48,661 3.17 1.25 to 1.85 0.33 to (0.27) 2005 (6) 1,787 10.22 to 10.13 18,214 4.75 1.25 to 1.85 0.29 to (0.39) American Century VP Ultra Class I Division: 2006 1,057 9.04 to 8.74 9,446 - 1.25 to 1.85 (4.47) to (5.04) 2005 1,132 9.47 to 9.21 10,612 - 1.25 to 1.85 0.96 to 0.33 2004 1,148 9.38 to 9.18 10,692 - 1.25 to 1.85 9.20 to 8.64 2003 931 8.59 to 8.45 7,952 - 1.25 to 1.85 23.35 to 22.61 (23.67) to 2002 698 6.96 to 6.89 4,849 0.24 1.25 to 1.85 (24.13) American Century VP Ultra Class II Division: 2006 3,842 10.78 to 10.63 41,243 - 1.25 to 1.85 (4.59) to (5.16) 2005 (6) 1,379 11.30 to 11.20 15,536 - 1.25 to 1.85 0.71 to 0.09 American Century VP Value Class II Division: 2006 3,494 14.61 to 14.21 50,565 1.17 1.25 to 1.85 17.00 to 16.30 2005 3,366 12.49 to 12.22 41,722 0.65 1.25 to 1.85 3.57 to 2.95 2004 2,631 12.06 to 11.87 31,569 0.60 1.25 to 1.85 12.71 to 12.09 2003 1,123 10.70 to 10.59 11,981 0.47 1.25 to 1.85 27.21 to 26.45 (14.96) to 2002 (4) 282 8.41 to 8.38 2,364 - 1.25 to 1.85 (15.28) American Century VP Vista Class I Division: 2006 52 $13.44 to $13.25 $694 -% 1.25% to 1.85% 7.66% to 7.01% 2005 (6) 25 12.48 to 12.38 313 - 1.25 to 1.85 6.76 to 6.08 Asset Allocation Division: 2006 3,514 1.34 to 23.27 84,221 0.77 0.42 to 1.85 12.29 to 10.71 2005 4,008 1.19 to 21.02 84,245 1.65 0.42 to 1.85 5.31 to 3.85 2004 4,337 1.13 to 20.24 87,504 3.26 0.42 to 1.85 7.62 to 6.47 2003 4,408 1.05 to 19.01 84,285 1.93 0.42 to 1.85 21.08 to 19.38 (12.78) to 2002 4,620 0.86 to 15.92 74,399 - 0.42 to 1.85 (14.54) Balanced Division: 2006 6,432 2.17 to 19.84 92,320 2.49 0.42 to 1.85 10.73 to 9.40 2005 7,824 2.01 to 18.13 98,501 2.59 0.42 to 1.85 6.35 to 4.80 2004 11,449 1.84 to 17.30 109,503 2.12 0.42 to 1.85 8.88 to 8.06 2003 13,310 1.72 to 16.01 109,671 2.96 0.42 to 1.85 18.33 to 16.65 (13.55) to 2002 14,617 1.46 to 13.73 98,582 3.17 0.42 to 1.85 (14.78) Bond Division: 2006 18,814 2.11 to 18.24 319,793 3.87 0.42 to 1.85 4.21 to 2.73 2005 17,587 2.02 to 17.75 280,484 4.32 0.42 to 1.85 2.02 to 0.62 2004 18,219 1.92 to 17.64 252,489 4.56 0.42 to 1.85 1.59 to 3.04 2003 18,246 1.89 to 17.12 234,069 4.19 0.42 to 1.85 4.15 to 2.67 2002 17,899 1.82 to 16.67 210,777 4.09 0.42 to 1.85 8.80 to 7.26 Capital Value Division: 2006 11,695 3.65 to 28.33 213,650 1.57 0.42 to 1.85 19.45 to 17.76 2005 13,018 3.05 to 24.06 198,490 0.01 0.42 to 1.85 6.27 to 4.88 2004 17,135 2.87 to 22.94 214,377 1.43 0.42 to 1.85 11.67 to 10.29 2003 18,722 2.57 to 20.80 205,389 1.44 0.42 to 1.85 24.97 to 23.20 (14.02) to 2002 21,252 2.05 to 16.88 175,700 0.78 0.42 to 1.85 (15.25) Diversified International Division: 2006 13,309 2.99 to 26.09 290,731 1.18 0.42 to 1.85 27.43 to 25.63 2005 13,536 2.35 to 20.77 228,177 1.03 0.42 to 1.85 23.04 to 21.53 2004 15,016 1.91 to 17.09 184,002 0.94 0.42 to 1.85 20.89 to 18.76 2003 14,422 1.47 to 14.39 137,068 1.04 0.42 to 1.85 31.78 to 29.91 (16.42) to 2002 14,934 1.20 to 11.07 100,045 0.49 0.42 to 1.85 (17.61) Dreyfus IP Founders Discovery Initial Shares Division: 2006 2,033 $8.76 to $8.46 $17,584 -% 1.25% to 1.85% 4.51% to 3.89% 2005 1,907 8.38 to 8.15 15,815 - 1.25 to 1.85 (1.30) to (1.93) 2004 1,581 8.49 to 8.31 13,319 - 1.25 to 1.85 8.43 to 7.92 2003 848 7.83 to 7.70 6,592 - 1.25 to 1.85 34.49 to 33.69 (34.06) to 2002 235 5.82 to 5.76 1,361 - 1.25 to 1.85 (34.46) Dreyfus IP Technology Service Shares Division: 2006 37 12.18 to 12.00 452 - 1.25 to 1.85 2.75 to 2.13 2005 (6) 13 11.85 to 11.75 159 - 1.25 to 1.85 2.16 to 1.56 Equity Growth Division: 2006 6,016 1.06 to 28.96 179,750 - 0.42 to 1.85 5.71 to 4.27 2005 6,904 1.00 to 27.78 195,218 - 0.42 to 1.85 7.53 to 5.59 2004 7,862 0.93 to 26.31 207,318 0.53 0.42 to 1.85 8.14 to 7.34 2003 8,445 0.86 to 24.51 208,587 0.41 0.42 to 1.85 25.42 to 23.64 (28.02) to 2002 8,938 0.68 to 19.82 178,521 0.27 0.42 to 1.85 (29.04) Equity Income Division: 2006 11,269 1.21 to 13.59 155,519 1.85 0.42 to 1.85 20.79 to 19.08 2005 7,195 1.00 to 11.41 83,133 0.08 0.42 to 1.85 7.53 to 6.64 2004 3,782 0.93 to 10.70 40,432 4.10 1.25 to 1.85 17.72 to 15.44 2003 2,907 0.79 to 9.27 27,203 4.44 0.42 to 1.85 13.36 to 11.74 2002 2,743 0.70 to 8.29 22,961 4.42 0.42 to 1.85 (3.82) to (14.21) Equity Value Division: 2006 294 13.42 to 13.24 3,927 1.70 1.25 to 1.85 18.08 to 17.37 2005 (6) 133 11.37 to 11.28 1,511 2.48 1.25 to 1.85 2.52 to 1.90 Fidelity VIP Equity-Income Service Class 2 Division: 2006 5,585 13.95 to 13.57 77,174 2.96 1.25 to 1.85 18.44 to 17.74 2005 5,125 11.78 to 11.53 59,908 1.31 1.25 to 1.85 4.25 to 3.69 2004 4,327 11.30 to 11.12 48,616 1.05 1.25 to 1.85 9.92 to 9.23 2003 2,353 10.28 to 10.18 24,125 0.70 1.25 to 1.85 28.41 to 27.65 (19.14) to 2002 (4) 517 8.01 to 7.98 4,138 - 1.25 to 1.85 (19.44) Fidelity VIP Growth Service Class Division: 2006 3,889 $8.76 to $8.45 $33,789 0.30% 1.25% to 1.85% 5.41% to 4.78% 2005 4,630 8.31 to 8.06 38,238 0.40 1.25 to 1.85 4.40 to 3.73 2004 5,219 7.96 to 7.77 41,373 0.16 1.25 to 1.85 1.92 to 1.30 2003 5,302 7.81 to 7.67 41,286 0.19 1.25 to 1.85 31.13 to 30.35 (31.07) to 2002 (4) 5,325 5.96 to 5.88 31,670 0.15 1.25 to 1.85 (31.48) Fidelity VIP Growth Service Class 2 Division: 2006 364 12.05 to 11.88 4,365 0.09 1.25 to 1.85 5.25 to 4.62 2005 (6) 115 11.45 to 11.35 1,309 - 1.25 to 1.85 4.19 to 3.56 Fidelity VIP Overseas Service Class 2 Division: 2006 2,197 16.00 to 15.78 35,000 0.42 1.25 to 1.85 16.31 to 15.62 2005 (6) 882 13.76 to 13.65 12,096 - 1.25 to 1.85 17.31 to 16.67 Fidelity VIP II Contrafund Service Class Division: 2006 8,076 14.79 to 14.26 118,478 1.10 1.25 to 1.85 10.21 to 9.55 2005 7,983 13.42 to 13.02 106,462 0.19 1.25 to 1.85 15.39 to 14.71 2004 7,170 11.63 to 11.35 82,971 0.23 1.25 to 1.85 13.91 to 13.27 2003 6,094 10.21 to 10.02 62,014 0.33 1.25 to l.85 26.76 to 26.00 (10.55) to 2002 5,347 8.05 to 7.95 42,986 0.68 1.25 to 1.85 (11.09) Fidelity VIP II Contrafund Service Class 2 Division: 2006 1,620 14.41 to 14.21 23,281 1.10 1.25 to 1.85 10.05 to 9.39 2005 (6) 528 13.10 to 12.99 6,902 - 1.25 to 1.85 15.22 to 14.45 Fidelity VIP III Mid Cap Service Class 2 Division: 2006 283 $15.60 to$ 15.38 $4,393 0.09% 1.25% to 1.85% 11.01% to 10.35% 2005 (6) 71 14.05 to 13.94 997 - 1.25 to 1.85 16.50 to 15.88 Goldman Sachs VIT Mid Cap Value Fund Service Class I Division: 2006 853 14.86 to 14.65 12,621 1.43 1.25 to 1.85 14.72 to 14.04 2005 (6) 253 12.96 to 12.85 3,272 1.31 1.25 to 1.85 11.44 to 10.78 Goldman Sachs Structured Small Cap Equity Service Class I Division: 2006 298 13.48 to 13.29 4,001 0.94 1.25 to 1.85 10.88 to 10.22 2005 (6) 94 12.16 to 12.06 1,146 0.60 1.25 to 1.85 4.74 to 4.15 Government & High Quality Bond Division: 2006 16,900 2.18 to 17.75 276,598 4.15 0.42 to 1.85 3.79 to 2.32 2005 18,392 2.10 to 17.35 286,799 4.41 0.42 to 1.85 1.45 to 0.17 2004 22,005 2.07 to 17.32 306,512 4.73 0.42 to 1.85 3.50 to 1.64 2003 25,536 2.00 to 17.04 341,730 3.41 0.42 to 1.85 1.41 to (0.03) 2002 26,265 1.97 to 17.05 318,208 3.45 0.42 to 1.85 8.34 to 6.80 Growth Division: 2006 8,539 1.95 to 17.80 96,085 0.27 0.42 to 1.85 9.46 to 7.91 2005 10,265 1.79 to 16.49 101,200 0.73 0.42 to 1.85 11.88 to 10.01 2004 16,647 1.60 to 14.99 114,994 0.33 0.42 to 1.85 8.84 to 7.38 2003 19,553 1.47 to 13.96 123,359 0.23 0.42 to 1.85 25.93 to 24.15 (29.37) to 2002 22,176 1.17 to 11.24 111,599 0.02 0.42 to 1.85 (30.37) International Emerging Markets Division: 2006 3,632 $3.17 to $28.59 $104,347 -% 0.42% to 1.85% 37.74% to 35.79% 2005 3,018 2.30 to 21.05 62,694 1.34 0.42 to 1.85 33.72 to 31.81 2004 2,096 1.72 to 15.97 32,241 0.79 0.42 to 1.85 24.46 to 22.56 2003 1,274 1.38 to 13.03 16,414 1.11 0.42 to 1.85 56.56 to 54.32 2002 768 8.55 to 8.44 6,532 0.14 0.42 to 1.85 (8.78) to (9.32) International SmallCap Division: 2006 4,226 2.48 to 29.72 127,551 0.52 0.42 to 1.85 29.83 to 28.00 2005 4,454 1.91 to 23.22 102,214 0.53 0.42 to 1.85 28.19 to 26.75 2004 4,109 1.49 to 18.32 74,478 0.76 0.42 to 1.85 29.57 to 27.84 2003 3,557 1.15 to 14.33 51,540 1.36 0.42 to 1.85 53.55 to 51.33 2002 3,225 0.88 to 9.47 30,873 0.27 0.42 to 1.85 (2.56) to (17.74) Janus Aspen Mid Cap Growth Service Shares Division: 2006 2,530 7.74 to 7.47 19,323 - 1.25 to 1.85 11.90 to 11.23 2005 2,681 6.92 to 6.71 18,346 - 1.25 to 1.85 10.54 to 10.00 2004 2,849 6.26 to 6.10 17,665 - 1.25 to 1.85 19.01 to 18.22 2003 2,855 5.26 to 5.16 14,913 - 1.25 to 1.85 33.09 to 32.30 2002 2,550 3.95 to 3.90 10,028 - 1.25 to 1.85 (29.01) to (29.44) LargeCap Blend Division: 2006 14,897 13.01 to 12.65 192,106 0.62 1.25 to 1.85 14.38 to 13.70 2005 11,345 11.37 to 11.13 128,134 0.01 1.25 to 1.85 3.36 to 2.87 2004 7,891 11.00 to 10.82 86,333 1.18 1.25 to 1.85 9.02 to 8.31 2003 4,990 10.09 to 9.99 50,195 0.98 1.25 to 1.85 22.22 to 21.49 2002 (4) 1,412 8.25 to 8.22 11,648 0.87 1.25 to 1.85 (16.46) to (16.76) LargeCap Growth Equity Division: 2006 3,188 0.78 to 5.48 19,397 - 0.42 to 1.85 2.30 to 0.85 2005 3,271 0.76 to 5.44 18,820 0.15 0.42 to 1.85 2.70 to 1.87 2004 3,253 0.74 to 5.34 18,253 0.28 0.42 to 1.85 2.78 to 1.14 2003 2,824 0.72 to 5.28 15,478 - 0.42 to 1.85 22.63 to 20.89 2002 855 4.42 to 4.36 3,761 - 1.25 to 1.85 (34.10) to (34.50) LargeCap Stock Index Division: 2006 15,070 $1.22 to$ 10.19 $152,650 1.33% 0.42% to 1.85% 15.09% to 13.46% 2005 15,133 1.06 to 8.98 134,689 0.03 0.42 to 1.85 3.92 to 2.51 2004 14,735 1.02 to 8.76 127,190 1.60 0.42 to 1.85 9.68 to 8.42 2003 11,654 0.93 to 8.08 93,977 1.41 0.42 to 1.85 27.78 to 25.97 2002 8,549 0.73 to 6.42 55,031 1.21 0.42 to 1.85 (22.77) to (23.86) LargeCap Value Division: 2006 11,912 14.70 to 14.30 173,683 0.94 1.25 to 1.85 20.04 to 19.33 2005 9,023 12.24 to 11.98 109,779 0.01 1.25 to 1.85 4.08 to 3.45 2004 6,391 11.76 to 11.58 74,817 1.59 1.25 to 1.85 11.68 to 11.03 2003 4,011 10.53 to 10.43 42,122 1.63 1.25 to 1.85 26.46 to 25.71 2002 (4) 1,317 8.33 to 8.29 10,958 1.89 1.25 to 1.85 (15.99) to (16.30) MidCap Division: 2006 11,881 4.17 to 37.04 367,161 1.03 0.42 to 1.85 13.75 to 12.14 2005 13,033 3.66 to 33.03 339,324 0.09 0.42 to 1.85 8.61 to 7.21 2004 15,701 3.37 to 30.81 322,650 1.18 0.42 to 1.85 17.42 to 15.57 2003 16,473 2.87 to 26.66 277,286 1.06 0.42 to 1.85 32.25 to 30.38 2002 17,766 2.17 to 20.44 209,892 0.96 0.42 to 1.85 (9.13) to (10.42) MidCap Growth Division: 2006 4,666 1.31 to 12.06 57,787 - 0.42 to 1.85 9.20 to 7.64 2005 4,764 1.20 to 11.21 53,923 - 0.42 to 1.85 13.21 to 11.65 2004 4,811 1.06 to 10.04 48,681 - 0.42 to 1.85 11.58 to 9.73 2003 4,535 0.95 to 9.15 41,402 - 0.42 to 1.85 39.99 to 38.00 2002 2,226 0.68 to 6.63 14,937 - 0.42 to 1.85 (39.86) to (27.62) MidCap Value Division: 2006 6,981 1.83 to 16.42 119,378 0.24 0.42 to 1.85 12.80 to 11.20 2005 6,389 1.62 to 14.76 94,905 - 0.42 to 1.85 10.20 to 8.53 2004 4,931 1.47 to 13.60 66,587 0.10 0.42 to 1.85 22.50 to 20.35 2003 3,343 1.20 to 11.30 37,406 0.08 0.42 to 1.85 35.92 to 33.99 2002 1,878 0.89 to 8.43 16,144 0.73 0.42 to 1.85 (10.34) to (11.61) Money Market Division: 2006 9,838 1.60 to 13.28 94,506 4.53 0.42 to 1.85 4.32 to 2.71 2005 9,888 1.54 to 12.93 82,162 2.64 0.42 to 1.85 2.67 to 0.70 2004 12,349 1.50 to 2.13 89,606 0.88 0.42 to 2.16 - to (0.93) 2003 15,091 1.50 to 12.96 107,056 0.78 0.42 to 1.85 0.31 to (1.11) 2002 20,955 1.49 to 13.11 157,262 1.40 0.42 to 1.85 0.99 to (0.45) Neuberger Berman AMT Fasciano S Class Division: -% 1.25% to 2006 174 $11.58 to $11.42 $2,008 1.85% 3.95% to 3.33% 2005 (6) 58 11.14 to 11.05 640 - 1.25 to 1.85 1.64 to 1.01 Neuberger Berman AMT High Income Bond S Class Division: 2006 194 10.66 to 10.52 2,064 8.30 1.25 to 1.85 6.13 to 5.50 2005 (6) 89 10.05 to 9.97 886 10.56 1.25 to 1.85 - to (0.70) Neuberger Berman AMT Partners I Class Division: 2006 310 15.15 to 14.94 4,672 0.96 1.25 to 1.85 10.85 to 10.19 2005 (6) 65 13.67 to 13.55 884 1.51 1.25 to 1.85 16.64 to 15.81 Neuberger Berman AMT Socially Responsive I Class Division: 2006 186 13.62 to 13.43 2,519 0.14 1.25 to 1.85 12.29 to 11.62 2005 (6) 64 12.13 to 12.03 773 - 1.25 to 1.85 5.57 to 4.88 Principal LifeTime Strategic Income Division: 2006 1,035 12.10 to 11.93 12,491 0.13 1.25 to 1.85 8.89 to 8.24 2005 (6) 490 11.11 to 11.02 5,446 - 1.25 to 1.85 3.64 to 2.99 Principal LifeTime 2010 Division: 2006 2,089 10.85 to 12.43 26,166 0.04 0.95 to 1.85 8.55 to 10.24 2005 (6) 1,126 11.36 to 11.27 12,780 - 1.25 to 1.85 4.32 to 3.78 Principal LifeTime 2020 Division: 2006 7,291 $11.04 to $13.03 $95,945 -% 0.95% to 1.85% 10.43% to 13.06% 2005 (6) 2,259 11.62 to 11.52 26,189 - 1.25 to 1.85 5.44 to 4.82 Principal LifeTime 2030 Division: 2006 914 11.01 to 12.99 11,982 0.01 0.95 to 1.85 10.17 to 12.73 2005 (6) 280 11.61 to 11.52 3,241 - 1.25 to 1.85 5.45 to 4.82 Principal LifeTime 2040 Division: 2006 390 11.01 to 13.22 5,191 0.02 0.95 to 1.85 10.22 to 13.03 2005 (6) 123 11.79 to 11.70 1,449 - 1.25 to 1.85 5.93 to 5.31 Principal LifeTime 2050 Division: 2006 260 13.48 to 13.29 3,485 0.01 1.25 to 1.85 14.06 to 13.38 2005 (6) 66 11.82 to 11.73 774 - 1.25 to 1.85 6.20 to 5.68 Real Estate Securities Division: 2006 5,236 3.18 to 35.07 181,645 1.59 0.42 to 1.85 36.04 to 34.11 2005 5,253 2.34 to 26.15 133,793 0.02 0.42 to 1.85 15.27 to 13.75 2004 5,230 2.03 to 22.99 115,811 2.28 0.42 to 1.85 34.44 to 32.05 2003 4,200 1.51 to 17.41 71,203 3.69 0.42 to 1.85 38.33 to 36.37 2002 2,762 1.09 to 12.77 34,861 4.15 0.42 to 1.85 7.27 to 5.75 Short-Term Bond Division: 2006 11,441 10.48 to 10.11 117,594 2.22 0.85 to 1.85 3.56 to 2.53 2005 8,171 10.12 to 9.86 81,529 1.51 0.85 to 1.85 0.90 to (0.10) 2004 5,485 10.03 to 9.87 54,515 - 0.85 to 1.85 0.50 to (0.50) 2003 (5) 2,055 9.98 to 9.92 20,446 2.63 0.85 to 1.85 (0.25) to (0.86) SmallCap Division: 2006 5,338 1.31 to 12.92 71,752 0.16 0.42 to 1.85 12.23 to 10.64 2005 5,934 1.17 to 11.68 70,854 0.02 0.42 to 1.85 6.36 to 5.13 2004 5,891 1.10 to 11.11 66,830 - 0.42 to 1.85 19.57 to 17.57 2003 5,224 0.92 to 9.45 50,283 0.10 0.42 to 1.85 36.29 to 34.32 (27.63) to 2002 3,608 0.68 to 7.03 25,858 0.09 0.42 to 1.85 (28.66) SmallCap Growth Division: 2006 4,608 $0.80 to $10.37 $48,773 -% 0.42% to 1.85% 8.52% to 6.98% 2005 4,861 0.73 to 9.69 46,695 - 0.42 to 1.85 5.80 to 4.64 2004 5,065 0.69 to 9.26 46,544 - 0.42 to 1.85 11.29 to 9.20 2003 4,956 0.62 to 8.48 41,566 - 0.42 to 1.85 45.04 to 42.98 (44.13) to 2002 4,236 0.43 to 5.93 25,168 - 0.42 to 1.85 (46.85) SmallCap Value Division: 2006 4,998 2.01 to 25.05 126,060 0.29 0.42 to 1.85 18.15 to 16.47 2005 4,563 1.70 to 21.51 95,378 0.04 0.42 to 1.85 5.59 to 4.27 2004 3,973 1.61 to 20.63 78,298 0.17 0.42 to 1.85 22.90 to 20.86 2003 3,375 1.31 to 17.07 56,509 0.44 0.42 to 1.85 49.98 to 47.85 2002 2,672 0.88 to 11.55 30,766 0.66 0.42 to 1.85 (9.25) to (10.54) T. Rowe Price Blue Chip Growth II Division: 2006 83 12.49 to 12.32 1,028 0.24 1.25 to 1.85 7.97 to 7.33 2005 (6) 56 11.57 to 11.48 644 0.28 1.25 to 1.85 4.33 to 3.70 T. Rowe Price Health Science II Division: 2006 162 13.62 to 13.43 2,197 - 1.25 to 1.85 7.09 to 6.45 2005 (6) 43 12.72 to 12.62 551 - 1.25 to 1.85 11.78 to 11.09 Templeton Growth Securities Class 2 Division: 2006 160 18.97 3,029 1.28 0.85 20.78 2005 146 15.70 2,287 1.07 0.85 7.90 2004 127 14.55 1,852 1.11 0.85 15.11 2003 94 12.64 1,193 1.48 0.85 31.02 2002 85 9.65 824 2.44 0.85 (19.18)
(1) These amounts represent the dividends, excluding distributions of capital gains, received by the division from the underlying mutual fund, net of management fees assessed by the fund manager, divided by the average net assets. These ratios exclude those expenses, such as mortality and expense charges, that result in direct reductions in the unit values. The recognition of investment income by the subaccount is affected by the timing of the declaration of dividends by the underlying fund in which the subaccounts invest. (2) These ratios represent the annualized contract expenses of Separate Account B, consisting primarily of mortality and expense charges, for each period indicated. The ratios include only those expenses that result in a direct reduction to unit values. Charges made directly to contract owner accounts through the redemption of units and expenses of the underlying fund are excluded. (3) These amounts represent the total return for the periods indicated, including changes in the value of the underlying fund, and reflect deductions for all items included in the expense ratio. The total return does not include any expenses assessed through the redemption of units; inclusion of these expenses in the calculation would result in a reduction in the total return presented. Investment options with a date notation indicate the effective date of that investment option in the variable account. The total return is calculated for the period indicated or from the effective date through the end of the reporting period. (4) Commencement of operations, May 18, 2002. Investment income ratio and expense ratio have been annualized for the period ended December 31, 2002. (5) Commencement of operations, May 17, 2003. Investment income ratio and expense ratio have been annualized for the period ended December 31, 2003. (6) Commencement of operations, January 4, 2005. Investment income ratio and expense ratio have been annualized for the period ended December 31, 2005. (7) Commencement of operations, April 28, 2006. Investment income ratio and expense ratio have been annualized for the period ended December 31, 2005. There are divisions that have total return outside of the ranges indicated above. The following is a list of the divisions and corresponding lowest total return and highest total return. 2006 Total Division Return Range --------------------------------------------------------------------------- American Century VP Income & Growth Class I Division 12.69% to 16.10% Capital Value Division 13.20 to 19.45 Diversified International Division 19.66 to 27.43 LargeCap Stock Index Division 11.23 to 15.09 LargeCap Growth Equity Division 0.84 to 2.30 MidCap Division 11.04 to 13.75 MidCap Growth Division 3.08 to 9.20 MidCap Value Division 8.72 to12.80 Principal LifeTime 2010 Division 8.55 to 10.91 Principal LifeTime 2020 Division 10.43 to 13.73 Principal LifeTime 2030 Division 10.17 to 13.40 Principal LifeTime 2040 Division 10.22 to 13.70 Principal LifeTime 2050 Division 10.41 to 14.06 Real Estate Securities Division 23.83 to 36.04 SmallCap Division 5.04 to 12.23 SmallCap Growth Division 0.12 to 8.52 SmallCap Value Division 8.88 to 18.15 2005 Total Division Return Range --------------------------------------------------------------------------- Balanced Division 4.80% to 6.52% Bond Division 0.62 to 2.60 Capital Value Division 4.88 to 6.47 Diversified International Division 21.53 to 23.12 Government & High Quality Bond Division 0.17 to 1.49 LargeCap Growth Equity Division 1.87 to 2.74 MidCap Division 7.21 to 8.84 2004 Total Division Return Range --------------------------------------------------------------------------- Balanced Division 8.06% to 9.88% Bond Division 1.59 to 7.03 Capital Value Division 10.29 to 12.12 Money Market Division (1.00) to - Small Cap Division 17.57 to 39.04 2003 Total Division Return Range --------------------------------------------------------------------------- American Century VP Income & Growth Class I Division 26.98% to 28.26% Government Securities Division (0.69) to 1.41 LargeCap Growth Equity Division 17.63 to 22.63 2002 Total Division Return Range --------------------------------------------------------------------------- LargeCap Growth Equity Division (31.57)% to (30.46)% MidCap Growth Division (39.86) to (26.89) Report of Independent Registered Public Accounting Firm The Board of Directors and Stockholder Principal Life Insurance Company We have audited the accompanying consolidated statements of financial position of Principal Life Insurance Company ("the Company") as of December 31, 2006 and 2005, 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, 2006. 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 the standards of the Public Company Accounting Oversight Board (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. We were not engaged to perform an audit of the Company's internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and 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, 2006 and 2005, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2006, in conformity with U.S. generally accepted accounting principles. As discussed in Note 1 to the consolidated financial statements, in response to new accounting standards, the Company changed its methods of accounting for certain fixed and variable contract features effective January 1, 2004, certain non-monetary exchanges of similar productive assets (primarily real estate) effective July 1, 2005, and its pension and other post-retirement benefits effective December 31, 2006. /s/Ernst & Young LLP Des Moines, Iowa March 5, 2007 Principal Life Insurance Company Consolidated Statements of Financial Position December 31, 2006 2005 (in millions) Assets Fixed maturities, available-for-sale $42,168.8 $39,949.0 Fixed maturities, trading 197.9 105.0 Equity securities, available-for-sale 645.3 702.9 Equity securities, trading 148.2 60.1 Mortgage loans 11,141.9 10,979.2 Real estate 854.8 888.4 Policy loans 850.7 827.7 Other investments 933.6 716.5 Total investments 56,941.2 54,228.8 Cash and cash equivalents 1,898.0 1,715.1 Accrued investment income 715.2 668.7 Premiums due and other receivables 839.4 564.4 Deferred policy acquisition costs 2,265.9 2,069.9 Property and equipment 404.7 406.7 Goodwill 229.5 207.8 Other intangibles 197.1 94.8 Separate account assets 69,451.7 58,670.8 Assets of discontinued operations -- 103.2 Other assets 1,509.4 1,268.7 Total assets $134,452.1 $119,998.9 Liabilities Contractholder funds $36,782.7 $33,598.6 Future policy benefits and claims 15,004.2 14,650.3 Other policyholder funds 613.6 654.1 Short-term debt 412.2 719.1 Long-term debt 298.6 313.5 Income taxes currently payable 9.1 -- Deferred income taxes 758.1 875.5 Separate account liabilities 69,451.7 58,670.8 Liabilities of discontinued operations -- 4.5 Other liabilities 4,320.6 3,429.9 Total liabilities 127,650.8 112,916.3 Stockholder's equity Common stock, par value $1 per share - 5.0 million shares authorized, 2.5 million shares issued and outstanding (wholly owned indirectly by Principal Financial Group, Inc.) 2.5 2.5 Additional paid-in capital 5,515.3 5,354.8 Retained earnings 670.9 870.4 Accumulated other comprehensive income 612.6 854.9 Total stockholder's equity 6,801.3 7,082.6 Total liabilities and stockholder's equity $134,452.1 $119,998.9 ========================================================== See accompanying notes. Principal Life Insurance Company Consolidated Statements of Operations
For the year ended December 31, 2006 2005 2004 (in millions) Revenues Premiums and other considerations $4,066.2 $3,727.4 $3,468.9 Fees and other revenues 1,634.3 1,486.6 1,279.7 Net investment income 3,350.2 3,133.1 3,027.5 Net realized/unrealized capital gains (losses) 30.4 (17.5) (109.7) Total revenues 9,081.1 8,329.6 7,666.4 Expenses Benefits, claims, and settlement expenses 5,293.3 4,873.6 4,602.2 Dividends to policyholders 290.7 293.0 296.7 Operating expenses 2,231.0 2,063.0 1,876.5 Total expenses 7,815.0 7,229.6 6,775.4 Income from continuing operations before income taxes 1,266.1 1,100.0 891.0 Income taxes 319.1 286.8 225.4 Income from continuing operations, net of related income taxes 947.0 813.2 665.6 Income from discontinued operations, net of related income taxes 30.6 18.9 104.6 Income before cumulative effect of accounting change 977.6 832.1 770.2 Cumulative effect of accounting change, net of related income taxes -- -- (2.4) Net income $977.6 $832.1 $767.8
See accompanying notes. Principal Life Insurance Company Consolidated Statements of Stockholder's Equity
Accumulated Additional other Total Common paid-in Retained comprehensive stockholder's stock capital earnings income equity (in millions) Balances at January 1, 2004 $2.5 $5,052.1 $594.6 $1,216.8 $6,866.0 Return of capital to parent -- (0.6) -- -- (0.6) Capital transactions of equity ---------------- method investee, net of related income taxes -- 20.4 -- -- 20.4 Stock-based compensation and additional related tax benefits -- 40.8 -- -- 40.8 Dividends to parent -- -- (1,124.1) -- (1,124.1) Comprehensive income: Net income -- -- 767.8 -- 767.8 Net unrealized gains, net -- -- -- 89.4 89.4 Foreign currency translation adjustment -- -- -- (0.6) (0.6) Minimum pension liability, net of related income taxes -- -- -- (2.8) (2.8) Comprehensive income 853.8 Balances at December 31, 2004 2.5 5,112.7 238.3 1,302.8 6,656.3 Capital contributions -- 34.0 -- -- 34.0 Capital transactions of equity method investee, net of related income taxes -- (0.1) -- -- (0.1) Stock-based compensation and additional related tax benefits -- 44.4 -- -- 44.4 Tax benefits related to demutualization -- 163.8 -- -- 163.8 Dividends to parent -- -- (200.0) -- (200.0) Comprehensive income: Net income -- -- 832.1 -- 832.1 Net unrealized losses, net -- -- -- (442.4) (442.4) Foreign currency translation adjustment -- -- -- 0.7 0.7 Minimum pension liability, net of related income taxes -- -- -- (6.2) (6.2) Comprehensive income 384.2 Balances at December 31, 2005 $2.5 $5,354.8 $870.4 $854.9 $7,082.6
============================================================================== Principal Life Insurance Company Consolidated Statements of Stockholder's Equity (continued)
Accumulated Additional other Total Common paid-in Retained comprehensive stockholder's stock capital earnings income equity (in millions) Balances at January 1, 2006 $2.5 $5,354.8 $870.4 $854.9 $7,082.6 Capital contributions -- 93.8 -- -- 93.8 Capital transactions of equity method investee, net of related income taxes -- 1.7 -- -- 1.7 Stock-based compensation and additional related tax benefits -- 65.0 (0.9) -- 64.1 Dividends to parent -- -- (1,176.2) -- (1,176.2) Transition adjustment related to post-retirement benefit obligations, net of related income taxes -- -- -- 23.3 23.3 Comprehensive income: Net income -- -- 977.6 -- 977.6 Net unrealized losses, net -- -- -- (269.9) (269.9) Foreign currency translation adjustment -- -- -- 1.6 1.6 Minimum pension liability, net of related income taxes -- -- -- 2.7 2.7 Comprehensive income 712.0 Balances at December 31, 2006 $2.5 $5,515.3 $670.9 $612.6 $6,801.3
============================================================================ See accompanying notes. Principal Life Insurance Company Consolidated Statements of Cash Flows
For the year ended December 31, 2006 2005 2004 (in millions) Operating activities Net income $977.6 $832.1 $767.8 Adjustments to reconcile net income to net cash provided by operating activities: Income from discontinued operations, net of related income taxes (30.6) (18.9) (104.6) Cumulative effect of accounting change, net of related income taxes -- -- 2.4 Amortization of deferred policy acquisition costs 236.8 238.8 207.7 Additions to deferred policy acquisition costs (445.8) (440.6) (457.8) Accrued investment income (46.5) 0.9 (27.0) Net cash flows from (for) trading securities (93.0) (29.4) 6.3 Premiums due and other receivables (98.7) (63.3) (21.4) Contractholder and policyholder liabilities and dividends 1,692.9 1,585.2 1,414.0 Current and deferred income taxes 125.0 (445.1) 34.3 Net realized/unrealized capital (gains) losses (30.4) 17.5 109.7 Depreciation and amortization expense 83.3 83.4 93.2 Mortgage loans held for sale, acquired or originated (382.6) (2,177.5) (1,045.7) Mortgage loans held for sale, sold or repaid, net of gain 719.7 2,238.6 845.1 Real estate acquired through operating activities (82.3) (44.6) (45.8) Real estate sold through operating activities 91.4 41.9 84.7 Stock-based compensation 63.8 44.4 39.4 Other (266.8) 127.9 (517.8) Net adjustments 1,536.2 1,159.2 616.7 Net cash provided by operating activities 2,513.8 1,991.3 1,384.5 Investing activities Available-for-sale securities: Purchases (7,399.7) (8,243.4) (9,126.9) Sales 1,094.0 2,759.5 1,759.8 Maturities 3,453.5 3,734.0 4,082.0 Mortgage loans acquired or originated (2,501.0) (2,293.8) (2,612.3) Mortgage loans sold or repaid 2,002.0 2,563.2 2,380.8 Real estate acquired (29.1) (92.2) (327.5) Real estate sold 211.1 319.3 345.4 Net purchases of property and equipment (39.5) (37.6) (42.3) Net proceeds from sales of subsidiaries -- -- 674.6 Purchases of interest in subsidiaries, net of cash acquired (37.2) (57.9) (87.2) Net change in other investments 94.2 35.6 154.6 Net cash used in investing activities $(3,151.7) $(1,313.3) $(2,799.0)
------------------------------------------------------------------------------ Principal Life Insurance Company Consolidated Statements of Cash Flows (continued)
For the year ended December 31, 2006 2005 2004 (in millions) Financing activities Proceeds from financing element derivatives $132.1 $168.4 $110.6 Payments for financing element derivatives (141.0) (123.2) (84.6) Excess tax benefits from share-based payment arrangements 8.4 -- -- Dividends to parent (1,176.2) (200.0) (1,124.1) (Return of capital)/capital contribution (from)/to parent (5.8) 34.0 (0.6) Issuance of long-term debt 1.0 38.3 12.1 Principal repayments of long-term debt (16.0) (72.6) (246.7) Net proceeds (repayments) of short-term borrowings (306.9) 21.4 220.6 Investment contract deposits 8,925.7 7,250.0 7,312.4 Investment contract withdrawals (6,859.4) (6,504.5) (5,294.9) Net increase (decrease) in banking operation deposits 258.9 41.9 (5.0) Net cash provided by financing activities 820.8 653.7 899.8 Discontinued operations Net cash provided by (used in) operating activities (1.1) 125.1 (628.0) Net cash used in investing activities (0.9) (125.0) (471.7) Net cash provided by financing activities -- -- 600.0 Net cash provided by (used in) discontinued operations (2.0) 0.1 (499.7) Net increase (decrease) in cash and cash equivalents 180.9 1,331.8 (1,014.4) Cash and cash equivalents at beginning of year 1,717.1 385.3 1,399.7 Cash and cash equivalents at end of year $1,898.0 $1,717.1 $385.3 Cash and cash equivalents of discontinued operations included above At beginning of year $2.0 $1.9 $501.6 At end of year $ -- $2.0 $1.9 Schedule of noncash transactions Capital contribution related to the allocation of intangible assets $99.9 $-- $-- Tax benefits related to demutualization $ -- $163.8 $--
================================================================================ See accompanying notes. Principal Life Insurance Company Notes to Consolidated Financial Statements December 31, 2006 1. Nature of Operations and Significant Accounting Policies Description of Business Principal Life Insurance Company along with its consolidated subsidiaries is a diversified financial services organization engaged in promoting retirement savings and investment and insurance products and services in the U.S. We are a direct wholly owned subsidiary of Principal Financial Services, Inc., which in turn is a direct wholly owned subsidiary of Principal Financial Group, Inc. Basis of Presentation The accompanying consolidated financial statements, which include our majority-owned subsidiaries and consolidated variable interest entities ("VIEs"), have been prepared in conformity with U.S. generally accepted accounting principles ("U.S. GAAP"). Less than majority-owned entities in which we had at least a 20% interest and LLCs, partnerships and real estate joint ventures in which we had at least a 5% interest, are reported on the equity basis in the consolidated statements of financial position as other investments. Investments in LLCs, partnerships and real estate joint ventures in which we have an ownership percentage of 3% to 5% are accounted for under the equity or cost method depending upon the specific facts and circumstances of our ownership and involvement. All significant intercompany accounts and transactions have been eliminated. Information included in the notes to the financial statements excludes information applicable to less than majority-owned entities reported on the equity and cost methods, unless otherwise noted. Closed Block We operate a closed block ("Closed Block") for the benefit of individual participating dividend-paying policies in force at the time of the 1998 mutual insurance holding company ("MIHC") formation. See Note 9, Closed Block, for further details. Use of Estimates in the Preparation of Financial Statements The preparation of our 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. Recent Accounting Pronouncements The Financial Accounting Standards Board (the "FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 158, Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106 and 132R ("SFAS 158"), on September 29, 2006. SFAS 158 requires an entity to recognize in its statement of financial position an asset for a defined benefit postretirement plan's overfunded status or a liability for a plan's underfunded status. This statement eliminates the ability to choose a measurement date, by requiring that plan assets and benefit obligations be measured as of the annual balance sheet date. The requirement to recognize the funded status of a defined benefit postretirement plan and the disclosure requirements are effective for fiscal years ending after December 15, 2006, and did not have a material impact on our consolidated financial statements. The requirement to measure plan assets and benefit obligations as of the annual balance sheet date is effective for fiscal years ending after December 15, 2008. See Note 14, Employee and Agent Benefits, for further details. On September 15, 2006, the FASB issued SFAS No. 157, Fair Value Measurements ("SFAS 157"). This standard, which provides guidance for using fair value to measure assets and liabilities, applies whenever other standards require or permit assets or liabilities to be measured at fair value, but does not expand the use of fair value in any new circumstances. SFAS 157 establishes a fair value hierarchy that gives the highest priority to quoted prices in active markets and the lowest priority to unobservable data, and requires fair value measurements to be separately disclosed by level within the hierarchy. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007. We are still evaluating the impact this guidance will have on our consolidated financial statements. Principal Life Insurance Company Notes to Consolidated Financial Statements (continued) 1. Nature of Operations and Significant Accounting Policies (continued) The staff of the United States Securities and Exchange Commission ("SEC") published Staff Accounting Bulletin ("SAB") No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements ("SAB 108"), on September 13, 2006. SAB 108 addresses quantifying the financial statement effects of misstatements, specifically, how the effects of prior year uncorrected errors must be considered in quantifying misstatements in the current year financial statements. Under SAB 108, registrants are required to quantify the effects on the current year financial statements of correcting all misstatements, including both the carryover and reversing effects of uncorrected prior year misstatements. After considering all relevant quantitative and qualitative factors, if a misstatement is material, a registrant's prior year financial statements must be restated. SAB 108 offers special transition provisions only for circumstances where its application would have altered previous materiality conclusions. When applying the special transition provisions, instead of restating prior period financial statements, a registrant must record the effect as a cumulative-effect adjustment to beginning-of-year retained earnings. SAB 108 is effective for fiscal years ending after November 15, 2006. SAB 108 did not have a material impact on our consolidated financial statements. On July 13, 2006, the FASB issued FASB Interpretation ("FIN") No. 48, Accounting for Uncertainty in Income Taxes ("FIN 48"). FIN 48, which is an interpretation of SFAS No. 109, Accounting for Income Taxes, prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken, or expected to be taken, in a tax return. FIN 48 requires the affirmative evaluation that it is more likely than not, based on the technical merits of a tax position, that an enterprise is entitled to economic benefits resulting from positions taken in income tax returns. If a tax position does not meet the more-likely-than-not recognition threshold, the benefit of that position is not recognized in the financial statements. FIN 48 also requires companies to disclose additional quantitative and qualitative information in their financial statements about uncertain tax positions. FIN 48 is effective for fiscal years beginning after December 15, 2006, and the cumulative effect of applying this Interpretation shall be reported as an adjustment to the opening balance of retained earnings for that fiscal year. FIN 48 is not expected to have a material impact on our consolidated financial statements. On March 17, 2006, the FASB issued SFAS No. 156, Accounting for Servicing of Financial Assets ("SFAS 156"), which amends SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities ("SFAS 140"). This Statement (1) requires an entity to recognize a servicing asset or liability each time it undertakes an obligation to service a financial asset by entering into a servicing contract in specified situations, (2) requires all separately recognized servicing assets and liabilities to be initially measured at fair value, (3) for subsequent measurement of each class of separately recognized servicing assets and liabilities, allows an entity to elect either the amortization or fair value measurement method, (4) permits a one-time reclassification of available-for-sale ("AFS") securities to trading securities by an entity with recognized servicing rights, without calling into question the treatment of other AFS securities, provided the AFS securities are identified in some manner as offsetting the entity's exposure to changes in fair value of servicing assets or liabilities that a servicer elects to subsequently measure at fair value, and (5) requires separate presentation of servicing assets and liabilities measured at fair value in the statement of financial position and also requires additional disclosures. The initial measurement requirements of this statement should be applied prospectively to all transactions entered into after the fiscal year beginning after September 15, 2006. The election related to the subsequent measurement of servicing assets and liabilities is also effective the first fiscal year beginning after September 15, 2006. SFAS 156 is not expected to have a material impact on our consolidated financial statements. On February 16, 2006, the FASB issued SFAS No. 155, Accounting for Certain Hybrid Financial Instruments - an amendment of FASB Statements No. 133 and 140 ("SFAS 155"), which amends SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities ("SFAS 133") and SFAS 140. SFAS 155 (1) permits fair value remeasurement for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation, (2) clarifies which interest-only and principal-only strips are not subject to the requirements of SFAS 133, (3) establishes a requirement to evaluate interests in securitized financial assets to identify interests that are freestanding derivatives or that are hybrid financial instruments that contain an embedded derivative requiring bifurcation, (4) clarifies that concentrations of credit risk in the form of subordination are not embedded derivatives, and (5) amends SFAS 140 to eliminate the prohibition on a qualifying special-purpose entity from holding a derivative financial instrument that pertains to a beneficial interest other than another derivative financial instrument. This Statement is effective for all financial instruments acquired or issued after the beginning of an entity's fiscal year that begins after September 15, 2006. At adoption, the fair value election may also be Principal Life Insurance Company Notes to Consolidated Financial Statements (continued) 1. Nature of Operations and Significant Accounting Policies (continued) applied to hybrid financial instruments that have been bifurcated under SFAS 133 prior to adoption of this Statement. Any changes resulting from the adoption of this Statement should be recognized as a cumulative effect adjustment to beginning retained earnings. SFAS 155 is not expected to have a material impact on our consolidated financial statements. On September 19, 2005, the Accounting Standards Executive Committee ("AcSEC") issued Statement of Position ("SOP") 05-1, Accounting by Insurance Enterprises for Deferred Acquisition Costs in Connection With Modifications or Exchanges of Insurance Contracts ("SOP 05-1"). AcSEC defines an internal replacement as a modification in product benefits, features, rights, or coverages that occurs by the exchange of a contract for a new contract, or by amendment, endorsement, or rider to a contract, or by the election of a feature or coverage within a contract. An internal replacement that is determined to result in a replacement contract that is substantially unchanged from the replaced contract should be accounted for as a continuation of the replaced contract. Contract modifications resulting in a replacement contract that is substantially changed from the replaced contract should be accounted for as an extinguishment of the replaced contract and any unamortized deferred policy acquisition costs, unearned revenue liabilities, and deferred sales inducement costs from the replaced contract should be written off and acquisition costs on the new contracts capitalized as appropriate. This SOP is effective for internal replacements occurring in fiscal years beginning after December 15, 2006. SOP 05-1 is not expected to have a material impact on our consolidated financial statements. On May 30, 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections, a replacement of APB Opinion No. 20 and FASB Statement No. 3 ("SFAS 154"), which changes the requirements for the accounting and reporting of a change in accounting principle. Under SFAS 154, a change in accounting principle should be retrospectively applied to all prior periods, unless it is impracticable to do so. This retrospective application requirement replaces the Accounting Principles Board ("APB") Opinion No. 20, Accounting Changes ("APB 20"), requirement to recognize changes in accounting principle by including the cumulative effect of the change in net income during the current period. SFAS 154 applies to all voluntary changes in accounting principles where we are changing to a more preferable accounting method, as well as to changes required by an accounting pronouncement that does not contain specific transition provisions. SFAS 154 carries forward without change the guidance contained in APB 20 for reporting the correction of an error in previously issued financial statements and a change in accounting estimate. SFAS 154 is effective for accounting changes on or after January 1, 2006. SFAS 154 does not change the transition provisions of any existing accounting pronouncements. On December 16, 2004, the FASB issued SFAS No. 123 (revised 2004), Share-Based Payment ("SFAS 123R"). SFAS 123R requires all share-based payments to employees to be recognized at fair value in the financial statements. SFAS 123R replaces SFAS No. 123, Accounting for Stock-Based Compensation ("SFAS 123"), supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees ("APB 25"), and SFAS No. 148, Accounting for Stock-Based Compensation-Transition and Disclosure - an Amendment of FASB Statement No. 123 and amends SFAS No. 95, Statement of Cash Flows. On April 14, 2005, the SEC approved a new rule delaying the effective date of SFAS 123R to annual periods that begin after June 15, 2005. Accordingly, Principal Financial Group, Inc. adopted SFAS 123R effective January 1, 2006 using the modified-prospective method. The provisions of our stock awards allow approved retirees to retain all or a portion of their awards if they retire prior to the end of the required service period. SFAS 123R considers this to be a nonsubstantive service condition. Accordingly, it is appropriate to recognize compensation cost either immediately for stock awards granted to retirement eligible employees, or over the period from the grant date to the date retirement eligibility is achieved, if retirement eligibility is expected to occur during the nominal vesting period. Our approach was to follow the widespread practice of recognizing compensation cost over the explicit service period (up to the date of actual retirement). For any awards that are granted after our adoption of SFAS 123R on January 1, 2006, we recognize compensation cost through the period that the employee first becomes eligible to retire and is no longer required to provide service to earn the award. If we had applied the nonsubstantive vesting provisions of SFAS 123R to awards granted prior to January 1, 2006, our consolidated financial statements would not have been materially impacted. SFAS 123R requires that the benefits of tax deductions in excess of recognized compensation cost be reported as a financing cash flow, rather than as an operating cash flow. This requirement reduces net operating cash flows and increases net financing cash flows in periods after the effective date. Principal Life Insurance Company Notes to Consolidated Financial Statements (continued) 1. Nature of Operations and Significant Accounting Policies (continued) Under the modified-prospective method, any excess income tax deduction realized for awards accounted for under SFAS 123R (regardless of the type of award or the jurisdiction in which the tax benefit is generated) is eligible to absorb write-offs of deferred income tax assets for any awards accounted for under SFAS 123R. SFAS 123R does not require separate pools of excess income tax benefits for separate types of awards, rather the excess income tax benefits of employee and nonemployee awards may be combined in a single pool of excess tax benefits. Our policy is to pool the employee and nonemployee awards together in this manner. Deferred income tax asset write-offs resulting from deficient deductions on employee awards may be offset against previous excess income tax benefits arising from nonemployee awards, and vice versa. This Statement did not have a material impact on our consolidated financial statements as we began expensing all stock options using a fair-value based method effective for the year beginning January 1, 2002. In addition, any stock options granted prior to January 1, 2002 were fully vested at the time of adoption of SFAS 123R. The Black-Scholes formula is used to estimate the value of stock options granted to employees. The prospective method of transition as prescribed by SFAS 123 was applied when Principal Financial Group, Inc. elected to begin expensing stock-based compensation in 2002. The cumulative effect of the change in accounting principle as a result of adopting SFAS 123R is immaterial. Therefore, the pre-tax cumulative effect of the change in accounting principle is reflected in operating expenses. See Note 20, Stock-Based Compensation Plans, for further details. In December, 2004, SFAS No. 153, Exchange of Nonmonetary Assets, an amendment of APB Opinion No. 29 ("SFAS 153"), was issued. APB Opinion No. 29, Accounting for Nonmonetary Transactions ("APB 29"), provided the basic principle that exchanges of nonmonetary assets should be measured based on the fair value of the assets exchanged. However, APB 29 provided an exception that allowed certain exchanges of similar productive assets to be recorded at book value. SFAS 153 amends APB 29 to eliminate this exception and requires non-monetary exchanges that meet certain criteria to be accounted for at fair value. We adopted SFAS 153 and are applying its guidelines to nonmonetary exchanges occurring on or after July 1, 2005. On March 9, 2004, the SEC Staff issued SAB No.105, Application of Accounting Principles to Loan Commitments ("SAB 105"), in which the SEC Staff expressed their view that the fair value of recorded loan commitments, including interest rate lock commitments ("IRLCs"), that are required to follow derivative accounting under SFAS 133, should not consider the expected future cash flows related to the associated servicing of the loan. We record IRLCs at zero value at date of issuance with subsequent gains or losses measured by changes in market interest rates. Therefore, this SAB did not have a material impact on our consolidated financial statements. On July 7, 2003, the AcSEC issued SOP 03-1, Accounting and Reporting by Insurance Enterprises for Certain Nontraditional Long Duration Contracts and for Separate Accounts ("SOP 03-1"). This SOP addresses an insurance enterprise's accounting for certain fixed and variable contract features not covered by other authoritative accounting guidance. We adopted SOP 03-1 effective January 1, 2004, and recorded a cumulative effect of accounting change of $(2.4) million, which is net of income tax benefits of $1.3 million. The accounting change impacted our Life and Health Insurance and U.S. Asset Management and Accumulation segments. SOP 03-1 addresses the classification of contracts and calculation of an additional liability for contracts that contain significant insurance features. The adoption of the guidance required the recognition of an additional liability in cases where the insurance benefit feature resulted in gains in early years followed by losses in later years. The accrual and release of the additional liability also impacted the amortization of deferred policy acquisition costs ("DPAC"). As of January 1, 2004, we increased future policyholder benefits due to our no lapse guarantee feature of our universal life and variable universal life products within our Life and Health Insurance segment and for variable annuities with guaranteed minimum death benefits in our U.S. Asset Management and Accumulation segment. This resulted in an after-tax cumulative effect of $(0.9) million in the Life and Health Insurance segment and $(1.5) million in the U.S. Asset Management and Accumulation segment. In addition, the guidance clarifies the accounting and classification for sales inducements. Although the valuation impacts were immaterial, we reclassified $30.3 million of sales inducements from DPAC to other assets as of January 1, 2004. Principal Life Insurance Company Notes to Consolidated Financial Statements (continued) 1. Nature of Operations and Significant Accounting Policies (continued) 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 We classify our fixed maturity and equity investments into one of two categories: available-for-sale or trading. We determine the appropriate classification of fixed maturity securities at the time of purchase. Fixed maturity securities include bonds, mortgage-backed securities and redeemable preferred stock. We classify fixed maturity securities as either available-for-sale or trading and, accordingly, carry them at fair value. (See Note 17, Fair Value of Financial Instruments, for policies related to the determination of fair value.) Unrealized gains and losses related to available-for-sale securities, excluding those in fair value hedging relationships, are reflected in stockholder's equity, net of adjustments related to DPAC, sales inducements, unearned revenue reserves, policyholder dividend obligation ("PDO"), derivatives in cash flow hedge relationships and applicable income taxes. Unrealized gains and losses related to trading securities and available-for-sale securities in fair value hedging relationships are reflected in net income. The cost of fixed maturity securities is adjusted for amortization of premiums and accrual of discounts, both computed using the interest method. The cost of fixed maturity securities is adjusted for declines in value that are other than temporary. Impairments in value deemed to be other than temporary are reported in net income as a component of net realized/unrealized capital gains (losses). For loan-backed and structured securities, we recognize income using a constant effective yield based on currently anticipated prepayments using a tool which models the prepayment behavior of the underlying collateral based on the current interest rate environment. Equity securities include mutual funds, common stock and nonredeemable preferred stock. The cost of equity securities is adjusted for declines in value that are other than temporary. Impairments in value deemed to be other than temporary are reported in net income as a component of net realized/unrealized capital gains (losses). Equity securities are classified as available-for-sale or trading and, accordingly, are carried at fair value. (See Note 17, Fair Value of Financial Instruments, for policies related to the determination of fair value.) Unrealized gains and losses related to available-for-sale securities are reflected in stockholder's equity, net of related DPAC, sales inducements, unearned revenue reserves, PDO, and applicable income taxes. Unrealized gains and losses related to trading securities are reflected in net income as net realized/unrealized capital gains (losses). 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 fair market values of the properties at the time of foreclosure or the outstanding loan balance. 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. We recognize impairment losses for 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 to fair value. 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 in net income. Commercial and residential mortgage loans are generally reported at cost adjusted for amortization of premiums and accrual of discounts, computed using the interest method, net of valuation allowances, and direct write-downs for impairment. Any changes in the valuation allowances are reported in net income as net realized/unrealized capital gains (losses). We measure impairment based upon the present value of expected cash flows discounted at the loan's effective interest rate or the loan's observable market price. If foreclosure is probable, the measurement of any valuation allowance is based upon the fair value of the collateral. We have commercial mortgage loans held-for-sale in the amount of $77.3 million and $412.1 million at December 31, 2006 and 2005, respectively, which are carried at lower of cost or fair value, less cost to sell, and reported as mortgage loans in the statements of financial position. Principal Life Insurance Company Notes to Consolidated Financial Statements (continued) 1. Nature of Operations and Significant Accounting Policies (continued) Net realized capital gains and losses on sales of investments are determined on the basis of specific identification. In general, in addition to realized capital gains and losses on investment sales, unrealized gains and losses related to other than temporary impairments, trading securities, certain seed money investments, fair value hedge ineffectiveness, derivatives not designated as hedges and changes in the mortgage loan allowance are reported in net income as net realized/unrealized capital gains (losses). Investment gains and losses on sales of certain real estate held-for-sale, which do not meet the criteria for classification as a discontinued operation, are reported as net investment income and are excluded from net realized/unrealized capital gains (losses). Policy loans and other investments, excluding investments in unconsolidated entities, are primarily reported at cost. Securitizations We, along with other contributors, sell commercial mortgage loans to trusts that, in turn, securitize the assets. As these trusts are classified as qualifying special purpose entities ("QSPE") pursuant to the guidance of SFAS 140, we recognize the gain on the sale of the loans to the trust and the trusts are not required to be consolidated under the provisions of FIN No. 46 (Revised 2003), Consolidation of Variable Interest Entities ("FIN 46R"). There is significant judgment used to determine whether a trust is a QSPE. To maintain QSPE status, the trust must continue to meet the QSPE criteria both initially and in subsequent periods. We have analyzed the governing pooling and servicing agreements for each of our securitizations and believe that the terms are industry standard and are consistent with the QSPE criteria. If at any time we determine a trust no longer qualifies as a QSPE, each trust will need to be reviewed to determine if there is a need to recognize the commercial mortgage loan asset in the statement of financial position along with the offsetting liability. In addition, certain industry practices related to the qualifying status of QSPE's are being discussed by the FASB and could impact the accounting for existing and/or future transactions. Derivatives Overview. Derivatives are financial instruments whose values are derived from interest rates, foreign exchange rates, financial indices or the values of securities. Derivatives generally used by us include interest rate swaps, swaptions, futures, currency swaps, currency forwards, credit default swaps, total return swaps, interest rate lock commitments, bond forwards, mortgage-backed forwards, commodity swaps and options. Derivatives may be exchange traded or contracted in the over-the-counter market. Derivative positions are either assets or liabilities in the consolidated statements of financial position and are measured at fair value, generally by obtaining quoted market prices or through the use of pricing models. Fair values can be affected by changes in interest rates, foreign exchange rates, financial indices, values of securities, credit spreads, and market volatility and liquidity. Accounting and Financial Statement Presentation. We designate derivatives as either: (a) a hedge of the exposure to changes in the fair value of a recognized asset or liability or an unrecognized firm commitment, including those denominated in a foreign currency ("fair value" hedge); (b) a hedge of a forecasted transaction or the exposure to variability of cash flows to be received or paid related to a recognized asset or liability, including those denominated in a foreign currency ("cash flow" hedge) ; (c) a derivative not designated as a hedging instrument.Our accounting for the ongoing changes in fair value of a derivative depends on the intended use of the derivative and the designation, as described above, and is determined when the derivative contract is entered into or at the time of redesignation under SFAS 133. Hedge accounting is used for derivatives that are specifically designated in advance as hedges and that reduce our 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. Principal Life Insurance Company Notes to Consolidated Financial Statements (continued) 1. Nature of Operations and Significant Accounting Policies (continued) Fair Value Hedges. When a derivative is designated as a fair value hedge and is determined to be highly effective, changes in its fair value, along with changes in the fair value of the hedged asset, liability or firm commitment attributable to the hedged risk, are reported in net realized/unrealized capital gains (losses). Any difference between the net change in fair value of the derivative and the hedged item represents hedge ineffectiveness. Cash Flow Hedges. When a derivative is designated as a cash flow hedge and is determined to be highly effective, changes in its fair value are recorded as a component of other comprehensive income. Any hedge ineffectiveness is recorded immediately in net income. At the time the variability of cash flows being hedged impact net income, the related portion of deferred gains or losses on the derivative instrument is reclassified and reported in net income. Non-Hedge Derivatives. If a derivative does not qualify or is not designated for hedge accounting, all changes in fair value are reported in net income without considering the changes in the fair value of the economically associated assets or liabilities. In our commercial mortgage backed securitization operation, we enter into commitments to fund commercial mortgage loans at specified interest rates and other applicable terms within specified periods of time. These commitments are legally binding agreements to extend credit to a counterparty. Loan commitments that will be held for sale are recognized as derivatives and are recorded at fair value. Hedge Documentation and Effectiveness Testing. We formally document all relationships between hedging instruments and hedged items, as well as our risk management objective and strategy for undertaking various hedge transactions. This process includes associating all derivatives designated as fair value or cash flow hedges with specific assets or liabilities on the statement of financial position or with specific firm commitments or forecasted transactions. Effectiveness of the hedge is formally assessed at inception and throughout the life of the hedging relationship. Even if a derivative is highly effective and qualifies for hedge accounting treatment, the hedge might have some ineffectiveness. We use qualitative and quantitative methods to assess hedge effectiveness. Qualitative methods may include monitoring changes to terms and conditions and counterparty credit ratings. Quantitative methods may include statistical tests including regression analysis and minimum variance and dollar offset techniques. If we determine a derivative is no longer highly effective as a hedge, we prospectively discontinue hedge accounting. Termination of Hedge Accounting. We prospectively discontinue hedge accounting when (1) the criteria to qualify for hedge accounting is no longer met, e.g., a derivative is determined to no longer be highly effective in offsetting the change in fair value or cash flows of a hedged item; (2) the derivative expires, is sold, terminated or exercised; or (3) we remove the designation of the derivative being the hedging instrument for a fair value or cash flow hedge. If it is determined that a derivative no longer qualifies as an effective hedge, the derivative will continue to be carried on the statement of financial position at its fair value, with changes in fair value recognized currently in net realized/unrealized capital gains (losses). The asset or liability under a fair value hedge will no longer be adjusted for changes in fair value pursuant to hedging rules and the existing basis adjustment is amortized to the statement of operations line associated with the asset or liability. The component of other comprehensive income related to discontinued cash flow hedges that are no longer highly effective is amortized to the statement of operations consistent with the net income impacts of the original hedged cash flows. If a cash flow hedge is discontinued because a hedged forecasted transaction is no longer probable, the deferred gain or loss is immediately reclassified from other comprehensive income into net income. Embedded Derivatives. We purchase and issue financial instruments and products that contain a derivative that is embedded in the financial instrument or product. We assess whether this embedded derivative is clearly and closely related to the asset or liability that serves as its host contract. If we deem that the embedded derivative's terms are not clearly and closely related to the host contract, and a separate instrument with the same terms would qualify as a derivative instrument, the derivative is bifurcated from that contract and held at fair value on the statement of financial position, with changes in fair value reported in net income. Principal Life Insurance Company Notes to Consolidated Financial Statements (continued) 1. Nature of Operations and Significant Accounting Policies (continued) 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, traditional and group life insurance, accident and health insurance and disability income policies, as well as a provision for dividends on participating policies. Investment contracts are contractholders' funds on deposit with us and generally include reserves for pension and annuity contracts. Reserves on investment contracts are equal to the cumulative deposits less any applicable charges and withdrawals plus credited interest. Reserves for universal life insurance contracts are equal to cumulative deposits less charges plus credited interest, which represents the account balances that accrue to the benefit of the policyholders. We hold additional reserves on certain long duration contracts where benefit features result in gains in early years followed by losses in later years, universal life/variable universal life contracts that contain no lapse guarantee features, or annuities with guaranteed minimum death benefits. Reserves for nonparticipating term life insurance and disability income contracts are computed on a basis of assumed investment yield, mortality, morbidity and expenses, including a provision for adverse deviation, which generally varies by plan, year of issue and policy duration. Investment yield is based on our experience. Mortality, morbidity and withdrawal rate assumptions are based on our experience 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 rates and mortality rates guaranteed in calculating the cash surrender values described in the contract. Participating business represented approximately 20%, 24% and 28% of our life insurance in force and 61%, 63% and 67% of the number of life insurance policies in force at December 31, 2006, 2005 and 2004, respectively. Participating business represented approximately 71%, 76% and 77% of life insurance premiums for the years ended December 31, 2006, 2005 and 2004, respectively. The amount of dividends to policyholders is approved annually by our Board of Directors. The amount of dividends to be paid to policyholders is determined after consideration of several factors including interest, mortality, morbidity and other expense experience for the year and judgment as to the appropriate level of statutory surplus to be retained by us. At the end of the reporting period, we establish a dividend liability for the pro rata portion of the dividends expected to be paid on or before the next policy anniversary date. Some of our 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 in relation to the emergence of estimated gross profit margins. 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, we believe 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. Recognition of Premiums and Other Considerations, Fees and Other Revenues and Benefits Traditional individual life insurance products include those products with fixed and guaranteed premiums and benefits and consist principally of whole life and term life insurance policies. Premiums from these products are recognized as premium revenue when due. Related policy benefits and expenses for individual life and annuity products are associated with earned premiums and result in the recognition of profits over the expected term of the policies and contracts. Immediate annuities with life contingencies include products with fixed and guaranteed annuity considerations and benefits and consist principally of group and individual single premium annuities with life contingencies. Annuity considerations from these products are recognized as revenue. However, the collection of these annuity considerations does not represent the completion of the earnings process, as we establish annuity reserves, using estimates for mortality and investment assumptions, which include provision for adverse deviation as required by U.S. GAAP. We anticipate profits to emerge over the life of the annuity products as we earn investment income, pay benefits and release reserves. Principal Life Insurance Company Notes to Consolidated Financial Statements (continued) 1. Nature of Operations and Significant Accounting Policies (continued) Group life and health insurance premiums are generally recorded as premium revenue over the term of the coverage. Certain group contracts contain experience premium refund provisions based on a pre-defined formula that reflects their claim experience. Experience premium refunds are recognized over the term of the coverage and adjusted to reflect current experience. 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 group life and health insurance products are associated with earned premiums and result in the recognition of profits over the term of the policies and contracts. Universal life-type policies are insurance contracts with terms that are not fixed. 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 and investment income. 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 us to significant risks arising from policyholder mortality or morbidity and consist primarily of Guaranteed Investment Contracts ("GICs"), funding agreements 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. Fees and other revenues are earned for asset management services provided to retail and institutional clients based largely upon contractual rates applied to the market value of the client's portfolio. Additionally, fees and other revenues are earned for administrative services performed including recordkeeping and reporting services for retirement savings plans. Fees and other revenues received for performance of asset management and administrative services are recognized as revenue when the service is performed or earned. Deferred Policy Acquisition Costs Commissions and other costs (underwriting, issuance and field 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. Maintenance costs and acquisition costs that are not deferrable are charged to operations as incurred. DPAC for universal life-type insurance contracts, 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. For investment contracts pertaining to individual and group annuities which have separate account investment options, we utilize a mean reversion method (reversion to the mean assumption), a common industry practice, to determine the future domestic equity market growth assumption used for the amortization of DPAC. This amortization is adjusted in the current period when estimates of estimated gross profit are revised. The DPAC of nonparticipating 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. DPAC are subject to recoverability testing at the time of policy issue and loss recognition testing on an annual basis or when an event occurs that may warrant loss recognition. If loss recognition is necessary, DPAC would be written off to the extent that it is determined that future policy premiums and investment income or gross profits are not adequate to cover related losses and expenses. Long-Term Debt Long-term debt includes notes payable, nonrecourse mortgages and other debt with a maturity date greater than one year at the date of issuance. Current maturities of long term debt are classified as long-term debt in our statement of financial position. Principal Life Insurance Company Notes to Consolidated Financial Statements (continued) 1. Nature of Operations and Significant Accounting Policies (continued) Reinsurance We enter into reinsurance agreements with other companies in the normal course of business. We may assume reinsurance from or cede reinsurance to other companies. Assets and liabilities related to reinsurance ceded are reported on a gross basis. Premiums and expenses are reported net of reinsurance ceded. We are contingently liable with respect to reinsurance ceded to other companies in the event the reinsurer is unable to meet the obligations it has assumed. At December 31, 2006, 2005 and 2004, respectively, we had reinsured $21.7 billion, $21.2 billion and $20.1 billion of life insurance in force, representing 13%, 14%, and 15%, respectively, of total net life insurance in force through a single third-party reinsurer. To minimize the possibility of losses, we regularly evaluate the financial condition of our reinsurers and monitor concentrations of credit risk. The effects of reinsurance on premiums and other considerations and policy and contract benefits were as follows:
For the year ended December 31, 2006 2005 2004 (in millions) Premiums and other considerations: Direct $4,229.3 $3,966.6 $3,693.1 Assumed 117.3 56.6 67.0 Ceded (280.4) (295.8) (291.2) Net premiums and other considerations $4,066.2 $3,727.4 $3,468.9 Benefits, claims and settlement expenses: Direct $5,472.2 $5,062.2 $4,740.9 Assumed 141.8 77.0 83.2 Ceded (320.7) (265.6) (221.9) Net benefits, claims and settlement expenses $5,293.3 $4,873.6 $4,602.2
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 us for contracts with equity, real estate and fixed-income investments. The separate account contract owner, rather than us, 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 of our other business. We receive fees for mortality, withdrawal, and expense risks, as well as administrative, maintenance and investment advisory services, that are included in the consolidated statements of operations. Net 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. At December 31, 2006 and 2005, the separate accounts include a separate account valued at $768.4 million and $726.6 million, respectively, which primarily includes shares of Principal Financial Group, Inc. stock that were allocated and issued to eligible participants of qualified employee benefit plans administered by us as part of the policy credits issued under the Principal Mutual Holding Company's 2001 demutualization. The separate account shares are recorded at fair value and are reported as separate account assets and separate account liabilities in the consolidated statements of financial position. Changes in fair value of the separate account shares are reflected in both the separate account assets and separate account liabilities and do not impact our results of operations. Income Taxes Our ultimate parent, Principal Financial Group, Inc., files a U.S. consolidated income tax return that includes us and all of our qualifying subsidiaries. Principal Financial Group, Inc. allocates income tax expenses and benefits to companies in the group generally based upon pro rata contribution of taxable income or operating losses. We are 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 income tax assets and deferred income tax liabilities of a change in tax rates is recognized in operations in the period in which the change is enacted. Principal Life Insurance Company Notes to Consolidated Financial Statements (continued) 1. Nature of Operations and Significant Accounting Policies (continued) Goodwill and Other Intangibles Goodwill and other intangibles include the cost of acquired subsidiaries in excess of the fair value of the net tangible assets recorded in connection with acquisitions. Goodwill and indefinite-lived intangible assets are not amortized. Rather, goodwill and indefinite-lived intangible assets are tested for impairment at one level below our operating segments on an annual basis during the fourth quarter each year, or more frequently if events or changes in circumstances indicate that the asset might be impaired. Impairment testing for indefinite-lived intangible assets consists of a comparison of the fair value of the intangible asset with its carrying value. Intangible assets with a finite useful life are amortized as related benefits emerge over a period of 5 to 15 years and are reviewed periodically for indicators of impairment in value. If facts and circumstances suggest possible impairment, the sum of the estimated undiscounted future cash flows expected to result from the use of the asset is compared to the current carrying value of the asset. If the undiscounted future cash flows are less than the carrying value, an impairment loss is recognized for the excess of the carrying amount of assets over their fair value. Stock-Based Compensation Our ultimate parent, Principal Financial Group, Inc., has several stock-based compensation plans, which are described more fully in Note 20, Stock-Based Compensation Plans. The fair value method is applied to all stock-based awards granted subsequent to January 1, 2002. For stock-based awards granted prior to this date, the intrinsic value method is used. Awards under these plans vest over periods ranging from one year to three years. The cost related to stock-based compensation included in the determination of net income for 2004 is less than that which would have been recognized if the fair value based method had been applied to all awards since the inception of our stock-based compensation plans. Had compensation expense for our stock option awards and employees' purchase rights been determined based upon fair values at the grant dates for awards under the plans in accordance with SFAS 123, our net income would have been reduced to the pro forma amounts indicated below. For the purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period.
For the year ended December 31, 2006 2005 2004 (in millions) Net income $977.6 $832.1 $767.8 Add: Stock-based compensation expense included in reported net income, net of related tax effects 37.2 29.8 26.7 Deduct: Total stock-based compensation expense determined under fair value based method for all awards, net of related tax effects 37.2 29.8 29.3 Pro forma net income $977.6 $832.1 $765.2
================================================================================ Reclassifications Reclassifications have been made to the 2005 and 2004 consolidated financial statements to conform to the 2006 presentation. Principal Life Insurance Company Notes to Consolidated Financial Statements (continued) 2. Related Party Transactions We have entered into various related party transactions with our ultimate parent and its other affiliates. During the years ended December 31, 2006, 2005 and 2004, we received $118.2 million, $114.3 million and $94.8 million, respectively, of expense reimbursements from affiliated entities. We and our direct parent, Principal Financial Services, Inc., are parties to a cash advance agreement, which allows us, collectively, to pool our available cash in order to more efficiently and effectively invest our cash. The cash advance agreement allows (i) us to advance cash to Principal Financial Services, Inc. in aggregate principal amounts not to exceed $3.1 billion, with such advanced amounts earning interest at the daily 30-day LIBOR rate (the "Internal Crediting Rate"); and (ii) Principal Financial Services, Inc. to advance cash to us in aggregate principal amounts not to exceed $1.1 billion , with such advance amounts paying interest at the Internal Crediting Rate plus 10 basis points to reimburse Principal Financial Services, Inc. for the costs incurred in maintaining short-term investing and borrowing programs. Under this cash advance agreement, we had a receivable from Principal Financial Services, Inc. of $201.1 million and $229.6 million at December 31, 2006 and 2005, respectively, and earned interest of $13.5 million, $12.3 million and $8.5 million during 2006, 2005 and 2004, respectively. Pursuant to certain regulatory requirements or otherwise in the ordinary course of business, we guarantee certain payments of our subsidiaries and have agreements with affiliates to provide and/or receive management, administrative and other services, all of which, individually and in the aggregate, are immaterial to our business, financial condition and net income. 3. Discontinued Operations Real Estate Investments In 2005 and 2006, we sold certain real estate properties previously held for investment purposes. These properties qualify for discontinued operations treatment. Therefore, the income from discontinued operations has been removed from our results of continuing operations for all periods presented. The gains on disposal are reported as other after-tax adjustments in our Corporate and Other segment. All assets, including cash, and liabilities of the discontinued operations have been reclassified to separate discontinued asset and liability line items on the consolidated statements of financial position. We have separately disclosed the operating, investing and financing portions of the cash flows attributable to our discontinued operations in our consolidated statements of cash flows. Additionally, the information included in the notes to the financial statements excludes information applicable to these properties, unless otherwise noted. The properties were sold to take advantage of positive real estate market conditions in specific geographic locations and to further diversify our real estate portfolio. Principal Life Insurance Company Notes to Consolidated Financial Statements (continued) 3. Discontinued Operations (continued) Selected financial information for the discontinued operations is as follows:
December 31, ----------------------------------- 2006 2005 ----------------- ---------------- (in millions) Assets Real estate $-- $99.3 All other assets -- 3.9 ----------------- ---------------- ----------------- ---------------- Total assets $-- $103.2 ================= ================ Liabilities All other liabilities $-- $4.5 ----------------- ---------------- ----------------- ---------------- Total liabilities $-- $4.5 ================= ================
For the year ended December 31, 2006 2005 2004 (in millions) Total revenues $(0.5) $2.8 $2.5 Income from discontinued operations: Income (loss) before income taxes $(0.5) $2.8 $2.5 Income taxes (benefits) (0.2) 1.0 0.9 Gain on disposal of discontinued operations 47.5 34.3 -- Income taxes on disposal 16.6 12.0 -- Net income $30.6 $24.1 $1.6
================================================================================ Principal Residential Mortgage, Inc. On July 1, 2004, we closed the sale of Principal Residential Mortgage, Inc. to CitiMortgage, Inc. Our total after-tax proceeds from the sale were approximately $620.0 million. Our Mortgage Banking segment, which included Principal Residential Mortgage, Inc., is accounted for as a discontinued operation, and therefore, the income from discontinued operations (excluding corporate overhead) has been removed from our results of continuing operations and segment operating earnings for all periods presented. The gain (loss) on disposal is reported as an other after-tax adjustment in our Mortgage Banking segment. We have separately disclosed the operating, investing and financing portions of the cash flows attributable to our discontinued operations in our consolidated statements of cash flows. Corporate overhead allocated to our Mortgage Banking segment does not qualify for discontinued operations treatment and is included in our results of continuing operations and segment operating earnings for all periods prior to July 1, 2004. Additionally, the information included in the notes to the financial statements excludes information applicable to Principal Residential Mortgage, Inc., unless otherwise noted. The decision to sell Principal Residential Mortgage, Inc. was made with a view toward intensifying our strategic focus on our core retirement and risk protection business as well as achieving our longer-term financial objectives. In addition, the sale was also viewed as a positive move for Principal Financial Group, Inc.'s stockholders as it enabled us to move forward from an improved capital position, with better financial flexibility and greater stability of earnings. Principal Life Insurance Company Notes to Consolidated Financial Statements (continued) 3. Discontinued Operations (continued) Selected financial information for the discontinued operations of our Mortgage Banking segment is as follows:
For the year ended December 31, 2006 2005 2004 (in millions) Total revenues $-- $-- $446.9 Loss from continuing operations, net of related income taxes (represents corporate overhead) $-- $-- $(10.3) Income (loss) from discontinued operations Income before income taxes (1) -- -- 22.4 Income taxes (1) -- -- 8.7 Gain (loss) on disposal of discontinued operations -- (1.7) 134.7 Income taxes on disposal -- 3.5 41.9 Income (loss) from discontinued operations, net of related income taxes -- (5.2) 106.5 Net income (loss) $-- $(5.2) $96.2
=============================================================================== 21 (1) The 2004 summary results of operations information is for the six months ended prior to the July 1, 2004, sale of Principal Residential Mortgage, Inc. and, accordingly, there is no statement of operations data to present subsequent to the date of the sale. Our U.S. Asset Management and Accumulation segment held residential mortgage banking escrow deposits (reported as other liabilities) as of December 31, 2003. The purchaser (or acquirer) closed out the banking escrow deposit accounts as a result of the sale. U.S. Asset Management and Accumulation total revenues from this arrangement reclassified to discontinued operations for the year ended December 31, 2004 was $(5.6) million. Loss from discontinued operations net of related income taxes, for the year ended December 31, 2004 was $3.5 million. 4. Goodwill and Other Intangible Assets The changes in the carrying amount of goodwill reported in our operating segments for 2005 and 2006 were as follows:
U.S. Asset Management Life and and Accumulation Health Insurance Consolidated (in millions) Balances at January 1, 2005 $91.8 $69.5 $161.3 Goodwill from acquisitions 46.5 -- 46.5 Balances at December 31, 2005 138.3 69.5 207.8 Goodwill from acquisitions 21.7 -- 21.7 Balances at December 31, 2006 $160.0 $69.5 $229.5
============================================================================== Amortized intangible assets were as follows:
December 31, 2006 2005 Gross Net Gross Net carrying Accumulated carrying carrying Accumulated carrying amount amortization amount amount amortization amount (in millions) Intangibles with finite useful .8 lives $116.9 $19.7 $97.2 $107.2 $12.4 $94
=============================================================================== Principal Life Insurance Company Notes to Consolidated Financial Statements (continued) 4. Goodwill and Other Intangible Assets (continued) The amortization expense for intangible assets with finite useful lives was $7.6 million, $6.1 million and $4.2 million for 2006, 2005 and 2004, respectively. At December 31, 2006, the estimated amortization expense for the next five years is as follows (in millions): Year ending December 31: 2007 $8.2 2008 8.3 2009 8.5 2010 8.5 2011 8.0 In connection with our parent's December 31, 2006, acquisition of WM Advisors, Inc., we were allocated $99.9 million of the purchase price based on the fact that we will benefit from our parent's acquisition. Of the $99.9 million, $94.5 million related to investment management contracts that are not subject to amortization, $3.2 million related to goodwill and $2.2 million was related to other amortizable intangible assets that will be subject to a three-year amortization period. 5. Variable Interest Entities We have relationships with various types of special purpose entities and other entities where we have a variable interest. The following serves as a discussion of investments in entities that meet the definition of a VIE. Consolidated Variable Interest Entities Synthetic Collateralized Debt Obligation. On May 26, 2005, we invested $130.0 million in a secured limited recourse credit linked note issued by a grantor trust. The trust entered into a credit default swap providing credit protection on the first 45% of loss of seven mezzanine tranches totaling $288.9 million of seven synthetic reference portfolios. Our risk of loss for the seven referenced mezzanine tranches begins at 4.85% and ends at 10.85% of loss on each of the seven synthetic reference portfolios. Therefore, defaults in an underlying reference portfolio will only affect the credit-linked note if cumulative losses exceed 4.85% of a synthetic reference portfolio. We have determined that this grantor trust is a variable interest entity and that we are the primary beneficiary of the trust due to our interest in the variable interest entity and management of the synthetic reference portfolios. Upon consolidation of the trust, as of December 31, 2006 and 2005, our consolidated statements of financial position include $130.3 million and $130.0 million, respectively, of available-for-sale fixed maturity securities, which represent the collateral held by the trust. As of December 31, 2006 and 2005, the credit default swap entered into by the trust has an outstanding notional amount of $130.0 million. During the year ended December 31, 2006 and 2005, the credit default swaps had a change in fair value that resulted in a $4.4 million pre-tax gain and a $0.4 million pre-tax loss, respectively. The creditors of the grantor trusts have no recourse to our assets. Grantor Trusts. We contributed undated subordinated floating rate notes to three grantor trusts. The trusts separated the cash flows of the underlying notes by issuing an interest-only certificate and a residual certificate related to each note contributed. Each interest-only certificate entitles the holder to interest on the stated note for a specified term while the residual certificate entitles the holder to interest payments subsequent to the term of the interest-only certificate and to all principal payments. We retained the interest-only certificate and the residual certificates were subsequently sold to a third party. Principal Life Insurance Company Notes to Consolidated Financial Statements (continued) 5. Variable Interest Entities (continued) We have determined that these grantor trusts are VIEs as our interest-only certificates are exposed to the majority of the risk of loss. The restricted interest periods end between 2016 and 2020 and, at that time, the residual certificate holders' certificates are redeemed by the trust in return for the notes. We have determined that it will be necessary for us to consolidate these entities until the expiration of the interest-only period. As of December 31, 2006 and 2005, our consolidated statements of financial position include $366.2 million and $364.1 million, respectively, of undated subordinated floating rate notes of the grantor trusts, which are classified as available-for-sale fixed maturity securities and represent the collateral held by the trust. The obligation to deliver the underlying securities to the residual certificate holders of $156.8 million and $147.4 million as of December 31, 2006 and 2005, respectively, is classified as an other liability and contains an embedded derivative of the forecasted transaction to deliver the underlying securities. The creditors of the grantor trusts have no recourse to our assets. Other. In addition to the entities above, we have a number of relationships with a disparate group of entities, which meet the criteria for VIEs. Due to the nature of our direct investment in the equity and/or debt of these VIEs, we are the primary beneficiary of such entities, which requires us to consolidate them. These entities include seven private investment trusts, a financial services company and a hedge fund. The consolidation of these VIEs did not have a material effect on either our consolidated statement of financial position as of December 31, 2006 or 2005, or results of operations and for the years ended December 31, 2006, 2005 and 2004. For the majority of these entities, the creditors have no recourse to our assets. The carrying amount and classification of consolidated VIE assets that are collateral the VIEs have designated for their own obligations and the debt of the VIEs are as follows: December 31, 2006 2005 (in millions) Fixed maturity securities, available-for-sale $178.0 $88.3 Fixed maturity securities, trading 14.0 -- Equity securities, available-for-sale -- 39.6 Equity securities, trading 59.5 -- Real estate -- 12.4 Cash and other assets 83.2 71.6 Total assets pledged as collateral $334.7 $211.9 Long-term debt $206.4 $120.2 =============================================================================== As of December 31, 2006 and 2005, $334.7 million and $211.9 million, respectively, of assets were pledged as collateral for the VIE entities' other obligations. Additionally, as of December 31, 2006 and 2005, these entities had long-term debt of $206.4 million and $120.2 million, respectively, of which $206.4 million and $106.8 million, respectively, was issued to our affiliates and, therefore, eliminated upon consolidation. Significant Unconsolidated Variable Interest Entities We hold a significant variable interest in a number of VIEs where we are not the primary beneficiary. These entities include private investment trusts and custodial relationships that have issued trust certificates or custodial receipts that are recorded as available-for-sale fixed maturity securities in the consolidated financial statements. On June 21, 2006, we invested $285.0 million in a secured limited recourse note issued by a segregated portfolio company. The note represents Class B notes. Class A notes are senior and Class C through Class F notes are subordinated to Class B notes. The entity entered into a credit default swap with a third party providing credit protection in exchange for a fee. Defaults in an underlying reference portfolio will only affect the note if cumulative losses of a synthetic reference portfolio exceed the loss attachment point on the portfolio. We have determined we are not the primary beneficiary, as we do not hold the majority of the risk of loss. Our maximum exposure to loss as a result of our involvement with this entity is our recorded investment of $285.3 million as of December 31, 2006. Principal Life Insurance Company Notes to Consolidated Financial Statements (continued) 5. Variable Interest Entities (continued) Between October 3, 1996 and September 21, 2001, we entered into seven separate but similar transactions where various third parties transferred funds to either a custodial account or a trust. The custodians or trusts purchased shares of specific money market funds and then separated the cash flows of the money market shares into share receipts and dividend receipts. The dividend receipts entitle the holder to dividends paid for a specified term while the share receipts, purchased at a discount, entitle the holder to dividend payments subsequent to the term of the dividend receipts and the rights to the underlying shares. We have purchased the share receipts. After the restricted dividend period ends between 2017 and 2021, we, as the share receipt holder, have the right to terminate the custodial account or trust agreement and will receive the underlying money market fund shares. We determined the primary beneficiary is the dividend receipt holder, which has the majority of the risk of loss. Our maximum exposure to loss as a result of our involvement with these entities is our recorded investment of $235.7 million and $224.5 million as of December 31, 2006 and 2005, respectively. On June 20, 1997, we entered into a transaction in which we purchased a residual trust certificate. The trust separated the cash flows of an underlying security into an interest-only certificate that entitles the third party certificate holder to the stated interest on the underlying security through May 15, 2017, and into a residual certificate entitling the holder to interest payments subsequent to the term of the interest-only certificates and any principal payments. Subsequent to the restricted interest period, we, as the residual certificate holder, have the right to terminate the trust agreement and will receive the underlying security. We determined the primary beneficiary is the interest-only certificate holder, which has the majority of the risk of loss. Our maximum exposure to loss as a result of our involvement with this entity is our recorded investment of $78.7 million and $77.0 million as of December 31, 2006 and 2005, respectively. 6. Investments Fixed Maturities and Equity Securities The cost, gross unrealized gains and losses and fair value of fixed maturities and equity securities available-for-sale as of December 31, 2006 and 2005, are summarized as follows:
Gross Gross unrealized unrealized Cost gains losses Fair value (in millions) December 31, 2006 Fixed maturities, available-for-sale: U.S. government and agencies $522.3 $0.8 $3.6 $519.5 Non-U.S. governments 384.9 36.1 0.4 420.6 States and political subdivisions 1,557.7 45.4 4.9 1,598.2 Corporate -- public 19,223.3 661.0 137.3 19,747.0 Corporate -- private 10,282.1 373.9 75.7 10,580.3 Mortgage-backed and other asset-backed securities 9,163.8 217.2 77.8 9,303.2 Total fixed maturities, available-for-sale $41,134.1 $1,334.4 $299.7 $42,168.8 Total equity securities, available-for-sale $638.0 $11.6 $4.3 $645.3 December 31, 2005 Fixed maturities, available-for-sale: U.S. government and agencies $549.4 $1.7 $4.0 $547.1 Non-U.S. governments 416.2 47.2 0.3 463.1 States and political subdivisions 1,222.6 45.7 3.8 1,264.5 Corporate -- public 18,763.0 887.0 104.6 19,545.4 Corporate -- private 9,463.7 484.3 52.3 9,895.7 Mortgage-backed and other asset-backed securities 8,043.5 267.7 78.0 8,233.2 Total fixed maturities, available-for-sale $38,458.4 $1,733.6 $243.0 $39,949.0 Total equity securities, available-for-sale $683.8 $24.4 $5.3 $702.9
=============================================================================== Principal Life Insurance Company Notes to Consolidated Financial Statements (continued) 6. Investments (continued) The cost and fair value of fixed maturities available-for-sale at December 31, 2006, by expected maturity, were as follows: Cost Fair value (in millions) Due in one year or less $2,210.2 $2,209.9 Due after one year through five years 9,193.2 9,364.8 Due after five years through ten years 11,137.5 11,309.7 Due after ten years 9,429.4 9,981.3 31,970.3 32,865.7 Mortgage-backed and other asset-backed securities 9,163.8 9,303.1 Total $41,134.1 $42,168.8 =============================================================================== The above summarized activity is based on expected maturities. Actual maturities may differ because borrowers may have the right to call or prepay obligations. Corporate private placement bonds represent a primary area of credit risk exposure. The corporate private placement bond portfolio is diversified by issuer and industry. We monitor the restrictive bond covenants, which are intended to regulate the activities of issuers and control their leveraging capabilities. Net Investment Income Major categories of net investment income are summarized as follows: For the year ended December 31, 2006 2005 2004 (in millions) Fixed maturities, available-for-sale $2,463.8 $2,291.7 $2,183.6 Fixed maturities, trading 10.6 7.3 9.4 Equity securities, available-for-sale 54.6 48.5 46.9 Equity securities, trading 0.4 -- -- Mortgage loans 708.1 723.7 731.5 Real estate 64.7 63.9 65.8 Policy loans 50.9 50.3 51.1 Cash and cash equivalents 60.1 42.6 20.6 Derivatives 38.6 14.2 16.9 Other 51.9 43.7 25.3 Total 3,503.7 3,285.9 3,151.1 Less investment expenses (153.5) (152.8) (123.6) Net investment income $3,350.2 $3,133.1 $3,027.5 =============================================================================== Principal Life Insurance Company Notes to Consolidated Financial Statements (continued) 6. Investments (continued) Net Realized/Unrealized Capital Gains and Losses The major components of net realized/unrealized capital gains (losses) on investments are summarized as follows:
For the year ended December 31, 2006 2005 2004 (in millions) Fixed maturities, available-for-sale: Gross gains $31.8 $107.5 $42.3 Gross losses (62.9) (85.1) (83.4) Hedging (net) (14.6) (45.8) (0.7) Fixed maturities, trading (4.6) (1.7) (1.1) Equity securities, available-for-sale: Gross gains 1.4 6.8 7.7 Gross losses (0.1) (6.4) (10.4) Equity securities, trading 20.1 5.7 4.4 Mortgage loans 3.2 1.1 (12.1) Derivatives (4.9) 14.6 (116.9) Other 61.0 (14.2) 60.5 Net realized/unrealized capital gains (losses) $30.4 $(17.5) $(109.7)
=============================================================================== Proceeds from sales of investments (excluding call and maturity proceeds) in fixed maturities were $1.3 billion, $2.4 billion and $1.7 billion in 2006, 2005 and 2004, respectively. We recognize impairment losses for fixed maturities and equity securities when declines in value are other than temporary. Gross realized losses related to other than temporary impairments of fixed maturity securities were $14.6 million, $28.6 million and $60.6 million in 2006, 2005 and 2004, respectively. As a result of the need to fund our parent's acquisition of WM Advisors, Inc. we also recognized $17.2 million of write-downs in 2006 that resulted from our determination that we no longer had the ability and intent to hold certain fixed maturity securities until they recovered in value. We also recognized gross realized losses as the result of credit triggered sales of $22.2 million, $30.8 million and $18.9 million in 2006, 2005 and 2004, respectively. In 2005, we also recognized an $11.0 million loss related to a large investment that was called from us. Principal Life Insurance Company Notes to Consolidated Financial Statements (continued) 6. Investments (continued) Gross Unrealized Losses for Fixed Maturities and Equity Securities For fixed maturities and equity securities available-for-sale with unrealized losses as of December 31, 2006 and 2005, the gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position are summarized as follows:
December 31, 2006 Less than Greater than or equal twelve months to twelve months Total Gross Gross Gross Carrying unrealized Carrying unrealized Carrying unrealized value losses value losses value losses (in millions) Fixed maturities, available-for-sale: U.S. government and agencies $32.0 $0.2 $315.9 $3.4 $347.9 $3.6 Non-U.S. governments 44.7 0.1 11.7 0.3 56.4 0.4 States and political subdivisions 278.1 0.7 347.0 4.2 625.1 4.9 Corporate -- public 2,529.7 27.7 4,591.0 109.6 7,120.7 137.3 Corporate -- private 1,635.2 11.4 2,375.8 64.3 4,011.0 75.7 Mortgage-backed and other asset-backed securities 1,312.2 9.7 2,751.5 68.1 4,063.7 77.8 Total fixed maturities, available-for-sale $5,831.9 $49.8 $10,392.9 $249.9 $16,224.8 $299.7 Total equity securities, available-for-sale $1.4 $-- $134.0 $4.3 $135.4 $4.3
=============================================================================== As of December 31, 2006, we held $16,224.8 million in available-for-sale fixed maturity securities with unrealized losses of $299.7 million. Our portfolio consists of fixed maturity securities where 98% are investment grade (rated AAA through BBB-) with an average price of 98 (carrying value/amortized cost). For those securities that have been in a loss position for less than twelve months, our portfolio holds 643 securities with a carrying value of $5,831.9 million and unrealized losses of $49.8 million reflecting an average price of 99. Of this portfolio, 97% was investment grade (rated AAA through BBB-) at December 31, 2006, with associated unrealized losses of $48.3 million. The losses on these securities can primarily be attributed to changes in market interest rates and changes in credit spreads since the securities were acquired. For those securities that have been in a continuous loss position greater than or equal to twelve months, our portfolio holds 1,186 securities with a carrying value of $10,392.9 million and unrealized losses of $249.9 million. The average rating of this portfolio is A with an average price of 98 at December 31, 2006. Of the $249.9 million in unrealized losses, the Corporate-public and Corporate-private sectors account for $173.9 million in unrealized losses with an average price of 98 and an average credit rating of BBB+. The remaining unrealized losses consist primarily of $68.1 million in unrealized losses within the mortgage-backed and other asset-backed securities sector. The average price of the mortgage-backed and other asset-backed securities sector is 98 and the average credit rating is AA+. The losses on these securities can primarily be attributed to changes in market interest rates and changes in credit spreads since the securities were acquired. Principal Life Insurance Company Notes to Consolidated Financial Statements (continued) 6. Investments (continued)
December 31, 2005 Less than twelve Greater than or equal months to twelve months Total Gross Gross Gross Carrying unrealized Carrying unrealized Carrying unrealized value losses value losses value losses (in millions) Fixed maturities, available-for-sale: U.S. government and agencies $406.3 $3.5 $43.5 $0.5 $449.8 $4.0 Non-U.S. governments 7.9 0.1 11.7 0.2 19.6 0.3 States and political subdivisions 374.2 2.9 55.2 0.9 429.4 3.8 Corporate -- public 4,617.6 80.4 877.1 24.2 5,494.7 104.6 Corporate -- private 2,297.4 36.3 488.9 16.0 2,786.3 52.3 Mortgage-backed and other asset-backed securities 2,847.4 53.8 795.0 24.2 3,642.4 78.0 Total fixed maturities, available-for-sale $10,550.8 $177.0 $2,271.4 $66.0 $12,822.2 $243.0 Total equity securities, available-for-sale $144.5 $2.6 $287.7 $2.7 $432.2 $5.3
=============================================================================== Of these amounts, our portfolio represented $12,822.2 million in available-for-sale fixed maturity securities with unrealized losses of $243.0 million. Our portfolio consisted of fixed maturity securities where 97% are investment grade (rated AAA through BBB-) with an average price of 98 (carrying value/amortized cost). For those securities that had been in a loss position for less than twelve months, our portfolio held 1,199 securities with a carrying value of $10,550.8 million and unrealized losses of $177.0 million reflecting an average price of 98. Of this portfolio, 97% was investment grade (rated AAA through BBB-) at December 31, 2005, with associated unrealized losses of $167.1 million. The losses on these securities can primarily be attributed to changes in market interest rates and changes in credit spreads since the securities were acquired. For those securities that had been in a continuous loss position greater than or equal to twelve months, our portfolio held 337 securities with a carrying value of $2,271.4 million and unrealized losses of $66.0 million. The average rating of this portfolio was A+ with an average price of 97 at December 31, 2005. Of the $66.0 million in unrealized losses, the Corporate-public and Corporate-private sectors account for $40.2 million in unrealized losses with an average price of 97 and an average credit rating of BBB+. The remaining unrealized losses consist primarily of $24.2 million in unrealized losses within the mortgage-backed and other asset-backed securities sector. The average price of the mortgage-backed and other asset-backed securities sector is 97 and the average credit rating is AA+. We closely monitor our below investment grade holdings and those investment grade names where we have concerns. While we are in an unrealized loss position on these securities, all securities except those identified as previously impaired continue to make payments. We consider relevant facts and circumstances in evaluating whether the impairment of a security is other than temporary. Relevant facts and circumstances considered include: (1) the length of time the fair value has been below cost; (2) the financial position and access to capital of the issuer, including the current and future impact of any specific events; and (3) our ability and intent to hold the security to maturity or until it recovers in value. To the extent we determine that a security is deemed to be other than temporarily impaired, the difference between amortized cost and fair value is charged to earnings. Principal Life Insurance Company Notes to Consolidated Financial Statements (continued) 6. Investments (continued) Net Unrealized Gains and Losses on Available-for-Sale Securities The net unrealized gains and losses on investments in fixed maturities and equity securities available-for-sale are reported as a separate component of stockholder's equity. The cumulative amount of net unrealized gains and losses on available-for-sale securities was as follows:
December 31, 2006 2005 (in millions) Net unrealized gains on fixed maturities, available-for-sale(1) $1,036.3 $1,490.5 Net unrealized gains on equity securities, available-for-sale 7.2 19.2 Adjustments for assumed changes in amortization patterns (128.1) (136.2) Net unrealized gains on derivative instruments 39.9 39.6 Net unrealized losses on policyholder dividend obligation -- (33.7) Net unrealized losses on equity method subsidiaries and minority interest adjustments (24.6) (31.3) Provision for deferred income taxes (327.1) (474.6) Net unrealized gains on available-for-sale securities $603.6 $873.5
=============================================================================== 21 (1) Excludes net unrealized gains (losses) on fixed maturities, available-for-sale included in fair value hedging relationships. Principal Life Insurance Company Notes to Consolidated Financial Statements (continued) 6. Investments (continued) Commercial Mortgage Loans Commercial mortgage loans represent a primary area of credit risk exposure. At December 31, 2006 and 2005, the commercial mortgage portfolio is diversified by geographic region and specific collateral property type as follows:
December 31, 2006 2005 Carrying Percent Carrying Percent amount of total amount of total ($ in millions) Geographic distribution New England $397.6 3.9% $353.0 3.6% Middle Atlantic 1,817.4 18.0 1,822.3 18.4 East North Central 847.0 8.4 775.2 7.8 West North Central 525.6 5.2 458.3 4.6 South Atlantic 2,550.9 25.3 2,531.2 25.7 East South Central 285.6 2.8 348.0 3.5 West South Central 682.4 6.8 674.1 6.8 Mountain 845.5 8.4 823.7 8.3 Pacific 2,170.5 21.5 2,138.1 21.6 Valuation allowance (32.2) (0.3) (33.2) (0.3) Total $10,090.3 100.0% $9,890.7 100.0% Property type distribution Office $2,672.3 26.5% $2,706.5 27.4% Retail 2,808.8 27.7 3,036.5 30.6 Industrial 2,740.1 27.2 2,812.3 28.4 Apartments 1,440.3 14.3 1,078.5 10.9 Hotel 41.7 0.4 44.8 0.5 Mixed use/other 419.3 4.2 245.3 2.5 Valuation allowance (32.2) (0.3) (33.2) (0.3) Total $10,090.3 100.0% $9,890.7 100.0%
=============================================================================== Commercial Mortgage Loan Loss Allowance Mortgage loans on real estate are considered impaired when, based on current information and events, it is probable that we will be unable to collect all amounts due according to contractual terms of the loan agreement. When we determine that a loan is impaired, a valuation allowance is established equal to 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 change in the valuation allowance is included in net realized/unrealized capital gains (losses) on our consolidated statements of operations. Principal Life Insurance Company Notes to Consolidated Financial Statements (continued) 6. Investments (continued) The allowance for losses is maintained at a level believed adequate by management to absorb estimated probable credit losses. Management's periodic evaluation and assessment of the adequacy of the allowance for losses and the need for mortgage impairments is based on known and inherent risks in the portfolio, adverse situations that may affect a 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 of our loan specific reserve component is also subjective, as it requires estimating the amounts and timing of future cash flows expected to be received on impaired loans. Impaired mortgage loans, along with the related allowance for losses, were as follows: December 31, 2006 2005 (in millions) Impaired loans $0.1 $23.8 Allowance for losses -- (2.3) Net impaired loans $0.1 $21.5 ============================================================================== The average recorded investment in impaired mortgage loans and the interest income recognized on impaired mortgage loans were as follows: For the year ended December 31, 2006 2005 2004 (in millions) Average recorded investment in impaired loans $4.3 $51.6 $105.2 Interest income recognized on impaired loans 0.5 5.1 7.0 ------------------------------------------------------------------------------- When it is determined that a loan is impaired, interest accruals are stopped and all interest income is recognized on the cash basis. A summary of the changes in the commercial mortgage loan allowance for losses is as follows:
For the year ended December 31, 2006 2005 2004 (in millions) Balance at beginning of year $33.2 $42.4 $49.6 Provision for losses 1.3 6.7 14.4 Releases due to write-downs, sales and foreclosures (2.3) (15.9) (21.6) Balance at end of year $32.2 $33.2 $42.4
=============================================================================== Real Estate Depreciation expense on invested real estate was $34.2 million, $27.8 million and $31.8 million in 2006, 2005 and 2004, respectively. Accumulated depreciation was $228.3 million and $199.7 million as of December 31, 2006 and 2005, respectively. Principal Life Insurance Company Notes to Consolidated Financial Statements (continued) 6. Investments (continued) Other Investments Other investments include minority interests in unconsolidated entities and properties owned jointly with venture partners and operated by the partners. Such investments are generally accounted for using the equity method. In applying the equity method, we record our share of income or loss reported by the equity investees. Changes in the value of our investment in equity investees attributable to capital transactions of the investee, such as an additional offering of stock, are recorded directly to stockholder's equity. Total assets of the unconsolidated entities were $5,957.3 million and $4,756.9 million at December 31, 2006 and 2005, respectively. Total revenues of the unconsolidated entities were $1,245.0 million, $1,026.7 million and $700.4 million in 2006, 2005 and 2004, respectively. During 2006, 2005 and 2004, we included $43.5 million, $46.1 million and $30.5 million, respectively, in net investment income representing our share of current year net income of the unconsolidated entities. At December 31, 2006 and 2005, our net investment in unconsolidated entities was $97.1 million and $62.8 million, respectively. In the ordinary course of our business and as part of our investment operations, we have also entered into long term contracts to make and purchase investments aggregating $677.2 million and $882.8 million at December 31, 2006 and 2005, respectively. Derivative assets are carried at fair value and reported as a component of other investments. Certain seed money investments are carried at fair value with changes in fair value included in net income as net realized/unrealized capital gains or losses. 7. Securitization Transactions We, along with other contributors, sell commercial mortgage loans in securitization transactions to trusts. As these trusts are classified as a qualifying special purpose entity, they are not subject to the VIE consolidation rules. We purchase primary servicing responsibilities and may retain other interests. The investors and the securitization entities have no recourse to our other assets for failure of debtors to pay when due. The value of our retained interests is subject primarily to credit risk. In 2006, 2005, and 2004, we recognized gains of $13.6 million, $39.8 million and $14.4 million, respectively, on the securitization of commercial mortgage loans. Key economic assumptions used in measuring the other retained interests at the date of securitization resulting from transactions completed included a cumulative foreclosure rate between 2% and 10% during 2006, 5% and 18% during 2005, and 4% and 10% during 2004. The assumed range of the loss severity, as a percentage of defaulted loans, was between 2% and 31% during 2006, 3% and 29% during 2005, and 13% and 31% during 2004. The low end of the loss severity range relates to a portfolio of seasoned loans. The high end of the loss severity range relates to a portfolio of newly issued loans. At December 31, 2006 and 2005, the fair values of other retained interests related to the securitizations of commercial mortgage loans were $345.3 million and $321.0 million, respectively. Only $0.5 million in 2006 and $0.8 million in 2005 represented equity investments. All other interests are classified as available-for-sale securities and are carried at fair value. At December 31, 2006 and 2005, respectively, $156.2 million and $181.3 million of these available-for-sale securities were interest-only investments. Cash flows are continuously monitored for adverse deviations from original expectations and impairments are recorded when necessary. Key economic assumptions and the sensitivity of the current fair values of residual cash flows were tested to one and two standard deviations from the expected rates. The changes in the fair values at December 31, 2006 and 2005, as a result of this sensitivity analysis were not significant. Principal Life Insurance Company Notes to Consolidated Financial Statements (continued) 7. Securitization Transactions (continued) The table below summarizes cash flows for securitization transactions:
For the year ended December 31, 2006 2005 2004 (in millions) Proceeds from new securitizations $698.6 $2,270.4 $871.1 Servicing fees received 1.3 1.1 1.1 Other cash flows received on retained interests 37.4 36.0 31.1
------------------------------------------------------------------------------- 8. Derivative Financial Instruments Derivatives are generally used to hedge or reduce exposure to market risks (primarily 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. Derivatives are used to change the characteristics of our asset/liability mix consistent with our risk management activities. Additionally, derivatives are also used in asset replication strategies. We do not buy, sell or hold these investments for trading purposes. Types of Derivative Instruments Interest rate swaps are contracts in which we agree with other parties to exchange, at specified intervals, the difference between fixed rate and floating rate interest amounts based upon designated market rates or rate indices and an agreed upon notional principal amount. Generally, no cash is exchanged at the outset of the contract and no principal payments are made by either party. Cash is paid or received based on the terms of the swap. These transactions are entered into pursuant to master agreements that provide for a single net payment to be made by one counterparty at each due date. We use interest rate swaps primarily to more closely match the interest rate characteristics of assets and liabilities arising from timing mismatches between assets and liabilities (including duration mismatches). We also use interest rate swaps to hedge against changes in the value of assets we anticipate acquiring and other anticipated transactions and commitments. Interest rate swaps are used to hedge against changes in the value of the guaranteed minimum withdrawal benefit ("GMWB") liability. The GMWB rider on our variable annuity products provides for guaranteed minimum withdrawal benefits regardless of the actual performance of various equity and/or fixed income funds available with the product. In exchange-traded futures transactions, we agree to purchase or sell a specified number of contracts, the values of which are determined by the values of designated classes of securities, and to post variation margin on a daily basis in an amount equal to the difference in the daily market values of those contracts. We enter into exchange-traded futures with regulated futures commissions merchants who are members of a trading exchange. In a mortgage-backed securities ("MBS") forward transaction, we agree to purchase or sell a specified MBS on a future date. We have used exchange-traded futures and MBS forwards to reduce market risks from changes in interest rates, to alter mismatches between the assets in a portfolio and the liabilities supported by those assets, and to hedge against changes in the value of securities we own or anticipate acquiring or selling. We use exchange-traded futures to hedge against changes in the value of the GMWB liability related to the GMWB rider on our variable annuity product, as previously explained. A swaption is an option to enter into an interest rate swap at a future date. We write these options and receive a premium in order to transform our callable liabilities into fixed term liabilities. In addition, we may sell an investment-type contract with attributes tied to market indices (an embedded derivative as noted below), in which case we write an equity call option to convert the overall contract into a fixed-rate liability, essentially eliminating the equity component altogether. Equity call spreads are purchased to fund the equity participation rates promised to contractholders in conjunction with our fixed deferred annuity products that credit interest based on changes in an external equity index. Equity put options are used to hedge against changes in the value of the GMWB liability related to the GMWB rider on our variable annuity products, as previously explained. Principal Life Insurance Company Notes to Consolidated Financial Statements (continued) 8. Derivative Financial Instruments (continued) Total return swaps are contracts in which we agree with other parties to exchange, at specified intervals, an amount determined by the difference between the previous spread and the current spread on referenced indices based upon an agreed upon notional principal amount plus an additional amount determined by the financing spread. Generally, no cash is exchanged at the outset of the contract and no principal payments are made by either party. Cash is paid or received based on the terms of the swap. These transactions are entered into pursuant to master agreements that provide for a single net payment to be made by one counterparty at each due date. These derivatives have been used in our commercial mortgage securitization operation to hedge its long spread position. Currency forwards are contracts in which we agree with other parties to deliver a specified amount of an identified currency at a specified future date. Typically, the price is agreed upon at the time of the contract and payment for such a contract is made at the specified future date. Currency swaps are contracts in which we agree with other parties to exchange, at specified intervals, the difference between one currency and another at a forward exchange rate as calculated by reference to an agreed principal amount. Generally, the principal amount of each currency is exchanged at the beginning and termination of the currency swap by each party. These transactions are entered into pursuant to master agreements that provide for a single net payment to be made by one counterparty for payments made in the same currency at each due date. We use currency forwards and currency swaps to reduce market risks from changes in currency exchange rates with respect to investments or liabilities denominated in foreign currencies that we either hold or intend to acquire or sell. We use credit default swaps to enhance the return on our investment portfolio by providing comparable exposure to fixed income securities that might not be available in the primary market. They are also occasionally used to hedge credit exposures in our investment portfolio. Credit derivatives are used to sell or buy credit protection on an identified name or names on an unfunded or synthetic basis in return for receiving or paying a quarterly premium. At the same time we enter into these synthetic transactions, we buy a quality cash bond to match against the credit default swap. The premium generally corresponds to a referenced name's credit spread at the time the agreement is executed. When selling protection, if there is an event of default by the referenced name, as defined by the agreement, we are obligated to pay the counterparty the referenced amount of the contract and receive in return the referenced security in an amount equal to the notional value of the credit default swap. In our commercial mortgage backed securitization operation, we enter into commitments to fund commercial mortgage loans at specified interest rates and other applicable terms within specified periods of time. These commitments are legally binding agreements to extend credit to a counterparty. Loan commitments that will be held for sale are recognized as interest rate lock commitment derivatives that are recorded at fair value. Fair value is determined by discounting the expected total cash flows using market rates that are applicable to the yield, credit quality and maturity of each commitment. Loan commitments that are related to the origination of mortgage loans that will be held for investment are not accounted for as derivatives and, accordingly, are not recognized in our financial statements. Commodity swaps are used to sell or buy protection on commodity prices in return for receiving or paying a quarterly premium. We purchased a AAA rated secured limited recourse note from a VIE that is consolidated in our financial results. This VIE uses a commodity swap to enhance the return on an investment portfolio by selling protection on a static portfolio of commodity trigger swaps, each referencing a base or precious metal. The portfolio of commodity trigger swaps is a portfolio of deep out-of-the-money European puts on various base or precious metals. The VIE provides mezzanine protection that the average spot rate will not fall below a certain trigger price on each commodity trigger swap in the portfolio and receives guaranteed quarterly premiums in return until maturity. At the same time the VIE enters into this synthetic transaction, it buys a quality cash bond to match against the commodity swap. Principal Life Insurance Company Notes to Consolidated Financial Statements (continued) 8. Derivative Financial Instruments (continued) Exposure Our risk of loss is typically limited to the fair value of our 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. We are also exposed to credit losses in the event of nonperformance of the counterparties. Our current credit exposure is limited to the value of derivatives that have become favorable to us. This credit risk is minimized by purchasing such agreements from financial institutions with high credit ratings and by establishing and monitoring exposure limits. We also utilize various credit enhancements, including collateral and credit triggers to reduce the credit exposure to our derivative instruments. Our derivative transactions are generally documented under International Swaps and Derivatives Association, Inc. Master Agreements. Management believes that such agreements provide for legally enforceable set-off and close-out netting of exposures to specific counterparties. Under such agreements, in connection with an early termination of a transaction, we are permitted to set off our receivable from a counterparty against our payables to the same counterparty arising out of all included transactions. Prior to the application of the aforementioned credit enhancements, the gross exposure to credit risk with respect to these derivative instruments was $737.3 million and $461.9 million at December 31, 2006 and 2005, respectively. Subsequent to the application of such credit enhancements, the net exposure to credit risk was $539.8 million and $364.3 million at December 31, 2006 and 2005, respectively. Principal Life Insurance Company Notes to Consolidated Financial Statements (continued) 8. Derivative Financial Instruments (continued) The notional amounts and credit exposure of our derivative financial instruments by type were as follows: December 31, 2006 2005 (in millions) Notional amounts of derivative instruments Interest rate swaps $11,900.4 $8,531.3 Foreign currency swaps 5,307.0 3,830.4 Credit default swaps 1,550.9 1,297.6 Embedded derivative financial instruments 1,277.6 802.5 Swaptions 643.4 684.5 Call options 314.0 189.8 Currency forwards 235.3 509.2 Futures 28.1 32.2 Bond options 21.0 38.5 Commodity swaps 20.0 -- Interest rate lock commitments 8.8 392.3 Total return swaps -- 100.0 Mortgage-backed forwards and options -- 39.3 $21,306.5 $16,447.6 Gross credit exposure of derivative instruments Foreign currency swaps $560.5 $338.4 Interest rate swaps 129.1 89.3 Call options 30.6 18.0 Credit default swaps 15.7 14.0 Commodity swaps 0.7 -- Bond options 0.4 0.6 Currency forwards 0.3 1.6 Total credit exposure at end of year $737.3 $461.9 =============================================================================== The net interest effect of interest rate swap, currency swap and credit default swap transactions is recorded as an adjustment to net investment income or interest expense, as appropriate, over the periods covered by the agreements. The fair value of our derivative instruments classified as assets at December 31, 2006 and 2005, was $695.5 million and $419.3 million, respectively, and was reported with other investments on the consolidated statements of financial position. The fair value of derivative instruments classified as liabilities at December 31, 2006 and 2005, was $267.9 million and $190.1 million, respectively, and was reported with other liabilities on the consolidated statements of financial position. Principal Life Insurance Company Notes to Consolidated Financial Statements (continued) 8. Derivative Financial Instruments (continued) Fair Value Hedges We use fixed-to-floating rate interest rate swaps to more closely align the interest rate characteristics of certain assets and liabilities. In general, these swaps are used in asset and liability management to modify duration. We enter into currency exchange swap agreements to convert certain foreign denominated assets and liabilities into U.S. dollar floating-rate denominated instruments to eliminate the exposure to future currency volatility on those items. We use interest rates swaps and have used total return swaps to hedge interest rate and spread risk in our commercial mortgage securitization operations. We also sell callable investment-type agreements and use written interest rate swaptions to transform the callable liability into a fixed term liability. We recognized a pre-tax net gain (loss) of $4.7 million, $(11.8) million and $(28.7) million in 2006, 2005 and 2004, respectively, relating to the ineffective portion of our fair value hedges, which was reported with net realized/unrealized capital gains (losses) on our consolidated statements of operations. All gains or losses on derivatives were included in the assessment of hedge effectiveness. Cash Flow Hedges We also utilize floating-to-fixed rate interest rate swaps to eliminate the variability in cash flows of recognized financial assets and liabilities and forecasted transactions. We entered into currency exchange swap agreements to convert both principal and interest payments of certain foreign denominated assets and liabilities into U.S. dollar denominated fixed-rate instruments to eliminate the exposure to future currency volatility on those items. In 2006, 2005 and 2004, we recognized a $0.2 million, $27.0 million and $57.8 million after-tax increase in value, respectively, related to cash flow hedges in accumulated other comprehensive income. During this time period, none of our cash flow hedges have been discontinued because it was probable that the original forecasted transaction would not occur by the end of the originally specified time period. We reclassified $0.7 million, $21.3 million, and $5.2 million in net losses from accumulated comprehensive income into net income during 2006, 2005, and 2004 respectively, which are the portion of deferred losses related to the variability in cash flows that were hedged and impacted net income in those periods. We expect to reclassify net losses of $3.9 million in the next 12 months. For the years ended December 31, 2006, 2005 and 2004, we recognized a pre-tax gain of $2.5 million, $1.2 million, and $1.9 million in net income due to cash flow ineffectiveness, respectively. All gains or losses on derivatives were included in the assessment of hedge effectiveness. The maximum length of time that we are hedging our exposure to the variability in future cash flows for forecasted transactions, excluding those related to the payments of variable interest on existing financial assets and liabilities, is 12.5 years. Principal Life Insurance Company Notes to Consolidated Financial Statements (continued) 8. Derivative Financial Instruments (continued) Derivatives Not Designated as Hedging Instruments Our use of futures, MBS forwards, certain swaptions and swaps, equity call options, bond options, currency forwards, and interest rate lock commitments are effective from an economic standpoint, but they have not been designated as hedges under SFAS 133. As such, periodic changes in the market value of these instruments flow directly into net income. For the years ended December 31, 2006, 2005 and 2004, gains (losses) of $8.2 million, $10.5 million and $(64.4) million, respectively, were recognized in income from market value changes of derivatives not receiving hedge accounting treatment. Embedded Derivatives We may purchase or issue financial instruments or products that contain a derivative instrument that is embedded in the financial instrument or product. When it is determined that the embedded derivative possesses economic characteristics that are not clearly or closely related to the economic characteristics of the host contract and a separate instrument with the same terms would qualify as a derivative instrument, the embedded derivative is bifurcated from the host for measurement purposes. The embedded derivative, which is reported with the host instrument in the consolidated statements of financial position, is carried at fair value with changes in fair value reported in net income. We sell investment-type liability contracts in which the return is tied to an external equity index, a leveraged inflation index or leveraged reference swap. These returns are embedded options that are bifurcated from the host investment-type contract and accounted for separately. We economically hedge the embedded equity derivative by writing equity call options with identical features to convert the overall contract into a fixed-rate liability, effectively eliminating the equity component altogether. For the years ended December 31, 2006, 2005 and 2004, respectively, we recognized a $3.1 million, $1.0 million and $3.2 million pre-tax gain on the purchased equity call options and a $3.1 million, $1.0 million and $3.2 million pre-tax loss on the change in fair value of the embedded derivatives. We economically hedge the leveraged embedded derivatives with interest rate swaps and currency swaps to convert them to a fixed-rate liability or floating rate U.S. dollar liability. For the year ended December 31, 2006, we recognized a $2.6 million pre-tax loss on the swaps and a $6.0 million pre-tax gain on the change in fair value of the embedded derivatives. We contributed undated subordinated floating rate notes to three grantor trusts. The trusts separated the cash flows of the underlying notes by issuing an interest-only certificate and a residual certificate related to each note contributed. We retained the interest-only certificates and the residual certificates were subsequently sold to a third party. We have determined these grantor trusts are variable interest entities and it is necessary for us to consolidate these entities. The obligation to deliver the underlying securities to residual certificate holders of $156.8 million as of December 31, 2006, and $147.4 million as of December 31, 2005 is classified as an other liability and contains an embedded derivative of the forecasted transaction to deliver the underlying securities. For the years ended December 31, 2006, 2005 and 2004, respectively, we recognized a $7.2 million pre-tax gain, a $2.7 million pre-tax gain and a $28.2 million pre-tax loss on the change in fair value of the obligation, which is reflected in accumulated other comprehensive income on the consolidated statements of financial position. Principal Life Insurance Company Notes to Consolidated Financial Statements (continued) 8. Derivative Financial Instruments (continued) During 2005, we purchased existing Class A units of a trust that represent interest payments on the underlying security within the trust. The trust also issued Class B units representing the residual interests in the underlying security. We have determined that this trust is a variable interest entity and subsequent to this purchase it is necessary for us to consolidate this entity. The obligation to deliver the underlying security to the Class B unit holder of $12.0 million and $10.5 million as of December 31, 2006 and 2005, respectively, is classified as an other liability and contains an embedded derivative of the forecasted transaction to deliver the underlying security. For the years ended December 31, 2006 and 2005, respectively, we recognized a $0.5 million and $0.4 million pre-tax loss on the change in fair value of the obligation, which is reflected in accumulated other comprehensive income on the consolidated statements of financial position. We offer a fixed deferred annuity product that credits interest based on changes in an external equity index. It contains an embedded derivative that has been bifurcated and accounted for separately, with changes in fair value reported in net realized/unrealized gains (losses). We economically hedge the fixed deferred annuity product by purchasing options that match the product's profile. For the years ended December 31, 2006, 2005 and 2004, respectively, we recognized a $5.3 million, $1.5 million and $0.5 million pre-tax gain on the call spread options purchased and a $6.1 million, $2.3 million and $0.2 million pre-tax loss on the change in fair value of the embedded derivatives. We offer certain variable annuity products with a GMWB rider. The GMWB provides that the contractholder will receive at least their principal deposit back through withdrawals of up to a specified annual amount, even if the account value is reduced to zero. The GMWB represents an embedded derivative in the variable annuity contract that is required to be reported separately from the host variable annuity contract. Declines in the equity market may increase our exposure to benefits under contracts with the GMWB. We economically hedge the GMWB exposure using futures, options and interest rate swaps. For the years ended December 31, 2006, and 2005, respectively, we recognized in net income a $4.2 million and $0.5 million pre-tax loss on the hedging instruments and a $2.8 million pre-tax gain and $0.2 million pre-tax loss on the change in fair value of the embedded derivatives, respectively. 9. Closed Block In connection with the 1998 MIHC formation, we formed a Closed Block to provide reasonable assurance to policyholders included therein that, after the formation of the MIHC, assets would be available to maintain dividends in aggregate in accordance with the 1997 policy dividend scales, if the experience underlying such scales continued. Certain of our assets were allocated to the Closed Block in an amount that produces cash flows which, together with anticipated revenue from policies and contracts included in the Closed Block, were expected to be sufficient to support the Closed Block policies, including, but not limited to, provisions for payment of claims, certain expenses, charges and taxes, and to provide for continuation of policy and contract dividends in aggregate in accordance with the 1997 dividend scales, if the experience underlying such scales continues, and to allow for appropriate adjustments in such scales, if such experience changes. Due to adjustable life policies being included in the Closed Block, the Closed Block is charged with amounts necessary to properly fund for certain adjustments, such as face amount and premium increases, that are made to these policies after the Closed Block inception date. These amounts are referred to as Funding Adjustment Charges and are treated as capital transfers from the Closed Block. Assets allocated to the Closed Block inure solely to the benefit of the holders of policies included in the Closed Block. Closed Block assets and liabilities are carried on the same basis as other similar assets and liabilities. We will continue to pay guaranteed benefits under all policies, including the policies within 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, we will be required to make such payments from their general funds. No additional policies were added to the Closed Block, nor was the Closed Block affected in any other way, as a result of the demutualization. A PDO is required to be established for earnings in the Closed Block that are not available to stockholders. A model of the Closed Block was established to produce the pattern of expected earnings in the Closed Block (adjusted to eliminate the impact of related amounts in accumulated other comprehensive income). Principal Life Insurance Company Notes to Consolidated Financial Statements (continued) 9. Closed Block (continued) If actual cumulative earnings of the Closed Block are greater than the expected cumulative earnings of the Closed Block, only the expected cumulative earnings will be recognized in income with the excess recorded as a PDO. This PDO represents undistributed accumulated earnings that will be paid to Closed Block policyholders as additional policyholder dividends unless offset by future performance of the Closed Block that is less favorable than originally expected. If actual cumulative performance is less favorable than expected, only actual earnings will be recognized in income. At December 31, 2006 and 2005, cumulative actual earnings have been less than cumulative expected earnings. As of December 31, 2006, cumulative net unrealized gains were not greater than expected. Therefore, there was no PDO liability as of December 31, 2006. However, cumulative net unrealized gains were greater than expected, resulting in the recognition of a PDO of $33.7 million, and $118.5 million as of December 31, 2005 and 2004, respectively. Closed Block liabilities and assets designated to the Closed Block were as follows:
December 31, 2006 2005 (in millions) Closed Block liabilities Future policy benefits and claims $5,376.0 $5,387.1 Other policyholder funds 26.4 27.3 Policyholder dividends payable 357.4 361.0 Policyholder dividend obligation -- 33.7 Other liabilities 61.5 57.0 Total Closed Block liabilities 5,821.3 5,866.1 Assets designated to the Closed Block Fixed maturities, available-for-sale 3,023.7 2,989.8 Equity securities, available-for-sale 65.9 71.5 Mortgage loans 640.3 716.4 Policy loans 755.2 754.6 Other investments 84.4 47.7 Total investments 4,569.5 4,580.0 Cash and cash equivalents 50.9 34.3 Accrued investment income 70.8 71.0 Deferred income tax asset 72.8 73.6 Premiums due and other receivables 17.7 20.2 Other assets 42.3 35.9 Total assets designated to the Closed Block 4,824.0 4,815.0 Excess of Closed Block liabilities over assets designated to the Closed Block 997.3 1,051.1 Amounts included in other comprehensive income 55.7 61.5 Maximum future earnings to be recognized from Closed Block assets and liabilities $1,053.0 $1,112.6
Principal Life Insurance Company =============================================================================== Notes to Consolidated Financial Statements (continued) 9. Closed Block (continued) Closed Block revenues and expenses were as follows:
For the year ended December 31, 2006 2005 2004 (in millions) Revenues Premiums and other considerations $596.7 $617.7 $648.7 Net investment income 293.2 294.4 301.6 Net realized/unrealized capital gains (losses) (0.9) 2.3 (4.1) Total revenues 889.0 914.4 946.2 Expenses Benefits, claims and settlement expenses 497.0 518.8 515.1 Dividends to policyholders 287.0 285.3 289.1 Operating expenses 5.5 9.1 11.6 Total expenses 789.5 813.2 815.8 Closed Block revenue, net of Closed Block expenses, before income taxes 99.5 101.2 130.4 Income taxes 32.2 32.4 42.6 Closed Block revenue, net of Closed Block expenses and income taxes 67.3 68.8 87.8 Funding adjustment charges (7.7) (8.7) (10.1) Closed Block revenue, net of Closed Block expenses, income tax and funding adjustment charges $59.6 $60.1 $77.7
============================================================================== The change in maximum future earnings of the Closed Block was as follows: For the year ended December 31, 2006 2005 2004 (in millions) Beginning of year $1,112.6 $1,172.7 $1,250.4 End of year 1,053.0 1,112.6 1,172.7 Change in maximum future earnings $(59.6) $(60.1) $(77.7) =============================================================================== We charge the Closed Block with federal income taxes, payroll taxes, state and local premium taxes and other state or local taxes, licenses and fees as provided in the plan of reorganization. 10. Deferred Policy Acquisition Costs Policy acquisition costs deferred and amortized in 2006, 2005 and 2004 were as follows: For the year ended December 31, 2006 2005 2004 (in millions) Balance at beginning of year $2,069.9 $1,770.9 $1,519.6 Cost deferred during the year 445.8 440.6 457.8 Amortized to expense during the year (236.8) (238.8) (207.7) Effect of unrealized gains (losses) (13.0) 97.2 31.5 Other (1) -- -- (30.3) Balance at end of year $2,265.9 $2,069.9 $1,770.9 [GRAPHIC OMITTED] ============================================================================== 21 (1) Due to the January 1, 2004 adoption of SOP 03-1, we reclassified $30.3 million of sales inducements from DPAC to other assets. Principal Life Insurance Company Notes to Consolidated Financial Statements (continued) 11. Insurance Liabilities Contractholder Funds Major components of contractholder funds in the consolidated statements of financial position are summarized as follows: December 31, 2006 2005 (in millions) Liabilities for investment-type contracts: GICs $12,307.3 $12,601.6 Funding agreements 14,242.4 11,832.0 Other investment-type contracts 1,277.8 1,362.9 Total liabilities for investment-type contracts 27,827.5 25,796.5 Liabilities for individual annuities 6,427.6 5,413.7 Universal life and other reserves 2,527.6 2,388.4 Total contractholder funds $36,782.7 $33,598.6 =============================================================================== Our GICs and funding agreements contain provisions limiting early surrenders, which typically include penalties for early surrenders, minimum notice requirements or, in the case of funding agreements with survivor options, minimum pre-death holding periods and specific maximum amounts. Funding agreements include those issued directly to nonqualified institutional investors, as well as to three separate programs where the funding agreements have been issued directly or indirectly to unconsolidated special purpose entities. Claims for principal and interest under funding agreements are afforded equal priority to claims of life insurance and annuity policyholders under insolvency provisions of Iowa Insurance Laws. We are authorized to issue up to $4.0 billion of funding agreements under a program established in 1998 to support the prospective issuance of medium term notes by an unaffiliated entity in non-U.S. markets. As of December 31, 2006 and 2005, $3,770.4 million and $3,203.6 million, respectively, of liabilities are outstanding with respect to the issuance outstanding under this program. We do not anticipate any new issuance activity under this program as we are authorized to issue up to Euro 4.0 billion (approximately USD$5.3 billion) of funding agreements under a program established in 2006 to support the prospective issuance of medium term notes by an unaffiliated entity in non-U.S. markets. The unaffiliated entity is an unconsolidated special purpose vehicle. As of December 31, 2006, $474.1 million of liabilities are outstanding with respect to the issuance outstanding under this new program. In addition, we were authorized to issue up to $7.0 billion of funding agreements under a program established in 2001 to support the prospective issuance of medium term notes by an unaffiliated entity in both domestic and international markets. The unaffiliated entity is an unconsolidated qualifying special purpose entity. As of December 31, 2006 and 2005, $3,747.9 million and $4,744.5 million, respectively, of liabilities are being held with respect to the issuance outstanding under this program. We do not anticipate any new issuance activity under this program, given our December 2005 termination of the dealership agreement for this program and the availability of the SEC-registered program described in the following paragraph. Principal Life Insurance Company Notes to Consolidated Financial Statements (continued) 11. Insurance Liabilities (continued) We were authorized to issue up to $4.0 billion of funding agreements under a program established in March 2004 to support the prospective issuance of medium term notes by unaffiliated entities in both domestic and international markets. In recognition of the use of nearly all $4.0 billion of initial issuance authorization, this program was amended in February 2006 to authorize issuance of up to an additional $5.0 billion. Under this program, both the notes and the supporting funding agreements are registered with the SEC. As of December 31, 2006 and 2005, $5,831.4 million and $3,667.9 million, respectively, of liabilities are being held with respect to the issuance outstanding under this program. In contrast with direct funding agreements, GIC issuances and the other two funding agreement-backed medium term note programs described above, our payment obligations on each funding agreement issued under this SEC-registered program are guaranteed by Principal Financial Group, Inc. Future Policy Benefits and Claims 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: For the year ended December 31, 2006 2005 2004 (in millions) Balance at beginning of year $814.8 $747.6 $719.5 Incurred: Current year 2,047.5 1,787.0 1,682.9 Prior years (37.5) (22.0) (28.8) Total incurred 2,010.0 1,765.0 1,654.1 Payments: Current year 1,666.9 1,444.0 1,376.2 Prior years 280.7 253.8 249.8 Total payments 1,947.6 1,697.8 1,626.0 Balance at end of year: Current year 380.6 343.0 306.7 Prior years 496.6 471.8 440.9 Total balance at end of year $877.2 $814.8 $747.6 =============================================================================== The activity summary in the liability for unpaid accident and health claims shows a decrease of $37.5 million, $22.0 million and $28.8 million for the years ended December 31, 2006, 2005 and 2004, respectively, relating to prior years. Such liability adjustments, which affected current operations during 2006, 2005 and 2004, respectively, resulted in part 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. We also had claim adjustment expense liabilities of $33.4 million, $30.6 million and $28.3 million, and related reinsurance recoverables of $4.9 million, $3.5 million and $3.6 million in 2006, 2005 and 2004, respectively, which are not included in the rollforward above. Principal Life Insurance Company Notes to Consolidated Financial Statements (continued) 12. Debt Short-Term Debt The components of short-term debt as of December 31, 2006 and 2005, were as follows: December 31, 2006 2005 (in millions) Nonrecourse short-term debt $61.0 $71.4 Revolving line of credit with parent 351.2 647.7 Total short-term debt $412.2 $719.1 =============================================================================== As of December 31, 2006, we had credit facilities with various financial institutions in an aggregate amount of $1.1 billion. As of December 31, 2006 and 2005, we had $412.2 million and $719.1 million of outstanding borrowings related to our credit facilities, with $74.5 million and $80.7 million of assets pledged as support, respectively. Assets pledged consisted primarily of commercial mortgages and securities. Our short-term debt consists of a payable to Principal Financial Services, Inc. of $351.2 million and $647.7 million as of December 31, 2006 and 2005, respectively. Interest paid on intercompany debt was $23.8 million, $22.0 million and $6.2 million during 2006, 2005 and 2004, respectively. The weighted-average interest rates on short-term borrowings as of December 31, 2006 and 2005, were 5.6% and 4.5% respectively. Long-Term Debt The components of long-term debt as of December 31, 2006 and 2005, were as follows: December 31, 2006 2005 (in millions) 8% surplus notes payable, due 2044 $99.2 $99.2 Nonrecourse mortgages and notes payable 160.5 162.2 Other mortgages and notes payable 38.9 52.1 Total long-term debt $298.6 $313.5 =============================================================================== The amounts included above are net of the discount and premium associated with issuing these notes, which are being amortized to expense over their respective terms using the interest method. On March 10, 1994, we issued $100.0 million of surplus notes due March 1, 2044, at an 8% annual interest rate. None of our affiliates 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 we have sufficient surplus earnings to make such payments. Interest for the years ended December 31, 2006, 2005 and 2004 of $8.0 million, $8.0 million and $10.6 million, respectively, was approved by the Commissioner, and charged to expense. Principal Life Insurance Company Notes to Consolidated Financial Statements (continued) 12. Debt (continued) Subject to Commissioner approval, the notes due March 1, 2044, may be redeemed at our 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 non-recourse mortgages, other mortgages and notes payable are primarily financings for real estate developments. We, including certain subsidiaries, had $135.0 million in credit facilities as of December 31, 2006, with various financial institutions, in addition to obtaining loans with various lenders to finance these developments. Outstanding principal balances as of December 31, 2006, range from $0.3 million to $96.2 million per development with interest rates generally ranging from 5.5% to 8.6%. Outstanding principal balances as of December 31, 2005, range from $0.3 million to $97.5 million per development with interest rates generally ranging from 5.5% to 8.6%. Outstanding debt is secured by the underlying real estate properties, which were reported as real estate on our consolidated statements of financial position with a carrying value of $246.2 million and $284.1 million as of December 31, 2006 and 2005, respectively. At December 31, 2006, future annual maturities of the long-term debt were as follows (in millions): Year ending December 31: 2007 $113.5 2008 62.9 2009 0.5 2010 0.6 2011 0.6 Thereafter 120.5 Total future maturities of the long-term debt $298.6 =============================================================================== Cash paid for interest for 2006, 2005 and 2004, was $31.8 million, $91.1 million and $37.4 million, respectively. These amounts include interest paid on taxes during these years. 13. Income Taxes Our income tax expense from continuing operations was as follows: For the year ended December 31, 2006 2005 2004 (in millions) Current income taxes: U.S. federal $233.0 $190.1 $290.9 State and foreign 49.0 43.2 34.6 ---------------------------------------------- ---------------------------------------------- Total current income taxes 282.0 233.3 325.5 Deferred income taxes (benefits) 37.1 53.5 (100.1) Total income taxes $319.1 $286.8 $225.4 =============================================================================== Principal Life Insurance Company Notes to Consolidated Financial Statements (continued) 13. Income Taxes (continued) Our provision for income taxes may not have the customary relationship of taxes to income. A reconciliation between the corporate income tax rate and the effective tax rate from continuing operations is as follows: For the year ended December 31, 2006 2005 2004 Statutory corporate tax rate 35% 35% 35% Dividends received deduction (8) (7) (9) Interest exclusion from taxable income (1) (2) (1) Federal tax settlement for prior years (1) (1) -- Other -- 1 -- Effective tax rate 25% 26% 25% =============================================================================== Significant components of our net deferred income taxes were as follows:
December 31, 2006 2005 (in millions) Deferred income tax assets (liabilities): Insurance liabilities $299.4 $322.6 Other deferred tax assets 88.6 124.3 Total deferred tax assets 388.0 446.9 Deferred policy acquisition costs (679.2) (615.0) Net unrealized gains on available-for-sale securities (327.0) (474.6) Other deferred tax liabilities (139.9) (232.8) Total deferred tax liabilities (1,146.1) (1,322.4) Total net deferred income tax liabilities $(758.1) $(875.5)
=============================================================================== The Internal Revenue Service (the "Service") has completed examinations of the U.S. consolidated federal income tax returns for 2003 and prior years. The Service's completion of the examinations for the years 1999 - 2001 resulted in notices of deficiency dated December 29, 2004, and March 1, 2005. We paid the deficiencies (approximately $444.0 million for 1999 and 2000, and $1.3 million for 2001, including interest) in the first quarter of 2005 and have filed, or will file, claims for refund relating to the disputed adjustments. The examination for the years 2002 and 2003 resulted in a refund of approximately $176.7 million (including interest) of which $161.5 million related to deficiencies previously paid as a result of the 1999 through 2001 examination. We believe that we have adequate defenses against, or sufficient provisions for, the contested issues, but final resolution of the contested issues could take several years while legal remedies are pursued. Consequently, we do not expect the ultimate resolution of issues in tax years 1999 - 2003 to have a material impact on our net income. Similarly, we believe there are adequate defenses against, or sufficient provisions for, any challenges that might arise in tax years subsequent to 2003. Net cash paid for income taxes was $177.3 million in 2006, which included a $155.1 million audit refund pertaining to prior tax years; $676.9 million in 2005, primarily due to the notices of deficiency noted above; and $626.9 million in 2004, of which $444.3 million was attributable to the sale of Principal Residential Mortgage, Inc. Principal Life Insurance Company Notes to Consolidated Financial Statements (continued) 14. Employee and Agent Benefits We have post-retirement benefit plans covering substantially all of our employees and certain agents, including employees of other companies affiliated with our ultimate parent, Principal Financial Group, Inc. ("affiliated companies"). Actuarial information regarding the status of the post-retirement benefit plans is calculated for the total plan only. The affiliated company portion of the actuarial present value of the accumulated or projected benefit obligations, or net assets available for benefits, is not separately determined. However, we are reimbursed for employee benefits related to the affiliated companies. The reimbursement is not reflected in our employee and agent benefits disclosures. We have defined benefit pension plans covering substantially all our employees and certain agents. Some of these plans provide supplemental pension benefits to employees with salaries and/or pension benefits in excess of the qualified plan limits imposed by federal tax law. The employees and agents are generally first eligible for the pension plans when they reach age 21. For plan participants employed prior to January 1, 2002, the pension benefits are based on the greater of a final average pay benefit or a cash balance benefit. The final average pay benefit is 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 final average pay 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 cash balance portion of the plan started on January 1, 2002. An employee's account will be credited with an amount based on the employee's salary, age and service. These credits will accrue with interest. For plan participants hired on and after January 1, 2002, only the cash balance plan applies. Our policy is to fund the cost of providing pension benefits in the years that the employees and agents are providing service to us. Our funding policy for the qualified defined benefit plan is to contribute an amount annually at least equal to the minimum annual contribution required under the Employee Retirement Income Security Act ("ERISA"), and, generally, not greater than the maximum amount that can be deducted for federal income tax purposes. Our funding policy for the non-qualified benefit plan is to fund the plan in the years that the employees are providing service to us using a methodology similar to the calculation of the net periodic benefit cost under U.S. GAAP, but using long-term assumptions. However, if the U.S. GAAP funded status is positive, no deposit is made. While we designate assets to cover the computed liability of this plan, the assets are not included as part of the asset balances presented in this footnote as they do not qualify as plan assets in accordance with U.S. GAAP. We also provide certain health care, life insurance and long-term care benefits for retired employees. Subsidized retiree health benefits are provided for employees hired prior to January 1, 2002. Employees hired after December 31, 2001, will have access to retiree health benefits but are intended to pay for the full cost of the coverage. The health care plans are contributory with participants' contributions adjusted annually; the contributions are based on the number of years of service and age at retirement for those hired prior to January 1, 2002. As part of the substantive plan, the retiree health contributions are assumed to be adjusted in the future as claim levels change. The life insurance plans are contributory for a small group of previously grandfathered participants that have elected supplemental coverage and dependent coverage. Covered employees are first eligible for the medical and life postretirement benefits when they reach age 57 and have completed ten years of service with us. Retiree long-term care benefits are provided for employees whose retirement was effective prior to July 1, 2000. 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. Our policy is to fund the cost of providing retiree benefits in the years that the employees are providing service to us using a methodology similar to the calculation of the net periodic benefit cost under U.S. GAAP, but using long-term assumptions. However, if the U.S. GAAP funded status is positive, no deposit is made. We use a measurement date of October 1 for the pension and other postretirement benefit plans. Principal Life Insurance Company Notes to Consolidated Financial Statements (continued) 14. Employee and Agent Benefits (continued) Obligations and Funded Status The plans' combined funded status, reconciled to amounts recognized in the consolidated statements of financial position and consolidated statements of operations, was as follows:
Other postretirement Pension benefits benefits December 31, December 31, 2006 2005 2006 2005 (in millions) Change in benefit obligation Benefit obligation at beginning of year $(1,441.7) $(1,312.1) $(287.3) $(287.8) Service cost (47.0) (49.7) (9.5) (10.0) Interest cost (81.6) (77.4) (16.2) (16.9) Actuarial gain (loss) 43.0 (121.1) 47.1 19.8 Participant contributions -- -- (4.1) (3.6) Benefits paid 47.3 44.7 13.0 11.2 Plan amendments (0.6) 73.9 -- -- Other -- -- (0.9) -- Benefit obligation at end of year $(1,480.6) $(1,441.7) $(257.9) $(287.3) Change in plan assets Fair value of plan assets at beginning of year $1,297.8 $1,156.4 $448.9 $408.5 Actual return on plan assets 129.8 165.7 26.2 47.5 Employer contribution 29.8 20.4 0.5 0.5 Participant contributions -- -- 4.1 3.6 Benefits paid (47.3) (44.7) (13.0) (11.2) Fair value of plan assets at end of year $1,410.1 $1,297.8 $466.7 $448.9 Reconciliation of funded status to amount recognized Funded (under funded) status $-- $(143.9) $-- $161.6 Unrecognized net actuarial (gain) loss -- 201.2 -- (18.3) Unrecognized prior service benefit -- (71.3) -- (17.2) Net prepaid benefit asset (benefit obligation) $-- $(14.0) $-- $126.1 Amounts recognized in statement of financial position (Pre-SFAS 158) consist of Prepaid benefit cost $-- $172.3 $-- $126.1 Accrued benefit liability, including minimum liability -- (203.9) -- -- Accumulated other comprehensive income -- 17.6 -- -- Net amount recognized $-- $(14.0) $-- $126.1 Amount recognized in statement of financial position (Post-SFAS 158) Other assets $205.1 $-- $208.9 $-- Other liabilities (275.6) -- (0.1) -- Total $(70.5) $-- $208.8 $--
=============================================================================== Principal Life Insurance Company Notes to Consolidated Financial Statements (continued) 14. Employee and Agent Benefits (continued)
Other postretirement Pension benefits benefits December 31, December 31, 2006 2005 2006 2005 (in millions) Amount recognized in accumulated other comprehensive income (Post-SFAS 158) Total net actuarial (gain) loss $113.5 $-- $(59.5) $-- Prior service benefit (61.7) -- (14.6) -- Pre-tax accumulated other comprehensive income (gain) loss $51.8 $-- $(74.1) $--
=============================================================================== Prior to SFAS 158, a company booked on its statement of financial position the net prepaid benefit asset or benefit obligation for the fiscal year end. Under SFAS 158, a company now recognizes the over funded or under funded status of the pension and postretirement plans as an asset or liability in its statement of financial position. The incremental effect of applying SFAS 158 on individual line items in the statement of financial position as of December 31, 2006, is as follows:
Before Adjustment flows through application of accumulated other After application of SFAS 158 comprehensive income SFAS 158 (in millions) Assets for pension plans $184.2 $20.9 $205.1 Assets for other post-retirement benefits plans 134.8 74.1 208.9 Liability for pension plans (203.0) (72.6) (275.6) Liability for other post-retirement benefits plan -- (0.1) (0.1) Additional minimum pension liability (13.4) 13.4 -- Pre-tax accumulated other comprehensive income (13.4) 35.7 22.3
------------------------------------------------------------------------------- Employer contributions to the pension plans include contributions made directly to the qualified pension plan assets and contributions from corporate assets to pay nonqualified pension benefits. Benefits paid from the pension plans include both qualified and nonqualified plan benefits. Nonqualified pension plan assets are not included as part of the asset balances presented in this footnote. The nonqualified pension plan assets are held in a Rabbi trust for the benefit of all nonqualified plan participants. The assets held in a Rabbi trust are available to satisfy the claims of general creditors only in the event of bankruptcy. Therefore, these assets are fully consolidated in our consolidated statements of financial position and are not reflected in our funded status as they do not qualify as plan assets. The market value of assets held in these trusts was $216.0 million as of December 31, 2006, and $198.3 million as of December 31, 2005. Principal Life Insurance Company Notes to Consolidated Financial Statements (continued) 14. Employee and Agent Benefits (continued) Pension Plan Changes and Plan Gains/Losses As of January 1, 2006, changes were made to our retirement program, including the Principal Select Saving Plan ("401(k)"), the Principal Pension Plan ("Pension Plan") and to the corresponding nonqualified plans. The qualified and nonqualified pension plan changes include a reduction to the traditional and cash balance formulas, a change in the early retirement factors, and the removal of the cost of living adjustments for traditional benefits earned after January 1, 2006. The qualified and nonqualified 401(k) plan's company match increased from 50% of a contribution rate up to a maximum of 3% of the participant's compensation to 75% of a contribution rate up to a maximum of 6% of the participant's compensation. Employees who were at least 47 years old, with a minimum of 10 years of service as of December 31, 2005, were given the choice to remain under the current pension and 401(k) arrangement or move to the new plan design. The vast majority of this group chose to remain under the current pension and 401(k) arrangement. The Pension Plan changes were recognized as a prior service benefit and resulted in a reduction of liabilities of $73.9 million. For the year ended December 31, 2006, the pension plans had an actuarial gain of $43.0 million, this gain was primarily due to the increase in the discount rate and was partially offset by greater than expected salary increases. For the year ended December 31, 2005, the pension plans had an actuarial loss of $121.1 million, which was primarily due to the decrease in the discount rate. The accumulated benefit obligation for all defined benefit pension plans was $1,274.3 million and $1,239.2 million at December 31, 2006, and 2005, respectively. The Principal Residential Mortgage, Inc. divestiture in 2004 resulted in a curtailment for the plans that provided benefits to the Principal Residential Mortgage, Inc. participants. A mid-year re-measurement to reflect the curtailment occurred as of the date of sale, July 1, 2004. Curtailment gains of $25.1 million and $3.9 million occurred under the pension and other postretirement benefit plans, respectively in 2004. This did not affect the pension plans or other postretirement benefit plans covering agents and managers. In addition, this did not affect the long-term care plan because these plans consist of only retired participants. Due to the Principal Residential Mortgage, Inc. divestiture, we provided for contractual termination benefits in connection with termination of employment for a select group of Principal Residential Mortgage, Inc. management employees. The pension plan recognized $1.8 million in special termination benefits liability in 2004. Other Post Retirement Plan Changes and Plan Gains/Losses On December 8, 2003, the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the "Medicare Modernization Act") was signed into law. The Medicare Modernization Act introduced a prescription drug benefit under Medicare ("Medicare Part D") as well as a federal subsidy to sponsors of retiree medical benefit plans. The prescription drug benefits offered by the sponsor must be at least actuarially equivalent to benefits offered under Medicare Part D to qualify for the subsidy. This subsidy is effective in 2006 and would only apply to benefits paid for qualifying retirees who have not enrolled in Medicare Part D. An actuarial gain of $47.1 million occurred during 2006 for the other postretirement benefit plans. This was due to a less than assumed increase in health care claim costs and trend assumption, as well as an increase in the discount rate. Retiree contributions also increased more than health care claim costs. An actuarial gain of $19.8 million occurred during 2005 for the other postretirement benefit plans. This was due to a less than assumed increase in health care claim costs and trend assumption, as well as a refinement in the recognition of Medicare Part D government subsidy. The gain was partially offset by a decrease in the discount rate. Principal Life Insurance Company Notes to Consolidated Financial Statements (continued) 14. Employee and Agent Benefits (continued) On July 26, 2004, the Centers of Medicare and Medicaid Services issued proposed regulations that provided guidance on the definition of actuarially equivalent retiree prescription drug coverage. These regulations aided in our third quarter of 2004 determination that the majority of our retiree prescription drug benefit coverage is actuarially equivalent to Medicare's Part D prescription drug plan and thus makes us eligible for the tax-free subsidy beginning in 2006. Accordingly, we conducted a mid-year re-measurement during third quarter of 2004 of our retiree medical plans to reflect the recognition of the Medicare Modernization Act in accordance with FSP No. 106-2, Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003. This caused an actuarial gain of approximately $22.5 million for the medical plans. In addition, it also caused the net periodic benefit cost for 2004 to change for the fourth quarter. The 2004 service cost decreased by approximately $0.2 million, interest cost decreased approximately $0.4 million and the actuarial loss amortization decreased by $0.1 million. During 2006, the total Medicare subsidies we received and accrued for were $0.9 million. Information for pension plans with an accumulated benefit obligation in excess of plan assets: The obligations below relate only to the nonqualified pension plan liabilities. As noted previously, the nonqualified plans have assets that are deposited in trusts that fail to meet the requirements to be included in plan assets; however, these assets are included in our consolidated statements of financial position. December 31, 2006 2005 (in millions) Projected benefit obligation $275.6 $255.7 Accumulated benefit obligation 216.4 203.9 ------------------------------------------------------------------------------- Information for other postretirement benefit plans with an accumulated postretirement benefit obligation in excess of plan assets: December 31, 2006 2005 (in millions) Accumulated postretirement benefit obligation $2.1 $2.3 Fair value of plan assets 2.0 1.6 ------------------------------------------------------------------------------- Components of net periodic benefit cost:
Pension benefits Other postretirement benefits For the year ended December 31, 2006 2005 2004 2006 2005 2004 (in millions) Service cost $47.0 $49.7 $49.6 $9.5 $10.0 $8.7 Interest cost 81.6 77.4 73.8 16.2 16.9 15.4 Expected return on plan assets (105.4) (96.2) (87.4) (32.4) (29.4) (27.6) Amortization of prior service cost (benefit) (9.0) 1.3 1.8 (2.6) (2.6) (2.8) Amortization of transition asset -- -- (0.1) -- -- -- Recognized net actuarial loss 20.4 16.4 14.1 0.2 0.5 0.5 Special termination and benefits -- -- 1.8 -- -- -- Curtailment gain -- -- (13.8) -- -- (5.4) Net periodic benefit cost (income) $34.6 $48.6 $39.8 $(9.1) $(4.6) $(11.2)
=============================================================================== The pension plans' actuarial gains and losses are amortized using a straight-line amortization method over the average remaining service period of employees. For the qualified pension plan, there is no corridor recognized in determining the amount to amortize; for the nonqualified pension plans, the corridor allowed under SFAS 87 is used. Principal Life Insurance Company Notes to Consolidated Financial Statements (continued) 14. Employee and Agent Benefits (continued)
Other postretirement Pension benefits benefits For the year ended December 31, 2006 2005 2006 2005 (in millions) Other changes recognized in accumulated other comprehensive income (Post- SFAS 158) Net actuarial (gain)/loss $113.5 $-- $(59.5) $-- Prior service benefit (61.7) -- (14.6) -- Total recognized in accumulated other comprehensive income $51.8 $-- $(74.1) $-- Total recognized in net periodic benefit cost and accumulated other comprehensive income $86.4 $-- $(83.2) $--
=============================================================================== For 2006, net actuarial (gain) loss and net prior service benefits are immediately recognized in accumulated other comprehensive income. The estimated net actuarial loss and prior service (benefit) that will be amortized from accumulated other comprehensive income into net periodic benefit cost for the pension benefits during the 2007 fiscal year are $10.0 million and $(8.3) million, respectively. The estimated net actuarial (gain) and prior service (benefit) for the postretirement benefits that will be amortized from accumulated other comprehensive income into net periodic benefit cost during the 2007 fiscal year are $(1.9) million and $(2.6) million, respectively. Additional information:
Other postretirement Pension benefits benefits For the year ended December 31, 2006 2005 2006 2005 (in millions) Increase (decrease) in minimum liability included in other comprehensive income (Pre-SFAS 158) $(4.2) $9.5 $-- $--
------------------------------------------------------------------------------- Assumptions: Weighted-average assumptions used to determine benefit obligations as disclosed under the Obligations and Funded Status section Other postretirement Pension benefits benefits December 31, 2006 2005 2006 2005 Discount rate 6.15% 5.75% 6.15% 5.75% Rate of compensation increase 5.00% 5.00% 5.00% 5.00% -------------------------------------------------------------------------------- Principal Life Insurance Company Notes to Consolidated Financial Statements (continued) 14. Employee and Agent Benefits (continued) Weighted-average assumptions used to determine net periodic benefit cost
Pension benefits Other postretirement benefits For the year ended December 31, 2006 2005 2004 2006 2005 2004 Discount rate 5.75% 6.00% 6.25%/6.50%* 5.75% 6.00% 6.25%/6.50%* Expected long-term return on plan assets 8.25% 8.50% 8.50% 7.30% 7.30% 7.31% Rate of compensation increase 5.00% 5.00% 5.00% 5.00% 5.00% 5.00%
-------------------------------------------------------------------------------- * The discount rate used to calculate the benefit expense for the first three quarters of 2004 expense related to the home office pension and other postretirement benefit plans and retiree medical plans was 6.25%. The discount rate used to calculate the benefit expense for the last quarter of 2004 was 6.50%. The change in rates occurred due to the third quarter 2004 remeasurement for the Principal Residential Mortgage, Inc. divestiture and Medicare Modernization Act. A remeasurement did not occur on the agents and managers pension and other non-medical postretirement benefit plans. For other postretirement benefits, the 7.30% rate for 2006 is based on the weighted average expected long-term asset returns for the medical, life and long-term care plans. The expected long-term rates for the medical, life and long-term care plans are 7.25%, 7.75% and 5.85%, respectively. The expected return on plan assets is the long-term rate we expect to be earned based on the plans' investment strategy. Historical and expected future returns of multiple asset classes were analyzed to develop a risk free rate of return and risk premiums for each asset class. The overall rate for each asset class was developed by combining a long-term inflation component, the risk free real rate of return and the associated risk premium. A weighted average rate was developed based on those overall rates and the target asset allocation of the plans. Based on a review in 2005, the long term expected return on plan assets was lowered for the 2006 pension expense calculation. Assumed health care cost trend rates
December 31, 2006 2005 Health care cost trend rate assumed for next year under age 65 12.0% 13.0% Health care cost trend rate assumed for next year age 65 and over 11.0% 13.0% Rate to which the cost trend rate is assumed to decline (the ultimate trend rate) 5.0% 5.0% Year that the rate reaches the ultimate trend rate 2018 2017
------------------------------------------------------------------------------- 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:
1-percentage- 1-percentage- point increase point decrease (in millions) Effect on total of service and interest cost components $5.5 $(4.3) Effect on accumulated postretirement benefit obligation (44.8) 36.6
------------------------------------------------------------------------------- Principal Life Insurance Company Notes to Consolidated Financial Statements (continued) 14. Employee and Agent Benefits (continued) Pension Plan Assets The qualified pension plan's weighted-average asset allocations by asset category as of the two most recent measurement dates are as follows: October 1, Asset category 2006 2005 Domestic equity securities 54% 54% International equity securities 14 14 Domestic debt securities 23 23 Real estate 9 9 Total 100% 100% =============================================================================== Our investment strategy is to achieve the following: o Obtain a reasonable long-term return consistent with the level of risk assumed and at a cost of operation within prudent levels. Performance benchmarks are monitored. o Ensure sufficient liquidity to meet the emerging benefit liabilities for the plan. o Provide for diversification of assets in an effort to avoid the risk of large losses and maximize the investment return to the pension plan consistent with market and economic risk. In administering the qualified pension plan's asset allocation strategy, we consider the projected liability stream of benefit payments, the relationship between current and projected assets of the plan and the projected actuarial liabilities streams, the historical performance of capital markets adjusted for the perception of future short- and long-term capital market performance and the perception of future economic conditions. The overall target asset allocation for the qualified plan assets is: Asset category Target allocation Domestic equity securities 40% - 60% International equity securities 5% - 15% Domestic debt securities 20% - 30% International debt securities 0% - 7% Real estate 3% - 10% Other 0% - 7% ------------------------------------------------------------------------------- For 2006 and 2005, respectively, the plan assets include none of our stock. Prior to April 30, 2005, the plan held our stock in a separate account under an annuity contract. These assets were received in the qualified defined benefit plan as a result of the 2001 demutualization. These holdings were liquidated as of April 30, 2005. Other Postretirement Benefit Plan Assets The other postretirement benefit plans' weighted-average asset allocations by asset category as of the two most recent measurement dates are as follows: October 1, Asset category 2006 2005 Equity securities 58% 55% Debt securities 42 45 Total 100% 100% Principal Life Insurance Company =============================================================================== Notes to Consolidated Financial Statements (continued) 14. Employee and Agent Benefits (continued) The weighted average target asset allocation for the other postretirement benefit plans is: Asset category Target allocation Equity securities 50 - 70% Debt securities 30 - 50% -------------------------------------------------------------------------------- The investment strategies and policies for the other postretirement benefit plans are similar to those employed by the qualified pension plan. Contributions We expect to contribute approximately $1.0 million to our other postretirement benefit plans in 2007. Our funding policy for the qualified pension plan is to fund the plan annually in an amount at least equal to the minimum annual contribution required under ERISA and, generally, not greater than the maximum amount that can be deducted for federal income tax purposes. We do not anticipate that we will be required to fund a minimum annual contribution under ERISA for the qualified pension plan. At this time, it is too early to estimate the amount that may be contributed, but it is possible that we may fund the plans in 2007 in the range of $20-$50 million. This includes funding for both our qualified and nonqualified pension plans. Estimated Future Benefit Payments The following benefit payments, which reflect expected future service, expected to be paid and the amount of tax-free subsidy receipts under Medicare Part D expected to be received are:
Other postretirement benefits (gross benefit payments, including prescription Amount of Medicare Part D Pension benefits drug benefits) subsidy receipts (in millions) Year ending December 31: 2007 $51.5 $18.7 $1.0 2008 55.1 20.5 1.2 2009 59.1 22.6 1.3 2010 63.9 25.0 1.5 2011 69.7 27.7 1.7 2012-2016 448.4 182.0 12.2
-------------------------------------------------------------------------------- The above table reflects the total estimated future benefits to be paid from the plan, including both our share of the benefit cost and the participants' share of the cost, which is funded by their contributions to the plan. The assumptions used in calculating the estimated future benefit payments are the same as those used to measure the benefit obligation for the year ended December 31, 2006. The information that follows shows supplemental information for our defined benefit pension plans. Certain key summary data is shown separately for qualified and non-qualified plans. Principal Life Insurance Company Notes to Consolidated Financial Statements (continued) 14. Employee and Agent Benefits (continued)
For the year ended December 31, 2006 2005 Qualified Nonqualified Qualified Nonqualified plan plans Total plan plans Total (in millions) Reconciliation of funded status to amount recognized Benefit obligation, end of the year $-- $-- $-- $(1,186.0) $(255.7) $(1,441.7) Fair value of plan assets, end of the year -- -- -- 1,297.8 -- 1,297.8 Funded (underfunded) status -- -- -- 111.8 (255.7) (143.9) Unrecognized net actuarial loss -- -- -- 111.5 89.7 201.2 Unrecognized prior service benefit -- -- -- (51.0) (20.3) (71.3) Net amount recognized $-- $-- $-- $172.3 $(186.3) $(14.0) Amounts recognized in statement of financial position (Pre-SFAS 158) Prepaid benefit cost $-- $-- $-- $172.3 $-- $172.3 Accrued benefit liability including ============== -- -- minimum liability -- -- (203.9) (203.9) Accumulated other comprehensive income -- -- -- -- 17.6 17.6 Net amount recognized $-- $-- $-- $172.3 $(186.3) $(14.0) Amount recognized in statement of financial position (Post-SFAS 158) Other assets $205.1 $-- $205.1 $-- $-- $-- Other liabilities -- (275.6) (275.6) -- -- -- Total $205.1 $(275.6) $(70.5) $-- $-- $-- Amount recognized in accumulated other comprehensive income (Post-SFAS 158) Total net actuarial loss $24.2 $89.3 $113.5 $-- $-- $-- Prior service benefit (45.1) (16.6) (61.7) -- -- -- Total accumulated other comprehensive income (not adjusted for applicable tax) $(20.9) $72.7 $51.8 $-- $-- $-- Components of net periodic benefit cost Service cost $39.3 $7.7 $47.0 $41.9 $7.8 $49.7 Interest cost 67.2 14.4 81.6 63.7 13.7 77.4 Expected return on plan assets (105.4) -- (105.4) (96.2) -- (96.2) Amortization of prior service cost (benefit) (5.9) (3.1) (9.0) 2.8 (1.5) 1.3 Recognized net actuarial loss 12.9 7.5 20.4 11.2 5.2 16.4 Net periodic benefit cost $8.1 $26.5 $34.6 $23.4 $25.2 $48.6 Total recognized in net periodic benefit cost and accumulated other comprehensive income $(12.8) $99.2 $86.4 $-- $-- $--
=============================================================================== Principal Life Insurance Company Notes to Consolidated Financial Statements (continued) 14. Employee and Agent Benefits (continued) In addition, we have defined contribution plans that are generally available to all employees and agents. Eligible participants could not contribute more than $15,000 of their compensation to the plans in 2006. Effective January 1, 2006, we made several changes to the retirement programs. In general, the pension and supplemental executive retirement plan benefit formulas were reduced, and the 401(k) matching contribution was increased. Employees who were age 47 or older with at least ten years of service on December 31, 2005, could elect to retain the prior benefit provisions and forgo receipt of the additional matching contributions. The employees who elected to retain the prior benefit provisions are referred to as "Grandfathered Choice Participants". In 2006, we matched the Grandfathered Choice Participant's contribution at a 50% contribution rate up to a maximum contribution of 3% of the participant's compensation. For all other participants, we matched the participant's contributions at a 75% contribution rate up to a maximum of 6% of the participant's compensation. The defined contribution plans allow employees to choose among various investment options, including our common stock. We contributed $36.4 million, $19.0 million and $18.6 million in 2006, 2005, and 2004, respectively, to our qualified defined contribution plans. We also have a nonqualified defined contribution plan available to select employees and agents which allows them to contribute amounts in excess of limits imposed by federal tax law. In 2006, we matched the Grandfathered Choice Participant's Contribution at a 50% contribution rate up to a maximum contribution of 3% of the participant's compensation. For all other participants, we matched the participant's contributions at a 75% contribution rate up to a maximum contribution of 6% of the participant's compensation. We contributed $8.0 million, $4.8 million and $4.5 million in 2006, 2005, and 2004, respectively, to our nonqualified defined contribution plans. 15. Contingencies, Guarantees and Indemnifications Litigation We are regularly involved in litigation, both as a defendant and as a plaintiff, but primarily as a defendant. Litigation naming us as a defendant ordinarily arises out of our business operations as a provider of asset management and accumulation products and services, life, health and disability insurance. Some of the lawsuits are class actions, or purport to be, and some include claims for punitive damages. In addition, regulatory bodies, such as state insurance departments, the SEC, the National Association of Securities Dealers, Inc., the Department of Labor and other regulatory bodies regularly make inquiries and conduct examinations or investigations concerning our compliance with, among other things, insurance laws, securities laws, ERISA and laws governing the activities of broker-dealers. Several lawsuits have been filed against other insurance companies and insurance brokers alleging improper conduct relating to the payment and non-disclosure of contingent compensation and bid-rigging activity. Several of these suits were filed as purported class actions. Several state attorneys general and insurance regulators have initiated industry-wide inquiries or other actions relating to compensation arrangements between insurance brokers and insurance companies and other industry issues. Beginning in March of 2005, we have received subpoenas and interrogatories from the offices of the Attorneys General of New York and Connecticut seeking information related to compensation agreements with brokers and agents and the sale of retirement products and services. We are cooperating with these inquiries. To date, none of these Attorneys General investigations has resulted in any action against us. We are, however, engaged in discussions with the Connecticut and New York Attorney General's Office with respect to broker payments relating to sales of our single premium group annuity products, which primarily fund terminating defined benefit plans. At this point, we cannot predict the outcome of these discussions. We have received other requests from regulators and other governmental authorities relating to other industry issues and may receive additional such requests, including subpoenas and interrogatories, in the future. Principal Life Insurance Company Notes to Consolidated Financial Statements (continued) 15. Contingencies, Guarantees and Indemnifications (continued) On December 23, 2004, a lawsuit was filed in Iowa state court against us, Principal Financial Group, Inc. and Principal Financial Services, Inc., on behalf of a proposed class comprised of the settlement class in our sales practices class action settlement, which was approved in April 2001 by the United States District Court for the Southern District of Iowa. This more recent lawsuit claims that the treatment of the settlement costs of that sales practices litigation in relation to the allocation of demutualization consideration to our policyholders was inappropriate. Demutualization allocation was done pursuant to the terms of a plan of demutualization approved by the policyholders in July 2001 and the Commissioner in August 2001. The lawsuit further claims that such allocation was not accurately described to policyholders during the demutualization process and is a breach of the sales practices settlement. On January 27, 2005, we filed a notice to remove the action from state court to the United States District Court for the Southern District of Iowa. On July 22, 2005, the plaintiff's motion to remand the action to state court was denied, and our motion to dismiss the lawsuit was granted. On September 21, 2005, the plaintiff's motion to alter or amend the judgment was denied. On October 4, 2005, the plaintiff filed a notice of appeal to the United States Court of Appeals for the Eighth Circuit. Oral argument was held on April 20, 2006. On October 20, 2006, the Court of Appeals affirmed our motion to dismiss. On November 8, 2006, a trustee of Fairmount Park Inc. Retirement Savings Plan filed a putative class action lawsuit in the United States District Court for the Southern District of Illinois against us. The complaint alleges, among other things, that we breached our alleged fiduciary duties while performing services to 401(k) plans by failing to disclose, or adequately disclose, to employers or plan participants the fact that we receive "revenue sharing fees from mutual funds that are included in its pre-packaged 401(k) plans" and allegedly failed to use the revenue to defray the expenses of the services provided to the plans. We have filed an Answer and a Motion to Transfer and intend to aggressively defend the lawsuit. Plaintiff further alleges that these acts constitute prohibited transactions under ERISA. Plaintiff seeks to certify a class of all retirement plans to which we were a service provider and for which we received and retained "revenue sharing" fees from mutual funds. Plaintiff seeks declaratory, injunctive and monetary relief. We intend to aggressively defend the lawsuit. 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 our business or financial position. The outcome of litigation is always uncertain, and unforeseen results can occur. It is possible that such outcomes could materially affect net income in a particular quarter or annual period. Guarantees and Indemnifications In the normal course of business, we have provided guarantees to third parties primarily related to a former subsidiary, joint ventures and industrial revenue bonds. These agreements generally expire through 2019. The maximum exposure under these agreements as of December 31, 2006, was approximately $171.0 million; however, we believe the likelihood is remote that material payments will be required and therefore have not accrued for a liability on our consolidated statements of financial position. Should we be required to perform under these guarantees, we generally could recover a portion of the loss from third parties through recourse provisions included in agreements with such parties, the sale of assets held as collateral that can be liquidated in the event that performance is required under the guarantees or other recourse generally available to us, therefore, such guarantees would not result in a material adverse effect on our business or financial position. It is possible that such outcomes could materially affect net income in a particular quarter or annual period. The fair value of such guarantees is not material. We are also subject to various other indemnification obligations issued in conjunction with certain transactions, primarily the sale of Principal Residential Mortgage, Inc. and other divestitures, acquisitions and financing transactions whose terms range in duration and often are not explicitly defined. Certain portions of these indemnifications may be capped, while other portions are not subject to such limitations; therefore, the overall maximum amount of the obligation under the indemnifications cannot be reasonably estimated. While we are unable to estimate with certainty the ultimate legal and financial liability with respect to these indemnifications, we believe the likelihood is remote that material payments would be required under such indemnifications and therefore such indemnifications would not result in a material adverse effect on our business or financial position. It is possible that such outcomes could materially affect net income in a particular quarter or annual period. The fair value of such indemnifications was determined to be insignificant. Principal Life Insurance Company Notes to Consolidated Financial Statements (continued) 15. Contingencies, Guarantees and Indemnifications (continued) Operating Leases As a lessee, we lease office space, data processing equipment, office furniture and office equipment under various operating leases. Rental expense for the year ended December 31, 2006, 2005 and 2004, respectively, was $47.3 million, $50.8 million and $44.9 million. At December 31, 2006, the future minimum lease payments are $186.3 million. The following represents payments due by period for operating lease obligations as of December 31, 2006 (in millions). Year ending December 31: 2007 $50.9 2008 43.3 2009 35.1 2010 25.8 2011 16.7 2012 and thereafter 28.1 199.9 Less future sublease rental income on noncancelable leases 13.6 Total future minimum lease payments $186.3 ================================================================================ Capital Lease As a lessee, we lease an aircraft under a capital lease. As of December 31, 2006 and 2005, respectively, the aircraft had a gross asset balance of $14.4 million and accumulated depreciation of $1.1 million and $0.5 million. Depreciation expense for both the years ended December 31, 2006 and 2005, was $0.6 million. At December 31, 2006, the future minimum lease payments are $17.9 million. The following represents payments due by period for capital lease obligations as of December 31, 2006 (in millions). Year ending December 31: 2007 $0.9 2008 1.0 2009 1.1 2010 1.1 2011 1.2 2012 and thereafter 12.6 Total $17.9 ================================================================================ Securities Posted as Collateral We posted $484.5 million in securities under collateral agreements at December 31, 2006, to satisfy collateral requirements primarily associated with our derivatives credit support agreements and a reinsurance arrangement with our U.S. Asset Management and Accumulation segment. Principal Life Insurance Company Notes to Consolidated Financial Statements (continued) 16. Stockholder's Equity Accumulated Other Comprehensive Income Comprehensive income includes all changes in stockholder's equity during a period except those resulting from investments by stockholders and distributions to stockholders. The components of accumulated other comprehensive income were as follows:
Net unrealized gains Net unrealized Foreign Accumulated on available- losses currency Minimum other for-sale on derivative translation pension comprehensive securities instruments adjustment liability income (in millions) Balances at January 1, 2004 $1,285.1 $(58.6) $(7.2) $(2.5) $1,216.8 Net change in unrealized gains on fixed maturities, available-for-sale 67.6 -- -- -- 67.6 Net change in unrealized gains on equity securities, available-for-sale 0.2 -- -- -- 0.2 Net change in unrealized gains on equity method subsidiaries and minority interest adjustments (28.2) -- -- -- (28.2) Adjustments for assumed changes in amortization pattern 28.2 -- -- -- 28.2 Net change in unrealized losses on derivative instruments -- 88.9 -- -- 88.9 Net change in unrealized gains on policyholder dividend obligation (19.5) -- -- -- (19.5) Change in net foreign currency translation adjustment -- -- (0.6) -- (0.6) Change in minimum pension liability adjustment -- -- -- (4.3) (4.3) Net change in provision for deferred income tax benefit (expense) (16.7) (31.1) -- 1.5 (46.3) Balances at December 31, 2004 $1,316.7 $(0.8) $(7.8) $(5.3) $1,302.8
-------------------------------------------------------------------------------- Principal Life Insurance Company Notes to Consolidated Financial Statements (continued) 16. Stockholder's Equity (continued)
Net unrealized Net gains unrealized Foreign Accumulated on available- gains (losses) currency Minimum other for-sale on derivative translation pension comprehensive securities instruments adjustment liability income (in millions) Balances at January 1, 2005 $1,316.7 $(0.8) $(7.8) $(5.3) $1,302.8 Net change in unrealized gains on fixed maturities, available-for-sale (902.3) -- -- -- (902.3) Net change in unrealized gains on equity securities, available-for-sale 5.8 -- -- -- 5.8 Net change in unrealized gains on equity method subsidiaries and minority interest adjustments 5.3 -- -- -- 5.3 Adjustments for assumed changes in amortization pattern 94.7 -- -- -- 94.7 Net change in unrealized losses on derivative instruments -- 41.7 -- -- 41.7 Net change in unrealized gains on policyholder dividend obligation 84.7 -- -- -- 84.7 Change in net foreign currency translation adjustment -- -- 0.7 -- 0.7 Change in minimum pension liability adjustment -- -- -- (9.5) (9.5) Net change in provision for deferred income tax benefit 244.2 (16.5) -- 3.3 231.0 Balances at December 31, 2005 $849.1 $24.4 $(7.1) $(11.5) $854.9
-------------------------------------------------------------------------------- Principal Life Insurance Company Notes to Consolidated Financial Statements (continued) 16. Stockholder's Equity (continued)
Minimum Net unrealized Net pension gains unrealized Foreign Unrecognized liability Accumulated on available- gains currency post-retiremen other for-sale on derivative translation benefit comprehensive securities instruments adjustment obligations t income (in millions) Balances at January 1, 2006 $849.1 $24.4 $(7.1) $-- $(11.5) $854.9 Net change in unrealized gains on ------------- fixed maturities, available-for-sale (454.2) -- -- -- -- (454.2) Net change in unrealized gains on equity securities, available-for-sale (12.0) -- -- -- -- (12.0) Net change in unrealized gains on equity method subsidiaries and minority interest adjustments 6.7 -- -- -- -- 6.7 Adjustments for assumed changes in amortization pattern 8.1 -- -- -- -- 8.1 Net change in unrealized gains on derivative instruments -- 0.3 -- -- -- 0.3 Net change in unrealized gains on policyholder dividend obligation 33.7 -- -- -- -- 33.7 Change in net foreign currency translation adjustment -- -- 1.6 -- -- 1.6 Change in minimum pension liability -- -- -- -- 4.2 4.2 Transition adjustment related to post-retirement benefit obligations -- -- -- 22.3 13.4 35.7 Net change in provision for deferred income tax benefit (expense) 147.6 (0.1) -- (7.8) (6.1) 133.6 Balances at December 31, 2006 $579.0 $24.6 $(5.5) $14.5 $-- $612.6
================================================================================ 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:
For the year ended December 31, 2006 2005 2004 (in millions) Unrealized gains (losses) on available-for-sale securities arising during the year $(255.0) $(430.1) $113.5 Adjustment for realized losses on available-for-sale securities included in net income (14.9) (12.3) (24.1) Unrealized gains (losses) on available-for-sale securities, as adjusted $(269.9) $(442.4) $89.4
=============================================================================== The above table is presented net of income tax, derivatives in cash flow hedge relationships, PDO and related changes in the amortization patterns of DPAC, sales inducements and unearned revenue reserves. Principal Life Insurance Company Notes to Consolidated Financial Statements (continued) 16. Stockholder's Equity (continued) Dividend Limitations Under Iowa law, we may pay stockholder dividends only from the earned surplus arising from its business and must receive the prior approval of the Commissioner to pay a stockholder dividend if such a stockholder dividend would exceed certain statutory limitations. The current statutory limitation is the greater of 10% of our policyholder surplus as of the preceding year-end or the net gain from operations from the previous calendar year. Based on this limitation and 2006 statutory results, we could pay approximately $660.4 million in stockholder dividends in 2007 without exceeding the statutory limitation. 17. Fair Value of Financial Instruments The following discussion describes the methods and assumptions we utilize in estimating our fair value disclosures for financial instruments. Certain financial instruments, particularly policyholder liabilities other than investment-type 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 our 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 our financial instruments. We define 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 us 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 and residential 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 policy loans are estimated by discounting expected cash flows using a risk-free rate based on the U.S. Treasury curve. The fair values for assets classified as other investments excluding equity investments in subsidiaries and cash and cash equivalents in the accompanying consolidated statements of financial position approximate their carrying amounts. The fair values of our reserves and liabilities for investment-type insurance contracts 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. Investment-type insurance contracts include 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. Insurance contracts include insurance, annuity and other policy contracts that do involve significant mortality or morbidity risk. The fair values for our insurance contracts, other than investment-type contracts, are not required to be disclosed. We do 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 our incremental borrowing rate for similar borrowing arrangements. Principal Life Insurance Company Notes to Consolidated Financial Statements (continued) 17. Fair Value of Financial Instruments (continued) The carrying amounts and estimated fair values of our financial instruments were as follows:
December 31, 2006 2005 Carrying amount Fair value Carrying amount Fair value (in millions) Assets (liabilities) Fixed maturities, available-for-sale $42,168.8 $42,168.8 $39,949.0 $39,949.0 Fixed maturities, trading 197.9 197.9 105.0 105.0 Equity securities, available-for-sale 645.3 645.3 702.9 702.9 Equity securities, trading 148.2 148.2 60.1 60.1 Mortgage loans 11,141.9 11,644.7 10,979.2 11,796.6 Policy loans 850.7 930.7 827.7 925.6 Other investments 836.5 836.5 648.4 648.4 Cash and cash equivalents 1,898.0 1,898.0 1,715.1 1,715.1 Investment-type insurance contracts (34,255.1) (33,652.9) (31,210.2) (31,120.4) Short-term debt (412.2) (412.2) (719.1) (719.1) Long-term debt (298.6) (311.9) (313.5) (329.4)
-------------------------------------------------------------------------------- 18. Statutory Insurance Financial Information We prepare 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 (the "State of Iowa"). The State of Iowa recognizes only statutory accounting practices prescribed or permitted by the State of Iowa for determining and reporting the financial condition and results of operations of an insurance company to determine its solvency under the Iowa Insurance Law. The National Association of Insurance Commissioners' ("NAIC") Accounting Practices and Procedures Manual has been adopted as a component of prescribed practices by the State of Iowa. The Commissioner has the right to permit other specific practices that deviate from prescribed practices. Life and 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 and health insurance company is to be determined based on the various risk factors related to it. At December 31, 2006, we meet the minimum RBC requirements. Statutory net income and statutory surplus were as follows: As of or for the year ended December 31, 2006 2005 2004 (in millions) Statutory net income $684.9 $666.2 $512.7 Statutory surplus 3,596.1 3,657.8 3,044.3 ------------------------------------------------------------------------------- Principal Life Insurance Company Notes to Consolidated Financial Statements (continued) 19. Segment Information We provide financial products and services through the following segments: U.S. Asset Management and Accumulation and Life and Health Insurance. In addition, there is a Mortgage Banking (discontinued operations) and Corporate and Other segment. The segments are managed and reported separately because they provide different products and services, have different strategies or have different markets and distribution channels. The U.S. Asset Management and Accumulation segment provides retirement and related financial products and services primarily to businesses, their employees and other individuals and provides asset management services to our asset accumulation business, the life and health insurance operations, the Corporate and Other segment and third-party clients. The Life and Health insurance segment provides individual life insurance, group health insurance and specialty benefits, which consists of group dental and vision insurance, individual and group disability insurance and group life insurance, throughout the United States. On July 1, 2004, we closed the sale of Principal Residential Mortgage, Inc. to CitiMortgage, Inc. The results of operations (excluding corporate overhead) for our Mortgage Banking segment, which includes Principal Residential Mortgage, Inc., are reported as other after-tax adjustments for all periods presented. See Note 3, Discontinued Operations, for further explanation. The Corporate and Other segment manages the assets representing capital that has not been allocated to any other segment. Financial results of the Corporate and Other segment primarily reflect our financing activities (including interest expense), income on capital not allocated to other segments, inter-segment eliminations, income tax risks and certain income, expenses and other after-tax adjustments not allocated to the segments based on the nature of such items. Management uses segment operating earnings for goal setting, determining employee compensation and evaluating performance on a basis comparable to that used by securities analysts. We determine segment operating earnings by adjusting U.S. GAAP net income for net realized/unrealized capital gains and losses, as adjusted, and other after-tax adjustments which management believes are not indicative of overall operating trends. Net realized/unrealized capital gains and losses, as adjusted, are net of income taxes, related changes in the amortization pattern of DPAC and sales inducements, recognition of front-end fee revenues for sales charges on pension products and services, net realized capital gains and losses distributed, minority interest capital gains and losses and certain market value adjustments to fee revenues. Segment operating revenues exclude net realized/unrealized capital gains and their impact on recognition of front-end fee revenues and certain market value adjustments to fee revenues. While these items may be significant components in understanding and assessing the consolidated financial performance, management believes the presentation of segment operating earnings enhances the understanding of our results of operations by highlighting earnings attributable to the normal, ongoing operations of the business. The accounting policies of the segments are consistent with the accounting policies for the consolidated financial statements, with the exception of income tax allocation. The Corporate and Other segment functions to absorb the risk inherent in interpreting and applying tax law. The segments are allocated tax adjustments consistent with the positions we took on tax returns. The Corporate and Other segment results reflect any differences between the tax returns and the estimated resolution of any disputes. Principal Life Insurance Company Notes to Consolidated Financial Statements (continued) 19. Segment Information (continued) The following tables summarize selected financial information by segment and reconcile segment totals to those reported in the consolidated financial statements: December 31, 2006 2005 (in millions) Assets: U.S. Asset Management and Accumulation $117,105.9 $103,424.9 Life and Health Insurance 14,336.6 14,053.2 Corporate and Other 3,009.6 2,520.8 Total consolidated assets $134,452.1 $119,998.9 ===============================================================================
For the year ended December 31, 2006 2005 2004 (in millions) Operating revenues by segment: U.S. Asset Management and Accumulation $4,340.8 $4,003.2 $3,639.7 Life and Health Insurance 4,722.6 4,372.9 4,153.2 Corporate and Other (12.7) (15.1) (4.2) Total segment operating revenues 9,050.7 8,361.0 7,788.7 Add: Net realized/unrealized capital gains (losses), including recognition of front-end fee revenues and certain market value adjustments to fee revenues 29.9 (28.6) (119.8) Subtract: Operating revenues from discontinued real estate investments (0.5) 2.8 2.5 Total revenues per consolidated statements of operations $9,081.1 $8,329.6 $7,666.4 Operating earnings (loss) by segment, net of related income taxes: U.S. Asset Management and Accumulation $616.8 $520.0 $498.5 Life and Health Insurance 285.3 277.4 257.7 Mortgage Banking -- -- (10.3) Corporate and Other 26.6 10.6 (1.0) Total segment operating earnings, net of related income taxes 928.7 808.0 744.9 Net realized/unrealized capital gains (losses), as adjusted 7.7 (26.8) (77.7) Other after-tax adjustments (1) 41.2 50.9 100.6 Net income per consolidated statements of operations $977.6 $832.1 $767.8
[GRAPHIC OMITTED] ================================================================================ 21 (1) In 2006, other after-tax adjustments of $41.2 million included (1) the positive effect of: (a) gain on sales of real estate properties that qualify for discontinued operations treatment ($30.9 million) and (b) a favorable court ruling on a contested IRS issue for 1991 and later years ($18.8 million) and (2) the negative effect from a contribution to the Principal Financial Group, Inc. Foundation ($8.5 million). In 2005, other after-tax adjustments of $50.9 million included (1) the positive effect of: (a) a decrease in income tax reserves established for IRS tax matters ($33.8 million); (b) gains on sales of real estate properties that qualify for discontinued operations treatment ($22.3 million) and (2) the negative effect from a change in the estimated gain on disposal of Principal Residential Mortgage, Inc. ($5.2 million). Principal Life Insurance Company Notes to Consolidated Financial Statements (continued) 19. Segment Information (continued) In 2004, other after-tax adjustments of $100.6 million included (1) the positive effect of: the discontinued operations and estimated gain on disposal of Principal Residential Mortgage, Inc. ($103.0 million) and (2) the negative effect from a cumulative change in accounting principle related to the implementation of SOP 03-1 ($2.4 million). The following is a summary of income tax expense (benefit) allocated to our segments for purposes of determining operating earnings. Segment income taxes are reconciled to income taxes reported on our consolidated statements of operations.
For the year ended December 31, 2006 2005 2004 (in millions) Income tax expense (benefit) by segment: U.S. Asset Management and Accumulation $169.5 $151.6 $147.8 Life and Health Insurance 144.1 139.9 130.6 Mortgage Banking -- -- (6.4) Corporate and Other 10.9 10.4 (5.1) Total segment income taxes from operating earnings 324.5 301.9 266.9 Add: Tax expense (benefits) related to net realized/unrealized capital gains (losses), as adjusted 8.3 (10.6) (40.6) Tax benefits related to other after-tax adjustments (13.9) (3.5) -- Subtract: Income tax expense (benefit) from discontinued real estate (0.2) 1.0 0.9 Total income tax expense per consolidated statements of operations $319.1 $286.8 $225.4
================================================================================ Principal Life Insurance Company Notes to Consolidated Financial Statements (continued) 19. Segment Information (continued) The following table summarizes operating revenues for our products and services:
For the year ended December 31, 2006 2005 2004 (in millions) U.S. Asset Management and Accumulation: Full-service accumulation $1,382.7 $1,267.4 $1,177.2 Individual annuities 582.8 471.6 393.8 Bank and trust services 53.0 38.8 33.7 Eliminations (5.0) (3.4) (1.9) Total Accumulation 2,013.5 1,774.4 1,602.8 Investment only 1,080.7 1,002.3 931.6 Full-service payout 830.8 863.5 811.8 Total Guaranteed 1,911.5 1,865.8 1,743.4 Total U.S. Asset Accumulation 3,925.0 3,640.2 3,346.2 Principal Global Investors 485.4 414.3 338.5 Eliminations (69.6) (51.3) (45.0) Total U.S. Asset Management and Accumulation 4,340.8 4,003.2 3,639.7 Life and Health Insurance: Individual life insurance 1,344.7 1,361.7 1,370.4 Health insurance 2,063.8 1,879.7 1,778.8 Specialty benefits insurance 1,316.0 1,131.5 1,004.0 Eliminations (1.9) -- -- Total Life and Health Insurance 4,722.6 4,372.9 4,153.2 Corporate and Other (12.7) (15.1) (4.2) Total operating revenues $9,050.7 $8,361.0 $7,788.7 Total operating revenues $9,050.7 $8,361.0 $7,788.7 Net realized/unrealized capital gains (losses), including recognition of front-end fee revenues and certain market value adjustments to fee revenues 29.9 (28.6) (119.8) Operating revenues from discontinued real estate investments 0.5 (2.8) (2.5) Total revenues per consolidated statements of operations $9,081.1 $8,329.6 $7,666.4
=============================================================================== Principal Life Insurance Company Notes to Consolidated Financial Statements (continued) 20. Stock-Based Compensation Plans The Stock-Based Compensation Plans footnote represents all share based compensation data related to us and our subsidiaries' employees. As of December 31, 2006, our ultimate parent, Principal Financial Group, Inc. has the 2005 Stock Incentive Plan, the Employee Stock Purchase Plan the Stock Incentive Plan and the Long-Term Performance Plan ("Stock-Based Compensation Plans"). As of May 17, 2005, no new grants will be made under the Stock Incentive Plan or the Long-Term Performance Plan. Under the terms of the 2005 Stock Incentive Plan, grants may be nonqualified stock options, incentive stock options qualifying under Section 422 of the Internal Revenue Code, restricted stock, restricted stock units, stock appreciation rights, performance shares, performance units, or other stock based awards. To date, Principal Financial Group, Inc.has not granted any incentive stock options, restricted stock, or performance units. For awards with graded vesting, we use an accelerated expense attribution method. The compensation cost that was charged against income for the Stock-Based Compensation Plans is as follows: For the year ended December 31, 2006 2005 2004 (in millions) Compensation cost $58.0 $47.4 $43.2 Related income tax benefit 19.0 15.5 13.8 Capitalized as part of an asset 3.4 1.6 2.6 -------------------------------------------------------------------------------- Nonqualified Stock Options Nonqualified stock options were granted to certain employees under the 2005 Stock Incentive Plan and the Stock Incentive Plan. Options outstanding under the 2005 Stock Incentive Plan and the Stock Incentive Plan were granted at an exercise price equal to the fair market value of Principal Financial Group, Inc.'s common stock on the date of grant, and expire ten years after the grant date. These options have graded or cliff vesting over a three-year period, except in the case of approved retirement. As of December 31, 2006, there were $11.4 million of total unrecognized compensations costs related to nonvested stock options. The cost is expected to be recognized over a weighted-average service period of approximately 1.7 years. The fair value of stock options is estimated using the Black-Scholes option pricing model that uses the assumptions noted in the following table. Expected volatilities are based on historical volatility of Principal Financial Group, Inc.'s stock and other factors. Due to Principal Financial Group, Inc.'s limited public company history, we use peer data to estimate option exercise and employee termination within the valuation model. Separate groups of employees that have similar historical exercise behavior are considered separately for valuation purposes. The expected term of options granted is estimated based on peer data and represents the period of time that options granted are expected to be outstanding. The risk-free rate for periods within the expected life of the option is based on the U.S. Treasury risk-free interest rate in effect at the time of grant. The dividend yield is based on historical dividend distributions compared to the closing price of Principal Financial Group, Inc.'s common shares on the grant date. The following is a summary of assumptions for the stock options granted during the period: For the year ended December 31, ------------------------------------- ------------------------------------- Options 2006 2005 2004 ------------------------------------- --------- ---------- ------------------------------------- --------- Dividend yield 1.32% 1.41% 1.26% =========== ========= ========== =========== ========= ========== Expected volatility 16.2% 19.1% 39.2% =========== ========= ========== =========== ========= ========== Risk-free interest rate 4.6% 4.1% 3.3% =========== ========= ========== =========== ========= ========== Expected life (in years) 6 6 6 =========== ========= ========== Principal Life Insurance Company Notes to Consolidated Financial Statements (continued) 20. Stock-Based Compensation Plans (continued) Using the Black-Scholes option valuation model, the weighted-average estimated fair value of stock options granted was $11.41, $9.18 and $13.55 per share during 2006, 2005 and 2004, respectively. The total intrinsic value of stock options exercised was $38.4 million, $27.8 million and $12.4 million during 2006, 2005 and 2004, respectively. The weighted-average remaining contractual lives for stock options exercisable is approximately 7 years as of December 31, 2006. Performance Share Awards Beginning in 2006, performance share awards were granted to certain employees under the 2005 Stock Incentive Plan. The performance share awards are treated as an equity award and are paid in shares. Whether the performance shares are earned depends upon the participant's continued employment through the performance period (except in the case of an approved retirement) and Principal Financial Group, Inc.'s performance against three-year goals set at the beginning of the performance period. A return on equity objective and an earnings per share objective must be achieved for any of the performance shares to be earned. If the performance requirements are not met, the performance shares will be forfeited and no compensation cost is recognized and any previously recognized compensation cost is reversed. There is no maximum contractual term on these awards. As of December 31, 2006, there were $15.7 million of total unrecognized compensation costs related to nonvested performance share awards granted. The cost is expected to be recognized over a weighted-average service period of approximately 2.0 years. The fair value of performance share awards is determined based on the closing stock price of Principal Financial Group, Inc.'s shares on the grant date. The weighted-average grant-date fair value of performance share awards granted during 2006 was $49.40. Because no performance share awards vested or were paid out, the intrinsic value of performance share awards vested and the actual tax benefits realized for tax deductions for performance share award payouts are $0.0 million in 2006. Restricted Stock Units Restricted stock units are issued under the 2005 Stock Incentive Plan and Stock Incentive Plan. Restricted stock units are treated as an equity award. The fair value of restricted stock units is determined based on the closing stock price of Principal Financial Group, Inc.'s common shares on the grant date. There is no maximum contractual term on these awards. Restricted stock units were issued to certain employees and agents pursuant to the Stock Incentive Plan and 2005 Stock Incentive Plan. Under these plans, awards have a graded or cliff vesting over a three-year service period. When service for the Company ceases (except in the case of an approved retirement), all vesting stops and unvested units are forfeited. The weighted-average grant-date fair value of restricted stock units granted during 2006, 2005 and 2004 was $50.08, $39.51 and $36.32, respectively. As of December 31, 2006, there were $7.3 million of total unrecognized compensation costs related to nonvested restricted stock unit awards granted under these plans. The cost is expected to be recognized over a weighted-average period of approximately 1.5 years. The total intrinsic value of restricted stock units vested was $15.0 million, $1.0 million and $0.8 million during 2006, 2005 and 2004, respectively. Principal Life Insurance Company Notes to Consolidated Financial Statements (continued) 20. Stock-Based Compensation Plans (continued) Employee Stock Purchase Plan Under our Employee Stock Purchase Plan, participating employees have the opportunity to purchase shares of Principal Financial Group, Inc.'s common stock on a quarterly basis. Employees may purchase up to $25,000 worth of company stock each year. Employees may purchase shares of Principal Financial Group, Inc.'s common stock at a price equal to 85% of the shares' fair market value as of the beginning or end of the quarter, whichever is lower. We recognize compensation expense for the fair value of the discount granted to employees participating in the employee stock purchase plan in the quarter of grant. Shares of the Employee Stock Purchase Plan are treated as an equity award. The weighted-average fair value of the discount on the stock purchased was $10.34, $7.97 and $7.16 during 2006, 2005 and 2004, respectively. The total intrinsic value of the Employee Stock Purchase Plan settled was $6.2 million, $5.4 million and $5.7 million during 2006, 2005 and 2004, respectively. Long-Term Performance Plan Principal Financial Group, Inc. also maintains the Long-Term Performance Plan, which provides the opportunity for eligible executives to receive additional awards if specified minimum corporate performance objectives are achieved over a three-year period. This plan utilizes stock as an option for payment and is treated as a liability award during vesting and a liability award or equity award subsequent to vesting, based on the participant payment election. Effective with stockholder approval of the 2005 Stock Incentive Plan, no further grants will be made under the Long-Term Performance Plan, and any future awards earned under the Long-Term Performance Plan will be issued under the 2005 Stock Incentive Plan. As of December 31, 2005, all awards under this plan were fully vested and no awards were granted under this plan in 2006 or 2005. There is no maximum contractual term on these awards. The amount of cash used to settle Long-Term Performance Plan units granted was $10.2 million for 2006. The total intrinsic value of Long-Term Performance Plan units settled was $10.4 million, $6.1 million and $7.8 million during 2006, 2005 and 2004, respectively. The fair value of Long-Term Performance Plan liability units is determined as of each reporting period based on the Black-Scholes option pricing model that uses the assumptions noted in the following table: For the year ended December 31, Long-Term Performance Plan 2006 ----------------------------- ------------------------- ----------------------------- ------------------------- Dividend yield --% ========================= ========================= Expected volatility 11.2% ========================= ========================= Risk-free interest rate 4.8% ========================= ========================= Expected life (in years) 2 ========================= Principal Life Insurance Company Notes to Consolidated Financial Statements (continued) 21. Quarterly Results of Operations (Unaudited) The following is a summary of unaudited quarterly results of operations for 2006 and 2005:
For the three months ended December 31 September 30 June 30 March 31 (in millions) 2006 Total revenues $2,369.2 $2,230.2 $2,258.0 $2,223.7 Total expenses 2,057.3 1,917.7 1,974.0 1,866.0 Income from continuing operations, net of related income taxes 232.4 230.7 208.8 275.1 Income (loss) from discontinued operations, net of related income taxes 30.1 0.4 (0.1) 0.2 Net income 262.5 231.1 208.7 275.3 2005 Total revenues $2,266.3 $2,045.9 $2,033.2 $1,984.2 Total expenses 1,991.5 1,779.1 1,748.6 1,710.4 Income from continuing operations, net of related income taxes 218.4 191.9 203.5 199.4 Income from discontinued operations, net of related income taxes 2.4 0.2 15.7 0.6 Net income 220.8 192.1 219.2 200.0
-------------------------------------------------------------------------------- SUPPLEMENT DATED OCTOBER 4, 2007 TO THE PRINCIPAL INVESTMENT PLUS VARIABLE ANNUITYsm PROSPECTUS DATED MAY 1, 2007 The information in this Supplement updates and amends certain information contained in the Prospectus dated May 1, 2007 for the Principal Investment Plus Variable Annuitysm. You should read this Supplement along with the Prospectus. THE CONTRACT On p. 17 of your Prospectus, delete the third sentence in the second paragraph under the heading "Right to Examine the Contract" and replace it with the following: In addition, we are required to allocate initial premium payments to the Money Market Division if the Contract is issued in California and the owner is age 60 or older. RF 1042 S-08 SUPPLEMENT DATED AUGUST 8, 2007 TO THE PROSPECTUSES OF THE VARIABLE LIFE INSURANCE POLICIES AND VARIABLE ANNUITY CONTRACTS OF PRINCIPAL LIFE INSURANCE COMPANY DATED MAY 1, 2007 PRINCIPAL VARIABLE CONTRACTS FUND, INC. SMALLCAP ACCOUNT CHANGES This supplement is intended for distribution with prospectuses dated May 1, 2007 for variable life insurance policies and variable annuity contracts issued by Principal Life Insurance Company. This supplement describes changes to the availability of the SmallCap Division which invests in the Principal Variable Contracts Fund, Inc. (VCF) SmallCap Account. Not all Policies or Contracts offer this investment option. Effective November 19, 2007, the Principal VCF SmallCap Account will close to new investors. As a result, the SmallCap Division will not be available as an investment option for Policies or Contracts with an application signature date of November 19, 2007 or later. If you own an affected Policy or Contract, you should disregard all references in the prospectus to this investment option. The SmallCap Division will continue to accept additional investments from Policies and Contracts with an application signature date before November 19, 2007. Refer to the prospectus for more information before investing in the SmallCap Division. SUPPLEMENT DATED AUGUST 8, 2007 TO THE PRINCIPAL INVESTMENT PLUS VARIABLE ANNUITYsm PROSPECTUS DATED MAY 1, 2007 The information in this Supplement updates and amends certain information contained in the Prospectus dated May 1, 2007 for the Principal Investment Plus Variable Annuitysm. You should read this Supplement along with the Prospectus. ================================================================================ On page 1 of your Prospectus, insert the following paragraph after the table of underlying mutual funds and before the grey-shaded box: This prospectus describes optional features, not all of which may be available at the time you are interested in purchasing a Contract. We may withdraw or prospectively restrict the availability of the optional features. Broker dealers selling the Contracts may also limit the availability of an optional feature. In addition, some optional features may restrict your ability to elect certain other optional features. You may contact your representative or contact the annuity servicing center (1-800-852-4450) for availability of any optional feature. ================================================================================ On page 1 of your Prospectus, delete the first sentence in the grey-shaded box and replace it with the following: The Contract is available with or without the premium payment credit rider (this rider may not be available through all broker dealers). ================================================================================ THE CONTRACT Delete the first paragraph under the sub-heading "Premium Payment Credit Rider", which appears in the grey-shaded box on page 19 of your Prospectus, and replace it with the following: You may elect a premium payment credit rider at the time the Contract is issued. The premium payment credit rider may not be available in all states or through all broker dealers and may be subject to additional restrictions. We may withdraw or prospectively restrict the availability of this rider at any time. You may contact your representative or contact the annuity servicing center (1-800-852-4450) for availability of this rider. If the premium payment credit rider is elected, the following provisions apply to the contract: SUPPLEMENT DATED JUNE 4, 2007 TO THE PRINCIPAL INVESTMENT PLUS VARIABLE ANNUITY/SM/ PROSPECTUS DATED MAY 1, 2007 Please keep this Supplement with your Principal Investment Plus Variable Annuitysm prospectus dated May 1, 2007 and retain it for reference. This Supplement is to add additional available investment options for the Investment Protector Plus Rider and to add a new optional Investment Protector Plus 2 Rider. INVESTMENT PROTECTOR PLUS RIDER Effective June 1, 2007, the following Strategic Asset Management Portfolios are available for investment under the Investment Protector Plus Rider - Strategic Asset Management Balanced Account Portfolio, Strategic Asset Management Conservative Balanced Portfolio and Strategic Asset Management Flexible Income Portfolio. THE CONTRACT-INVESTMENT PROTECTOR PLUS RIDER The following description of the investment options available when utilizing the Investment Protector Plus Rider replaces the description beginning on page 27 in your Prospectus. INVESTMENT OPTION RESTRICTIONS While this rider is in effect, the investment options you may select are restricted. The Company reserves the right to modify the list of available investment options, from time to time, at its sole discretion. If the Company modifies the investment options, it will give holders of this rider prior written notice of the modifications and an opportunity to opt out of the modifications and to continue their existing rider investment options. You may allocate your Separate Account divisions to: . one of the GMWB Select Models or Self-Build Models shown below; or . the Principal LifeTime 2010 Account; or . the Principal LifeTime 2020 Account; or . the Principal LifeTime Strategic Income Account; or . Strategic Asset Management Balanced Account Portfolio; or . Strategic Asset Management Conservative Balanced Portfolio; or . Strategic Asset Management Flexible Income Portfolio. For more information about the Principal LifeTime Accounts and the Strategic Asset Management (SAM) Portfolios, please see their respective prospectuses in this Prospectus. This rider does not restrict allocations to the Fixed or DCA Accounts. You may transfer from one available investment option to another by moving 100% of the accumulated value in the separate account divisions to any of the other investment options available with this rider: GMWB Select or Self-Build Models or Principal LifeTime Accounts or SAM Portfolios. You may make a transfer by providing us notice (the change is effective on the next valuation period after we receive your notice). The limited investment options available under this rider are intended to support the rider guarantees with balanced investment objectives. If Your investment goal is aggressive growth, this rider may not be appropriate for you. 1 RF 1042 S-5 INVESTMENT PROTECTOR PLUS 2 RIDER Purchasers of Contracts issued on or after June 1, 2007, may elect the optional Investment Protector Plus 2 Rider, which provides guaranteed minimum withdrawal benefits. Availability of this rider is subject to state approval. This rider does not replace the current Investment Protector Plus Rider and may not be used if the Investment Protector Plus Rider has been elected. SUMMARY OF EXPENSE INFORMATION - PERIODIC EXPENSES TABLE Add the following new table immediately after the Investment Protector Plus Rider section of the Periodic Expense table found on page 7 of the Prospectus.
PERIODIC EXPENSES ----------------------------------------------------------------------------- .Investment Protector Plus 2 rider . . guaranteed maximum 0.25% of the average quarterly Investment Back remaining withdrawal benefit base** .current .0.1875% of the average quarterly Investment Back remaining withdrawal benefit base** -----------------------------------------------------------------------------
** The Investment Back withdrawal benefit base is equal to the total of all premiums paid, adjusted for Excess Withdrawals, GMWB Bonuses or GMWB Step-Ups, and is recalculated on each contract anniversary. It is the amount on which the withdrawal benefit is based (see THE CONTRACT - Investment Protector Plus 2 Rider --Withdrawal Benefit Base Calculation). On page 13 of the Prospectus, insert the following new Example 4 after Example 3 and before SUMMARY: Example 4. Contract with Investment Protector Plus 2, premium payment credit and enhanced death benefit riders. This Example reflects the charges imposed if you were to purchase the Contract with the Investment Protector Plus 2 Rider as well as the premium payment credit rider and the enhanced death benefit rider. This Example also reflects the minimum and maximum annual underlying mutual fund operating expenses (as of December 31, 2006) for the limited array of underlying mutual funds available when utilizing the Investment Protector Plus 2 Rider (see the rider description for more details). This Example assumes: . a $10,000 investment in the Contract for the time periods indicated; . a 5% return each year; . an annual contract fee of $30 (expressed as a percentage of the average accumulated value); . that the Investment Protector Plus 2 Rider was added to the Contract at issue; . that the premium payment credit rider was added to the Contract at issue and the premium payment credit rider surrender charge schedule is applied; . that the enhanced death benefit rider was added to the Contract at issue; and . the maximum and minimum fees and expenses (without voluntary fee waivers, if any) of the underlying mutual funds available when utilizing the Investment Protector Plus 2 Rider. This Example shows the current fees of the Contract.
IF YOU FULLY IF YOU SURRENDER YOUR CONTRACT IF YOU DO NOT ANNUITIZE YOUR CONTRACT AT THE END OF THE APPLICABLE SURRENDER AT THE END OF THE TIME PERIOD YOUR CONTRACT APPLICABLE TIME PERIOD ----------------------------------------------------------------------------------------------------------------------------------- 1 YR. 3 YRS. 5 YRS. 10 YRS. 1 YR. 3 YRS. 5 YRS. 10 YRS. 1 YR. 3 YRS. 5 YRS. 10 YRS. ----------------------------------------------------------------------------------------------------------------------------------- Maximum Total Underlying Mutual Fund 1,160 1,885 2,524 4,036 390 1,193 2,024 4,036 890 1,693 2,024 4,036 Operating Expenses (0.92%) ----------------------------------------------------------------------------------------------------------------------------------- Minimum total Underlying Mutual Fund 1,122 1,772 2,326 3,656 349 1,072 1,826 3,656 849 1,572 1,826 3,656 Operating Expenses (0.52%) -----------------------------------------------------------------------------------------------------------------------------------
2 RF 1042 S-5 THE CONTRACT-INVESTMENT PROTECTOR PLUS 2 RIDER On page 31 of the prospectus, insert the following description of the Investment Protector Plus 2 Rider preceding the section titled Death Benefit. INVESTMENT PROTECTOR PLUS 2 RIDER You may elect to purchase the optional Investment Protector Plus 2 Rider at an additional charge. The Contract is available with or without this rider. This rider provides protection against market risk by allowing you to make certain annual withdrawals (i.e., partial surrenders and partial annuitizations), regardless of your Contract's accumulated value. Election of this rider may or may not be to your benefit. If you do not intend to make any partial surrenders or partial annuitizations, this rider may not be appropriate for you. Please review the terms of this rider and consult your sales representative to determine whether this rider is appropriate for you. We guarantee that you may withdraw certain guaranteed minimum withdrawal benefit (GMWB) amounts each contract year, regardless of your accumulated value, subject to the terms and conditions of this rider. This rider: . Provides the flexibility of two separate measures of withdrawal benefits without requiring you to elect either measure (as long as the accumulated value is greater than zero); . Limits the investment options available under the Contract; and . Has a charge which is discussed in this Supplement. This rider is available only at the time the Contract is issued and only if the owner(s) is at least age 45 and younger than age 81. (If the owner is not a natural person, then this rider is available only if the annuitant(s) is at least age 45 and younger than age 81.) You may not terminate this rider during the first five contract years. This rider does not restrict or change your right to make partial surrenders and partial annuitizations under the Contract, including your right to elect scheduled partial surrenders. You must notify us if you want to make a partial surrender or partial annuitization. This rider provides two alternative withdrawal benefit measures - For Life and Investment Back measures. . The For Life measure guarantees that, regardless of the accumulated value, you may withdraw a fixed annual percentage of the For Life withdrawal benefit base (see Calculation of the For Life Withdrawal Benefit for applicable percentages) for the rest of your life or until the For Life withdrawal benefit base is zero. NOTE: Your right to the For Life benefit does not commence until the contract year after the oldest owner (oldest annuitant if the owner is not a natural person) attains age 59 1/2. . The Investment Back measure guarantees that, regardless of the accumulated value, you may withdraw 7% annually of the Investment Back withdrawal benefit base until the Investment Back remaining withdrawal benefit base is zero. Your right to the Investment Back benefit commences immediately. You are not required to elect a withdrawal benefit measure (except in the event that the Contract accumulated value is zero). We tell you each contract year the amount of the For Life withdrawal benefit and the Investment Back withdrawal benefit. NOTE: This rider is designed to permit you to recover at least your premium payments by allowing periodic withdrawals of specified amounts for the duration of the rider. Withdrawal amounts that exceed the withdrawal benefit under a measure will have a negative effect on the benefits of this rider and may result in termination of this rider for lack of value in the withdrawal benefit base. Please refer to the examples in Appendix B so that you may better understand how withdrawals affect the benefits available under this rider. 3 RF 1042 S-5 Definitions ----------- Some important terms in understanding this rider are: . Excess Withdrawal - the portion of a withdrawal that exceeds the withdrawal benefit under either measure. . GMWB Bonus - an amount equal to the total premium payments as of a contract anniversary multiplied by the applicable percentage (see Investment Protector Plus 2 GMWB Bonus). . GMWB Step-Up - if the accumulated value of the Contract is greater than a withdrawal benefit base, then the withdrawal benefit base and the remaining withdrawal benefit base for that measure will be stepped up to the accumulated value on the contract anniversary (see Investment Protector Plus 2 GMWB Step-Up). . Remaining withdrawal benefit base - the amount that is available for future withdrawal benefits. . Withdrawal benefit - the amount that we guarantee you may withdraw each year under the For Life and the Investment Back measures. . Withdrawal benefit base - the basis for determining the withdrawal benefit available each year under the For Life and Investment Back measures. Calculation of the For Life Withdrawal Benefit ---------------------------------------------- We determine the For Life withdrawal benefit on the contract date and each contract anniversary as follows: . The For Life withdrawal benefit is not available until the contract year commencing after the oldest owner (oldest annuitant if the owner is not a natural person) attains age 59 1/2. Any withdrawal that you make prior to the contract year after the oldest owner (oldest annuitant if the owner is not a natural person) attains age 59 1/2 and the portion of any withdrawals that exceed the For Life withdrawal benefit in any year is an Excess Withdrawal that reduces the For Life withdrawal benefit base. . Thereafter, the For Life benefit is a fixed percentage* of the For Life withdrawal benefit base until the earlier to occur of: . The date the For Life withdrawal benefit base is zero; or . The date of your death. At your death (annuitant's death if the owner is not a natural person), the surviving joint owner, if any, or your beneficiary(ies) elects to receive the Investment Back benefit (a series of benefits) or the death benefit under the Contract. * The percentage for the For Life withdrawal measure is locked in at the time of your first withdrawal and is determined based on the age of the youngest owner (youngest annuitant if the owner is not a natural person) on the date of the first partial surrender or partial annuitization, as set forth below:
AGE OF YOUNGEST OWNER* AT FOR LIFE WITHDRAWAL FIRST WITHDRAWAL BENEFIT PERCENTAGE -------------------------------- ------------------- 45-49 3.50% 50-54 4.00% 55-59 4.50% 60-69 5.00% 70-74 5.50% 75-79 6.00% 80+ 6.50% * Youngest annuitant if the owner is not a natural person.
Calculation of the Investment Back Withdrawal Benefit ----------------------------------------------------- We determine the Investment Back withdrawal benefit on the contract date and each contract anniversary as follows: . The Investment Back withdrawal benefit starts on the contract date. . The benefit is 7% of the Investment Back withdrawal benefit base until the Investment Back remaining withdrawal benefit base is zero. . The portion of any withdrawal that exceeds the Investment Back withdrawal benefit in any year is an Excess Withdrawal that reduces the Investment Back withdrawal benefit base. 4 RF 1042 S-5 Calculation of the Withdrawal Benefit Base ------------------------------------------ We calculate the withdrawal benefit base for the Investment Back and the For Life measures separately on the contract date and each contract anniversary. On the contract date, the withdrawal benefit base for both measures equals your total premium payments. On succeeding contract anniversaries, the withdrawal benefit base equals total premium payments, plus any applicable GMWB bonus, minus Excess Withdrawals (as computed for the particular measure). Excess Withdrawal is the greater of (a) or (b) where: (a) is the amount of the partial surrender (and surrender charge, if any) or the partial annuitization that exceeds the withdrawal benefit remaining prior to the surrender or annuitization; and (b) is the result of ((1) divided by (2)) multiplied by (3) where: 1) is the amount of the partial surrender (and surrender charge, if any) or partial annuitization that exceeds the withdrawal benefit remaining prior to the partial surrender or partial annuitization; and 2) is the accumulated value after the withdrawal benefit is deducted but prior to deducting the amount of the partial surrender (and surrender charge, if any) or the amount of the partial annuitization that exceeds the withdrawal benefit; and 3) is the withdrawal benefit base prior to the adjustment for the excess withdrawal amount. Calculation of the Remaining Withdrawal Benefit Base ---------------------------------------------------- We calculate the remaining withdrawal benefit base for the Investment Back and For Life measures separately. We adjust the remaining withdrawal benefit base whenever a premium payment, partial surrender or partial annuitization is made, and when any applicable GMWB bonus is credited. On the contract date, the remaining withdrawal benefit base for both measures equals the withdrawal benefit base; i.e., total premium payments. After the contract date, the remaining withdrawal benefit base is the total of all premium payments and GMWB bonuses minus an amount that is the result of (a) plus (b) where: (a) is the actual amount surrendered or annuitized that does not exceed the withdrawal benefit remaining prior to the surrender; and (b) is the Excess Withdrawal amount, which is the greater of (1) and (2) where: (1) is the amount of the partial surrender (and surrender charge, if any) or the partial annuitization that exceeds the withdrawal benefit remaining prior to the partial surrender or partial annuitization; and (2) is the result of ((i) divided by (ii)) multiplied by (iii) where: (i) is the amount of the surrender (and surrender charge, if any) or the partial annuitization greater than the withdrawal benefit remaining prior to the surrender or annuitization; (ii) is the accumulated value after the withdrawal benefit amount is deducted but prior to the surrender or annuitization of the excess amount; and (iii) is the remaining withdrawal benefit base after the withdrawal benefit amount is deducted but prior to the adjustment for the excess amount. NOTE: The Excess Withdrawal amount deducted from the withdrawal benefit base and remaining withdrawal benefit base may be more than dollar-for-dollar if the accumulated value is less than the withdrawal benefit bases or the remaining withdrawal benefit bases. The calculation of the proportionate deductions to the withdrawal benefit base and remaining withdrawal benefit base are described above. 5 RF 1042 S-5 EFFECT OF ACCUMULATED VALUE If the accumulated value of your Contract is zero and if you have an Investment Back remaining withdrawal benefit base or a For Life withdrawal benefit base, or both, you must elect either the For Life or the Investment Back withdrawal benefit. We will pay the rider benefits under the measure you have elected. NOTE: If the Contract accumulated value is zero, the withdrawal benefits under this rider will continue, but all other rights and benefits under the rider and Contract, including the death benefits, will terminate; and no additional premium payments will be accepted. . The Investment Back measure will provide a series of withdrawal benefits until the Investment Back remaining withdrawal benefit base is zero. . The For Life measure will provide a series of withdrawal benefits until the later to occur of: (i) the date the For Life remaining withdrawal benefit base is zero; or (ii) the date of your death. If there is any remaining withdrawal benefit base at the time of your death, we will pay it as described in the Rider Death Provisions section below. EFFECT OF REACHING ANNUITIZATION DATE You must elect one of the following Contract or rider payment options on or before the annuitization date: Contract Provisions: . Payments resulting from applying the accumulated value to an annuity benefit payment option. . Payment of the accumulated value as a lump sum. Rider Provisions: . Series of withdrawal benefits until the Investment Back remaining withdrawal benefit base is zero. . Series of withdrawal benefits until the later to occur of: (i) the date the For Life remaining withdrawal benefit base is zero; or (ii) the date of your death (annuitant's death if the owner is not a natural person). GMWB BONUS On each of the first three contract anniversaries, we will credit the GMWB bonus to the withdrawal benefit base and the remaining withdrawal benefit base for each withdrawal measure provided you have not made any partial surrender or partial annuitization since the Contract Date. The GMWB bonus is equal to the total premium payments as of the contract anniversary multiplied by the applicable percentage below:
CONTRACT ANNIVERSARY GMWB BONUS PERCENTAGE -------------------------- --------------------- 1 7.00% 2 6.00% 3 5.00%
The GMWB bonus is no longer available after you make a partial surrender or partial annuitization. NOTE: The GMWB bonus is used only for purposes of calculating the withdrawal benefit base and the remaining withdrawal benefit base. It is not included in your Contract's accumulated value. GMWB STEP-UP Subject to the following terms and conditions, on each contract anniversary, we will automatically increase ("Step-Up") Your remaining withdrawal benefit base and withdrawal benefit base if your Contract accumulated value is greater than the applicable withdrawal benefit base. Each time there is a Step-Up your rider charge will be the then current rider charge. You may choose to opt out of the Step-Up feature of this rider if the charge for your rider will increase. This can happen since the rider charge in effect at the time of the Step-Up may be higher than your rider charge. We will send you advance notice if the charge for your rider will increase in order to give you the opportunity to opt out of the Step-Up feature. Once you opt out, the Step-Up feature may not be added back to the rider. The automatic Step-Up is available until the later of the contract anniversary following Your (oldest annuitant's if the owner is not a natural person) 80th birthday or 10 years after the Contract Date. 6 RF 1042 S-5 We will automatically reset (Step-Up) the For Life remaining withdrawal benefit base and For Life withdrawal benefit base to the accumulated value on the contract anniversary if the For Life withdrawal benefit base calculated on the contract anniversary is less than the accumulated value on that contract anniversary. We will automatically reset (Step-Up) the Investment Back remaining withdrawal benefit base and Investment Back withdrawal benefit base to the accumulated value on the contract anniversary if the Investment Back withdrawal benefit base calculated on the contract anniversary is less than the accumulated value on that contract anniversary. If your surviving spouse continues your Contract as a result of the spousal continuation election (described in THE CONTRACT), your surviving spouse may elect a special GMWB Step-Up at the time of making the spousal election provided you did not previously opt out of the Step-Up feature. If your spouse elects the special Step-Up, we will automatically reset (Step-Up) the remaining withdrawal benefit base and withdrawal benefit base to the accumulated value on the spousal election date if the withdrawal benefit base calculated on the spousal election date is less than the accumulated value. After the special election date, the GMWB Step-Up continues according to the terms of the rider and charges then in effect. INVESTMENT OPTION RESTRICTIONS While this rider is in effect, the investment options you may select are restricted. The Company reserves the right to modify the list of available investment options, from time to time, at its sole discretion. You may allocate your Separate Account divisions to: . one of the GMWB Select Models or Self-Build Models shown below, or . the Principal LifeTime 2010 Account, or . the Principal LifeTime 2020 Account, or . the Principal LifeTime Strategic Income Account; or . Strategic Asset Management Balanced Account Portfolio; or . Strategic Asset Management Conservative Balanced Portfolio; or . Strategic Asset Management Flexible Income Portfolio. For more information about the Principal LifeTime Accounts and the Strategic Asset Management (SAM) Portfolios, please see their respective prospectuses in this Prospectus. This rider does not restrict allocations to the Fixed or DCA Accounts. You may transfer from one available investment option to another by moving 100% of the accumulated value in the separate account divisions to any of the other investment options available with this rider: GMWB Select or Self-Build Models or Principal LifeTime Accounts or SAM Portfolios. You may make a transfer by providing us notice (the change is effective on the next valuation period after we receive your notice). The limited investment options available under this rider are intended to support the rider guarantees with balanced investment objectives. If your investment goal is aggressive growth, this rider may not be appropriate for you. GMWB MODELS You may use one of the three GMWB Select Models shown below. Alternatively, you may use one of the three GMWB Self-Build Models, which afford you limited investment option selections. For example, if you choose Self-Build Model A, you must allocate 30% of your division assets into the "stable divisions." You choose how you will allocate that 30% between the Money Market and the Short-Term Bond divisions (for example: 15% in each of Money Market and Short-Term bond; or 10% in Money Market and 20% in Short-Term Bond). 7 RF 1042 S-5 The Select Models are rebalanced each calendar quarter to the percentages shown in the Select Models chart below. The Self-Build Models are rebalanced each calendar quarter to the percentages you have selected. SELECT MODELS
INVESTMENT ADVISOR GMWB MODEL A GMWB MODEL B GMWB MODEL C ------------------------------------------------------------------------------------------ STABLE DIVISIONS 30% 20% 10% Short-Term Bond Principal Global 30% 20% 10% Investors, LLC ------------------------------------------------------------------------------------------ CONSERVATIVE DIVISIONS 40% 30% 20% American Century VP American Century Inflation Protection Investment Management, Inc. 10% 5% 10% Bond Principal Global Investors, LLC 15% 15% 10% Government & High Principal Global Quality Bond Investors, LLC 15% 10% N/A MODERATE DIVISIONS 20% 30% 45% Large Cap Blend 10% 10% 10% LargeCap Blend T. Rowe Price 10% 10% 10% Associates, Inc. ------------------------------------------------------------------------------------------ Large Cap Value 0% 5% 10% LargeCap Value AllianceBernstein L.P. N/A 5% 10% ------------------------------------------------------------------------------------------ Balanced 10% 15% 20% Equity Income Principal Global 10% 15% 20% Investors, LLC ------------------------------------------------------------------------------------------ Mid Cap Value 0% 0% 5% MidCap Value Neuberger Berman N/A N/A 5% Management, Inc. ------------------------------------------------ -------------- AGGRESSIVE DIVISIONS 10% 15% 20% Large Cap Growth 10% 10% 10% American Century VP American Century Ultra Investment Management, 10% 10% 10% Inc. -------------- MidCap Blend 0% 5% 5% MidCap Principal Global N/A 5% 5% Investors, LLC ------------------------------------------------------------------------------------------ Small Cap Value 0% 0% 5% SmallCap Value JP Morgan Investment Management, Inc. and Mellon Equity Associates, LLP N/A N/A 5% DYNAMIC DIVISIONS 0% 5% 5% Fidelity VIP Overseas Fidelity Management & N/A 5% 5% Research Company ------------------------------------------------------------------------------------------
8 RF 1042 S-5 SELF-BUILD MODELS
INVESTMENT ADVISOR GMWB MODEL A GMWB MODEL B GMWB MODEL C ------------------------------------------------------------------------------------------ STABLE DIVISIONS 30% 20% 10% ------------------------------------------------------------------------------------------ Short-Term Bond Principal Global Investors, LLC ------------------------------------------------------------------------------------------ Money Market Principal Global Investors, LLC ------------------------------------------ CONSERVATIVE DIVISIONS 40% 30% 20% ------------------------------------------------------------------------------------------ Bond Principal Global Investors, LLC Government & High Principal Global Quality Bond Investors, LLC American Century VP American Century Inflation Protection Investment Management, Inc. ------------------------------------------------------------------------------------------ MODERATE DIVISIONS 20% 30% 45% ------------------------------------------------------------------------------------------ Large Cap Blend 10% 10% 10% LargeCap Blend T. Rowe Price Associates, Inc. LargeCap Stock Index Principal Global Investors, LLC Neuberger Berman AMT Neuberger Berman Socially Responsive Management, Inc. ------------------------------------------------------------------------------------------ Large Cap Value 0% 5% 10% Capital Value Principal Global Investors, LLC N/A Equity Value American Century Investment Management, Inc. N/A LargeCap Value AllianceBernstein L.P. N/A ------------------------------------------------------------------------------------------ Balanced 10% 15% 20% Asset Allocation Morgan Stanley Asset Management Equity Income Principal Global Investors, LLC Principal LifeTime Principal Global 2010 Investors, LLC and Principal Management Corporation Principal LifeTime Principal Global 2020 Investors, LLC and Principal Management Corporation Principal LifeTime Principal Global Strategic Income Investors, LLC and Principal Management Corporation ------------------------------------------------------------------------------------------ Mid Cap Value 0% 0% 5% MidCap Value Neuberger Berman Management, Inc. N/A N/A 5% AGGRESSIVE DIVISIONS 10% 15% 20% ------------------------------------------------------------------------------------------ Large Cap Growth 10% 10% 10% American Century VP American Century Ultra Investment Management, Inc. Fidelity VIP Fidelity Management & Contrafund Research Company T. Rowe Price Health T. Rowe Price Sciences Associates, Inc. ------------------------------------------------------------------------------------------ Mid Cap Blend 0% 5% 5% MidCap Principal Global N/A 5% 5% Investors, LLC ------------------------------------------------------------------------------------------ Small Cap Value N/A N/A 5% SmallCap Value JP Morgan Investment Management, Inc. and Mellon Equity N/A N/A 5% Associates, LLP ----------------------------------------------------------------------------------------------- DYNAMIC DIVISIONS 0% 5% 5% ------------------------------------------------------------------------------------------ Diversified Principal Global International Investors, LLC N/A Fidelity VIP Overseas Fidelity Management & N/A Research Company ------------------------------------------------------------------------------------------
TERMINATION OF THE RIDER You may not terminate this rider prior to the fifth contract anniversary. However, the rider terminates upon the earliest to occur of . You send us notice to terminate the rider (after the fifth contract anniversary). (This will terminate the rider, not your Contract.) . You terminate the Contract. . The Investment Back remaining withdrawal benefit base and the For Life withdrawal benefit base are both zero. . The contract owner is changed (annuitant is changed if the owner is not a natural person). NOTE: We do not deem it a change of owner if a surviving spouse elects to continue the Contract. If this rider is attached to the Contract, the surviving spouse may elect to continue the Contract with or without this rider. If the rider is continued, only the Investment Back benefit continues; the For Life benefit terminates upon the death of the deceased spouse. . Once terminated, the rider may not be reinstated. 9 RF 1042 S-5 EFFECT OF NOT TAKING AVAILABLE BENEFITS You are not required to take any or all of the withdrawal benefit in a contract year. If you choose not to take any or all of a withdrawal benefit in a contract year, that benefit amount is not carried over to the next year. There will be no reduction in the For Life and the Investment Back withdrawal benefit bases and remaining withdrawal benefit bases. RIDER DEATH PROVISION . For Life measure - the For Life measure terminates on the original owner's death (annuitant's death, if the owner is not a natural person). If at the time of the owner's death (annuitant's death if the owner is not a natural person) the accumulated value is greater than zero, the surviving joint owner, if any, or your beneficiary(ies) must elect to receive either: . The Investment Back withdrawal benefit - We will make payments in an amount and frequency acceptable to us. If a surviving joint owner or beneficiary chooses a periodic payment, it must be at least $100 per payment until the Investment Back remaining withdrawal benefit base is zero; or . The death benefit under the Contract. . Investment Back measure - If at the time of the owner's death (annuitant's death if the owner is not a natural person) the accumulated value is greater than zero, the surviving joint owner, if any, or your beneficiary(ies) must elect to receive either: . The Investment Back withdrawal benefit - We will make payments in an amount and frequency acceptable to us. If a surviving joint owner or beneficiary chooses a periodic payment, it must be at least $100 per payment until the Investment Back remaining withdrawal benefit base is zero; or . The death benefit under the Contract. FOR EXAMPLES OF HOW THE RIDER FEATURES OPERATE, PLEASE SEE APPENDIX B. CHARGES AND DEDUCTIONS - CHARGES FOR OPTIONAL RIDERS Insert the following description of the charge for the Investment Protector Plus 2 Rider on page 36 of the Prospectus, immediately preceding Premium Payment Credit Rider: INVESTMENT PROTECTOR PLUS 2 RIDER. . The current annual charge for the rider is 0.75% of the average quarterly Investment Back withdrawal benefit base. The current quarterly charge is equal to 0.1875% of the average quarterly Investment Back withdrawal benefit base during the calendar quarter. We reserve the right to increase the quarterly charge up to a maximum of 0.25% of the average quarterly Investment Back withdrawal benefit base. At the end of each calendar quarter, the charge is deducted through the redemption of units from the accumulated value in the same proportion as the surrender allocation percentages. If the rider is purchased after the beginning of a calendar quarter, the charge is prorated according to the number of days it is in effect during the quarter. Upon termination of the rider or upon Your death (death of the Annuitant if the owner is not a natural person), the rider charge will be based on the number of days the rider is in effect during the calendar quarter. We reserve the right to increase the rider charge up to the maximum. We will send you advance notice if the charge for your rider will increase. If the charge for your rider will increase, you have the following options: 1. Accept the increased rider charge and continue to receive the automatic Step-Up at each contract anniversary; or 2. Decline the increased rider charge by sending us notice that you are opting out of the automatic Step-Up feature of this rider, remain at your current rider charge, and receive no further Step-Ups. Once you opt out of the Step-Up feature, it may not be added back to the rider. The rider charge is intended to reimburse us for the cost of the protection provided by the rider. 10 RF 1042 S-5 APPENDIX B - INVESTMENT PROTECTOR PLUS 2 (GMWB2) EXAMPLES These examples are provided to assist you in understanding the various features of the GMWB2 rider and the guarantees associated with each GMWB2 option. Please note that, for the purpose of the following examples, a partial annuitization has the same effect as a partial surrender. EXAMPLES WITHOUT EXCESS WITHDRAWALS The examples without excess withdrawals assume the following: . the client is age 62. . initial premium payment = $100,000. . withdrawal benefit base prior to partial surrender = $100,000. . remaining withdrawal benefit base prior to partial surrender = $100,000. . Investment Back (7%) withdrawal benefit payment = $7,000. . For Life (5%) withdrawal benefit payment = $5,000, if withdrawals started prior to age 70. EXAMPLE 1. In contract year one, no partial surrenders are made. (Partial annuitizations are not permitted in contract year one.) On the first contract anniversary: . a 7% GMWB bonus is credited to the withdrawal benefit base. The credit is $100,000 x 0.07% = $7,000; . Investment Back: . the new withdrawal benefit base is base is $100,000 + 7,000 = $107,000; and . the new withdrawal benefit payment is $107,000 x 0.07% = $7,490 . For Life: . the new withdrawal benefit base is base is $100,000 + 7,000 = $107,000; and . the new withdrawal benefit payment is $107,000 x 0.05% = $5,350 EXAMPLE 2. In contract year one: . no partial surrenders are made; and . the client makes a premium payment of $50,000. On the first contract anniversary: . a 7% GMWB bonus is credited to the withdrawal benefit base. The credit is ($100,000 + $50,000) x 0.07% = $10,500; . Investment Back: . the new withdrawal benefit base is $100,000 + $50,000 + $10,500 = $160,500; and . the new withdrawal benefit payment is $160,500 x 7% = $11,235 . For Life: . the new withdrawal benefit base is $100,000 + $50,000 + $10,500 = $160,500; and . the new withdrawal benefit payment is $160,500 x 5% = $8,025 11 RF 1042 S-5 EXAMPLE 3. In contract year one, the client makes a partial surrender of $5,000. The For Life withdrawal benefit percentage is locked-in at 5%. On the first contract anniversary, . Investment Back: . the new remaining withdrawal benefit base is $100,000 - $5,000 = $95,000. . the withdrawal benefit base remains the same ($100,000). . the withdrawal benefit payment for the next contract year remains the same ($100,000 x 0.07% = $7,000). . For Life . the new remaining withdrawal benefit base is $100,000 - $5,000 = $95,000. . the withdrawal benefit base remains the same ($100,000). . the withdrawal benefit payment for the next contract year remains the same ($100,000 x 0.05% = $5,000). EXAMPLE 4. In contract year one, no partial surrenders are made. On the first contract anniversary: . a 7% GMWB bonus is credited to the withdrawal benefit base. The credit is $100,000 x 0.07% = $7,000, and . the new withdrawal benefit base is $100,000 + $7,000 = $107,000. In contract year two: . the client makes a partial surrender of $5,000 and locks-in the For Life withdrawal percent at 5%. . no GMWB bonus is credited as the client made a partial surrender. In contract year three: . the client does not make any partial surrenders. . no GMWB bonus is credited as the client had taken a partial surrender (in contract year two). . For Life withdrawal percent remains locked-in at 5%. EXAMPLE 5. In each of the first two contract years, a partial surrender of $5,000 is made. Assume there is no automatic step-up received on the first contract anniversary. On the 2nd contract anniversary, you will receive an automatic step-up if the accumulated value is greater than the withdrawal benefit base.
THE ACCUMULATED VALUE ON THE $95,000 $110,000 SECOND CONTRACT ANNIVERSARY IS: INVESTMENT BACK Prior to step-up Withdrawal Benefit Base = $100,000 = $100,000 Withdrawal Benefit $ 100,000 $ 100,000 Payment = x 0.07% = $7,000 = x 0.07% = $7,000 Remaining Withdrawal Benefit Base = $90,000 = $90,000 After step-up Withdrawal Benefit Base = $100,000 = $110,000 Withdrawal Benefit $ 100,000 $ 110,000 Payment = x 0.07% = $7,000 = x 0.07% = $7,700 Remaining Withdrawal = $90,000 = $110,000 Benefit Base ------------------------------------------------------------------------------------------------- FOR LIFE Prior to step-up Withdrawal Benefit Base = $100,000 = $100,000 Withdrawal Benefit $ 100,000 $ 100,000 Payment = x 0.05% = $5,000 = x 0.05% = $5,000 Remaining Withdrawal Benefit Base = $90,000 = $90,000 After step-up Withdrawal Benefit Base = $100,000 = $110,000 Withdrawal Benefit $ 100,00 0 $ 110,000 Payment = x 0.05% = $5,000 = x 0.05% = $5,500 Remaining Withdrawal = $90,000 = $110,000 Benefit Base ------------------------------------------------------------------------------------
12 RF 1042 S-5 EXAMPLES WITH EXCESS WITHDRAWALS The excess withdrawal examples assume the following: . the client is age 62 at first withdrawal and therefore, locks-in the For Life withdrawal benefit payment at 5%. . the initial premium payment is $100,000. . withdrawal benefit base prior to partial surrender = $100,000. . remaining withdrawal benefit base prior to partial surrender = $100,000. . Investment Back (7%) withdrawal benefit payment = $7,000. . For Life (5%) withdrawal benefit payment = $5,000 partial surrender amount = $8,000 (excess amount for "Investment Back" is $1,000; excess amount for "For Life" is $3,000). EXAMPLE 1. In the first example, the accumulated value prior to partial surrender is $90,000. Withdrawal Benefit Base Calculation ----------------------------------- On the contract anniversary following the partial surrender, the withdrawal benefit base is adjusted for any excess withdrawals. INVESTMENT BACK. . The amount of the adjustment* is $1,204.82. The new withdrawal benefit base is $100,000 - 1,204.82 = $98,795.18. * The amount of the adjustment is the greater of (a) or (b) where: (a) is $1,000 (the amount of the excess withdrawal); and (b) is $1,204.82 (the result of ((1) divided by (2)) multiplied by (3)) where: (1) is the amount of the surrender greater than the withdrawal benefit payment remaining prior to the partial surrender ($1,000); (2) is the accumulated value after the withdrawal benefit payment is deducted but prior to the surrender of the excess amount ($90,000 - $7,000); and (3) is the withdrawal benefit base prior to the adjustment for the excess amount ($100,000). 13 RF 1042 S-5 FOR LIFE. . The amount of the adjustment* is $3,529.41. The new withdrawal benefit base is $100,000 - $3,529.41 = $96,470.59. * The amount of the adjustment is the greater of (a) or (b) where: (a) is $3,000 (the amount of the excess withdrawal); and (b) is $3,529.41 (the result of ((1) divided by (2)) multiplied by (3)) where: (1) is the amount of the surrender greater than the withdrawal benefit payment remaining prior to the partial surrender ($3,000); (2) is the accumulated value after the withdrawal benefit payment is deducted but prior to the surrender of the excess amount ($90,000 - $5,000); and (3) is the withdrawal benefit base prior to the adjustment for the excess amount ($100,000). Remaining withdrawal Benefit Base Calculation --------------------------------------------- The remaining withdrawal benefit base is adjusted when partial surrenders are made. INVESTMENT BACK. . The amount of the adjustment* is $8,120.48 (the amount of the withdrawal benefit payment plus the excess withdrawal). The new remaining withdrawal benefit base is $100,000 - $8,120.48 = $91,879.52. * The amount of the adjustment is (a) plus (b) where: (a) is $7,000 (the actual amount surrendered that does not exceed the withdrawal benefit payment); and (b) is $1,120.48 (a proportionate reduction for the excess withdrawal). The amount of the proportionate reduction is the greater of (1) or (2) where: (1) is $1,000 (the amount of the excess withdrawal); and (2) is $1,120.48 (the result of ((i) divided by (ii)) multiplied by (iii)) where; (i) is the amount of the surrender greater than the withdrawal benefit payment remaining prior to the partial surrender ($1,000); (ii) is the accumulated value after the withdrawal benefit payment is deducted but prior to the surrender of the excess amount ($90,000 - $7,000); and (iii) is the remaining withdrawal benefit base after the withdrawal benefit payment is deducted but prior to the adjustment for the excess amount ($100,000 - $7,000). FOR LIFE. . The amount of the adjustment* is $8,352.94 (the amount of the withdrawal benefit payment plus the excess withdrawal). The new remaining withdrawal benefit base is $100,000 - $8,352.94 = $91,647.06. * The amount of the adjustment is (a) plus (b) where: (a) is $5,000 (the actual amount surrendered that does not exceed the withdrawal benefit payment); and (b) is $3,352.94 (a proportionate reduction for the excess withdrawal). The amount of the proportionate reduction is the greater of (1) or (2) where: (1) is $3,000 (the amount of the excess withdrawal); and (2) is $3,352.94 (the result of ((i) divided by (ii)) multiplied by (iii)) where; (i) is the amount of the surrender greater than the withdrawal benefit payment remaining prior to the partial surrender ($3,000); (ii) is the accumulated value after the withdrawal benefit payment is deducted but prior to the surrender of the excess amount ($90,000 - $5,000); and (iii) is the remaining withdrawal benefit base after the withdrawal benefit payment is deducted but prior to the adjustment for the excess amount ($100,000 - $5,000). Withdrawal Benefit Payment Calculation (for the next contract year) ------------------------------------------------------------------- The withdrawal benefit payment is the new withdrawal benefit base (calculated on the contract anniversary) multiplied by the associated percentage. The For Life withdrawal benefit percentage is locked-in at 5%. INVESTMENT BACK. . The new withdrawal benefit payment $98,795.18 x 0.07% = $6,915.66. FOR LIFE. . The new withdrawal benefit payment $96,470.59 x 0.05% = $4,823.53. 14 RF 1042 S-5 EXAMPLE 2. In this example, the accumulated value prior to partial surrender is $110,000. Withdrawal Benefit Base Calculation ----------------------------------- On the contract anniversary following the partial surrender, the withdrawal benefit base is adjusted for any excess withdrawals. INVESTMENT BACK. . The amount of the adjustment* is $1,000 (the amount of the excess withdrawal). The new withdrawal benefit base is $100,000 - $1,000 = $99,000. * The amount of the adjustment is the greater of (a) or (b) where: (a) is $1,000 (the amount of the excess withdrawal); and (b) is $970.87 (the result of ((1) divided by (2)) multiplied by (3)) where: (1) is the amount of the surrender greater than the withdrawal benefit payment remaining prior to the partial surrender ($1,000); (2) is the accumulated value after the withdrawal benefit payment is deducted but prior to the surrender of the excess amount ($110,000 minus $7,000); and (3) is the withdrawal benefit base prior to the adjustment for the excess amount ($100,000). FOR LIFE. . The amount of the adjustment* is $3,000 (the amount of the excess withdrawal). The new withdrawal benefit base is $100,000 - $3,000 = $97,000. * The amount of the adjustment is the greater of (a) or (b) where: (a) is $3,000 (the amount of the excess withdrawal); and (b) is $2,857.14 (the result of ((1) divided by (2)) multiplied by (3)) where: (1) is the amount of the surrender greater than the withdrawal benefit payment remaining prior to the partial surrender ($3,000); (2) is the accumulated value after the withdrawal benefit payment is deducted but prior to the surrender of the excess amount ($110,000 minus $5,000); and (3) is the withdrawal benefit base prior to the adjustment for the excess amount ($100,000). Remaining withdrawal Benefit Base Calculation --------------------------------------------- The remaining withdrawal benefit base is adjusted when partial surrenders are made. INVESTMENT BACK. . The amount of the adjustment* is $8,000 (the amount of the withdrawal benefit payment plus the excess withdrawal). The new remaining withdrawal benefit base is $100,000 - $8,000 = $92,000. * The amount of the adjustment is (a) plus (b) where: (a) is $7,000 (the actual amount surrendered that does not exceed the withdrawal benefit payment); and (b) is $1,000 (a proportionate reduction for the excess withdrawal). The amount of the proportionate reduction is the greater of (1) or (2) where: (1) is $1,000 (the amount of the excess withdrawal); and (2) is $902.91 (the result of ((i) divided by (ii)) multiplied by (iii)) where: (i) is the amount of the surrender greater than the withdrawal benefit payment remaining prior to the partial surrender ($1,000); (ii) is the accumulated value after the withdrawal benefit payment is deducted but prior to the surrender of the excess amount ($110,000 - $7,000); and (iii) is the remaining withdrawal benefit base after the withdrawal benefit payment is deducted but prior to the adjustment for the excess amount ($100,000 - $7,000). 15 RF 1042 S-5 FOR LIFE. . The amount of the adjustment* is $8,000 (the amount of the withdrawal benefit payment plus the excess withdrawal). The new remaining withdrawal benefit base is $100,000 - $8,000 = $92,000. * The amount of the adjustment is (a) plus (b) where: (a) is $5,000 - the actual amount surrendered that does not exceed the withdrawal benefit payment; and (b) is $3,000 - a proportionate reduction for the excess withdrawal. The amount of the proportionate reduction is the greater of (1) or (2) where: (1) is $3,000 (the amount of the excess withdrawal); and (2) is $2,714.28 (the result of ((i) divided by (ii)) multiplied by (iii)) where: (i) is the amount of the surrender greater than the withdrawal benefit payment remaining prior to the partial surrender ($3,000); (ii) is the accumulated value after the withdrawal benefit payment is deducted but prior to the surrender of the excess amount ($110,000 - $5,000); and (iii) is the remaining withdrawal benefit base after the withdrawal benefit payment is deducted but prior to the adjustment for the excess amount ($100,000 - $5,000). Withdrawal Benefit Payment Calculation (for the next contract year) ------------------------------------------------------------------- The withdrawal benefit payment is the new withdrawal benefit base (calculated on the contract anniversary) multiplied by the associated percentage. The For Life withdrawal benefit percentage is locked-in at 5%. INVESTMENT BACK. . The new withdrawal benefit payment is $99,000 x 0.07% = $6,930. FOR LIFE. . The new withdrawal benefit payment $97,000 x 0.05% = $4,850. 16 RF 1042 S-5 PRINCIPAL INVESTMENT PLUS VARIABLE ANNUITY/SM/ the "Contract" Issued by Principal Life Insurance Company (the "Company"). This prospectus is dated May 1, 2007. This prospectus provides information about the Contract and the Principal Life Insurance Company Separate Account B ("Separate Account") that you, as owner, should know before investing. The prospectus should be read and retained for future reference. Additional information about the Contract is included in the Statement of Additional Information ("SAI"), dated May 1, 2007, 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 at the end of this prospectus. You may obtain a free copy of the SAI by writing or telephoning: Principal Investment Plus Variable Annuity/sm/, 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. The individual deferred annuity contract ("Contract") described in this prospectus is funded with the Separate Account, dollar cost averaging fixed accounts ("DCA Plus Accounts") and a Fixed Account. The DCA Plus Accounts and the Fixed Account are a part of the General Account of the Company. The assets of the Separate Account Divisions ("divisions") are invested in the following underlying mutual funds:
Neuberger Berman AIM V.I. Basic Value Fund Advisers Management Principal Variable - Series I Trust Contracts Fund AIM V.I. Small Cap Equity Fasciano Portfolio - MidCap Value Account - Fund - Series I S Class Class 1 AllianceBernstein Partners Portfolio - Money Market Account - Variable Products Series I Class Class 1 Fund AllianceBernstein Small Socially Responsive Principal LifeTime 2010 Cap Growth Portfolio - Portfolio-I Class Account - Class 1 Class A American Century Variable Principal Variable Principal LifeTime 2020 Portfolios II, Inc. Contracts Fund Account - Class 1 Inflation Protection Fund Asset Allocation Principal LifeTime 2030 - Class II Account - Class 1 Account - Class 1 American Century Variable Bond Account - Class Principal LifeTime 2040 Portfolios, Inc. 1 Account - Class 1 Ultra Fund - Class II Capital Value Account Principal LifeTime 2050 - Class 1 Account - Class 1 Vista Fund - Class I Diversified Principal LifeTime International Account Strategic Income Account - - Class 1 Class 1 Dreyfus Investment Equity Growth Account Real Estate Securities Portfolios - Class 1 Account - Class 1 Technology Growth Equity Income Account Short-Term Bond Account - Portfolio-Service Shares I - Class 1/(1)/ Class 1 Fidelity Variable Equity Value Account SmallCap Growth Account - Insurance Products - Class 1 Class 1 Contrafund Portfolio - Government & High SmallCap Value Account - Service Class 2 Quality Bond Account Class 1 - Class 1 Equity-Income Portfolio - Growth Account - Strategic Asset Management Service Class 2 Class 1 Portfolios Growth Portfolio - International Balanced Account Service Class 2 Emerging Markets Portfolio - Class 1 Account - Class 1 Mid Cap Portfolio - International Conservative Balanced Service Class 2 SmallCap Account - Portfolio - Class 1 Class 1 Overseas Portfolio - LargeCap Blend Conservative Growth Service Class 2 Account - Class 1 Portfolio - Class 1 Goldman Sachs Variable LargeCap Stock Index Flexible Income Portfolio Insurance Trust Account - Class 1 - Class 1 Structured Small Cap LargeCap Value Strategic Growth Equity Fund Account - Class 1 Portfolio - Class 1 MidCap Value Fund MidCap Account - West Coast Equity Account Class 1 - Class 1 Lehman Brothers Asset MidCap Growth Account T. Rowe Price Blue Chip Management, LLC/(2)/ - Class 1 Growth Portfolio - II Lehman Brothers High Income Bond Portfolio - S T. Rowe Price Health Class/(3)/ Sciences Portfolio - II
/ //(1)// /On January 5, 2007, Equity Income Account assets merged into the Equity Income Account I. / //(2)// /On May 1, 2007, Neuberger Berman Advisers Management Trust re-branded the trust name to Lehman Brothers Asset Management, LLC. / //(3)// /On May 1, 2007, Neuberger Berman AMT High Income Bond Portfolio re-branded under the name of Lehman Brothers High Income Bond Portfolio. The Contract is available with or without the premium payment credit rider. The amount of the credit may be more than offset by the charges associated with it (increased surrender charge and surrender charge period and annual expenses). Expenses for a Contract with the rider are higher than expenses for a Contract without the rider. You should review your own circumstances to determine whether the rider is suitable for you. To assist you in making that determination, we have highlighted in gray boxes those portions of this prospectus pertaining to the rider. Please note that we recapture the premium payment credit if you request full annuitization of the Contract prior to the third contract anniversary. The credit is recovered from your investment options. Potentially, the amount we would recover could be more than the then current value of the credit if the investment options have experienced negative investment performance and you would be worse off than if you had not purchased the credit option. Subject to state availability, if you purchase the Contract on or after May 20, 2006 you have the right to partially annuitize a portion of your accumulated value. These securities have not been approved or disapproved by the SEC or any state securities commission nor has the SEC or any state securities commission passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense. 1 This prospectus is valid only when accompanied by the current prospectuses for the underlying mutual funds. These prospectuses should be kept for future reference. 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. TABLE OF CONTENTS GLOSSARY................................................................ SUMMARY OF EXPENSE INFORMATION.......................................... SUMMARY................................................................. Investment Limitations................................................. Transfers.............................................................. Surrenders............................................................. Charges and Deductions................................................. Annuity Benefit Payments............................................... Death Benefit.......................................................... Examination Offer Period (Free-Look)................................... THE PRINCIPAL INVESTMENT PLUS VARIABLE ANNUITY.......................... THE COMPANY............................................................. THE SEPARATE ACCOUNT.................................................... THE UNDERLYING MUTUAL FUNDS............................................. THE CONTRACT............................................................ To Buy a Contract...................................................... Premium Payments....................................................... Right to Examine the Contract (Free-Look).............................. Premium Payment Credit Rider........................................... The Accumulation Period................................................ Automatic Portfolio Rebalancing (APR).................................. Telephone and Internet Services........................................ Surrenders............................................................. Investment Protector Plus Rider........................................ Death Benefit.......................................................... Enhanced Death Benefit Rider........................................... The Annuitization Period............................................... CHARGES AND DEDUCTIONS.................................................. Annual Fee............................................................. Mortality and Expense Risks Charge..................................... Charges for Optional Riders............................................ Transaction Fee........................................................ Transfer Fee........................................................... Premium Taxes.......................................................... Surrender Charge....................................................... Free Surrender Privilege............................................... Administration Charge.................................................. Special Provisions for Group or Sponsored Arrangements................. FIXED ACCOUNT AND DCA PLUS ACCOUNTS..................................... Fixed Account.......................................................... Fixed Account Accumulated Value........................................ Fixed Account Transfers, Total and Partial Surrenders.................. Dollar Cost Averaging Plus Program (DCA Plus Program).................. GENERAL PROVISIONS...................................................... The Contract........................................................... Delay of Payments...................................................... Misstatement of Age or Gender.......................................... Assignment............................................................. Change of Owner or Annuitant........................................... Beneficiary............................................................ Contract Termination................................................... Reinstatement.......................................................... Reports................................................................ Important Information about Customer Identification Procedures ......... RIGHTS RESERVED BY THE COMPANY.......................................... Frequent Trading and Market Timing (Abusive Trading Practices)......... DISTRIBUTION OF THE CONTRACT............................................ PERFORMANCE CALCULATION................................................. VOTING RIGHTS........................................................... FEDERAL TAX MATTERS..................................................... Non-Qualified Contracts................................................ Required Distributions for Non-Qualified Contracts..................... IRA, SEP and SIMPLE-IRA................................................ Rollover IRAs.......................................................... Withholding............................................................ MUTUAL FUND DIVERSIFICATION............................................. STATE REGULATION........................................................ GENERAL INFORMATION..................................................... FINANCIAL STATEMENTS.................................................... TABLE OF SEPARATE ACCOUNT DIVISIONS..................................... TABLE OF CONTENTS OF THE STATEMENT OF ADDITIONAL INFORMATION............ CONDENSED FINANCIAL INFORMATION......................................... APPENDIX A- GMWB EXAMPLES ............................................... GLOSSARY ACCUMULATED VALUE - an amount equal to the DCA Plus Account(s) accumulated value plus the Fixed Account accumulated value plus the Separate Account division accumulated 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 benefit payment is based. This person may or may not be the owner. ANNUITIZATION - application of a portion or all of the accumulated value to an annuity benefit payment option to make income payments. ANNUITIZATION DATE - the date all of the owner's accumulated value is applied to an annuity benefit payment option. 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, 2006, the first contract year ends on June 4, 2007, and the first contract anniversary falls on June 5, 2007.) DATA PAGE - that portion of the Contract which contains the following: owner and annuitant data (names, gender, annuitant age); the contract issue date; maximum annuitization date; contract charges and limits; benefits; and a summary of any optional benefits chosen by the contract owner. DOLLAR COST AVERAGING PLUS (DCA PLUS) ACCOUNT - an account which earns guaranteed interest for a specific amount of time. 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 premium payments are transferred from a DCA Plus Account to the investment options over a specified period of time. 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 - an annuitant whose life determines the annuity benefit under this Contract. Any reference to the death of the annuitant means the death of the first annuitant to die. JOINT OWNER - an owner who has an undivided interest with the right of survivorship in this Contract with another owner. Any reference to the death of the owner means the death of the first owner to die. 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 communication received by us, at the annuity service office, either in writing or in another form approved by us in advance. Your notices may be mailed to us at: Principal Life Insurance Company P O Box 9382 Des Moines, Iowa 50306-9382 OWNER - the person, including joint owner, who owns all the rights and privileges of this Contract. PREMIUM PAYMENTS - the gross amount you contributed to the Contract. QUALIFIED PLANS - retirement plans which receive favorable tax treatment under Section 401 or 403(a) of the Internal Revenue Code. SEPARATE ACCOUNT DIVISION (DIVISION(S)) - a part of the Separate Account which invests in shares of an underlying mutual fund. (Referred to in the marketing materials as "sub-accounts.") SEPARATE ACCOUNT DIVISION ACCUMULATED VALUE - the amount of your accumulated value in all divisions. SURRENDER CHARGE - the charge deducted upon certain partial surrenders or total surrender of the Contract before the annuitization date. SURRENDER VALUE - accumulated value less any applicable surrender charge, rider fee, annual fee, transaction fee and any premium or other taxes. TRANSFER - moving all or a portion of your accumulated value to or among one investment option or another. Simultaneous transfers are considered to be one transfer for purposes of calculating the transfer fee, if any. UNDERLYING MUTUAL FUND - a registered open-end investment company, or a separate division or portfolio thereof, in which a division invests. UNIT - the accounting measure used to calculate the value of a division. 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 for trading and trading is not restricted. 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., 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 following tables describe the fees and expenses that you will pay when buying, owning and surrendering the Contract. The first table describes the fees and expenses that you will pay at the time that you buy the Contract, surrender the Contract or transfer cash value between investment options.The expenses in the shaded box reflect the expenses associated with the premium payment credit rider. These expenses are higher than the expenses for the Contract without the premium payment credit rider.
CONTRACT OWNER TRANSACTION EXPENSES ------------------------------------------------------------------------------ Sales charge imposed on premium payments (as a .none percentage of premium payments) ------------------------------------------------------------------------------ Maximum surrender charge (as a percentage of .6% amount surrendered)/(1)/ ------------------------------------------------------------------------------ Maximum deferred surrender charge for Contracts with the premium payment credit rider (as a percentage of amount .8% surrendered)/(2)/ ------------------------------------------------------------------------------ Transaction Fees for each unscheduled partial .The lesser of $ surrender 25 or 2% of each unscheduled . guaranteed maximum partial surrender after the 12th in a contract year .zero .current ------------------------------------------------------------------------------ Transaction Fee/(3)/ for each unscheduled .The lesser of $ transfer 30 or 2% of each unscheduled . guaranteed maximum transfer after the first in a contract year .current .zero ------------------------------------------------------------------------------ State Premium Taxes (vary by state) . 3.5% of premiums paid . guaranteed maximum .zero .current ------------------------------------------------------------------------------
/ //(1)/ Surrender charge without the premium payment credit rider (as a percentage of amounts surrendered):
TABLE OF SURRENDER CHARGES WITHOUT THE PREMIUM PAYMENT CREDIT RIDER -------------------------------------------------------------------- NUMBER OF COMPLETED CONTRACT YEARS SURRENDER CHARGE APPLIED TO ALL SINCE EACH PREMIUM PAYMENT PREMIUM PAYMENTS RECEIVED IN WAS MADE THAT CONTRACT YEAR ---------------------------------- ------------------------------- 0 (year of premium payment) 6% 1 6% 2 6% 3 5% 4 4% 5 3% 6 2% 7 and later 0%
///(2)/ SURRENDER CHARGE WITH THE PREMIUM PAYMENT CREDIT RIDER (AS A PERCENTAGE OF AMOUNTS SURRENDERED):
TABLE OF SURRENDER CHARGES WITH THE PREMIUM PAYMENT CREDIT RIDER ------------------------------------------------------------------- NUMBER OF COMPLETED CONTRACT YEARS SURRENDER CHARGE APPLIED TO ALL SINCE EACH PREMIUM PAYMENT PREMIUM PAYMENTS RECEIVED IN WAS MADE THAT CONTRACT YEAR ---------------------------------- ------------------------------- 0 (year of premium payment) 8% 1 8% 2 7% 3 6% 4 5% 5 4% 6 3% 7 2% 8 1% 9 and later 0%
/ //(3)/ Please note that in addition to the fees shown, the Separate Account and/or sponsors of the underlying mutual funds may adopt requirements pursuant to rules and/or regulations adopted by federal and/or state regulators which require us to collect additional transfer fees and/or impose restrictions on transfers. The next table describes the fees and expenses that are deducted periodically during the time that you own the Contract, not including underlying mutual fund fees and expenses.
PERIODIC EXPENSES ----------------------------------------------------------------------------- Annual Fee (waived for Contracts the lesser of $30 with accumulated value of $30,000 or 2% of the accumulated value or more) ----------------------------------------------------------------------------- Separate Account Annual Expenses (as a percentage of average separate account accumulated value) . guaranteed maximum Mortality and Expense Risks Charge 1.25% Administration Charge 0.15% Total Separate Account Annual ----- Expense 1.40% .current 1.25% Mortality and Expense Risks Charge 0.00% Administration Charge ----- Total Separate Account Annual 1.25% Expense ----------------------------------------------------------------------------- Optional Riders ----------------------------------------------------------------------------- . Enhanced Death Benefit rider . guaranteed maximum .0.075% of average quarterly .current accumulated value .0.0625% of average quarterly accumulated value ----------------------------------------------------------------------------- . Investment Protector Plus rider .0.2125% of the average quarterly . guaranteed maximum Investment Back remaining withdrawal benefit base* .current .0.15% of the average quarterly Investment Back remaining withdrawal benefit base* ----------------------------------------------------------------------------- .an annual charge of 0.60 % of accumulated value in the . Premium Payment Credit rider divisions deducted daily plus a . guaranteed maximum reduction of up to 0.60% of the Fixed Account interest rate . an annual charge of 0.60 .current % of accumulated value in the divisions deducted daily (with no reduction of the Fixed Account interest rate) -----------------------------------------------------------------------------
* The Investment Back remaining withdrawal benefit base is the total amount that is available for future withdrawal benefit payments (see THE CONTRACT - Surrenders - Investment Protector Plus Rider). --------------------------------- The next item shows the minimum and maximum total operating expenses charged by the underlying mutual funds that you may pay periodically during the time that you own the contract. More detail concerning the fees and expenses of each underlying mutual fund is contained in its prospectus. .
MINIMUM AND MAXIMUM ANNUAL UNDERLYING MUTUAL FUND OPERATING EXPENSES AS OF DECEMBER 31, 2006 ------------------------------------------------------------------------------ MINIMUM MAXIMUM ------------------------------------------------------------------------------ Total annual underlying mutual fund operating expenses (expenses that are deducted from underlying mutual fund assets, including management fees, distribution and/or service 0.26% 1.44% (12b-1) fees and other expenses) ------------------------------------------------------------------------------
Annual expenses of the underlying mutual funds (as a percentage of average net assets) as of December 31, 2006:
ANNUAL UNDERLYING MUTUAL FUND EXPENSES ACQUIRED FUND ("UNDERLYING FUND") TOTAL CONTRACTUAL MANAGEMENT 12B-1 OTHER FEES AND GROSS NET UNDERLYING MUTUAL FUNDS FEES FEES/(1)/ EXPENSES EXPENSES EXPENSES/(//2)/ EXPENSES ----------------------- ---------- --------- -------- ------------ ---------------- ---------------- AIM V.I. Basic Value Fund - Series 1.02%/(3)(4)/ I 0.72% N/A% 0.30% AIM V.I. Small Cap Equity Fund - Series I 0.75 N/A 0.53 0.01%/ 1.29 1.15/(5)(6)/ AllianceBernstein Small Cap Growth Portfolio - Class A 0.75 N/A 0.41 1.16 American Century VP II Inflation Protection Fund - Class II 0.49/(7)/ 0.25 0.01 / 0.75 American Century VP Ultra - Class II 0.90/(7)/ 0.25 0.00/(8)/ 1.15 American Century VP Vista Fund - Class I 1.00 N/A 0.00/(8)/ 1.00 Dreyfus IP Technology Growth - Service Shares 0.75 0.25 0.12/(9)/ / 1.12 Fidelity VIP Contrafund - Service Class 2 0.57 0.25 0.09 / 0.91 0.90/(//10//)/ Fidelity VIP Equity-Income - Service Class 2 0.47 0.25 0.10 / 0.82 / Fidelity VIP Growth - Service Class 2 0.57 0.25 0.12 0.94 0.92/(//10//)/ Fidelity VIP Mid Cap - Service Class 2 0.57 0.25 0.11 0.93 0.91/(//10//)/ Fidelity VIP Overseas - Service Class 2 0.72 0.25 0.16 1.13 1.06/(//10//)/ Goldman Sachs VIT Structured Small Cap Equity Fund - Institutional Class 0.75 N/A 0.12 0.87 0.75/(1//1//)/ Goldman Sachs VIT Mid Cap Value Fund - Institutional Class 0.80 N/A 0.06 0.86 0.80/(1//2//)/ Neuberger Berman AMT Fasciano Portfolio - S Class 1.15 0.25 0.60 2.00 1.40/(1//3//)/ Lehman Brothers High Income Bond Portfolio- S Class 0.78 0.25 2.41 3.44 1.10/(1//3//)/ Neuberger Berman AMT Partners Portfolio - I Class 0.83 N/A 0.08 0.91 Neuberger Berman AMT Socially Responsive Portfolio - I Class 0.85 N/A 0.13 0.98 / Principal VCF Asset Allocation, Class 1 0.80 N/A 0.03 0.83 Principal VCF Bond, Class 1 0.43 N/A 0.09 0.52 Principal VCF Capital Value, Class 1 0.60 N/A 0.00 0.60 Principal VCF Diversified International, Class 1 0.84 N/A 0.07 0.91/(//1//4//)/ Principal VCF Equity Growth, Class 1 0.76 N/A 0.00 0.76 / Principal VCF Equity Income I Account - Class 1 0.49 N/A 0.04 0.53/(15)/ Principal VCF Equity Value, Class 1 0.85 N/A 0.23 1.08 0.90/(1//6//)/ Principal VCF Government & High Quality Bond, Class 1 0.45 N/A 0.11 0.56 Principal VCF Growth, Class 1 0.68 N/A 0.01 0.69/(17)/ / Principal VCF International Emerging Markets, Class 1 1.25 N/A 0.19 1.44 / Principal VCF International SmallCap Account - Class 1 1.18 N/A 0.09 1.27 Principal VCF LargeCap Blend, Class 1 0.75 N/A 0.01 0.76/(18)/ / Principal VCF LargeCap Stock Index, Class 1 0.25 N/A 0.01 0.26 / Principal VCF LargeCap Value, Class 1 0.75 N/A 0.01 0.76 / Principal VCF MidCap, Class 1 0.57 N/A 0.00 0.57 Principal VCF MidCap Growth, Class 1 0.90 N/A 0.02 0.92 Principal VCF MidCap Value, Class 1 1.05 N/A 0.01 1.06 / Principal VCF Money Market, Class 1 0.48 N/A 0.01 0.49/(19//)/ Principal VCF Principal LifeTime 2010 Account - Class 1 0.12 N/A 0.04 0.62 0.78 0.78/(//20//)/ Principal VCF Principal LifeTime 2020 Account - Class 1 0.12 N/A 0.02 0.63 0.77 0.76/(//20//)/ Principal VCF Principal LifeTime 2030 Account - Class 1 0.12 N/A 0.09 0.67 0.88 0.83/(//20//)/ Principal VCF Principal LifeTime 2040 Account - Class 1 0.12 N/A 0.20 0.69 1.01 0.82/(//20//)/ Principal VCF Principal LifeTime 2050 Account - Class 1 0.12 N/A 0.32 0.71 1.15 0.83/(//20//)/ Principal VCF Principal LifeTime Strategic IncomeAccount - Class 1 0.12 N/A 0.09 0.58 0.79 0.72/(//20//)/ Principal VCF Real Estate Securities, Class 1 0.87 N/A 0.00 0.87/(21)/ Principal VCF Short-Term Bond, Class 1 0.50 N/A 0.14 0.64 Principal VCF SmallCap Growth, Class 1 1.00 N/A 0.02 1.02/(22)/ / Principal VCF SmallCap Value, Class 1 1.08 N/A 0.03 1.11/(23)/ Principal VCF Strategic Asset Management Balanced Portfolio - Class 1 0.25 N/A 0.01 0.66 0.92/(24)/ Principal VCF Strategic Asset Management Conservative Balanced Portfolio - Class 1 0.25 N/A 0.01 0.62 0.88/(24)/ Principal VCF Strategic Asset Management Conservative Growth Portfolio - Class 1 0.25 N/A 0.01 0.69 0.95/(24)/ Principal VCF Strategic Asset Management Flexible Income Portfolio - Class 1 0.25 N/A 0.01 0.59 0.85/(24)/ Principal Strategic Asset Management Strategic Growth Portfolio - Class 1 0.25 N/A 0.01 0.73 0.99/(24)/ Principal VCF West Coast Equity, Class 1 0.63 N/A 0.02 0.65/(2//5)/ T. Rowe Price Blue Chip Growth Portfolio - II 0.85 0.25 N/A 1.10 T. Rowe Price Health Sciences Portfolio - II 0.95 0.25 N/A 1.20
/ //(1)/ Because the 12b-1 fee is charged as an ongoing fee, over time the fee will increase the cost of your investment and may cost you more than paying other types of sales charges. / //(2)/ The Company and Princor Financial Services Corporation may receive a portion of the underlying fund expenses for record keeping, marketing and distribution services. / //(3)/ Through December 31, 2009, the Fund's advisor has contractually agreed to waive a portion of its advisory fees to the extent necessary so that the advisory fees payable by the Fund does not exceed a specified maximum annual advisory fee rate, wherein the fee rate includes breakpoints and is based upon net asset levels. The fund's maximum annual advisory fee rate ranges from 0.695% (for average net assets up to $250 million) to 0.52% (for average net assets over $10 billion). / //(4)/ The Fund's advisor has contractually agreed to waive advisory fees and/or reimburse expenses of Series I shares to the extent necessary to limit Total Annual Fund Operating Expenses of Series I shares to 1.30% of average daily net assets. The expense limitation agreement is in effect through April 30, 2007. / //(5) /Through April 30, 2008, the Fund's advisor has contractually agreed to waive a portion of its advisory fees to the extent necessary so that the advisory fees payable by the Fund does not exceed a specified maximum annual advisory fee rate, wherein the fee rate includes breakpoints and is based upon net asset levels. The Fund's maximum annual advisory fee rate ranges from 0.745% (for average net assets up to $250 million) to 0.64% (for average net assets over $10 billion). / //(6)/ As a result of reorganization which will occur on or about May 1, 2007, the Fund's Total Annual Fund Operating Expenses have been restated to reflect such reorganization. The advisor for AIM V.I. Small Cap Equity Fund has contractually agreed to waive advisory fees and/or reimburse expenses of Series I shares to the extent necessary to limit Total Annual fund Operating Expenses of Series I shares to 1.15% of average daily net assets. This expense limitation agreement is in effect through at least April 30, 2008./ / / //(//7//)/ The fund has a stepped fee schedule. As a result, the fund's management fee rate generally decreases as the fund's assets increase and increases as the fund's assets decrease. / //(8)/ Other expenses, which include the fees and expenses of the fund's independent directors and their legal counsel, interest, and fees and expenses incurred indirectly by the fund as a result of investment in shares of one or more mutual funds, hedge funds, private equity funds or other pooled investment vehicles, were less than 0.005% for the most recent fiscal year. / //(//9//)/ / //(10)/ A portion of the brokerage commissions that the fund pays may be reimbursed and used to reduce the fund's expenses. In addition, through arrangements with the fund's custodian, credits realized as a result of uninvested cash balances are used to reduce the fund's custodian expenses. Including these reductions, the total class operating expenses would have been VIP Contrafund 0.90%; VIP Growth 0.92%; VIP Mid Cap 0.91%; and VIP Overseas 1.06%. These offsets may be discontinued at any time. / //(1//1//)/ Goldman Sachs, has voluntarily agreed to waive a portion of its management fee equal to 0.02% of the Fund's average daily net assets. Goldman Sachs has entered into the following fee reduction commitment for the Funds which was implemented on a voluntary basis beginning July 1, 2005 and on a contractual basis as of the date of this Prospectus equal to 0.75%. Management fee annual rate on the first $2 billion in average daily net assets and 0.68% Management fee annual over $2 billion in average daily net assets. / //(1//2//)/ Goldman Sachs has entered into the following fee reduction commitment for the Funds which was implemented on a voluntary basis beginning July 1, 2005 and on a contractual basis as of the date of this Prospectus equal to 0.80%. Management fee annual rate on the first $2 billion in average daily net assets and 0.72% Management fee annual over $2 billion in average daily net assets. / / / //(1//3//) /Neuberger Berman Management, Inc. (NBMI) has undertaken through December 31, 2010, to waive fees and/or reimburse certain operating expenses, including the compensation of NBMI and excluding taxes, interest, extraordinary expenses, brokerage commissions and transaction costs, that exceed, in aggregate, 1.10% of average daily net asset value of the Lehman Brothers High Income Bond Portfolio, 1.40% of the average daily net asset value of the Fasciano Portfolio, and 1.30% of the average daily net asset value of the Socially Responsive Portfolio.The expense limitation arrangements for the Portfolios are contractual and any excess expenses can be repaid to NBMI within three years of the year incurred, provided such recoupment would not cause a Portfolio to exceed its respective limitation. / //(14)// /Principal has contractually agreed to limit the Account's expenses attributable to Class 1 and 2 shares and, if necessary, pay expenses normally payable by the Account, through the period ending April 29, 2008. The expense limits will maintain a total level of operating expenses (expressed as a percent of average net assets on an annualized basis) not to exceed 1.04% for Class 1 shares and 1.29% for Class 2 shares. / //(15)/ Principal has contractually agreed to limit the Account's expenses attributable to Class 1 and 2 shares and, if necessary, pay expenses normally payable by the Account, through the period ending April 29, 2008. The expense limits will maintain a total level of operating expenses (expressed as a percent of average net assets on an annualized basis) not to exceed 0.66% for Class 1 shares and 0.91% for Class 2 shares. The estimated expenses shown in the table are intended to reflect those that will be in effect on an ongoing basis. / //(16)/ Principal has contractually agreed to limit the Account's expenses attributable to Class 1 shares and, if necessary, pay expenses normally payable by the Account through the period ending April 29, 2008. The expense limit will maintain a total level of operating expenses (expressed as a percent of average net asset on an annualized basis) not to exceed 0.90%. / //(17)/ Principal has contractually agreed to limit the Account's expenses attributable to Class 1 and 2 shares and, if necessary, pay expenses normally payable by the Account, through the period ending April 29, 2008. The expense limits will maintain a total level of operating expenses (expressed as a percent of average net assets on an annualized basis) not to exceed 0.80% for Class 1 shares and 1.05% for Class 2 shares. / //(18)/ Principal has contractually agreed to limit the Account's expenses attributable to Class 1 and 2 shares and, if necessary, pay expenses normally payable by the Account, through the period ending April 29, 2008. The expense limits will maintain a total level of operating expenses (expressed as a percent of average net assets on an annualized basis) not to exceed 0.78% for Class 1 shares and 1.03% for Class 2 shares. The expenses shown for Class 2 are estimated. The estimated expenses shown in the table are intended to reflect those that will be in effect on an ongoing basis. / //(19)/ Principal has contractually agreed to limit the Account's expenses attributable to Class 1 and 2 shares and, if necessary, pay expenses normally payable by the Account, through the period ending April 29, 2008. The expense limits will maintain a total level of operating expenses (expressed as a percent of average net assets on an annualized basis) not to exceed 0.72% for Class 1 shares and 0.97% for Class 2 shares. The expenses shown for Class 2 are estimated. The estimated expenses shown in the table are intended to reflect those that will be in effect on an ongoing basis. / //(20)/ Principal has contractually agreed to limit the Account's expenses (not including underlying fund expenses) and if necessary, pay expenses normally payable by the Accounts, through the period ending April 29, 2008. The expense limits will maintain a total level of operating expenses (expressed as a percent of average net assets on an annualized basis) not to exceed 0.16% for the Principal LifeTime 2010 Account, 0.13% for the Principal LifeTime 2020 Account, 0.16% for the Principal LifeTime 2030 Account, 0.13% for the Principal LifeTime 2040 Account, 0.12% for the Principal LifeTime 2050 Account and 0.14% for the Principal Strategic Income Account. / //(21)/ Principal has contractually agreed to limit the Account's expenses attributable to Class 1 and 2 shares and, if necessary, pay expenses normally payable by the Account, through the period ending April 29, 2008. The expense limits will maintain a total level of operating expenses (expressed as a percent of average net assets on an annualized basis) not to exceed 0.90% for Class 1 shares and 1.15% for Class 2 shares. The expenses shown for Class 2 are estimated. The estimated expenses shown in the table are intended to reflect those that will be in effect on an ongoing basis. / //(22)/ Principal has contractually agreed to limit the Account's expenses attributable to Class 1 and 2 shares and, if necessary, pay expenses normally payable by the Account, through the period ending April 29, 2008. The expense limits will maintain a total level of operating expenses (expressed as a percent of average net assets on an annualized basis) not to exceed 1.02% for Class 1 shares and 1.27% for Class 2 shares. The expenses shown for Class 2 are estimated. The estimated expenses shown in the table are intended to reflect those that will be in effect on an ongoing basis. / //(23)/ Principal has contractually agreed to limit the Account's expenses attributable to Class 1 and 2 shares and, if necessary, pay expenses normally payable by the Account, through the period ending April 29, 2008. The expense limits will maintain a total level of operating expenses (expressed as a percent of average net assets on an annualized basis) not to exceed 1.01% for Class 1 shares and 1.26% for Class 2 shares. The expenses shown for Class 2 are estimated. The estimated expenses shown in the table are intended to reflect those that will be in effect on an ongoing basis. / //(24)/ The estimated expenses shown in the table are intended to reflect those that will be in effect on an ongoing basis. Principal has contractually agreed to limit the Portfolios' expenses (not including underlying fund expenses) and, if necessary, pay expenses normally payable by the Portfolios, through the period ending April 29, 2008. The expense limits will maintain a total level of operating expenses (expressed as a percent of average net assets on an annualized basis) not to exceed 0.30% for the Class 1 shares and 0.55% for the Class 2 shares of the Flexible Income Portfolio, 0.35% for the Class 1 shares and 0.60% for the Class 2 shares of the Conservative Balanced Portfolio, 0.28% for the Class 1 shares and 0.53% for the Class 2 shares of the Balanced Portfolio, 0.29% for the Class 1 shares and 0.54% for the Class 2 shares of the Conservative Growth Portfolio and 0.30% for the Class 1 shares and 0.55% for the Class 2 shares of the Strategic Growth Portfolio. / //(25)/ Principal has contractually agreed to limit the Account's expenses attributable to Class 1 and Class 2 shares an, if necessary, pay expenses normally payable by the Account through the period ending April 29, 2008. The expense limits will maintain a total level of operating expenses (expressed as a percent of average net assets on an annualized basis) not to exceed 0.68% for Class 1 shares and 0.93% for Class 2 shares. The estimated expenses shown in the table are intended to reflect those that will be in effect on an ongoing basis. EXAMPLE These Examples are intended to help you compare the cost of investing in the Contract with the cost of investing in other variable annuity contracts. These costs include contract owner transaction expenses, contract fees, Separate Account annual expenses, and underlying mutual fund fees and expenses. The shaded areas show charges that apply to Contracts with the premium payment credit rider. The unshaded areas show charges that apply to Contracts without the premium payment credit rider. Although your actual costs may be higher or lower, based on these assumptions, your costs would be as shown below. EXAMPLE 1. CONTRACT WITHOUT RIDERS. This Example reflects the maximum charges imposed if you were to purchase the Contract without any riders. The Example also reflects the minimum and maximum annual underlying mutual fund operating expenses (as of December 31, 2006). The Example assumes: . a $10,000 investment in the Contract for the time periods indicated; . a 5% return each year; . an annual contract fee of $30 (expressed as a percentage of the average accumulated value); . that the Contract has been purchased without optional riders; and . the maximum and minimum fees and expenses (without voluntary fee waivers, if any) of any of the underlying mutual funds. This Example shows the current fees of the Contract.
IF YOU FULLY IF YOU SURRENDER YOUR CONTRACT IF YOU DO NOT ANNUITIZE YOUR CONTRACT AT THE END OF THE APPLICABLE SURRENDER AT THE END OF THE TIME PERIOD YOUR CONTRACT APPLICABLE TIME PERIOD ----------------------------------------------------------------------------------------------------------------------------------- 1 YR. 3 YRS. 5 YRS. 10 YRS. 1 YR. 3 YRS. 5 YRS. 10 YRS. 1 YR. 3 YRS. 5 YRS. 10 YRS. ----------------------------------------------------------------------------------------------------------------------------------- Maximum Total Underlying Mutual Fund 821 1,402 1,799 2,964 268 820 1,399 2,964 268 820 1,399 2,964 Operating Expenses (1.44%) ----------------------------------------------------------------------------------------------------------------------------------- Minimum total Underlying Mutual Fund 713 1,071 1,212 1,773 152 471 812 1,773 152 471 812 1,773 Operating Expenses (0.26%) -----------------------------------------------------------------------------------------------------------------------------------
EXAMPLE 2. CONTRACT WITH PREMIUM PAYMENT CREDIT AND ENHANCED DEATH BENEFIT RIDERS. This Example reflects the maximum charges imposed if you were to purchase the Contract with the premium payment credit and enhanced death benefit riders. The Example also reflects the minimum and maximum annual underlying mutual fund operating expenses (as of December 31, 2006). The Example assumes: . a $10,000 investment in the Contract for the time periods indicated; . a 5% return each year; . an annual contract fee of $30 (expressed as a percentage of the average accumulated value); . that the premium payment credit rider was added to the Contract at issue and the premium payment credit rider surrender charge schedule is applied; . that the enhanced death benefit rider was added to the Contract at issue; and . the maximum and minimum fees and expenses (without voluntary fee waivers, if any) of any of the underlying mutual funds. . This Example shows the current fees of the Contract.
IF YOU FULLY IF YOU SURRENDER YOUR CONTRACT IF YOU DO NOT ANNUITIZE YOUR CONTRACT AT THE END OF THE APPLICABLE SURRENDER AT THE END OF THE TIME PERIOD YOUR CONTRACT APPLICABLE TIME PERIOD ----------------------------------------------------------------------------------------------------------------------------------- 1 YR. 3 YRS. 5 YRS. 10 YRS. 1 YR. 3 YRS. 5 YRS. 10 YRS. 1 YR. 3 YRS. 5 YRS. 10 YRS. ----------------------------------------------------------------------------------------------------------------------------------- Maximum Total Underlying Mutual Fund 1,141 1,819 2,396 3,794 369 1,122 1,896 3,794 869 1,622 1,896 3,794 Operating Expenses (1.44%) ----------------------------------------------------------------------------------------------------------------------------------- Minimum total Underlying Mutual Fund 1,030 1,461 1,802 2,631 248 761 1,302 2,631 748 1,261 1,302 2,631 Operating Expenses (0.26%) -----------------------------------------------------------------------------------------------------------------------------------
EXAMPLE 3. CONTRACT WITH INVESTMENT PROTECTOR PLUS, PREMIUM PAYMENT CREDIT AND ENHANCED DEATH BENEFIT RIDERS. This Example reflects the charges imposed if you were to purchase the Contract with the Investment Protector Plus rider. The Example also reflects the minimum and maximum annual underlying mutual fund operating expenses (as of December 31, 2006) for the limited array of underlying mutual funds available when utilizing the Investment Protector Plus rider (see the rider description for more details). The Example assumes: . a $10,000 investment in the Contract for the time periods indicated; . a 5% return each year; . an annual contract fee of $30 (expressed as a percentage of the average accumulated value); . that the Investment Protector Plus rider was added to the Contract at issue; . that the premium payment credit rider was added to the Contract at issue and the premium payment credit rider surrender charge schedule is applied; . that the enhanced death benefit rider was added to the Contract at issue; and . the maximum and minimum fees and expenses (without voluntary fee waivers, if any) of the underlying mutual funds available when utilizing the Investment Protector Plus rider. . This Example shows the current fees of the Contract.
IF YOU FULLY IF YOU SURRENDER YOUR CONTRACT IF YOU DO NOT ANNUITIZE YOUR CONTRACT AT THE END OF THE APPLICABLE SURRENDER AT THE END OF THE TIME PERIOD YOUR CONTRACT APPLICABLE TIME PERIOD ----------------------------------------------------------------------------------------------------------------------------------- 1 YR. 3 YRS. 5 YRS. 10 YRS. 1 YR. 3 YRS. 5 YRS. 10 YRS. 1 YR. 3 YRS. 5 YRS. 10 YRS. ----------------------------------------------------------------------------------------------------------------------------------- Maximum Total Underlying Mutual Fund 1,143 1,821 2,396 3,774 371 1,124 1,896 3,774 871 1,624 1,896 3,774 Operating Expenses (0.88%) ----------------------------------------------------------------------------------------------------------------------------------- Minimum total Underlying Mutual Fund 1,109 1,715 2,217 3,424 334 1,015 1,717 3,424 834 1,515 1,717 3,424 Operating Expenses (0.52%) -----------------------------------------------------------------------------------------------------------------------------------
SUMMARY This prospectus describes a flexible variable annuity offered by the Company. The Contract is designed to provide individuals with retirement benefits, including: . non-qualified retirement programs; and . 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 (see Federal Tax Matters - IRA, SEP and SIMPLE-IRA and Rollover IRAs). THE CONTRACT DOES NOT PROVIDE ANY ADDITIONAL TAX DEFERRAL IF YOU PURCHASE IT TO FUND AN IRA OR OTHER INVESTMENT VEHICLE THAT ALREADY PROVIDES TAX DEFERRAL. For information on how to purchase the Contract, please see THE CONTRACT - To Buy a Contract. This is a brief summary of the Contract's features. More detailed information follows later in this prospectus. INVESTMENT LIMITATIONS . Initial premium payment must be $5,000 or more for non-qualified contracts. . Initial premium payment must be $2,000 for all other contracts. . Each subsequent payment must be at least $500. . If you are a member of a retirement plan covering three or more persons and payments are made through an automatic investment program, the initial and subsequent premium payments for the Contract must average at least $100 and not be less than $50. You may allocate your net premium payments to the investment options. . A complete list of the divisions may be found in the Table of Separate Account Divisions later in this prospectus. 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 investment options also include the Fixed Account and the DCA Plus Accounts. TRANSFERS (See 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: . a dollar amount or percentage of transfer must be specified; . a transfer may occur on a scheduled or unscheduled basis; . transfers to the Fixed Account are not permitted if a transfer has been made from the Fixed Account to a division within six months; and . transfers into DCA Plus Accounts are not permitted. During the annuity benefit 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: . a dollar amount must be specified; . surrendered amounts may be subject to surrender charge; .for Contracts without the premium payment credit rider, the maximum surrender charge is 6% of the amount(s) surrendered. .for Contracts with the premium payment credit rider, the maximum surrender charge is 8% of the amount(s) surrendered. . total surrenders may be subject to an annual Contract fee; . during a contract year, partial surrenders less than the Contract's earnings or 10% of premium payments are not subject to a surrender charge; and . surrenders before age 591/2 may involve an income tax penalty (see FEDERAL TAX MATTERS). CHARGES AND DEDUCTIONS (see CHARGES AND DEDUCTIONS) . There is no sales charge on premium payments. . A contingent deferred surrender charge is imposed on certain total or partial surrenders. . An annual mortality and expense risks charge equal to 1.25% of amounts in the Separate Account divisions is imposed daily. . The daily Separate Account administration charge currently is zero but we reserve the right to assess a charge not to exceed 0.15% of Separate Account division value(s) annually. . The optional riders are available at an additional charge (see CHARGES AND DEDUCTIONS). . Contracts with an accumulated value of less than $30,000 are subject to an annual 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 Variable Annuity Contract with us, then all the Contracts you own or jointly own may be aggregated on each Contract's anniversary, to determine if the $30,000 minimum has been met and whether that Contract will be charged. . Certain states and local governments impose a premium tax. The Company reserves the right to deduct the amount of the tax from premium payments or accumulated values. ANNUITY BENEFIT PAYMENTS . You may choose from several fixed annuity benefit payment options which are described in The Annuitization Period - Annuity Benefit Payment Options. . Payments are made to the owner (or beneficiary depending on the annuity benefit payment option selected). You should carefully consider the tax implications of each annuity benefit payment option (see Annuity Benefit Payment Options and FEDERAL TAX MATTERS). DEATH BENEFIT . If the owner dies before the annuitization date, a death benefit is payable (see Death Benefit). . The death benefit may be paid as either a single sum cash benefit or under an annuity benefit payment option (see Death Benefit). . If the annuitant dies on or after the annuitization date, the beneficiary will receive only any continuing payments which may be provided by the annuity benefit payment option in effect. EXAMINATION OFFER PERIOD (FREE-LOOK) (see Right to Examine the Contract (Free-Look)) .You may return the Contract during the examination offer period which is generally 10 days from the date you receive the Contract. The examination offer period may be longer in certain states. .We return all premium payments if required by state law. Otherwise we return accumulated value. . We keep the full amount of any premium payment credit. THE PRINCIPAL INVESTMENT PLUS VARIABLE ANNUITY The Principal Investment Plus 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 Company. The Separate Account division accumulated 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 premium 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 50392 and is authorized to transact life and annuity business in all states of the United States and the District of Columbia. The Company is a wholly owned indirect subsidiary of Principal Financial Group, Inc., a publicly-traded company. In 1879, the Company was incorporated under Iowa law as a mutual assessment life insurance company named Bankers Life Association. It became a legal reserve life insurance company and 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 insurance holding company structure took place in 1998, when the Company became a stock life insurance company. In 2001, the mutual insurance holding company converted to a stock company through a process called demutualization, resulting in the current organizational structure. THE SEPARATE ACCOUNT Separate Account B was established under Iowa law on January 12, 1970 and 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 benefit 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 underlying mutual fund. New divisions may be added and made available. Divisions may also be eliminated from the Separate Account following SEC approval. THE UNDERLYING MUTUAL FUNDS The underlying mutual funds are registered under the Investment Company Act of 1940 as open-end investment management companies. The underlying mutual funds provide the investment vehicles for the Separate Account. A full description of the underlying 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 WITHOUT CHARGE FROM A SALES REPRESENTATIVE OR OUR ANNUITY SERVICE OFFICE (CALL 1-800-852-4450). The Company purchases and sells underlying mutual fund shares for the Separate Account at their net asset value. Shares represent interests in the underlying mutual fund available for investment by the Separate Account. Each underlying 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 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 and qualified plans. 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. The Table of Separate Account Divisions later in this prospectus contains a brief summary of the investment objectives of, the advisor and, if applicable, sub-advisor for, each division. 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 premium payment. If you are buying the Contract to fund a SIMPLE-IRA or SEP, an initial premium 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. If the completed application is received in proper order, the initial premium payment is credited within two valuation days after the later of receipt of the application or receipt of the initial premium payment at the annuity service office. If the initial premium payment is not credited within five valuation days, it is refunded unless we have received your permission to retain the premium 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. Tax-qualified retirement arrangements, such as IRAs, SEPs, and SIMPLE-IRAs, are tax-deferred. You derive no additional benefit from the tax deferral feature of the annuity. Consequently, an annuity should be used to fund an IRA, or other tax qualified retirement arrangement to benefit from the annuity's features other than tax deferral. These features may include guaranteed lifetime income, death benefits without surrender charges, guaranteed caps on fees, and the ability to transfer among investment options without sales or withdrawal charges. PREMIUM PAYMENTS . The initial premium payment must be at least $5,000 for non-qualified retirement programs. . All other initial premium payments must be at least $2,000. . If you are making premium payments through a payroll deduction plan or through a bank (or similar financial institution) account under an automated investment program, your initial and subsequent premium payments must be at least $100. . All premium payments are subject to a surrender charge period that begins in the contract year each payment is received. . Subsequent payments must be at least $500 and can be made until the annuitization date. . If you are a member of a retirement plan covering three or more persons, the initial and subsequent premium payments for the Contract must average at least $100 and cannot be less than $50. . The total of all premium payments may not be greater than $2,000,000 without our prior approval. .In the state of Washington, for contracts with the Premium Payment Credit Rider no premium are allowed after the first contract year. RIGHT TO EXAMINE THE CONTRACT (FREE-LOOK) Under state law, you have the right to return the Contract for any reason during the examination offer period. The examination offer period is 10 days after the Contract is delivered to you in all states, unless your Contract is issued in: . Arizona and you are age 65 and over (30 day examination offer period), . California and you are age 60 and over (30 day examination offer period), . Idaho (20 day examination offer period), or . North Dakota (20 day examination offer period). Some states require us to return the initial premium payment while other states require us to return the accumulated value. Though we currently allocate your initial premium to the investment options you have selected, we reserve the right to allocate initial premiums to the Money Market Division during the examination offer period. In addition, we are required to allocate initial premium payments to the Money Market Division if the contract is issued in California and the owner is age 65 or older. After the examination offer period, the current value of the Money Market Division will be reallocated according to your allocation instructions. The states in which purchase payments are returned are:
Georgia Louisiana Nebraska Rhode Island Hawaii Maine New Hampshire South Carolina Idaho Maryland North Carolina Utah Iowa Michigan Oklahoma Virginia Kentucky Missouri Pennsylvania West Virginia
Please note that we recapture the premium payment credit if you decide to return the Contract during the examination offer period. We recover the full amount of the premium payment credit and you could receive less than your initial premium payment. If the purchase of this Contract is a replacement for another annuity contract or a life insurance policy, different examination offer periods may apply. The Company reserves the right to keep the initial premium payment in the Money Market Division longer than 10 days to correspond to the examination offer periods of a particular state's replacement requirements. If you are purchasing this Contract to fund an IRA, SIMPLE-IRA, or SEP-IRA and you return it on or before the seventh day of the free-look period, we will return the greater of: . total premium payments; or . 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 offer 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 offer period has expired. Specific information is available from your sales representative or the annuity service office (1-800-852-4450). Exchange Credit --------------- If you own a Single Premium Deferred Annuity ("SPDA") or a Single Premium Deferred Annuity Plus ("SPDA+") issued by us and are no longer subject to surrender charges, 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 premium payment. We reserve the right to change or discontinue the exchange credit. Both SPDA and SPDA+ are annuities which provide a fixed rate of accumulation. The values in the Separate Account divisions in this Contract vary with the investment experience and objectives of the various underlying mutual funds. Thus, the value of your Contract may increase or decrease with the investment holdings of the Separate Account 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: . a Contract application, . a SPDA/SPDA+ surrender form, . a replacement form (based on state written), and . 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" may not be available in all states. 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 premium payment. The credit is treated as earnings. We recover the 1% credit if you exercise your right to return the Contract during the examination offer period (see Right to Examine the Contract). PREMIUM PAYMENT CREDIT RIDER You may elect a premium payment credit rider at the time the Contract is issued (the rider may not be available in all states; consult your sales representative or the annuity service office for availability). If the premium payment credit rider is elected, the following provisions apply to the Contract: . A credit of 5% will be applied to premium payments received during your first contract year. For example, if you make premium 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 premium payment of $5,000 is made in your second contract year, no credit is added as a result of the $5,000 premium payment. .The credit is allocated among the investment options according to your then current premium payment allocations. .If you exercise your right to return the Contract during the examination offer period, the amount returned to you is reduced by any credits. You could receive less than your initial premium payment. .We recapture the premium payment credit if you request full annuitization of the Contract prior to the third contract anniversary or if you decide to return the Contract during the examination offer period. The credit is recovered from your investment options according to your surrender allocation percentages (if surrender allocation percentages are not specified, we would use your premium allocation percentages). Potentially, the amount we would recover could be more than the current value of the credit. If the investment options have experienced negative investment performance you would bear the loss for the difference between the original value of the credit (the amount recaptured) and the current (lower) value of that credit. .During each of contract years two and three, the amount of the partial annuitization is limited to no more than 10% of the accumulated value as of the most recent contract anniversary. . Credits are considered earnings under the Contract. .All premium payments are subject to the 9-year surrender charge table (see Surrender Charge). .The premium payment credit rider may not be cancelled and the associated 9-year surrender charge period cannot be changed. . You may not participate in the DCA Plus Program. The current annual charge for the rider is 0.60% of the average daily net assets of the Separate Account divisions. The charge is assessed until completion of your 8th contract year (and only prior to the annuitization date) even if the credit has been recovered. You should carefully examine the premium payment credit rider to decide if the premium payment credit rider is suitable as there are circumstances under which you would be worse off for having received the credit. In making this determination, you should consider the following factors: .the length of time you plan to own the Contract (the rider increases the amount and duration of the surrender charges); .the frequency, amount and timing of any partial surrenders (the rider increases the amount and duration of the surrender charges); .the amount and timing of your premium payment(s). If you elect the rider and anticipate making additional premium payments after the first contract year, please note that premium payments after the first contract year will be assessed higher Separate Account charges though no credit is applied to those premium payments; and .the higher Separate Account charges have a negative impact on investment performance. The charges used to recoup our expense of payment the premium payment credit include the surrender charge and the premium payment credit rider charge. We expect to make a profit from these charges. The following tables demonstrate hypothetical values but do not show the impact of partial surrenders or partial annuitizations. The tables are based on: . a $25,000 initial premium payment and no additional premium payments; . the deduction of total Separate Account annual expenses: . Contracts with the premium payment credit rider: . 1.85% annually for the first eight contract years . 1.25% annually after the first eight contract years . Contracts without the premium payment credit rider: . 1.25% annually for all contract years. .the deduction of the arithmetic average of the underlying mutual fund expenses as of December 31, 2006; . 0%, 5% and 10% annual rates of return before charges; and .payment of the $30 annual contract fee (while the Contract's value is less than $30,000).
0% ANNUAL RETURN 5% ANNUAL RETURN 10% ANNUAL RETURN -------------------------------- -------------------------------- -------------------------------- SURRENDER VALUE SURRENDER VALUE SURRENDER VALUE SURRENDER VALUE SURRENDER VALUE SURRENDER VALUE WITHOUT WITH WITHOUT WITH WITHOUT WITH CONTRACT PREMIUM PAYMENT PREMIUM PAYMENT PREMIUM PAYMENT PREMIUM PAYMENT PREMIUM PAYMENT PREMIUM PAYMENT YEAR CREDIT RIDER CREDIT RIDER CREDIT RIDER CREDIT RIDER CREDIT RIDER CREDIT RIDER -------- --------------- --------------- --------------- --------------- --------------- --------------- 1 $23,120.68 $23,662.52 $24,295.68 $24,870.02 $ 25,470.68 $ 26,127.74 2 $22,602.66 $22,993.83 $24,959.88 $25,401.84 $ 27,526.18 $ 28,171.95 3 $22,095.67 $22,559.10 $25,643.13 $26,234.47 $ 29,809.85 $ 30,614.73 4 $21,802.69 $22,128.39 $26,618.05 $27,089.05 $ 32,523.18 $ 33,216.86 5 $21,509.95 $21,701.77 $27,637.20 $27,957.33 $ 35,430.31 $ 35,989.94 6 $21,217.57 $21,279.33 $28,678.39 $28,839.63 $ 38,546.50 $ 38,946.39 7 $20,925.64 $20,861.11 $29,772.28 $29,766.27 $ 41,888.19 $ 42,099.53 8 $20,817.44 $20,447.18 $31,140.37 $30,708.26 $ 45,723.12 $ 45,463.66 9 $20,343.52 $20,161.23 $32,033.34 $31,853.18 $ 49,320.43 $ 49,329.90 10 $19,879.72 $19,875.90 $32,951.93 $33,023.77 $ 53,200.76 $ 53,480.64 15 $17,704.88 $17,701.46 $37,955.41 $38,038.17 $ 77,691.37 $ 78,100.09 20 $15,752.25 $15,749.18 $43,718.64 $43,813.95 $113,456.06 $114,052.93
The higher the rate of return, the more advantageous the premium payment credit rider becomes. However, Contracts with the premium payment credit rider are subject to both a greater surrender charge and a longer surrender charge period than Contracts issued without the premium payment credit rider. If you surrender your Contract with the premium payment credit rider while subject to a surrender charge, your surrender value may be less than the surrender value of a Contract without the premium payment credit rider. THE ACCUMULATION PERIOD The Value of Your Contract -------------------------- The accumulated value of your Contract is the total of the Separate Account division accumulated value plus the DCA Plus Account(s) accumulated value plus the Fixed Account accumulated 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 division accumulated value. The value reflects the investment experience of the divisions that you choose and also reflects your premium payments, partial surrenders, surrender charges, partial annuitizations and the Contract expenses deducted from the Separate Account. The Separate Account division accumulated 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: . the number of units you have in a division multiplied by . the value of a unit in the division. The number of units is the total of units purchased by allocations to the division from: . your initial premium payment; . subsequent investments; . premium payment credits; and . transfers from another investment option. minus units sold: . for partial surrenders and/or partial annuitizations from the division; . as part of a transfer to another division or the Fixed Account; and . to pay contract charges and fees. Unit values are calculated each valuation date at the close of normal trading of the NYSE. 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 (((a) plus (b)) divided by (c)) minus (d) where: . (a) is the share price (net asset value) of the underlying mutual fund at the end of the valuation period; . (b) is the per share amount of any dividend* (or other distribution) made by the mutual fund during the valuation period; . (c) is the share price (net asset value) of the underlying mutual fund at the end of the previous valuation period; and . (d) are the total Separate Account annual expenses. * When an investment owned by an underlying mutual fund pays a dividend, the dividend increases the net asset value of a share of the underlying mutual fund as of the date the dividend is recorded. As the net asset value of a share of an underlying 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. Premium Payments ---------------- . On your application, you direct your premium payments to be allocated to the investment options. . Allocations may be in percentages. . Percentages must be in whole numbers and total 100%. . Subsequent premium payments are allocated according to your then current allocation instructions. . Changes to the allocation instructions are made without charge. . A change is effective on the next valuation period after we receive your new instructions. . You can change the current allocations and future allocation instructions by: . mailing your instructions to us; . calling us at 1-800-852-4450 (if telephone privileges apply); . faxing your instructions to us at 1-866-894-2087; or . visiting www.principal.com. . Changes to premium payment allocations do not automatically result in the transfer of any existing investment option accumulated values. You must provide specific instructions to transfer existing accumulated values. . Premium payments are credited on the basis of unit value next determined after we receive a premium payment. . If no premiums are paid during two consecutive calendar years and the accumulated value is less than $2,000, we reserve the right to terminate the Contract (see GENERAL INFORMATION - Reservation of Rights). Division Transfers ------------------ . 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 (1-866-894-2087). . You must specify the dollar amount or percentage to transfer from each division. . The minimum transfer amount is the lesser of $100 or the value of your division. . In states where allowed, we reserve the right to reject transfer instructions from someone providing them for multiple contracts for which he or she is not the owner. You may not make a transfer to the Fixed Account if: . a transfer has been made from the Fixed Account to a division within six months; or . following the transfer, the Fixed Account value would be greater than $1,000,000. Unscheduled Transfers --------------------- . You may make unscheduled division transfers from a division to another division or to the Fixed Account by: . mailing your instructions to us; . calling us at 1-800-852-4450 (if telephone privileges apply); . faxing your instructions to us at 1-866-894-2087; or . visiting www.principal.com. . Transfers are not permitted into DCA Plus Accounts. . The transfer is made, and values determined, as of the end of the valuation period in which we receive your request. . We reserve the right to impose a fee of $ 30 on each unscheduled transfer after the first in a contract year. LIMITATIONS ON UNSCHEDULED TRANSFERS . We reserve the right to reject excessive exchanges or purchases if the trade would disrupt the management of the Separate Account, any division of the Separate Account or any underlying mutual fund. In addition, we may suspend or modify transfer privileges in our sole discretion at any time to prevent market timing efforts that could disadvantage other owners. These modifications could include, but not be limited to: . requiring a minimum time period between each transfer; . imposing a transfer fee; . limiting the dollar amount that an owner may transfer at any one time; or . not accepting transfer requests from someone providing requests for multiple Contracts for which he or she is not the owner. Scheduled Transfers (Dollar Cost Averaging) ------------------------------------------- . You may elect to have transfers made on a scheduled basis. . There is no charge for scheduled transfers and no charge for participating in the scheduled transfer program. . You must specify the dollar amount of the transfer. . You select the transfer date (other than the 29th, 30th or 31st) and the transfer period (monthly, quarterly, semi-annually or annually). . If the selected date is not a valuation date, the transfer is completed on the next valuation date. . Transfers are not permitted into DCA Plus Accounts. . If you want to stop a scheduled transfer, you must provide us notice prior to the date of the scheduled transfer. . Transfers continue until your value in the division is zero or we receive notice to stop the transfers. . 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. Scheduled transfers are designed to reduce the risks that result from market fluctuations. They do this by spreading out the allocation of your money to investment options over a longer period of time. This allows you to reduce the risk of investing most of your money at a time when market prices are high. The success of this strategy depends on market trends and is not guaranteed. Example:
MONTH AMOUNT INVESTED SHARE PRICE SHARES PURCHASED ----- --------------- ----------- ---------------- January $ 100 $ 25.00 4 February $ 100 $ 20.00 5 March $ 100 $ 20.00 5 April $ 100 $ 10.00 10 May $ 100 $ 25.00 4 June $ 100 $ 20.00 5 -------- ------- - Total $ 600 $120.00 33
In the example above, the average share price is $20.00 (total of share prices ($120.00) divided by number of purchases (6)). The average share cost is $18.18 (amount invested ($600.00) divided by number of shares purchased (33)). AUTOMATIC PORTFOLIO REBALANCING (APR) . APR allows you to maintain a specific percentage of your Separate Account division accumulated value in specified divisions over time. . You may elect APR at any time after the examination offer period has expired. . APR is not available for values in the Fixed Account or the DCA Plus Accounts. . APR is not available if you have arranged scheduled transfers from the same division. . There is no charge for APR transfers and no charge for participating in the APR program. . APR may be done on the frequency you specify: . quarterly (on a calendar year or contract year basis); or . semiannually or annually (on a contract year basis). . 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 (1-866-894-2087). (Divisions are rebalanced at the end of the next valuation period following your request.) Example: You elect APR to maintain your Separate Account division accumulated value with 50% in the Capital Value Division and 50% in the Bond Division. At the end of the specified period, 60% of the values are in the Capital Value Division, with the remaining 40% in the Bond Division. By rebalancing, units from the Capital Value Division are sold and applied to the Bond Division so that 50% of the Separate Account division accumulated value is once again in each Division. TELEPHONE AND INTERNET SERVICES These services permit you to: . make premium payment allocation changes; . make redemptions; . set up DCA scheduled transfers; . make transfers; and . make changes to APR. Instructions received via our telephone services 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 or internet transaction requests. We reserve the right to refuse telephone service or internet transaction requests. You assume the risk of loss caused by fraudulent telephone service or internet transactions we reasonably believe to be genuine. We follow procedures in an attempt to assure genuine telephone service or internet transactions. If these procedures are not followed, we may be liable for loss caused by unauthorized or fraudulent transactions. The procedures may include recording telephone service transactions, requesting personal identification (name, address, security phrase, password, daytime telephone number, social security number and/or birth date) and sending written confirmation to your address of record. If the Contract is owned by a business entity or a trust, an authorized individual (with the proper password) may use these services. Instructions provided by the authorized individual are binding on the owner. We reserve the right to modify or terminate telephone service or internet transaction procedures at any time. Telephone Services ------------------ 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 in good order by us before the close of normal trading of the NYSE. 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. Internet -------- Internet access is available for both you and your sales representative at www.principal.com. You may elect Internet authorization for your sales representative by providing us written notice. SURRENDERS You may surrender your Contract by providing us notice. Surrender requests may be sent to us at: Principal Life Insurance Company P O Box 9382 Des Moines, Iowa 50306-9382 Surrenders result in the cancellation of units and your receipt of the value of the canceled unit minus any applicable fee and surrender charge. The values are determined as of the end of the valuation period in which we receive your request. 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 591/2 may involve an income tax penalty (see FEDERAL TAX MATTERS). You may specify surrender allocation percentages with each partial surrender request. If you do not provide us with specific percentages, we will use your premium payment allocation percentages for the partial surrender. Surrenders may be subject to a surrender charge (see Surrender Charge). Total Surrender --------------- . You may surrender the Contract at any time before the annuitization date. . You receive the cash surrender value at the end of the valuation period during which we receive your surrender request. . The cash surrender value is your accumulated value minus any applicable surrender charges and fee(s) (contract fee and/or prorated share of the charge(s) for optional rider(s)). . The written consent of all collateral assignees and irrevocable beneficiaries must be obtained prior to surrender. . 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 ----------------------------- . Prior to the annuitization date, you may surrender a part of the accumulated value. . You must specify the dollar amount of the surrender (which must be at least $100). . The surrender is effective at the end of the valuation period during which we receive your written request for surrender. . The surrender is deducted from your investment options according to your surrender allocation percentages. . If surrender allocation percentages are not specified, we use your premium payment allocation percentages. . We surrender units from your investment options to equal the dollar amount of the surrender request plus any applicable surrender charge and transaction fee, if any. . 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 --------------------------- . You may elect partial surrenders from any of the investment options on a scheduled basis. . Your accumulated value must be at least $5,000 when the scheduled surrenders begin. . You may specify monthly, quarterly, semi-annually or annually and choose a surrender date (other than the 29th, 30th or 31st). . If the selected date is not a valuation date, the surrender is completed on the next valuation date. . We surrender units from your investment options to equal the dollar amount of the surrender request plus any applicable surrender charge. . The surrenders continue until your value in the investment option is zero or we receive written notice to stop the surrenders. INVESTMENT PROTECTOR PLUS RIDER You may elect to purchase the optional Investment Protector Plus Rider at an additional charge. The Contract is available with or without the rider. The rider provides protection against market risk by allowing you to make certain annual withdrawals (partial surrenders and partial annuitizations), regardless of your accumulated value. Election of this rider may or may not be to your benefit. If you do not intend to make any partial surrenders or partial annuitizations, the rider is not appropriate for you. Please review the rider terms and consult your sales representative to determine whether the rider is appropriate for you. We guarantee that you may withdraw certain guaranteed minimum withdrawal benefit (GMWB) amounts each contract year, regardless of your accumulated value, subject to the terms and conditions of the rider. The rider: . Provides the flexibility of two separate measures of withdrawal benefits without requiring you to elect either measure (as long as the accumulated value is greater than zero); . Limits the investment options available under the Contract; and . Has a charge which is discussed in the section CHARGES AND DEDUCTIONS -Charges for Optional Riders The rider is available only at the time the Contract is issued and only if the older owner is younger than age 81. (If the owner is not a natural person, then the rider is available only if the older annuitant is younger than age 81.) You may not terminate the rider during the first five contract years. The rider does not restrict or change your partial surrender or partial annuitization rights under the Contract, including your right to elect scheduled partial surrenders. You must notify us if you want to make a withdrawal. The rider provides two alternative withdrawal benefit measures - For Life and Investment Back measures. . The For Life measure guarantees that, regardless of the accumulated value, you may withdraw 5% of the For Life withdrawal benefit base for the rest of your life (annuitant's life if the owner is not a natural person) or until the For Life withdrawal benefit base is zero. Your right to the 5% annual For Life benefit does not commence until the contract year after the older owner (older annuitant if the owner is not a natural person) attains age 59 1/2. . The Investment Back measure guarantees that, regardless of the accumulated value, you may withdraw 7% annually of the Investment Back withdrawal benefit base until the Investment Back remaining withdrawal benefit base is zero. Your right to the 7% annual Investment Back benefit commences immediately. You are not required to elect a withdrawal benefit measure (as long as the accumulated value is greater than zero). We tell you each contract year the amount of the For Life withdrawal benefit and the Investment Back withdrawal benefit. NOTE: The rider is designed to permit you to recover at least your premium payments by allowing periodic withdrawals of specified amounts for the duration of the rider. Withdrawal amounts that exceed the withdrawal benefit under a measure will have a negative effect on the benefits of this rider and may result in termination of the rider for lack of value in the withdrawal benefit base. Please refer to the examples in Appendix A so that you may better understand how withdrawals affect the benefits available under this rider. Definitions ----------- Some important terms in understanding this rider are: . Excess Withdrawal - the portion of a withdrawal that exceeds the withdrawal benefit under either measure. . GMWB Bonus - an amount equal to 5% of total premium payments (see GMWB Bonus). . GMWB Step-Up - if the accumulated value of the Contract is greater than the Investment Back remaining withdrawal benefit base, you may increase ("step-up") the remaining withdrawal benefit base for both measures to the accumulated value in certain years (see GMWB Step-Up). . Remaining withdrawal benefit base - the amount that is available for future withdrawal benefits. . Withdrawal benefit- the amount that we guarantee you may withdraw each year under the For Life and the Investment Back measures. . Withdrawal benefit base - the basis for determining the withdrawal benefit available each year under the For Life and Investment Back measures. Calculation of the For Life Withdrawal Benefit ---------------------------------------------- We determine the For Life withdrawal benefit on the contract date and each contract anniversary as follows: . The For Life withdrawal benefit is not available until the contract year commencing after the older owner (older annuitant if the owner is not a natural person) attains age 59 1/2. Any withdrawal that you make prior to the contract year after the older owner attains age 59 1/2 and the portion of any withdrawals that exceed the For Life withdrawal benefit in any year thereafter is an Excess Withdrawal that reduces the For Life withdrawal benefit base. . Thereafter, the For Life benefit is 5% of the For Life withdrawal benefit base until the earlier to occur of: (i) the date the For Life withdrawal benefit base is zero; or (ii) the date of your death (annuitant's death if the owner is not a natural person). At your death, your beneficiary(ies) elects to receive the Investment Back benefit (a series of benefits) or the death benefit under the Contract (as a lump sum). Calculation of the Investment Back Withdrawal Benefit ----------------------------------------------------- We determine the Investment Back withdrawal benefit on the contract date and each contract anniversary as follows: . The Investment Back withdrawal benefit starts on the contract date. . The benefit is 7% of the Investment Back withdrawal benefit base until the Investment Back remaining withdrawal benefit base is zero. . The portion of any withdrawals that exceed the Investment Back withdrawal benefit in any year is an Excess Withdrawal that reduces the Investment Back withdrawal benefit base. Calculation of the Withdrawal Benefit Base ------------------------------------------ We calculate the withdrawal benefit base for the Investment Back and the For Life measures separately on the contract date and each contract anniversary. On the contract date, the withdrawal benefit base for both measures equals your total premium payments. On succeeding contract anniversaries, the withdrawal benefit base equals total premium payments minus Excess Withdrawals (as computed for the particular measure). Excess Withdrawal is the greater of (a) or (b) where: (a) is the amount of the partial surrender (and surrender charge, if any) or the partial annuitization that exceeds the withdrawal benefit remaining prior to the surrender or annuitization; and (b) is the result of ((1) divided by (2)) multiplied by (3) where: (1) is the amount of the partial surrender (and surrender charge, if any) or partial annuitization that exceeds the withdrawal benefit remaining prior to the partial surrender or partial annuitization; and (2) is the accumulated value after the withdrawal benefit is deducted but prior to deducting the amount of the partial surrender (and surrender charge, if any) or the amount of the partial annuitization that exceeds the withdrawal benefit; and (3) is the withdrawal benefit base prior to the adjustment for the excess withdrawal amount. Calculation of the Remaining Withdrawal Benefit Base ---------------------------------------------------- We calculate the remaining withdrawal benefit base for the Investment Back and For Life measures separately. We adjust the remaining withdrawal benefit base whenever a premium payment, partial surrender or partial annuitization occurs. On the contract date, the remaining withdrawal benefit base for both measures equals the withdrawal benefit base; i.e., total premium payments. After the contract date, the remaining withdrawal benefit base is the total of all premium payments minus an amount that is the result of (a) plus (b) where: (a) is the actual amount surrendered or annuitized that does not exceed the withdrawal benefit remaining prior to the surrender; and (b) is the greater of (1) and (2) where: (1) is the amount of the partial surrender (and surrender charge, if any) or the partial annuitization that exceeds the withdrawal benefit remaining prior to the partial surrender or partial annuitization; and (2) is the result of ((i) divided by (ii)) multiplied by (iii) where: (i) is the amount of the surrender (and surrender charge, if any) or the partial annuitization greater than the withdrawal benefit remaining prior to the surrender or annuitization; (ii) is the accumulated value after the withdrawal benefit amount is deducted but prior to the surrender or annuitization of the excess amount; and (iii) is the remaining withdrawal benefit base after the withdrawal benefit amount is deducted but prior to the adjustment for the excess amount. The Excess Withdrawal amount deducted from the withdrawal benefit base and remaining withdrawal benefit base may be more than dollar-for-dollar if the accumulated value is less than the benefit bases. The calculation of the proportionate deductions to the withdrawal benefit base and remaining withdrawal benefit base are described above. EFFECT OF ACCUMULATED VALUE If the accumulated value of your Contract is zero and if you have an Investment Back remaining withdrawal benefit base or a For Life withdrawal benefit base, or both, you must elect either the For Life or the Investment Back withdrawal benefit. We will pay the rider benefits under the measure you have elected. If the accumulated value is zero, the withdrawal benefits under this rider will continue, but all other rights and benefits under the rider and Contract, including the death benefits, will terminate; and no additional premium payments will be accepted. . The Investment Back measure will provide a series of withdrawal benefits until the Investment Back remaining withdrawal benefit base is zero. . The For Life measure will provide a series of withdrawal benefits until the later to occur of: (i) the date the For Life remaining withdrawal benefit base is zero; or (ii) the date of your death. If there is any remaining withdrawal benefit base at the time of your death, we will pay it to your beneficiaries, as described in the Rider Death Provisions section below. EFFECT OF REACHING ANNUITIZATION DATE. On the annuitization date you must elect one of the following payment options: Contract Provisions: . Payments resulting from applying the accumulated value to an annuity benefit payment option. . Payment of the accumulated value as a lump sum. Rider Provisions: . Series of withdrawal benefits until the Investment Back remaining withdrawal benefit base is zero. . Series of withdrawal benefits until the later to occur of: I. the date the For Life remaining withdrawal benefit base is zero; or II. the date of your death. GMWB BONUS If no partial surrenders or partial annuitizations are made in a given contract year, a GMWB bonus of 5% of the premium payments is credited to the withdrawal benefit base and the remaining withdrawal benefit base on the next contract anniversary. The GMWB bonus ends the earlier of: . the fifth contract anniversary; or . the date you make a partial surrender or partial annuitization. The amount of the GMWB bonus, if any, is added to the withdrawal benefit base and the remaining withdrawal benefit base.The GMWB bonus is used only to calculate the benefit bases for this rider and is not included in the accumulated value of your Contract. GMWB STEP-UP Beginning with the fifth contract anniversary, if the accumulated value is greater than the Investment Back remaining withdrawal benefit base, you may elect the GMWB Step-Up. The GMWB Step-Up increases the remaining withdrawal benefit base for both the For Life and Investment Back measures and will reset the withdrawal benefit base for both the For Life and Investment Back measures to the accumulated value on the most recent contract anniversary. To elect the GMWB Step-Up, you must notify us within 30 days after your fifth contract anniversary. If you do not elect to step-up at that time, you may make a step-up election within the 30-day period following any subsequent contract anniversary. Once you have elected to step-up, you must wait five contract years to make another step-up election. If you elect a GMWB Step-Up, you will be subject to any limitations on investment options and to the rider charge then in effect. A person who owns the contract as a result of spousal continuation (described in THE CONTRACT) may elect a GMWB Step-Up at the time of electing to continue the Contract. INVESTMENT OPTION RESTRICTIONS While this rider is in effect, the investment options you may select are restricted. Those investment options are determined at the time the rider is issued. The Company reserves the right to modify the available investment options from time-to-time at its sole discretion. If the Company modifies the investment options, it will give holders of this rider prior written notice of the modifications and an opportunity to opt out of the modifications and to continue their existing rider investment options. You may allocate your Separate Account divisions to . one of the GMWB Select or Self-Build models shown below, or . the Principal LifeTime 2010 Account, or . the Principal LifeTime 2020 Account, or . the Principal LifeTime Strategic Income Account. The rider does not impose restrictions on allocations to the Fixed or DCA Accounts. For more information about the Principal LifeTime Accounts, please see the attached prospectus for the Principal Variable Contracts Fund, Inc. You may transfer from one investment option available under this rider to another; e.g., you may transfer from the Principal LifeTime 2020 account to the Select Model C and later, to Self-Build Model C. Any such transfers must total 100% of the accumulated value in the separate account divisions. You make a transfer by providing us notice (the change is effective on the next valuation period after we receive your notice). The GMWB models and Principal LifeTime Accounts are designed to support the rider guarantees with balanced investment options. The rider may not be suitable if your goal is aggressive growth. GMWB MODELS You may use one of the three GMWB select models shown below. Alternatively, you may use one of the three GMWB self-build models, which afford you limited investment option selections. For example, if you choose self-build model A, you must allocate 30% of your division assets into the "stable divisions". You choose how you will allocate that 30% between the Money Market and the Short-Term Bond divisions (for example: 15% in each of Money Market and Short-Term Bond; or 10% in Money Market and 20% in Short-Term Bond). The select models are rebalanced each calendar quarter to the percentages shown in the Select Models chart below. The self-build models are rebalanced each calendar quarter to the percentages you have selected. SELECT MODELS
INVESTMENT ADVISOR GMWB MODEL A GMWB MODEL B GMWB MODEL C ------------------------------------------------------------------------------------------ STABLE DIVISIONS 30% 20% 10% Short-Term Bond Principal Global 30% 20% 10% Investors, LLC ------------------------------------------------------------------------------------------ CONSERVATIVE DIVISIONS 40% 30% 20% American Century VP American Century Inflation Protection Investment Management, Inc. 10% 5% 10% Bond Principal Global Investors, LLC 15% 15% 10% Government & High Principal Global Quality Bond Investors, LLC 15% 10% N/A MODERATE DIVISIONS 20% 30% 45% Large Cap Blend 10% 10% 10% LargeCap Blend T. Rowe Price 10% 10% 10% Associates, Inc. ------------------------------------------------------------------------------------------ Large Cap Value 0% 5% 10% LargeCap Value AllianceBernstein L.P. N/A 5% 10% ------------------------------------------------------------------------------------------ Balanced 10% 15% 20% Equity Income Principal Global 10% 15% 20% Investors, LLC ------------------------------------------------------------------------------------------ Mid Cap Value 0% 0% 5% MidCap Value Neuberger Berman N/A N/A 5% Management, Inc. ------------------------------------------------ -------------- AGGRESSIVE DIVISIONS 10% 15% 20% Large Cap Growth 10% 10% 10% American Century VP American Century Ultra Investment Management, 10% 10% 10% Inc. -------------- MidCap Blend 0% 5% 5% MidCap Principal Global N/A 5% 5% Investors, LLC ------------------------------------------------------------------------------------------ Small Cap Value 0% 0% 5% SmallCap Value JP Morgan Investment Management, Inc. and Mellon Equity Associates, LLP N/A N/A 5% DYNAMIC DIVISIONS 0% 5% 5% Fidelity VIP Overseas Fidelity Management & N/A 5% 5% Research Company ------------------------------------------------------------------------------------------
SELF-BUILD MODELS
INVESTMENT ADVISOR GMWB MODEL A GMWB MODEL B GMWB MODEL C ------------------------------------------------------------------------------------------ STABLE DIVISIONS 30% 20% 10% ------------------------------------------------------------------------------------------ Short-Term Bond Principal Global Investors, LLC ------------------------------------------------------------------------------------------ Money Market Principal Global Investors, LLC ------------------------------------------ CONSERVATIVE DIVISIONS 40% 30% 20% ------------------------------------------------------------------------------------------ Bond Principal Global Investors, LLC Government & High Principal Global Quality Bond Investors, LLC American Century VP American Century Inflation Protection Investment Management, Inc. ------------------------------------------------------------------------------------------ MODERATE DIVISIONS 20% 30% 45% ------------------------------------------------------------------------------------------ Large Cap Blend 10% 10% 10% LargeCap Blend T. Rowe Price Associates, Inc. LargeCap Stock Index Principal Global Investors, LLC Neuberger Berman AMT Neuberger Berman Socially Responsive Management, Inc. ------------------------------------------------------------------------------------------ Large Cap Value 0% 5% 10% Capital Value Principal Global Investors, LLC N/A Equity Value American Century Investment Management, Inc. N/A LargeCap Value AllianceBernstein L.P. N/A ------------------------------------------------------------------------------------------ Balanced 10% 15% 20% Asset Allocation Morgan Stanley Asset Management Equity Income Principal Global Investors, LLC Principal LifeTime Principal Global 2010 Investors, LLC and Principal Management Corporation Principal LifeTime Principal Global 2020 Investors, LLC and Principal Management Corporation Principal LifeTime Principal Global Strategic Income Investors, LLC and Principal Management Corporation ------------------------------------------------------------------------------------------ Mid Cap Value 0% 0% 5% MidCap Value Neuberger Berman Management, Inc. N/A N/A 5% AGGRESSIVE DIVISIONS 10% 15% 20% ------------------------------------------------------------------------------------------ Large Cap Growth 10% 10% 10% American Century VP American Century Ultra Investment Management, Inc. Fidelity VIP Fidelity Management & Contrafund Research Company T. Rowe Price Health T. Rowe Price Sciences Associates, Inc. ------------------------------------------------------------------------------------------ Mid Cap Blend 0% 5% 5% MidCap Principal Global N/A 5% 5% Investors, LLC ------------------------------------------------------------------------------------------ Small Cap Value N/A N/A 5% SmallCap Value JP Morgan Investment Management, Inc. and Mellon Equity N/A N/A 5% Associates, LLP ----------------------------------------------------------------------------------------------- DYNAMIC DIVISIONS 0% 5% 5% ------------------------------------------------------------------------------------------ Diversified Principal Global International Investors, LLC N/A Fidelity VIP Overseas Fidelity Management & N/A Research Company ------------------------------------------------------------------------------------------
TERMINATION OF THE RIDER You may not terminate the rider prior to the fifth contract anniversary. However, the rider terminates upon the earliest to occur of . You send us notice to terminate the rider (after the fifth contract anniversary). This will terminate the rider, not the Contract. . You terminate the Contract. . The Investment Back remaining withdrawal benefit base and the For Life withdrawal benefit base are zero. . The contract owner is changed (or annuitant is changed if the owner is not a natural person). Note: We do not consider it a change of owner if a surviving spouse elects to continue the Contract. The surviving spouse may elect to continue the Contract with or without the rider. If the rider is continued, only the Investment Back benefit continues; the For Life benefit terminates upon the death of the deceased spouse. . Once terminated, the rider may not be reinstated. EFFECT OF NOT TAKING AVAILABLE BENEFITS If you choose not to take any or all of a withdrawal benefit in a contract year, that benefit amount is not carried over to the next year. There will be no reduction in the For Life and the Investment Back withdrawal benefit bases and remaining withdrawal benefit bases. RIDER DEATH PROVISION . For Life measure - the For Life measure terminates on the original owner's death (annuitant's death, if the owner is not a natural person). If at the time of the owner's death (annuitant's death if the owner is not a natural person) the accumulated value is greater than zero, your beneficiary(ies) must elect to receive either: . the Investment Back withdrawal benefit - we will make payments in an amount and frequency acceptable to us. If a beneficiary chooses a periodic payment, it must be at least $100 per payment until the Investment Back remaining withdrawal benefit base is zero; or . the death benefit under the Contract (as a lump sum) If you elected the For Life measure when the accumulated value was zero, your beneficiary(ies) receives any For Life remaining withdrawal benefit base as a series of payments. . Investment Back measure - If at the time of the owner's death (annuitant's death if the owner is not a natural person) the accumulated value is greater than zero, your beneficiary(ies) must elect to receive either: . the Investment Back withdrawal benefit - we will make payments in an amount and frequency acceptable to us. If a beneficiary chooses a periodic payment, it must be at least $100 per payment until the Investment Back remaining withdrawal benefit base is zero; or . the death benefit under the Contract (as a lump sum). If you elected the Investment Back measure when the accumulated value was zero, your beneficiary(ies) receives any Investment Back remaining withdrawal benefit base as a series of payments. FOR EXAMPLES ON HOW THE RIDER FEATURES OPERATE AND ARE CALCULATED, PLEASE SEE APPENDIX A. Death Benefit ----------------- If you die before the annuitization date, we pay a death benefit as follows:
Upon death of the owner if there is one owner .if the spouse is named beneficiary, the death benefit is paid or the surviving spouse may elect to continue the Contract. .if someone other than the spouse is named beneficiary, the death benefit is paid to the beneficiary. If no beneficiary survives the owner, the death benefit is paid to the owner's estate. .if there are multiple beneficiaries named (which may or may not include the spouse of the owner), death benefits are paid to the beneficiaries. If no beneficiary survives the owner, the death benefit is paid to the owner's estate. if there are joint owners . .the death benefit is paid or the if the joint owners are spouses surviving spouse may elect to continue the Contract. .if the joint owners are not .the death benefit is paid to the spouses surviving owner. if the owner is a corporation, Upon death of the annuitant the death trust or other entity benefit is paid to the named beneficiary(ies). If no beneficiary(ies) survives the annuitant, the death benefit is paid to the owner.
Before the annuitization 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). The beneficiary(ies) may elect to apply the death benefit under an annuity benefit payment option or receive the death benefit as a single payment. Generally, unless the beneficiary(ies) elects otherwise we pay the death benefit in a single sum, subject to proof of your death. 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. No surrender charge applies when a death benefit is paid. If you die before the annuitization date 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. Standard Death Benefit Formula ---------------------------------- The amount of the standard death benefit is the greatest of (1), (2) or (3) where: . (1) is the accumulated value on the date we receive proof of death and all required documents; . (2) is the total of premium payments minus an adjustment for each partial surrender (and any applicable fees and charges) and each partial annuitization made prior to the date we receive proof of death and all required documents; and . (3) is the highest accumulated value (on any prior contract anniversary that is divisible by seven) plus any premium payments and minus an adjustment for each partial surrender (and any applicable fees and charges) and each partial annuitization made after that contract anniversary. The adjustment for each partial surrender and for each partial annuitization is equal to ((a) divided by (b)) multiplied by the amounts determined in (2) or (3) above immediately prior to the partial surrender or partial annuitization where: . (a) is the amount of the partial surrender (and any applicable fees and charges) or the amount of the partial annuitization; and . (b) is the accumulated value immediately before the partial surrender or partial annuitization. Example: Your accumulated value is $10,000 and you take a partial surrender of $2,000 (20% of the accumulated value). For purposes of calculating the death benefit, we adjust the amounts determined in (2) or (3) above by 20%. Enhanced Death Benefit Rider ---------------------------- This rider provides you with the greater of the enhanced death benefit or the standard death benefit (described above). The enhanced death benefit rider can only be purchased at the time the Contract is issued. You may terminate the rider at any time. Once the rider is terminated, it cannot be reinstated. The rider charge is discussed in the section CHARGES AND DEDUCTIONS - Charges for Optional Riders. Prior to the annuitization date and prior to the lock-in date (the later of the contract anniversary following the oldest owner's 75th birthday or five years after the rider effective date), the enhanced death benefit is the greater of (a) or (b) where: . (a) is (1) minus (2) where: . (1) is the total of premium payments made since the rider effective date increased at a 5% effective annual interest rate; and . (2) is an adjustment for each partial surrender and each partial annuitization made since the rider effective date increased at a 5% effective annual interest rate. . (b) is (1) plus (2) minus (3) where: . (1) is the highest accumulated value on any contract anniversary since the rider effective date; . (2) are the premium payments received since that contract anniversary; and . (3) is an adjustment for each partial surrender and each partial annuitization made since that contract anniversary. After the lock-in date, (a) and (b) are only: . increased by any premium payment since the lock-in date; and . decreased by an adjustment for each partial surrender and each partial annuitization since the lock-in date. The adjustment for each partial surrender or partial annuitization is ((1) divided by (2)) multiplied by (3) where: . (1) is the amount of the partial surrender (plus surrender charge, if any) or the amount of the partial annuitization; . (2) is the accumulated value immediately prior to the partial surrender or partial annuitization; and . (3) is the amounts determined in (a) or (b) above immediately prior to the partial surrender or partial annuitization. NOTE: For contracts issued in New York and Washington - under this rider, if the original owner dies before the annuitization date, the death benefit payable to the beneficiary is the greater of the standard death benefit or the death benefit calculated in (b) of the enhanced death benefit description above. 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 (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 benefit 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 ANNUITIZATION PERIOD Annuitization Date ------------------ You may specify an annuitization date in your application. You may change the annuitization date with our prior approval. The request must be in writing. You may not select an annuitization date later than the maximum annuitization date found on the data pages. If you do not specify an annuitization date, the annuitization date is the maximum annuitization date shown on the data pages. Full Annuitization ---------------------- You may annuitize your Contract at any time by electing to receive payments under an annuity benefit payment option. If the accumulated value on the annuitization date is less than $2,000.00 or if the amount applied under an annuity benefit payment option is less than the minimum requirement, we may pay out the entire amount in a lump sum. The contract would then be canceled. You may select when you want the payments to begin (within the period that begins the business day following our receipt of your instruction and ends one year after our receipt of your instructions). Once payments begin under the benefit option you choose, the option may not be changed. In addition, once payments begin, you may not surrender or otherwise liquidate or commute any of the portion of your accumulated value that has been annuitized. Depending on the type of annuity benefit payment option selected, payments that are initiated either before or after the annuitization date may be subject to penalty taxes (see FEDERAL TAX MATTERS). You should consider this carefully when you select or change the annuity benefit payment commencement date. Partial Annuitization --------------------- If you purchased your Contract prior to May 20, 2006 or your Contract is issued in a state which has not yet approved the partial annuitization endorsement, partial annuitization is not available and all references to "partial annuitization" within this prospectus do not apply to your Contract. Subject to state availability, if you purchase the Contract on or after May 20, 2006 you have the right to partially annuitize a portion of your accumulated value. A full list of states in which partial annuitization is available may be obtained from your sales representative or our annuity service office. After the first contract year and prior to the annuitization date, you may annuitize a portion of your accumulated value by sending us a notice. If you have elected the premium payment credit rider, the amount of the partial annuitization during each of contract years two and three is limited to no more than 10% of the accumulated value as of the most recent contract anniversary. The minimum partial annuitization amount is $2,000. Any partial annuitization request that reduces the accumulated value to less than $5,000 will be treated as a request for full annuitization. You may select one of the annuity benefit payment options listed below. Once payments begin under the option you select, the option may not be changed. In addition, once payments begin you may not surrender or otherwise liquidate or commute any of the portion of your accumulated value that has been annuitized. Annuity Benefit Payment Options ------------------------------- We offer fixed annuity benefit payments only. No surrender charge is imposed on any portion of your accumulated value that has been annuitized. You may choose from several fixed annuity benefit payment options. Payments will be made on the frequency you choose. You may elect to have your annuity benefit 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 surrenders after the annuitization date. The amount of the fixed annuity benefit payment depends on: . amount of accumulated value applied to the annuity benefit payment option; . annuity benefit payment option selected; and . age and gender of annuitant (unless fixed income option is selected). Annuity benefit payments are determined in accordance with annuity tables and other provisions contained in the Contract. The annuity benefit payment tables contained in this Contract are based on the Annuity 2000 Mortality Table. These tables are guaranteed for the life of the Contract. The amount of the initial payment is determined by applying all or a portion of the accumulated value as of the date of the application to the annuity table for the annuitant's annuity benefit option, gender, and age. Annuity benefit 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, gender discriminations is prohibited by law. You may select an annuity benefit payment option by written request only. Your selection of an annuity benefit payment option for a partial annuitization must be in writing and may not be changed after payments begin. Your selection of an annuity benefit payment option for any portion not annuitized may be changed by written request prior to the annuitization date. If an annuity benefit payment option is not selected, we will automatically apply: . for Contracts with one annuitant - Life Income with payments guaranteed for a period of 10 years. . for Contracts with joint annuitants - Joint and Full Survivor Life Income with payments guaranteed for a period of 10 years. The available annuity benefit payment options for both full and partial annuitizations include: FIXED PERIOD INCOME . Level payments are made for a fixed period. You may select a range from 5 to 30 years. If the annuitant dies before the selected period expires, payments continue to you or the person(s) you designate until the end of period. Payments stop after all guaranteed payments are made. LIFE INCOME . Level payments continue for the annuitant's lifetime. It is possible that you would only receive one payment under this option if the annuitant dies before the second payment is due. If you defer the first payment date, it is possible that you would receive no payments if the annuitant dies before the first payment date. LIFE INCOME WITH PERIOD CERTAIN . Level payments continue during the annuitant's lifetime with a guaranteed payment period of 5 to 30 years. If the annuitant dies before all of the guaranteed payments have been made, the guaranteed payments continue to you or the person(s) you designate until the end of the guaranteed payment period. JOINT AND SURVIVOR . Payments continue as long as either the annuitant or the joint annuitant is alive. You may also choose an option that lowers the amount of income after the death of a joint annuitant. It is possible that you would only receive one payment under this option if both annuitants die before the second payment is due. If you defer the first payment date, it is possible that you would receive no payments if both the annuitants die before the first payment date. JOINT AND SURVIVOR WITH PERIOD CERTAIN . Payments continue as long as either the annuitant or the joint annuitant is alive with a guaranteed payment period of 5 to 30 years. You may choose an option that lowers the amount of income after the death of a joint annuitant. If both annuitants die before all guaranteed payments have been made, the guaranteed payments continue to you or the person(s) you designate until the end of the guaranteed payment period. Other annuity benefit payment options may be available. SUPPLEMENTARY CONTRACT When you annuitize all or a portion of your Contract's accumulated value, we issue a supplementary fixed annuity contract that provides an annuity benefit payment based on the amount you have annuitized and the annuity benefit payment option that you have selected. The date of the first payment under the supplementary contract is the effective date of that supplementary contract unless you select a date for the first payment that is later than the supplementary contract effective date. The first annuity benefit payment must be made within one year of the supplementary contract effective date. TAX CONSIDERATIONS REGARDING ANNUITY BENEFIT PAYMENT OPTIONS If you own one or more tax qualified annuity contracts, you may avoid tax penalties if payments from at least one of your tax qualified contracts begin no later than April 1 following the calendar year in which you turn age 70 1/2. The required minimum distribution payment must be in equal (or substantially equal) amounts over your life or over the joint lives of you and your designated beneficiary. These required minimum distribution payments must be made at least once a year. Tax penalties may apply at your death on certain excess accumulations. You should confer with your tax advisor about any potential tax penalties before you select an annuity benefit payment option or take other distributions from the Contract. Additional rules apply to distributions under non-qualified contracts (see Required Distributions for Non-Qualified Contracts). DEATH OF ANNUITANT (DURING THE ANNUITY BENEFIT PAYMENT PERIOD) If the annuitant dies during the annuity benefit payment period, remaining payments are made to the owner throughout the guarantee period, if any, or for the life of any joint annuitant, if any. If the owner is the annuitant, remaining payments are made to the contingent owner. In all cases the person entitled to receive payments also receives any rights and privileges under the annuity benefit payment option. CHARGES AND DEDUCTIONS Certain charges are deducted under the Contract. If the charge is not sufficient to cover our costs, we bear the loss. If the expense is more than our costs, the excess is profit to the Company. We expect a profit from all the fees and charges listed below, except the Annual Fee and Premium Tax. In addition to the charges under the Contract, there are also deductions from and expenses paid out of the assets of the underlying mutual funds which are described in the underlying mutual funds' prospectuses. ANNUAL FEE 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, 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 and whether that Contract will be charged. The fee is deducted from the investment option that has the greatest value. The fee is deducted on each contract anniversary and upon total surrender of the Contract. The fee assists in covering administration costs. The administration costs include costs associated with: . issuing Contracts; . establishing and maintaining the records which relate to Contracts; . making regulatory filings and furnishing confirmation notices; . preparing, distributing and tabulating voting materials and other communications; . providing computer, actuarial and accounting services; and . 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 divisions. We agree not to increase this charge for the duration of the Contract. This charge is assessed only prior to the annuitization 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 benefit 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 administration 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. CHARGES FOR OPTIONAL RIDERS Subject to certain conditions, you may add one or more of the following optional riders to your Contract. Detailed information concerning the optional riders may be obtained from your sales representative or the annuity service office (1-800-852-4450). ENHANCED DEATH BENEFIT RIDER . The annual charge for the rider is 0.25% of the accumulated value (0.15% in New York and Washington). The charge is equal to 0.0625% (0.0375% in New York and Washington) of the average accumulated value during the calendar quarter. We reserve the right to increase the charge to 0.075% of the average accumulated value during the calendar quarter. The charge is deducted through the redemption of units from the accumulated value in the same proportion as the surrender allocation percentages. If the rider is purchased after the beginning of a quarter, 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 rider charge is intended to reimburse us for the cost of the potentially greater death benefit provided by the rider. INVESTMENT PROTECTOR PLUS RIDER . The annual charge for the rider is 0.60% of the average quarterly Investment Back remaining withdrawal benefit base. The current quarterly charge is equal to 0.15% of the average quarterly Investment Back remaining withdrawal benefit base during the calendar quarter. We reserve the right to increase the charge to 0.2125% of the average quarterly Investment Back remaining withdrawal benefit base. At the end of each calendar quarter, the charge is deducted through the redemption of units from the accumulated value in the same proportion as the surrender allocation percentages. If the rider is purchased after the beginning of a quarter, 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 rider charge is intended to reimburse us for the cost of the protection provided by the rider. PREMIUM PAYMENT CREDIT RIDER . The current charge for the rider is 0.60% of the average daily net assets of the Separate Account divisions. In addition, we reserve the right to reduce the Fixed Account interest rate by up to 0.60%. The charge is assessed until completion of your 8th contract year and only prior to the annuitization date. This charge is assessed daily when the value of a unit is calculated. The rider charge is intended to cover the cost of the credit. TRANSACTION FEE We reserve the right to charge a transaction fee of the lesser of $25 or 2% of each unscheduled partial surrender after the 12th unscheduled partial surrender in a contract year. The transaction fee would be deducted from the accumulated value remaining in the investment option(s) from which the amount is surrendered, on a pro rata basis. We also reserve the right to charge a transaction fee on each unscheduled transfer after the first unscheduled transfer in a contract year. The transfer fee would be deducted from the investment option(s) from which the amount is 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 premium payment when we receive it, or the accumulated value when you request a surrender (total or partial) or you request application of the accumulated value (full or partial) to an annuity benefit 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 premium 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 premium 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 premium payments paid during each contract year is determined by the following tables.
NUMBER OF COMPLETED CONTRACT YEARS SURRENDER CHARGE APPLIED TO ALL SINCE EACH PREMIUM PAYMENT PREMIUM PAYMENTS RECEIVED IN WAS MADE THAT CONTRACT YEAR ------------------------------------ ------------------------------- 0 (year of premium payment)* 6% 1 6% 2 6% 3 5% 4 4% 5 3% 6 2% 7 and later 0%
Surrender Charge with the premium payment credit rider (as a percentage of amounts surrendered)
NUMBER OF COMPLETED CONTRACT YEARS SURRENDER CHARGE APPLIED TO ALL SINCE EACH PREMIUM PAYMENT PREMIUM PAYMENTS RECEIVED IN WAS MADE THAT CONTRACT YEAR ---------------------------------- ------------------------------- 0 (year of premium payment)* 8% 1 8% 2 7% 3 6% 4 5% 5 4% 6 3% 7 2% 8 1% 9 and later 0%
* Each premium payment begins in year 0 for purposes of calculating the percentage applied to that payment. However, premium payments are added together by contract year for purposes of determining the applicable surrender charge. If your contract year begins April 1 and ends March 31 the following year, all premium payments received during that period are considered to have been made in that contract year. NOTE regarding Contracts written in the states of Alabama, Massachusetts, and Washington: For contracts without the Premium Payment Credit Rider, surrender charges are applicable to premiums deposited in the first three contract years. For Contracts with the Premium Payment Credit Rider, surrender charges are applicable only to premiums deposited in the first contract year. For purpose of calculating surrender charges, we assume that surrenders and transfers are made in the following order: . first from premium payments no longer subject to a surrender charge; . then from the free surrender privilege (first from the earnings, then from the oldest premium payments (first-in, first-out)) described below; and . then from premium payments subject to a surrender charge on a first-in, first-out basis. NOTE: Partial surrenders may be subject to both the surrender charge and the transaction fee, if any. 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: . earnings in the Contract (earnings = accumulated value less unsurrendered premium payments as of the date of the surrender or partial annuitization); or . 10% of the premium payments, decreased by any partial surrenders and partial annuitizations 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: . amounts applied under an annuity benefit payment option; or . payment of any death benefit, however, the surrender charge does apply to premium payments made by a surviving spouse after an owner's death; or . amounts distributed to satisfy the minimum distribution requirement of Section 401(a)9 of the Internal Revenue 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 . 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. Waiver of Surrender Charge Rider -------------------------------- This rider is automatically made a part of the Contract at issue. There is no charge for the rider. This rider waives the surrender charge on surrenders 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: . original owner or original annuitant has a critical need; and . the critical need did not exist before the contract date. . For the purposes of this section, the following definitions apply: . 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. . 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. . 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. In Texas and New Jersey, terminal illness is not included in the criteria for critical need. . 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, a different definition of total and permanent disability applies. In Oregon, total and permanent disability is not included in the criteria for critical need. Contact us at 1-800-852-4450 for additional information. NOTE: The waiver of surrender charge rider is not available in Massachusetts. Specific information is available from your sales representative or the annuity service office (1-800-852-4450). ADMINISTRATION CHARGE Currently, we do not impose a separate account administration charge. However, we reserve the right to assess each division with a daily separate account administration charge not to exceed the annual rate of 0.15% of the average daily net value of the division. This charge would only be imposed before the annuitization date. Separate account administration includes issuing the Contract, clerical, recordkeeping and bookkeeping services, keeping the required financial and accounting records, communicating with owners, and making regulatory filings. SPECIAL PROVISIONS FOR GROUP OR SPONSORED ARRANGEMENTS Where permitted by state law, Contracts may be purchased under group or sponsored arrangements as well as on an individual basis. GROUP ARRANGEMENT - program under which a trustee, employer or similar entity purchases Contracts covering a group of individuals on a group basis. SPONSORED ARRANGEMENT - program under which an employer permits group solicitation of its employees or an association permits group solicitation of its members for the purchase of Contracts on an individual basis. The charges and deductions described above may be reduced or eliminated for Contracts issued in connection with group or sponsored arrangements. The rules in effect at the time the application is approved will determine if reductions apply. Reductions may include but are not limited to sales of Contracts without, or with reduced, mortality and expense risks charges, annual fees or surrender charges. 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 premium payments, total assets under management for the 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 administration 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 owners and other 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 and contains only 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. We reserve the right to refuse premium payment allocations and transfers from the other investment options to the Fixed Account and premium payment allocations to the DCA Plus Accounts. We will send you a written notice at least 30 days prior to the date we exercise this right. We will also notify you if we lift such restrictions. FIXED ACCOUNT The Company guarantees that premium payments allocated and amounts transferred to the Fixed Account earn interest at the interest rate in effect on the date it is received or transferred. This rate applies to each premium payment or amount transferred through the end of the contract year. Each contract anniversary, we declare a renewal interest rate that 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. We reserve the right to reduce the Fixed Account interest rate by up to 0.60% if you elect the premium payment credit rider. FIXED ACCOUNT ACCUMULATED VALUE Your Fixed Account accumulated value on any valuation date is equal to: . premium payments or credits allocated to the Fixed Account; . plus any transfers to the Fixed Account from the other investment options; . plus interest credited to the Fixed Account; . minus any surrenders or applicable surrender charges or partial annuitizations from the Fixed Account; . 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 annuitization date and as provided below. The transfer is effective on the valuation date following our receipt of 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: . transfer an amount not to exceed 25% of your Fixed Account accumulated value; or . transfer up to 100% of your Fixed Account accumulated value if: . your Fixed Account accumulated value is less than $1,000; or . (a) minus (b) is greater than 1% where: . (a) is the weighted average of your Fixed Account interest rates for the preceding contract year; and . (b) is the renewal interest rate for the Fixed Account. 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: . You may establish scheduled transfers by sending a written request or by telephoning the annuity service office at 1-800-852-4450. . Transfers occur on a date you specify (other than the 29th, 30th or 31st of any month). . If the selected date is not a valuation date, the transfer is completed on the next valuation date. . Scheduled transfers are only available if the Fixed Account accumulated value is $5,000 or more at the time the scheduled transfers begin. . 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 accumulated value will continue until the Fixed Account accumulated value is zero or until you notify us to discontinue the transfers. . The minimum transfer amount is $100. . If the Fixed Account accumulated value is less than $100 at the time of transfer, the entire Fixed Account accumulated value will be transferred. . If you stop the transfers, you may not start transfers again without our prior approval. DOLLAR COST AVERAGING PLUS PROGRAM (DCA PLUS PROGRAM) Premium payments allocated to the DCA Plus Accounts earn the interest rate in effect at the time each premium payment is received. A portion of your DCA Plus Account accumulated value is periodically transferred (on the 28th of each month) to Separate Account divisions or to the Fixed Account. If the 28th is not a valuation date, 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. There is no charge for participating in the DCA Plus Program. If you elect the premium payment credit rider, you may not participate in the DCA Plus Program. DCA Plus Premium Payments ------------------------- You may enroll in the DCA Plus Program by allocating a minimum premium payment of $1,000 into a DCA Plus Account and selecting investment options into which transfers will be made. Subsequent premium 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 premium payments receive the fixed rate of return in effect on the date each premium payment is received by us. The rate of return remains in effect for the remainder of the 6-month or 12-month DCA Plus 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 investment options in no more than 6 months. Under the 12-month transfer program, all payments and accrued interest must be transferred to the selected investment options 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 four scheduled transfers remain in the six-month transfer program and the DCA Plus Account accumulated value is $4,000, the transfer amount would be $1,000 ($4,000 / 4). Scheduled DCA Plus Transfers ---------------------------- Transfers are made from DCA Plus Accounts to the investment options according to your allocation instructions. The transfers begin after we receive your premium 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 the investment options. 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. Premium 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, amendments, riders and endorsements and data pages. 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 or death, annuitization of the accumulated value 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: . trading on the NYSE is restricted as determined by the SEC or when the NYSE is closed for other than weekends and holidays; or . an emergency exists, as determined by the SEC, as a result of which: . disposal by a mutual fund of securities owned by it is not reasonably practicable; . it is not reasonably practicable for a mutual fund to fairly determine the value of its net assets; or . the SEC permits suspension for the protection of security holders. If payments are delayed and your surrender, annuitization or transfer is not canceled by your written instruction, the amount to be surrendered, annuitized or transferred will be determined the first valuation date following the expiration of the permitted delay. The surrender, annuitization or transfer will be made within seven days thereafter. In addition, payments on surrenders attributable to a premium 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 benefit 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 OR ANNUITANT You may change the owner and/or annuitant of your non-qualified Contract 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, 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 While this Contract is in force, 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. Unless you have named an irrevocable beneficiary, you may change your beneficiary designation by sending us notice. 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. Termination of the Contracts will not unfairly discriminate against any owner. REINSTATEMENT If you have replaced this Contract with an annuity contract from another company and want to reinstate this Contract, the following apply: . we reinstate the Contract effective on the original surrender date; .if you had the premium payment credit rider on the original Contract, the 9-year surrender charge period applies to the reinstated Contract. The remaining surrender charge period, if any, is calculated based on the number of years since the original contract date; .we apply the amount received from the other company and the amount of the surrender charge you paid when you surrendered the Contract; .these amounts are priced on the valuation date the money from the other company is received by us; . commissions are not paid on the reinstatement amounts; and . 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 annuitization date. After the annuitization date, any reports will be mailed to the person receiving the annuity benefit payments. Quarterly statements reflect purchases and surrenders occurring during the quarter as well as the balance of units owned and accumulated values. IMPORTANT INFORMATION ABOUT CUSTOMER IDENTIFICATION PROCEDURES To help the government fight the funding of terrorism and money laundering activities, Federal law requires financial institutions to obtain, verify, and record information that identifies each person who applies for a Contract. When you apply for a Contract, we will ask for your name, address, date of birth, and other information that will allow us to verify your identity. We may also ask to see your driver's license or other identifying documents. If concerns arise with verification of your identification, no transactions will be permitted while we attempt to reconcile the concerns. If we are unable to verify your identity within 30 days of our receipt of your original premium payment, the Contract will be terminated and any value surrendered in accordance with normal redemption procedures. 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: . transfer assets in any division to another division or to the Fixed Account; . add, combine or eliminate a division(s); . substitute the units of a division for the units of another division; . if units of a division are no longer available for investment; or . if in our judgment, investment in a division becomes inappropriate considering the purposes of the Separate Account. FREQUENT TRADING AND MARKET-TIMING (ABUSIVE TRADING PRACTICES) This Contract is not designed for frequent trading or market timing activity of the investment options. If you intend to trade frequently and/or use market timing investment strategies, you should not purchase this Contract. The Company does not accommodate market timing. We consider frequent trading and market timing activities to be abusive trading practices because they: . Disrupt the management of the underlying mutual funds by; . forcing the fund to hold short-term (liquid) assets rather than investing for long term growth, which results in lost investment opportunities for the fund; and . causing unplanned portfolio turnover; . Hurt the portfolio performance of the underlying mutual funds; and . Increase expenses of the underlying mutual fund and separate account due to; . increased broker-dealer commissions; and . increased recordkeeping and related costs. If we are not able to identify such abusive trading practices, the abuses described above will negatively impact the Contract and cause investors to suffer the harms described. We have adopted policies and procedures to help us identify and prevent abusive trading practices. In addition, the underlying mutual funds monitor trading activity to identify and take action against abuses. While our policies and procedures are designed to identify and protect against abusive trading practices, there can be no certainty that we will identify and prevent abusive trading in all instances. When we do identify abusive trading, we will apply our policies and procedures in a fair and uniform manner. If we, or an underlying mutual fund that is an investment option with the Contract, deem abusive trading practices to be occurring, we will take action that may include, but is not limited to: . Rejecting transfer instructions from a Contract owner or other person authorized by the owner to direct transfers; . Restricting submission of transfer requests by, for example, allowing transfer requests to be submitted by 1/st/ class U.S. mail only and disallowing requests made via the internet, by facsimile, by overnight courier or by telephone; . Limiting the number of unscheduled transfer during a Contract year to no more than 12; . Prohibiting you from requesting a transfer among the divisions for a minimum of thirty days where there is evidence of at least one round-trip transaction (exchange or redemption of shares that were purchased within 30 days of the exchange/redemption) by you; and . Taking such other action as directed by the underlying mutual fund. The underlying mutual funds have reserved the right to accept or reject, without prior written notice, any transfer requests. In some instances, a transfer may be completed prior to a determination of abusive trading. In those instances, we will reverse the transfer (within two business days of the transfer) and return the Contract to the investment option holdings it had prior to the transfer. We will give you notice in writing in this instance. DISTRIBUTION OF THE CONTRACT The Company has appointed Princor Financial Services Corporation ("Princor") (Des Moines, Iowa 50392-0200), a broker-dealer registered under the Securities Exchange Act of 1934, a member of the National Association of Securities Dealers, Inc. and affiliate of the Company, as the distributor and principal underwriter of the Contract. Princor is paid 6.5% of premium payments by the Company for the distribution of the Contract. Princor also may receive 12b-1 fees in connection with purchases and sales of mutual funds underlying the Contracts. The 12b-1 fees for the underlying mutual funds are shown in this Contract prospectus in Summary of Expense, Annual Underlying Mutual Fund Expenses. Applications for the Contracts are solicited by registered representatives of Princor or such other broker-dealers as have entered into selling agreements with Princor. Such registered representatives act as appointed agents of the Company under applicable state insurance law and must be licensed to sell variable insurance products. The Company intends to offer the Contract in all jurisdictions where it is licensed to do business and where the Contract is approved. 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 underlying mutual fund in which the division invests was first offered. The hypothetical performance from the date of the inception of the underlying 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 underlying mutual funds 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 underlying mutual fund shares in which you have a voting interest is determined by your investments in an underlying mutual fund as of a "record date." The record date is set by the underlying mutual fund within the requirements of the laws of the state which govern the various mutual funds. The number of underlying 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 underlying mutual fund. Shares for which owners are entitled to give voting instructions, but for which none are received, and shares of the underlying 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 underlying mutual fund shares held in Separate Account B need not be voted pursuant to instructions received from owners, the Company may vote underlying 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 Internal Revenue Code governs the income taxation of annuities in general. . Premium payments made under non-qualified Contracts are not excludable or deductible from your gross income or any other person's gross income. . 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. . 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. . Surrenders or partial surrenders are taxed as ordinary income to the extent of the accumulated income or gain under the Contract. . The value of the Contract pledged or assigned is taxed as ordinary income to the same extent as a partial surrender. . Annuity benefit payments: . The "investment in the contract" is generally the total of the premium payments made. . The basic rule for taxing annuity benefit payments is that part of each annuity benefit payment is considered a nontaxable return if the investment in the contract and part taxable income. An "exclusion ratio" is applied to each annuity benefit payment to determine how much of the payment is excludable from gross income. The remainder of the annuity benefit payment is includable in gross income for the year received. . After the premium payment(s) in the Contract is paid out, the full amount of any annuity benefit 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. Transfer of ownership may have tax consequences to the owner. Please consult with your tax advisor before changing ownership of your Contract. 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 Internal Revenue Code requires: . If the person receiving payments dies on or after the annuitization 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. . If you die prior to the annuitization date, the entire interest in the Contract will be distributed: . within five years after the date of your death; or . as annuity benefit 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. . If you take a distribution from the Contract before you are 591/2, you may incur an income tax penalty. Generally, unless the beneficiary elects otherwise, the above requirements are satisfied prior to the annuitization 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 benefit 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 Internal Revenue Code. Where the owner or other person receiving payments is not a natural person, the required distributions provided for in the Internal Revenue 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. . IRA - An Individual Retirement Annuity (IRA) is a retirement savings annuity. Contributions grow tax deferred. . 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. . 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, premium payments made under a retirement program recognized under the Internal Revenue Code are excluded from the participant's gross income for tax purposes prior to the annuity benefit payment date (subject to applicable state law). The portion, if any, of any premium 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. Tax-qualified retirement arrangements, such as IRAs, SEPs, and SIMPLE-IRAs, are tax-deferred. You derive no additional benefit from the tax deferral feature of the annuity. Consequently, an annuity should be used to fund an IRA, or other tax qualified retirement arrangement to benefit from the annuity's features other than tax deferral. These features may include guaranteed lifetime income, death benefits without surrender charges, guaranteed caps on fees, and the ability to transfer among investment options without sales or withdrawal charges. 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 Internal Revenue 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: . made on or after you reach age 591/2; . made to a beneficiary on or after your death; . made upon your disability; . part of a series of substantially equal periodic payments for the life or life expectancy of you or you and the beneficiary; . made to pay certain medical expenses; . for health insurance premiums while employed; . for first home purchases (up to $10,000); . for qualified higher education expenses; . for qualified hurricane distributions (up to $100,000); or . for qualified reservist distributions. ROLLOVER IRAS If you receive a lump-sum distribution from a qualified retirement plan, tax-sheltered annuity or governmental 457(b) plan, you may maintain the tax-deferred status of the distribution by rolling it over into an eligible retirement plan or IRA. You can accomplish this by electing a direct rollover from the plan, or you can receive the distribution and roll it over into an eligible retirement plan or IRA within 60 days. However, if you do not elect a direct rollover from the plan, the plan is required to withhold 20% of the distribution. This amount is sent to the IRS as income tax withholding to be credited against your taxes. Amounts received prior to age 59 1/2 and not rolled over may be subject to an additional 10% excise tax. ROTH IRAS The Contract may be purchased to fund a Roth IRA. Contributions to a Roth IRA are not deductible from taxable income. Subject to certain limitations, a traditional IRA, SIMPLE-IRA or SEP may be converted into a Roth IRA or a distribution from such an arrangement may be rolled over to a Roth IRA. However, a conversion or a rollover to a Roth IRA is not excludable from gross income. If certain conditions are met, qualified distributions from a Roth IRA are tax-free. For more information, please contact your tax advisor. WITHHOLDING Annuity benefit 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 Internal Revenue Code which establishes standards of diversification for the investments underlying the Contracts. Under this Internal Revenue 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 an underlying mutual fund to meet the diversification requirements could result in tax liability to non-qualified Contract holders. The investment opportunities of the underlying 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 the Commissioner's 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. GENERAL INFORMATION RESERVATION OF RIGHTS The Company reserves the right to: . increase the minimum amount for each premium payment to not more than $1,000; and . 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 premium 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. 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 Executive 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. CUSTOMER INQUIRIES Your questions should be directed to: Principal Investment Plus Variable Annuity, Principal Financial Group, P.O. Box 9382, Des Moines, Iowa 50306-9382, 1-800-852-4450. PAYMENTS TO FINANCIAL INTERMEDIARIES The Company pays compensation to broker-dealers, financial institutions, and other parties ("Financial Intermediaries") for the sale of the Contract according to schedules in the sales agreements and other agreements reached between the Company and the Financial Intermediaries. Such compensation generally consists of commissions on premiums paid on the Contract. The Company and/or its affiliates may also pay other amounts ("Additional Payments") that include, but are not limited to, marketing allowances, expense reimbursements, and educational payments. These Additional Payments are designed to provide incentives for the sale of the Contracts as well as other products sold by the Company and may influence the Financial intermediary or its sales representative to recommend the purchase of this Contract over competing annuity contracts or other investment options. You may ask your sales representative about these differing and divergent interests, how your sales representative is personally compensated, and how your sales representative's broker-dealer is compensated for soliciting applications for the Contract. SERVICE ARRANGEMENTS AND COMPENSATION The Company has entered into agreements with the distributors, advisers, and/or the affiliates of some of the mutual funds underlying the Contract and receives compensation for providing certain services including, but not limited to, distribution and operational support services, to the underlying mutual fund. Fees for these services are paid periodically (typically, quarterly or monthly) based on the average daily net asset value of shares of each fund held by the Separate Account and purchased at the Contract owners' instructions. Because the Company receives such fees, it may be subject to competing interests in making these funds available as investment options under the Contract. The Company takes into consideration the anticipated payments from underlying mutual funds when it determines the charges assessed under the Contract. Without these payments, charges under the Contract are expected to be higher. INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM 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 registered public accounting firm, 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. TABLE OF SEPARATE ACCOUNT DIVISIONS The following is a brief summary of the investment objectives of each division. There is no guarantee that the objectives will be met. AIM V.I. BASIC VALUE DIVISION INVESTS IN: AIM V.I. Basic Value Fund - Series I INVESTMENT ADVISOR: A I M Advisors, Inc. INVESTMENT OBJECTIVE: seeks long-term growth of capital. AIM V.I. SMALL CAP EQUITY DIVISION INVESTS IN: AIM V.I. Small Cap Equity Fund - Series I Shares INVESTMENT ADVISOR: A I M Advisors, Inc. INVESTMENT OBJECTIVE: seeks long-term growth of capital. ALLIANCEBERNSTEIN SMALL CAP GROWTH DIVISION INVESTS IN: AllianceBernstein Variable Products Series Fund, Inc. - AllianceBernstein Small Cap Growth Portfolio - Class A INVESTMENT ADVISOR: AllianceBernstein L.P. INVESTMENT OBJECTIVE: seeks growth of capital by pursuing aggressive investment policies. AMERICAN CENTURY VP INFLATION PROTECTION DIVISION INVESTS IN: American Century Variable Portfolios II, Inc. Inflation Protection Fund - Class II INVESTMENT ADVISOR: American Century Investment Management, Inc. INVESTMENT OBJECTIVE: seeks long-term total return using a strategy that seeks to protect against U.S. inflation. AMERICAN CENTURY VP ULTRA DIVISION INVESTS IN: American Century VP Ultra Fund - Class II INVESTMENT ADVISOR: American Century Investment Management, Inc. INVESTMENT OBJECTIVE: seeks long-term capital growth by investing primarily in stocks of U.S. companies. AMERICAN CENTURY VP VISTA DIVISION INVESTS IN: American Century VP Vista Fund - Class I INVESTMENT ADVISOR: American Century Investment Management, Inc. INVESTMENT OBJECTIVE: seeks long-term capital growth. DREYFUS IP TECHNOLOGY GROWTH DIVISION INVESTS IN: Dreyfus Investment Portfolios Technology Growth Portfolio - Service Class INVESTMENT ADVISOR: The Dreyfus Corporation INVESTMENT OBJECTIVE: seeks capital appreciation. FIDELITY VIP CONTRAFUND DIVISION INVESTS IN: Fidelity VIP Contrafund Portfolio - Service Class 2 INVESTMENT ADVISOR: Fidelity Management & Research Company INVESTMENT OBJECTIVE: seeks long-term capital appreciation. FIDELITY VIP EQUITY-INCOME DIVISION INVESTS IN: Fidelity VIP Equity-Income Portfolio - Service Class 2 INVESTMENT ADVISOR: Fidelity Management & Research Company INVESTMENT OBJECTIVE: seeks reasonable income. The fund will also consider the potential for capital appreciation. The fund's goal is to achieve a yield which exceeds the composite yield on the securities comprising the Standard & Poor's 500/SM/ Index (S&P 500/(R)/). FIDELITY VIP GROWTH DIVISION INVESTS IN: Fidelity VIP Growth Portfolio - Service Class 2 INVESTMENT ADVISOR: Fidelity Management & Research Company INVESTMENT OBJECTIVE: seeks to achieve capital appreciation. FIDELITY VIP MID CAP DIVISION INVESTS IN: Fidelity VIP Mid Cap Portfolio - Service Class 2 INVESTMENT ADVISOR: Fidelity Management & Research Company INVESTMENT OBJECTIVE: seeks long-term growth of capital. FIDELITY VIP OVERSEAS DIVISION INVESTS IN: Fidelity VIP Overseas Portfolio - Service Class 2 INVESTMENT ADVISOR: Fidelity Management & Research Company INVESTMENT OBJECTIVE: seeks long-term growth of capital. GOLDMAN SACHS STRUCTURED SMALL CAP EQUITY DIVISION INVESTS IN: Goldman Sachs VIT - Goldman Sachs Structured Small Cap Equity Fund - Institutional Class INVESTMENT ADVISOR: Goldman Sachs Asset Management, L.P. INVESTMENT OBJECTIVE: seeks long-term growth of capital. GOLDMAN SACHS VIT MID CAP VALUE DIVISION INVESTS IN: Goldman Sachs VIT Mid Cap Value Fund - Institutional Class INVESTMENT ADVISOR: Goldman Sachs Asset Management, L.P. INVESTMENT OBJECTIVE: seeks long-term capital appreciation. LEHMAN BROTHERS HIGH INCOME BOND DIVISION (F/K/A NEUBERGER BERMAN AMT HIGH INCOME BOND DIVISION) INVESTS IN: Lehman Brothers High Income Bond Account - S Class (f/k/a Neuberger Berman AMT High Income Bond Portfolio - S Class) INVESTMENT ADVISOR: Lehman Brothers Asset Management, LLC INVESTMENT OBJECTIVE: The fund seeks high total returns consistent with capital preservation. NEUBERGER BERMAN AMT FASCIANO DIVISION INVESTS IN: Neuberger Berman AMT Fasciano Portfolio - Class S INVESTMENT ADVISOR: Neuberger Berman Management Inc. INVESTMENT OBJECTIVE: seeks long-term capital growth. NEUBERGER BERMAN AMT PARTNERS DIVISION INVESTS IN: Neuberger Berman AMT Partners Portfolio - Class I INVESTMENT ADVISOR: Neuberger Berman Management Inc. INVESTMENT OBJECTIVE: seeks growth of capital. NEUBERGER BERMAN AMT SOCIALLY RESPONSIVE DIVISION INVESTS IN: Neuberger Berman AMT Socially Responsive Portfolio - I Class INVESTMENT ADVISOR: Neuberger Berman Management Inc. INVESTMENT OBJECTIVE: seeks long-term growth of capital by investing primarily in securities of companies that meet the fund's financial criteria and social policy. ASSET ALLOCATION DIVISION INVESTS IN: Principal Variable Contracts Fund Asset Allocation Account - Class 1 INVESTMENT ADVISOR: Morgan Stanley Investment Management, Inc. (doing business as Van Kampen) through a sub-advisory agreement with Principal Management Corporation INVESTMENT OBJECTIVE: to generate a total investment return consistent with the preservation of capital. The Account intends to pursue a flexible investment policy in seeking to achieve this investment objective by investing primarily in equity and fixed-income securities. BOND DIVISION INVESTS IN: Principal Variable Contracts Fund Bond Account - Class 1 INVESTMENT ADVISOR: Principal Global Investors, LLC through a sub-advisory agreement with Principal Management Corporation INVESTMENT OBJECTIVE: to provide as high a level of income as is consistent with preservation of capital and prudent investment risk. CAPITAL VALUE DIVISION INVESTS IN: Principal Variable Contracts Fund Capital Value Account - Class 1 INVESTMENT ADVISOR: Principal Global Investors, LLC through a sub-advisory agreement with Principal Management Corporation INVESTMENT OBJECTIVE: to provide long-term capital appreciation and secondarily growth investment income. The Account seeks to achieve its investment objectives through the purchase primarily of common stocks, but the Account may invest in other securities. DIVERSIFIED INTERNATIONAL DIVISION INVESTS IN: Principal Variable Contracts Fund Diversified International Account - Class 1 INVESTMENT ADVISOR: Principal Global Investors, LLC through a sub-advisory agreement with Principal Management Corporation INVESTMENT OBJECTIVE: to seek long-term growth of capital by investing in a portfolio of equity securities domiciled in any of the nations of the world. EQUITY GROWTH DIVISION (LARGECAP GROWTH EQUITY DIVISION MERGED INTO EQUITY GROWTH DIVISION ON MAY 1, 2007) INVESTS IN: Principal Variable Contracts Fund Equity Growth Account - Class 1 (LargeCap Growth Equity Account merged into Equity Growth Account on May 1, 2007) INVESTMENT ADVISOR: T. Rowe Price Associates, Inc. through a sub-advisory agreement with Principal Management Corporation INVESTMENT OBJECTIVE: to provide long-term capital appreciation by investing primarily in growth-oriented common stocks of medium and large capitalization U.S. corporations and, to a limited extent, foreign corporations. EQUITY INCOME I DIVISION (ON JANUARY 5, 2007 THE EQUITY INCOME DIVISION ASSETS MERGED INTO THE EQUITY INCOME I DIVISION) INVESTS IN: Principal Variable Contracts Fund Equity Income Account I - Class 1 (Principal Variable Contracts Fund - Equity Income Account merged into Principal Variable Contracts Fund - Equity Income I Account on January 5, 2007) INVESTMENT ADVISOR: Edge Asset Management, Inc. through a sub-advisory agreement with Principal Management Corporation INVESTMENT OBJECTIVE: to seek to provide a relatively high level of current income and long-term growth of income and capital. EQUITY VALUE DIVISION INVESTS IN: Principal Variable Contracts Fund Equity Value Account - Class 1 INVESTMENT ADVISOR: American Century Investment Management, Inc. through a sub-advisory agreement with Principal Management Corporation INVESTMENT OBJECTIVE: to seek growth of capital. The Account seeks to achieve its objective through the purchase primarily of common stocks, but the Account may invest in other securities. GOVERNMENT & HIGH QUALITY BOND DIVISION INVESTS IN: Principal Variable Contracts Fund Government & High Quality Bond Account - Class 1 INVESTMENT ADVISOR: Principal Global Investors, LLC through a sub-advisory agreement with Principal Management Corporation INVESTMENT OBJECTIVE: to seek a high level of current income, liquidity and safety of principal. GROWTH DIVISION INVESTS IN: Principal Variable Contracts Fund Growth Account - Class 1 INVESTMENT ADVISOR: Columbus Circle Investors through a sub-advisory agreement with Principal Management Corporation INVESTMENT OBJECTIVE: to seek growth of capital. The Account seeks to achieve its objective through the purchase primarily of common stocks, but the Account may invest in other securities. INTERNATIONAL EMERGING MARKETS DIVISION INVESTS IN: Principal Variable Contracts Fund International Emerging Markets Account - Class 1 INVESTMENT ADVISOR: Principal Global Investors, LLC through a sub-advisory agreement with Principal Management Corporation INVESTMENT OBJECTIVE: seeks long-term growth of capital by investing in equity securities of issuers in emerging market countries. INTERNATIONAL SMALLCAP DIVISION INVESTS IN: Principal Variable Contracts Fund International SmallCap Account - Class 1 INVESTMENT ADVISOR: Principal Global Investors, LLC through a sub-advisory agreement with Principal Management Corporation INVESTMENT OBJECTIVE: to seek long-term growth of capital. The Account will attempt to achieve its objective by investing primarily in equity securities of non-U.S. companies with comparatively smaller market capitalizations. LARGECAP BLEND DIVISION INVESTS IN: Principal Variable Contracts Fund LargeCap Blend Account - Class 1 INVESTMENT ADVISOR: T. Rowe Price Associates, Inc. through a sub-advisory agreement with Principal Management Corporation INVESTMENT OBJECTIVE: seeks long-term growth of capital. LARGECAP STOCK INDEX DIVISION INVESTS IN: Principal Variable Contracts Fund LargeCap Stock Index Account - Class 1 INVESTMENT ADVISOR: Principal Global Investors, LLC through a sub-advisory agreement with Principal Management Corporation INVESTMENT OBJECTIVE: to seek long-term growth of capital by investing in stocks of large U.S. companies. The Account attempts to mirror the investment results of the Standard & Poor's 500 Index. LARGECAP VALUE DIVISION INVESTS IN: Principal Variable Contracts Fund LargeCap Value Account - Class 1 INVESTMENT ADVISOR: AllianceBernstein, L.P. through a sub-advisory agreement with Principal Management Corporation INVESTMENT OBJECTIVE: to seek long-term growth of capital. MIDCAP DIVISION INVESTS IN: Principal Variable Contracts Fund MidCap Account - Class 1 INVESTMENT ADVISOR: Principal Global Investors, LLC through a sub-advisory agreement with Principal Management Corporation INVESTMENT OBJECTIVE: to achieve capital appreciation by investing primarily in securities of emerging and other growth-oriented companies. MIDCAP GROWTH DIVISION INVESTS IN: Principal Variable Contracts Fund MidCap Growth Account - Class 1 INVESTMENT ADVISOR: Mellon Equity Associates, LLP through a sub-advisory agreement with Principal Management Corporation INVESTMENT OBJECTIVE: to seek long-term growth of capital. The Account will attempt to achieve its objective by investing primarily in growth stocks of medium market capitalization companies. MIDCAP VALUE DIVISION INVESTS IN: Principal Variable Contracts Fund MidCap Value Account - Class 1 INVESTMENT ADVISOR: Neuberger Berman Management, Inc. through a sub-advisory agreement with Principal Management Corporation INVESTMENT OBJECTIVE: seeks long-term growth of capital by investing primarily in equity securities of companies with value characteristics and medium market capitalizations. MONEY MARKET DIVISION INVESTS IN: Principal Variable Contracts Fund Money Market Account - Class 1 INVESTMENT ADVISOR: Principal Global Investors, LLC through a sub-advisory agreement with Principal Management Corporation INVESTMENT OBJECTIVE: to seek as high a level of current income available from short-term securities as is considered consistent with preservation of principal and maintenance of liquidity by investing all of its assets in a portfolio of money market instruments. LIFETIME 2010 DIVISION INVESTS IN: Principal Variable Contracts Fund Principal LifeTime 2010 Account - Class 1 INVESTMENT ADVISOR: Principal Global Investors, LLC through a sub-advisory agreement with Principal Management Corporation INVESTMENT OBJECTIVE: seeks a total return consisting of long-term growth of capital and current income by investing primarily in shares of other Principal Variable Contracts Fund accounts. LIFETIME 2020 DIVISION INVESTS IN: Principal Variable Contracts Fund Principal LifeTime 2020 Account - Class 1 INVESTMENT ADVISOR: Principal Global Investors, LLC through a sub-advisory agreement with Principal Management Corporation INVESTMENT OBJECTIVE: seeks a total return consisting of long-term growth of capital and current income by investing primarily in shares of other Principal Variable Contracts Fund accounts. LIFETIME 2030 DIVISION INVESTS IN: Principal Variable Contracts Fund Principal LifeTime 2030 Account - Class 1 INVESTMENT ADVISOR: Principal Global Investors, LLC through a sub-advisory agreement with Principal Management Corporation INVESTMENT OBJECTIVE: seeks a total return consisting of long-term growth of capital and current income by investing primarily in shares of other Principal Variable Contracts Fund accounts. LIFETIME 2040 DIVISION INVESTS IN: Principal Variable Contracts Fund Principal LifeTime 2040 Account - Class 1 INVESTMENT ADVISOR: Principal Global Investors, LLC through a sub-advisory agreement with Principal Management Corporation INVESTMENT OBJECTIVE: seeks a total return consisting of long-term growth of capital and current income by investing primarily in shares of other Principal Variable Contracts Fund accounts. LIFETIME 2050 DIVISION INVESTS IN: Principal Variable Contracts Fund Principal LifeTime 2050 Account - Class 1 INVESTMENT ADVISOR: Principal Global Investors, LLC through a sub-advisory agreement with Principal Management Corporation INVESTMENT OBJECTIVE: seeks a total return consisting of long-term growth of capital and current income by investing primarily in shares of other Principal Variable Contracts Fund accounts. LIFETIME STRATEGIC INCOME DIVISION INVESTS IN: Principal Variable Contracts Fund Principal LifeTime Strategic Income Account - Class 1 INVESTMENT ADVISOR: Principal Global Investors, LLC through a sub-advisory agreement with Principal Management Corporation INVESTMENT OBJECTIVE: seeks high current income by investing primarily in shares of other Principal Variable Contracts Fund accounts. REAL ESTATE SECURITIES DIVISION INVESTS IN: Principal Variable Contracts Fund Real Estate Securities Account - Class 1 INVESTMENT ADVISOR: Principal Real Estate Investors, LLC through a sub-advisory agreement with Principal Management Corporation INVESTMENT OBJECTIVE: to seek to generate a high total return. The Account will attempt to achieve its objective by investing primarily in equity securities of companies principally engaged in the real estate industry. SHORT-TERM BOND DIVISION INVESTS IN: Principal Variable Contracts Fund Short-Term Bond Account - Class 1 INVESTMENT ADVISOR: Principal Global Investors, LLC through a sub-advisory agreement with Principal Management Corporation INVESTMENT OBJECTIVE: to provide current income. SMALLCAP GROWTH DIVISION INVESTS IN: Principal Variable Contracts Fund SmallCap Growth Account - Class 1 INVESTMENT ADVISOR: Emerald Advisors, Inc. through a sub-advisory agreement; Essex Investment Management Company, LLC through a sub-advisory agreement; and UBS Global Asset Management (Americas) Inc. through a sub-advisory agreement with Principal Management Corporation INVESTMENT OBJECTIVE: to seek long-term growth of capital. The Account will attempt to achieve its objective by investing primarily in equity securities of growth companies with comparatively smaller market capitalizations. SMALLCAP VALUE DIVISION INVESTS IN: Principal Variable Contracts Fund SmallCap Value Account - Class 1 INVESTMENT ADVISOR: J.P. Morgan Investment Management, Inc. through a sub-advisory agreement and Mellon Equity Associates, LLP through a sub-advisory agreement with Principal Management Corporation INVESTMENT OBJECTIVE: to seek long-term growth of capital by investing primarily in equity securities of small companies with value characteristics and comparatively smaller market capitalizations. STRATEGIC ASSET MANAGEMENT BALANCED PORTFOLIO DIVISION INVESTS IN: Principal Variable Contracts Fund Strategic Asset Management Balanced Portfolio - Class 1 INVESTMENT ADVISOR: Edge Asset Management, Inc. through a sub-advisory agreement with Principal Management Corporation INVESTMENT OBJECTIVE: seeks to provide as high a level of total return (consisting of reinvested income and capital appreciation) as is consistent with reasonable risk. STRATEGIC ASSET MANAGEMENT CONSERVATIVE BALANCED PORTFOLIO DIVISION INVESTS IN: Principal Variable Contracts Fund Strategic Asset Management Conservative Balanced Portfolio - Class 1 INVESTMENT ADVISOR: Edge Asset Management, Inc. through a sub-advisory agreement with Principal Management Corporation INVESTMENT OBJECTIVE: seeks to provide a high level of total return (consisting of reinvestment of income and capital appreciation), consistent with a moderate degree of principal risk. STRATEGIC ASSET MANAGEMENT CONSERVATIVE GROWTH PORTFOLIO DIVISION INVESTS IN: Principal Variable Contracts Fund Strategic Asset Management Conservative Growth Portfolio - Class 1 INVESTMENT ADVISOR: Edge Asset Management, Inc. through a sub-advisory agreement with Principal Management Corporation INVESTMENT OBJECTIVE: seeks to provide long-term capital appreciation. STRATEGIC ASSET MANAGEMENT FLEXIBLE INCOME PORTFOLIO DIVISION INVESTS IN: Principal Variable Contracts Fund Strategic Asset Management Flexible Income Portfolio - Class 1 INVESTMENT ADVISOR: Edge Asset Management, Inc. through a sub-advisory agreement with Principal Management Corporation INVESTMENT OBJECTIVE: seeks to provide a high level of total return (consisting of reinvestment of income with some capital appreciation). STRATEGIC ASSET MANAGEMENT STRATEGIC GROWTH PORTFOLIO DIVISION INVESTS IN: Principal Variable Contracts Fund Strategic Asset Management Strategic Growth Portfolio - Class 1 INVESTMENT ADVISOR: Edge Asset Management, Inc. through a sub-advisory agreement with Principal Management Corporation INVESTMENT OBJECTIVE: seeks to provide long-term capital appreciation. WEST COAST EQUITY DIVISION INVESTS IN: Principal Variable Contracts Fund West Coast Equity Account- Class 1 INVESTMENT ADVISOR: Edge Asset Management, Inc. through a sub-advisory agreement with Principal Management Corporation INVESTMENT OBJECTIVE: seeks long-term growth of capital and willing to accept the risks of investing in common stocks that may have greater risks than stocks of companies with lower potential for earnings growth. T. ROWE PRICE BLUE CHIP GROWTH DIVISION INVESTS IN: T. Rowe Price Blue Chip Growth Portfolio - II INVESTMENT ADVISOR: T. Rowe Price Associates, Inc. INVESTMENT OBJECTIVE: seeks to provide long-term capital growth. T. ROWE PRICE HEALTH SCIENCES DIVISION INVESTS IN: T. Rowe Price Health Sciences Portfolio - II INVESTMENT ADVISOR: T. Rowe Price Associates, Inc. INVESTMENT OBJECTIVE: seeks long-term capital appreciation. 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 home office. By paying the prescribed fees, you may obtain a copy of Part C of the registration statement from: SEC's Public Reference Branch, 100 F Street, NE, Room 1580 Washington, D.C. 20549 Telephone: (202) 551-8090 The filings are also available on the SEC's website at www.sec.gov. The registration number for the Contract is 333-128079. CUSTOMER INQUIRIES Your questions should be directed to: Principal Investment Plus Variable Annuity, Principal Financial Group, P.O. Box 9382, Des Moines, Iowa 50306-9382, 1-800-852-4450. TABLE OF CONTENTS OF THE SAI The table of contents for the Statement of Additional Information is provided below. TABLE OF CONTENTS General Information and History......................................... Independent Registered Public Accounting Firm ........................... Principal Underwriter ................................................... Calculation of Performance Data ......................................... Taxation Under Certain Retirement Plans................................. Principal Life Insurance Company Separate Account B Report of Independent Registered Public Accounting Firm................ Financial Statements ................................................... Principal Life Insurance Company Report of Independent Registered Public Accounting Firm ................ Consolidated Financial Statements ...................................... To obtain a copy of the Statement of Additional Information, free of charge, write or telephone: Princor Financial Services Corporation a company of the Principal Financial Group Des Moines, IA 50392-2080 Telephone: 1-800-852-4450 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 BEGINNING END OF PERCENTAGE OF CHANGE OUTEND OFNG DIVISION OF PERIOD PERIOD FROM PRIOR PERIOD PERIOD -------- --------- ------ -------------------- (IN THOUSANDS) ------------ ABVPSF AllianceBernstein Small Cap Growth 2006 $12.608 $13.782 9.31% 53 2005 12.131 12.608 3.93 18 Period Ended December 31, 2004/(1) / 10.000 12.131 21.31 AIM V.I. Basic Value 2006 11.733 13.118 11.80 49 2005 11.236 11.733 4.42 5 Period Ended December 31, 2004/(1)/ 10.000 11.236 12.36 AIM V.I. SmallCap Equity 2006 12.253 14.212 15.99 25 2005 11.476 12.253 6.77 6 Period Ended December 31, 2004/(1)/ 10.000 11.476 14.76 American Century VP Inflation Protection 2006 10.216 10.250 0.33 3,389 2005 10.191 10.216 0.25 1,227 Period Ended December 31, 2004/(1)/ 10.000 10.191 1.91 American Century VP Ultra 2006 11.296 10.779 -4.58 2,714 2005 11.217 11.296 0.70 911 Period Ended December 31, 2004/(1)/ 10.000 11.217 12.17 American Century VP Vista 2006 12.485 13.441 7.66 39 2005 11.691 12.485 6.79 17 Period Ended December 31, 2004/(1)/ 10.000 11.691 16.91 Dreyfus Investments Portfolios - Technology Growth 2006 11.850 12.176 2.75 25 2005 11.596 11.850 2.19 10 Period Ended December 31, 2004/(1)/ 10.000 11.596 15.96 Fidelity VIP Contrafund 2006 13.098 14.415 10.05 1,240 2005 11.370 13.098 15.20 427 Period Ended December 31, 2004/(1)/ 10.000 11.370 13.70 Fidelity VIP Equity-Income 2006 11.778 13.951 18.45 347 2005 11.297 11.778 4.26 94 Period Ended December 31, 2004/(1)/ 10.268 11.297 10.02 Fidelity VIP Growth 2006 11.446 12.048 5.26 204 2005 10.986 11.446 4.19 59 Period Ended December 31, 2004/(1)/ 10.000 10.986 9.86 Fidelity VIP MidCap 2006 14.052 15.600 11.02 198 2005 12.057 14.052 16.55 36 Period Ended December 31, 2004/(1)/ 10.000 12.057 20.57 Fidelity VIP OverSeas 2006 13.758 16.003 16.32 1,503 2005 11.728 13.758 17.31 581 Period Ended December 31, 2004/(1)/ 10.000 11.728 17.28 Goldman Sachs VIT Structured Small Cap Equity 2006 12.158 13.481 10.88 189 2005 11.607 12.158 4.75 63 Period Ended December 31, 2004/(1)/ 10.000 11.607 16.07 Goldman Sachs VIT Mid Cap Value 2006 12.965 14.863 14.64 550 2005 11.627 12.965 11.42 162 Period Ended December 31, 2004/(1)/ 10.000 11.627 16.27 Neuberger Berman AMT Fasciano 2006 11.137 11.578 3.96 104 2005 10.960 11.137 1.61 35 Period Ended December 31, 2004/(1)/ 10.000 10.960 9.60 Neuberger Berman AMT High Income Bond 2006 10.047 10.664 6.14 127 2005 10.053 10.047 -0.06 39 Period Ended December 31, 2004/(1)/ 10.000 10.053 0.53 Neuberger Berman AMT Partners 2006 13.665 15.148 10.86 209 2005 11.722 13.665 16.58 40 Period Ended December 31, 2004/(1)/ 10.000 11.722 17.22 Neuberger Berman AMT Socially Responsive 2006 12.126 13.617 12.30 144 2005 11.491 12.126 5.53 54 Period Ended December 31, 2004/(1)/ 10.000 11.491 14.91 T. Rowe Price Blue Chip Growth 2006 11.571 12.494 7.98 51 2005 11.091 11.571 4.33 34 Period Ended December 31, 2004/(1)/ 10.000 11.091 10.91 T. Rowe Price Health Sciences 2006 12.721 13.623 7.09 113 2005 11.385 12.721 11.73 34 Period Ended December 31, 2004/(1)/ 10.000 11.385 13.85 Asset Allocation 2006 21.674 24.140 11.38 170 2005 20.746 21.674 4.47 72 Period Ended December 31, 2004/(1)/ 19.143 20.746 8.37 Bond 2006 18.302 18.916 3.36 2,822 2005 18.080 18.302 1.23 1,000 Period Ended December 31, 2004/(1)/ 17.765 18.080 1.77 Capital Value 2006 24.803 29.384 18.47 209 2005 23.514 24.803 5.48 84 Period Ended December 31, 2004/(1)/ 20.929 23.514 12.35 Diversified International 2006 21.416 27.066 26.38 612 2005 17.518 21.416 22.25 184 Period Ended December 31, 2004/(1)/ 14.564 17.518 20.28 Equity Growth 2006 28.639 30.042 4.90 129 2005 26.962 28.639 6.22 40 Period Ended December 31, 2004/(1)/ 23.545 26.962 14.51 Equity Income 2006 11.768 14.098 19.80 4,978 2005 10.965 11.768 7.32 1,954 Period Ended December 31, 2004/(1)/ 9.627 10.965 13.90 Equity Value 2006 11.369 13.425 18.08 194 2005 11.093 11.369 2.49 92 Period Ended December 31, 2004/(//2//)/ 10.000 11.093 10.93 Government & High Quality Bond 2006 17.887 18.413 2.94 1,035 2005 17.755 17.887 0.74 382 Period Ended December 31, 2004/(1)/ 17.591 17.755 0.93 Growth 2006 17.006 18.462 8.56 125 2005 15.362 17.006 10.70 23 Period Ended December 31, 2004/(1)/ 13.752 15.362 11.71 International Emerging Markets 2006 21.709 29.657 36.61 368 2005 16.368 21.709 32.63 131 Period Ended December 31, 2004/(1)/ 12.726 16.368 28.62 International SmallCap 2006 23.945 30.833 28.76 362 2005 18.778 23.945 27.52 146 Period Ended December 31, 2004/(1)/ 15.489 18.778 21.23 LargeCap Blend 2006 11.373 13.010 14.39 3,901 2005 10.996 11.373 3.43 1,448 Period Ended December 31, 2004/(1)/ 9.960 10.996 10.40 LargeCap Stock Index 2006 9.263 10.573 14.14 891 2005 8.978 9.263 3.17 350 Period Ended December 31, 2004/(1)/ 8.129 8.978 10.44 LargeCap Value 2006 12.244 14.699 20.05 3,113 2005 11.759 12.244 4.12 1,132 Period Ended December 31, 2004/(1)/ 10.640 11.759 10.52 MidCap 2006 34.060 38.425 12.81 815 2005 31.580 34.060 7.85 319 Period Ended December 31, 2004/(1)/ 27.676 31.580 14.11 MidCap Growth 2006 11.555 12.513 8.29 185 2005 10.289 11.555 12.30 67 Period Ended December 31, 2004/(1)/ 8.792 10.289 17.03 MidCap Value 2006 15.179 16.981 11.87 1,276 2005 13.903 15.179 9.18 498 Period Ended December 31, 2004/(1)/ 11.817 13.903 17.65 Money Market 2006 13.341 13.786 3.34 371 2005 13.158 13.341 1.39 166 Period Ended December 31, 2004/(1)/ 13.154 13.158 0.03 Principal LifeTime 2010 2006 11.363 12.603 10.91 1,605 2005 10.885 11.363 4.39 904 Period Ended December 31, 2004/(2)/ 10.000 10.885 8.85 Principal LifeTime 2020 2006 11.616 13.212 13.74 5,303 2005 11.016 11.616 5.45 1,657 Period Ended December 31, 2004/(2)/ 10.000 11.016 10.16 Principal LifeTime 2030 2006 11.611 13.168 13.41 677 2005 11.013 11.611 5.43 190 Period Ended December 31, 2004/(2)/ 10.000 11.013 10.13 Principal LifeTime 2040 2006 11.792 13.409 13.71 278 2005 11.131 11.792 5.94 93 Period Ended December 31, 2004/(2)/ 10.000 11.131 11.31 Principal LifeTime 2050 2006 11.820 13.482 14.06 168 2005 11.127 11.820 6.23 27 Period Ended December 31, 2004/(2)/ 10.000 11.127 11.27 Principal LifeTime Strategic Income 2006 11.112 12.101 8.90 851 2005 10.721 11.112 3.65 446 Period Ended December 31, 2004/(2)/ 10.000 10.721 7.21 Real Estate Securities 2006 26.965 36.380 34.92 286 2005 23.567 26.965 14.42 81 Period Ended December 31, 2004/(1)/ 19.952 23.567 18.12 Short-Term Bond 2006 10.017 10.333 3.15 4,270 2005 9.963 10.017 0.54 1,671 Period Ended December 31, 2004/(1)/ 9.976 9.963 0.55 SmallCap Growth 2006 9.995 10.758 7.63 244 2005 9.488 9.995 5.34 65 Period Ended December 31, 2004/(1)/ 7.940 9.488 19.50 SmallCap Value 2006 22.178 25.988 17.18 950 2005 21.143 22.178 4.90 362 Period Ended December 31, 2004/(1)/ 17.898 21.143 18.13
/ //(1)/ Commenced operations on August 20, 2004. / //(2)/ Commenced operations on August 30, 2004.
NUMBER OF ACCUMULATION UNIT VALUE ACCUMULATION UNITS ----------------------------------------- OUTSTANDING BEGINNING END OF PERCENTAGE OF CHANGE END OF PERIOD DIVISION OF PERIOD PERIOD FROM PRIOR PERIOD (IN THOUSANDS) -------- --------- ------ -------------------- -------------------- ABVPSF AllianceBernstein Small Cap Growth 2006 $12.505 $13.589 8.67% 19 2005 12.104 12.505 3.31 4 Period Ended December 31, 2004/(1) / 10.000 12.104 21.04 AIM V.I. Basic Value 2006 11.637 12.933 11.14 33 2005 11.211 11.637 3.80 8 Period Ended December 31, 2004/(1)/ 10.000 11.211 12.11 AIM V.I. SmallCap Equity 2006 12.153 14.012 15.30 30 2005 11.451 12.153 6.13 7 Period Ended December 31, 2004/(1)/ 10.000 11.451 14.51 American Century VP Inflation Protection 2006 10.133 10.106 -0.27 1,377 2005 10.169 10.133 -0.35 560 Period Ended December 31, 2004/(1)/ 10.000 10.169 1.69 American Century VP Ultra 2006 11.204 10.627 -5.15 1,128 2005 11.192 11.204 0.11 468 Period Ended December 31, 2004/(1)/ 10.000 11.192 11.92 American Century VP Vista 2006 12.383 13.252 7.02 13 2005 11.665 12.383 6.16 8 Period Ended December 31, 2004/(1)/ 10.000 11.665 16.65 Dreyfus Investments Portfolios -Technology Growth 2006 11.754 12.005 2.14 12 2005 11.571 11.754 1.58 3 Period Ended December 31, 2004/(1)/ 10.000 11.571 15.71 2006 Fidelity VIP Contrafund 2006 12.991 14.212 9.40 380 2005 11.345 12.991 14.51 101 Period Ended December 31, 2004/(1)/ 10.000 11.345 13.45 Fidelity VIP Equity-Income 2006 11.525 13.570 17.74 144 2005 11.121 11.525 3.63 56 Period Ended December 31, 2004/(1)/ 10.129 11.121 9.79 Fidelity VIP Growth 2006 11.353 11.879 4.63 160 2005 10.962 11.353 3.57 56 Period Ended December 31, 2004/(1)/ 10.000 10.962 9.62 Fidelity VIP MidCap 2006 13.938 15.381 10.35 85 2005 12.031 13.938 15.85 35 Period Ended December 31, 2004/(1)/ 10.000 12.031 20.31 Fidelity VIP OverSeas 2006 13.646 15.779 15.63 694 2005 11.703 13.646 16.60 301 Period Ended December 31, 2004/(1)/ 10.000 11.703 17.03 Goldman Sachs VIT Structured Small Cap Equity 2006 12.059 13.292 10.22 110 2005 11.581 12.059 4.13 31 Period Ended December 31, 2004/(1)/ 10.000 11.581 15.81 Goldman Sachs VIT Mid Cap Value 2006 12.850 14.655 14.04 303 2005 11.602 12.850 10.76 91 Period Ended December 31, 2004/(1)/ 10.000 11.602 16.02 Neuberger Berman AMT Fasciano 2006 11.047 11.415 3.33 71 2005 10.936 11.047 1.01 22 Period Ended December 31, 2004/(1)/ 10.000 10.936 9.36 Neuberger Berman AMT High Income Bond 2006 9.970 10.519 5.50 67 2005 10.035 9.970 -0.65 50 Period Ended December 31, 2004/(1)/ 10.000 10.035 0.35 Neuberger Berman AMT Partners 2006 13.554 14.936 10.19 101 2005 11.696 13.554 15.89 25 Period Ended December 31, 2004/(1)/ 10.000 11.696 16.96 Neuberger Berman AMT Socially Responsive 2006 12.027 13.426 11.63 42 2005 11.465 12.027 4.90 9 Period Ended December 31, 2004/(1)/ 10.000 11.465 14.65 T. Rowe Price Blue Chip Growth 2006 11.477 12.319 7.33 32 2005 11.067 11.477 3.70 22 Period Ended December 31, 2004/(1)/ 10.000 11.067 10.67 T. Rowe Price Health Sciences 2006 12.618 13.432 6.45 49 2005 11.360 12.618 11.07 9 Period Ended December 31, 2004/(1)/ 10.000 11.360 13.60 Asset Allocation 2006 21.020 23.273 10.72 99 2005 20.241 21.020 3.85 25 Period Ended December 31, 2004/(1)/ 18.718 20.241 8.14 Bond 2006 17.751 18.237 2.74 1,157 2005 17.640 17.751 0.63 474 Period Ended December 31, 2004/(1)/ 17.370 17.640 1.55 Capital Value 2006 24.055 28.328 17.76 130 2005 22.942 24.055 4.85 31 Period Ended December 31, 2004/(1)/ 20.464 22.942 12.11 Diversified International 2006 20.770 26.094 25.63 239 2005 17.091 20.770 21.53 64 Period Ended December 31, 2004/(1)/ 14.241 17.091 39.62 Equity Growth 2006 27.776 28.962 4.27 65 2005 26.306 27.776 5.59 18 Period Ended December 31, 2004/(1)/ 23.022 26.306 14.26 Equity Income 2006 11.413 13.591 19.09 1,958 2005 10.699 11.413 6.67 908 Period Ended December 31, 2004/(1)/ 9.412 10.699 13.67 Equity Value 2006 11.279 13.239 17.37 100 2005 11.070 11.279 1.89 41 Period Ended December 31, 2004/(1)/ 10.000 11.070 10.70 Government & High Quality Bond 2006 17.348 17.751 2.33 349 2005 17.323 17.348 0.14 133 Period Ended December 31, 2004/(1)/ 17.201 17.323 0.71 Growth 2006 16.493 17.798 7.91 77 2005 14.988 16.493 10.04 11 Period Ended December 31, 2004/(1)/ 13.447 14.988 11.46 International Emerging Markets 2006 21.055 28.591 35.79 214 2005 15.970 21.055 31.84 64 Period Ended December 31, 2004/(1)/ 12.443 15.970 28.35 International SmallCap 2006 23.223 29.725 28.00 170 2005 18.321 23.223 26.76 68 Period Ended December 31, 2004/(1)/ 15.145 18.321 20.97 LargeCap Blend 2006 11.129 12.654 13.70 1,642 2005 10.824 11.129 2.82 664 Period Ended December 31, 2004/(1)/ 9.826 10.824 10.16 LargeCap Stock Index 2006 8.984 10.193 13.46 446 2005 8.760 8.984 2.56 166 Period Ended December 31, 2004/(1)/ 7.949 8.760 10.20 LargeCap Value 2006 11.981 14.297 19.33 1,312 2005 11.575 11.981 3.51 540 Period Ended December 31, 2004/(1)/ 10.497 11.575 10.27 MidCap 2006 33.033 37.044 12.14 343 2005 30.812 33.033 7.21 147 Period Ended December 31, 2004/(1)/ 27.062 30.812 13.86 MidCap Growth 2006 11.206 12.063 7.65 95 2005 10.038 11.206 11.64 18 Period Ended December 31, 2004/(1)/ 8.596 10.038 16.78 MidCap Value 2006 14.764 16.419 11.21 524 2005 13.604 14.764 8.53 229 Period Ended December 31, 2004/(1)/ 11.588 13.604 17.40 Money Market 2006 12.939 13.291 2.72 370 2005 12.838 12.939 0.79 189 Period Ended December 31, 2004/(1)/ 12.862 12.838 -0.19 Principal LifeTime 2010 2006 11.272 12.428 10.25 436 2005 10.863 11.272 3.77 222 Period Ended December 31, 2004/(2)/ 10.000 10.863 8.63 Principal LifeTime 2020 2006 11.523 13.028 13.06 1,978 2005 10.994 11.523 4.81 602 Period Ended December 31, 2004/(2)/ 10.000 10.994 9.94 Principal LifeTime 2030 2006 11.519 12.985 12.73 234 2005 10.991 11.519 4.80 90 Period Ended December 31, 2004/(2)/ 10.000 10.991 9.91 Principal LifeTime 2040 2006 11.698 13.223 13.03 103 2005 11.109 11.698 5.30 30 Period Ended December 31, 2004/(2)/ 10.000 11.109 11.09 Principal LifeTime 2050 2006 11.726 13.294 13.38 92 2005 11.105 11.726 5.59 39 Period Ended December 31, 2004/(2)/ 10.000 11.105 11.05 Principal LifeTime Strategic Income 2006 11.024 11.933 8.25 184 2005 10.699 11.024 3.04 45 Period Ended December 31, 2004/(2)/ 10.000 10.699 6.99 Real Estate Securities 2006 26.152 35.074 34.12 135 2005 22.994 26.152 13.73 55 Period Ended December 31, 2004/(1)/ 19.130 22.994 20.20 Short-Term Bond 2006 9.860 10.110 2.54 1,751 2005 9.866 9.860 -0.06 805 Period Ended December 31, 2004/(1)/ 9.894 9.866 -0.28 SmallCap Growth 2006 9.694 10.371 6.98 111 2005 9.257 9.694 4.72 32 Period Ended December 31, 2004/(1)/ 7.847 9.257 17.97 SmallCap Value 2006 21.510 25.054 16.48 373 2005 20.629 21.510 4.27 152 Period Ended December 31, 2004/(1)/ 17.518 20.629 17.76
/ //(1)/ Commenced operations on August 20, 2004. / //(2)/ Commenced operations on August 30, 2004. APPENDIX A - GMWB EXAMPLES These examples are provided to assist you in understanding the various features of the GMWB rider and the guarantees associated with each GMWB option. Please note that, for the purpose of the following examples, a partial annuitization has the same effect as a partial surrender. EXAMPLES WITHOUT EXCESS WITHDRAWALS The examples without excess withdrawals assume the following: . the client is age 62. . initial premium payment = $100,000. . withdrawal benefit base prior to partial surrender = $100,000. . remaining withdrawal benefit base prior to partial surrender = $100,000. . Investment Back (7%) withdrawal benefit payment = $7,000. . For Life (5%) withdrawal benefit payment = $5,000. EXAMPLE 1 . . In contract year one, no partial surrenders are made. (Partial annuitizations are not permitted in contract year one.) . On the first contract anniversary, a 5% GMWB bonus is credited to the withdrawal benefit base. The credit is $100,000 x 0.05% = $5,000 . The new withdrawal benefit base is $100,000 + $5,000 = $105,000. . The new withdrawal benefit payment: . Investment Back is $105,000 x 0.07% = $7,350 . For Life is $105,000 x 0.05% = $5,250 EXAMPLE 2 . In contract year one: . no partial surrenders are made; and . the client makes a premium payment of $50,000. On the first contract anniversary: . a 5% GMWB bonus is credited to the withdrawal benefit base. The credit is ($100,000 + $50,000) x 0.05% = $7,500; . Investment Back: . the new withdrawal benefit base is $100,000 + $50,000 + $7,500 = $157,500; and . the new withdrawal benefit payment is $157,500 x 7% = $11,025. . For Life: . the new withdrawal benefit base is $100,000 + $50,000 + $7,500 = $157,500; and . the new withdrawal benefit payment is $157,500 x 5% = $7,875. EXAMPLE 3 . In contract year one, the client makes a partial surrender of $5,000. On the first contract anniversary, . Investment Back: . the new remaining withdrawal benefit base is $100,000 - $5,000 = $95,000. . the withdrawal benefit base remains the same ($100,000). . the withdrawal benefit payment for the next contract year remains the same ($100,000 x 0.07% = $7,000). . For Life: . the new remaining withdrawal benefit base is $100,000 - $5,000 = $95,000. . the withdrawal benefit base remains the same ($100,000). . the withdrawal benefit payment for the next contract year remains the same ($100,000 x 0.05% = $5,000). EXAMPLE 4 . In contract year one, no partial surrenders are made. On the first contract anniversary: . a 5% GMWB bonus is credited to withdrawal benefit base. The credit is $100,000 x 0.05% = $5,000; and . the new withdrawal benefit base is $100,000 + $5,000 = $105,000. In contract year two: . the client makes a partial surrender of $5,000. . no GMWB bonus is credited as the client made a partial surrender. In contract year three: . the client does not make any partial surrenders; . no GMWB bonus is credited as the client had taken a partial surrender (in contract year two). EXAMPLE 5 . In each of the first three contract years, a partial surrender of $5,000 is made. In each of contract years four and five, a partial annuitization of $5,000 is made. On the fifth contract anniversary, you may elect a step-up.
EXAMPLE 5A. EXAMPLE 5B. THE ACCUMULATED VALUE IS: $90,000 $110,000 INVESTMENT BACK Prior to step-up Withdrawal Benefit Base = $100,000 = $100,000 Withdrawal Benefit $ 100,000 $ 100,000 Payment = x 0.07% = $7,000 = x 0.07% = $7,000 Remaining Withdrawal = $75,000 = $75,000 Benefit Base ------------------------------------------------------------------------------------ After step-up Withdrawal Benefit Base = $90,000 = $110,000 Withdrawal Benefit $ 90,000 $ 110,000 Payment = x 0.07% = $6,300 = x 0.07% = $7,700 Remaining Withdrawal = $90,000 = $110,000 Benefit Base ------------------------------------------------------------------------------------ FOR LIFE Prior to step-up Withdrawal Benefit Base = $100,000 = $100,000 Withdrawal Benefit $ 100,000 $ 100,000 Payment = x 0.05% = $5,000 = x 0.05% = $5,000 Remaining Withdrawal = $75,000 = $75,000 Benefit Base ------------------------------------------------------------------------------------ After step-up Withdrawal Benefit Base = $90,000 = $110,000 Withdrawal Benefit $ 90,00 0 $ 110,000 Payment = x 0.05% = $4,500 = x 0.05% = $5,500 Remaining Withdrawal = $90,000 = $110,000 Benefit Base ------------------------------------------------------------------------------------
EXAMPLES WITH EXCESS WITHDRAWALS The excess withdrawal examples assume the following: PAGE> . the client is age 62. . the initial premium payment is $100,000. . withdrawal benefit base prior to partial surrender = $100,000. . remaining withdrawal benefit base prior to partial surrender = $100,000. . Investment Back (7%) withdrawal benefit payment = $7,000. . For Life (5%) withdrawal benefit payment = $5,000. . partial surrender amount = $8,000 (excess amount for "Investment Back" is $1,000; excess amount for "For Life" is $3,000). EXAMPLE 1 . In the first example, the accumulated value prior to partial surrender is $90,000. WITHDRAWAL BENEFIT BASE CALCULATION ----------------------------------- On the contract anniversary following the partial surrender, the withdrawal benefit base is adjusted for any excess withdrawals. INVESTMENT BACK . The amount of the adjustment* is $1,204.82. The new withdrawal benefit base is $100,000 - $1,204.82 = $98,795.18. * The amount of the adjustment is the greater of (a) or (b) where: . (a) is $1,000 (the amount of the excess withdrawal); and . (b) is $1,204.82 (the result of ((1) divided by (2)) multiplied by (3)) where: . (1) is the amount of the surrender greater than the withdrawal benefit payment remaining prior to the partial surrender ($1,000); . (2) is the accumulated value after the withdrawal benefit payment is deducted but prior to the surrender of the excess amount ($90,000 - $7,000); and . (3) is the withdrawal benefit base prior to the adjustment for the excess amount ($100,000). FOR LIFE . The amount of the adjustment* is $3,529.41. The new withdrawal benefit base is $100,000 - $3,529.41 = $96,470.59. * The amount of the adjustment is the greater of (a) or (b) where: . (a) is $3,000 (the amount of the excess withdrawal); and . (b) is $3,529.41 (the result of ((1) divided by (2)) multiplied by (3)) where: . (1) is the amount of the surrender greater than the withdrawal benefit payment remaining prior to the partial surrender ($3,000); . (2) is the accumulated value after the withdrawal benefit payment is deducted but prior to the surrender of the excess amount ($90,000 - $5,000); and . (3) is the withdrawal benefit base prior to the adjustment for the excess amount ($100,000). REMAINING WITHDRAWAL BENEFIT BASE CALCULATION --------------------------------------------- The remaining withdrawal benefit base is adjusted when partial surrenders are made. INVESTMENT BACK . The amount of the adjustment* is $8,120.48 (the amount of the withdrawal benefit payment plus the excess withdrawal). The new remaining withdrawal benefit base is $100,000 - $8,120.48 = $91,879.52. * The amount of the adjustment is (a) plus (b) where: . (a) is $7,000 (the actual amount surrendered that does not exceed the withdrawal benefit payment); and . (b) is $1,120.48 (a proportionate reduction for the excess withdrawal). The amount of the proportionate reduction is the greater of (1) or (2) where: . (1) is $1,000 (the amount of the excess withdrawal); and . (2) is $1,120.48 (the result of ((i) divided by (ii)) multiplied by (iii)) where: . (i) is the amount of the surrender greater than the withdrawal benefit payment remaining prior to the partial surrender ($1,000); . (ii) is the accumulated value after the withdrawal benefit payment is deducted but prior to the surrender of the excess amount ($90,000 - $7,000); and . (iii) is the remaining withdrawal benefit base after the withdrawal benefit payment is deducted but prior to the adjustment for the excess amount ($100,000 - $7,000). FOR LIFE . The amount of the adjustment* is $8,352.94 (the amount of the withdrawal benefit payment plus the excess withdrawal). The new remaining withdrawal benefit base is $100,000 - $8,352.94 = $91,647.06. * The amount of the adjustment is (a) plus (b) where . (a) is $5,000 (the actual amount surrendered that does not exceed the withdrawal benefit payment); and . (b) is $3,352.94 (a proportionate reduction for the excess withdrawal). The amount of the proportionate reduction is the greater of (1) or (2) where: . (1) is $3,000 (the amount of the excess withdrawal); and . (2) is $3,352.94 (the result of ((i) divided by (ii)) multiplied by (iii)) where: . (i) is the amount of the surrender greater than the withdrawal benefit payment remaining prior to the partial surrender ($3,000); . (ii) is the accumulated value after the withdrawal benefit payment is deducted but prior to the surrender of the excess amount ($90,000 - $5,000); and . (iii) is the remaining withdrawal benefit base after the withdrawal benefit payment is deducted but prior to the adjustment for the excess amount ($100,000 - $5,000). WITHDRAWAL BENEFIT PAYMENT CALCULATION (FOR THE NEXT CONTRACT YEAR) ------------------------------------------------------------------- The withdrawal benefit payment is the new withdrawal benefit base (calculated on the contract anniversary) multiplied by the associated percentage. INVESTMENT BACK . The new withdrawal benefit payment $98,795.18. x 0.07% = $6,915.66. FOR LIFE . The new withdrawal benefit payment $96,470.59 x 0.05% = $4,823.53. EXAMPLE 2 . In this example, the accumulated value prior to partial surrender is $110,000. WITHDRAWAL BENEFIT BASE CALCULATION ----------------------------------- On the contract anniversary following the partial surrender, the withdrawal benefit base is adjusted for any excess withdrawals. INVESTMENT BACK . The amount of the adjustment* is $1,000 (the amount of the excess withdrawal). The new withdrawal benefit base is $100,000 - $1,000 = $99,000. * The amount of the adjustment is the greater of (a) or (b) where: . (a) is $1,000 (the amount of the excess withdrawal); and . (b) is $970.87 (the result of ((1) divided by (2)) multiplied by (3)) where: . (1) is the amount of the surrender greater than the withdrawal benefit payment remaining prior to the partial surrender ($1,000); . (2) is the accumulated value after the withdrawal benefit payment is deducted but prior to the surrender of the excess amount ($110,000 minus $7,000); and . (3) is the withdrawal benefit base prior to the adjustment for the excess amount ($100,000) FOR LIFE . The amount of the adjustment* is $3,000 (the amount of the excess withdrawal). The new withdrawal benefit base is $100,000 - $3,000 = $97,000. * The amount of the adjustment is the greater of (a) or (b) where: . (a) is $3,000 (the amount of the excess withdrawal); and . (b) is $2,857.14 (the result of ((1) divided by (2)) multiplied by (3)) where: . (1) is the amount of the surrender greater than the withdrawal benefit payment remaining prior to the partial surrender ($3,000); . (2) is the accumulated value after the withdrawal benefit payment is deducted but prior to the surrender of the excess amount ($110,000 minus $5,000); and . (3) is the withdrawal benefit base prior to the adjustment for the excess amount ($100,000). REMAINING WITHDRAWAL BENEFIT BASE CALCULATION --------------------------------------------- The remaining withdrawal benefit base is adjusted when partial surrenders are made. INVESTMENT BACK . The amount of the adjustment* is $8,000 (the amount of the withdrawal benefit payment plus the excess withdrawal). The new remaining withdrawal benefit base is $100,000 - $8,000 = $92,000. * The amount of the adjustment is (a) plus (b) where: . (a) is $7,000 (the actual amount surrendered that does not exceed the withdrawal benefit payment); and . (b) is $1,000 (a proportionate reduction for the excess withdrawal). The amount of the proportionate reduction is the greater of (1) or (2) where: . (1) is $1,000 (the amount of the excess withdrawal); and . (2) is $902.91 (the result of ((i) divided by (ii)) multiplied by (iii)) where: . (i) is the amount of the surrender greater than the withdrawal benefit payment remaining prior to the partial surrender ($1,000); . (ii) is the accumulated value after the withdrawal benefit payment is deducted but prior to the surrender of the excess amount ($110,000 - $7,000); and . (iii) is the remaining withdrawal benefit base after the withdrawal benefit payment is deducted but prior to the adjustment for the excess amount ($100,000 - $7,000). FOR LIFE . The amount of the adjustment* is $8,000 (the amount of the withdrawal benefit payment plus the excess withdrawal). The new remaining withdrawal benefit base is $100,000 - $8,000 = $92,000. * The amount of the adjustment is (a) plus (b) where . (a) is $5,000 - the actual amount surrendered that does not exceed the withdrawal benefit payment; and . (b) is $3,000 - a proportionate reduction for the excess withdrawal. The amount of the proportionate reduction is the greater of (1) or (2) where: . (1) is $3,000 (the amount of the excess withdrawal); and . (2) is $2,714.28 (the result of ((i) divided by (ii)) multiplied by (iii)) where: . (i) is the amount of the surrender greater than the withdrawal benefit payment remaining prior to the partial surrender ($3,000); . (ii) is the accumulated value after the withdrawal benefit payment is deducted but prior to the surrender of the excess amount ($110,000 - $5,000); and . (iii) is the remaining withdrawal benefit base after the withdrawal benefit payment is deducted but prior to the adjustment for the excess amount ($100,000 - $5,000). WITHDRAWAL BENEFIT PAYMENT CALCULATION (FOR THE NEXT CONTRACT YEAR) ------------------------------------------------------------------- The withdrawal benefit payment is the new withdrawal benefit base (calculated on the contract anniversary) multiplied by the associated percentage. INVESTMENT BACK . The new withdrawal benefit payment is $99,000 x 0.07% = $6,930. FOR LIFE . The new withdrawal benefit payment $97,000 x 0.05% = $4,850. PRINCIPAL LIFE INSURANCE COMPANY SEPARATE ACCOUNT B PRINCIPAL INVESTMENT PLUS VARIABLE ANNUITY/SM// /CONTRACT STATEMENT OF ADDITIONAL INFORMATION DATED MAY 1, 2007 This Statement of Additional Information provides information about the Principal Investment Plus Variable Annuity/sm// / (the "Contract") in addition to the information that is contained in the Contract's Prospectus, dated May 1, 2007. 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: Principal Investment Plus Variable Annuity The Principal Financial Group P.O. Box 9382 Des Moines Iowa 50306-9382 Telephone: 1-800-852-4450 TABLE OF CONTENTS Page General Information and History......................................... Independent Registered Public Accounting Firm........................... Principal Underwriter................................................... Calculation of Performance Data ......................................... Taxation Under Certain Retirement Plans................................. Financial Statements Principal Life Insurance Company Separate Account B Report of Independent Registered Public Accounting Firm............... Principal Life Insurance Company Report of Independent Registered Public Accounting Firm............... Financial Statements.................................................. GENERAL INFORMATION AND HISTORY Principal Life Insurance Company (the "Company") is the issuer of the Principal Investment Plus Variable Annuity (the "Contract") and serves as custodian of its assets. The Company is a stock life insurance company with its home office at: Principal Financial Group, Des Moines, Iowa 50392 and is authorized to transact life and annuity business in all states of the United States and the District of Columbia. The Company is a wholly owned indirect subsidiary of Principal Financial Group, Inc., a publicly-traded company. In 1879, the Company was incorporated under Iowa law as a mutual assessment life insurance company named Bankers Life Association. It became a legal reserve life insurance company and 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 insurance holding company structure took place in 1998, when the Company became a stock life insurance company. In 2001, the mutual insurance holding company converted to a stock company through a process called demutualization, resulting in the current organizational structure. INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Ernst & Young LLP, 801 Grand, Des Moines, Iowa, serves as the independent registered public accounting firm for Principal Life Insurance Company Separate Account B and the Principal Life Insurance Company. PRINCIPAL UNDERWRITER Princor Financial Services Corporation ("Princor") is the principal underwriter of the Contract. Princor is a indirect, wholly owned 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 two fiscal years Princor has received and retained the following commissions:
2006 2005 RECEIVED/RETAINED RECEIVED/RETAINED ----------------- ----------------- $22,386,910/$0 $12,169,228/$0
CALCULATION OF PERFORMANCE DATA The Separate Account may publish advertisements containing information (including graphs, charts, tables and examples) about the performance of one or more of its divisions. Separate performance figures will be shown for the Contract without the premium payment credit rider and for the Contract with the premium payment credit rider. The Contract was not offered prior to January 4, 2005. However, the certain divisions invest in underlying mutual funds which 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 as the Contract was issued on or after the date the underlying mutual fund was first offered. The hypothetical performance from the date of inception of the underlying mutual fund in which the division invests is derived by reducing the actual performance of the underlying mutual fund by the highest level of fees and charges of the Contract as if it had been in existence. In addition, as certain of the underlying mutual funds have added classes since the inception of the fund, performance may be shown for periods prior to the inception date of the new class which represents the historical results of initial class shares and do not include the effects of the subsequent class' annual fees and expenses. 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 the Contract. Both yield figures are based on historical earnings and are not intended to indicate future performance. The "yield" of the division refers to the income generated by an investment under the Contract in the division over a 7-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."
YIELD FOR THE PERIOD ENDED DECEMBER 31, 2006 ------------------------------------------------------------------------------- FOR CONTRACTS: 7-DAY ANNUALIZED YIELD 7-DAY EFFECTIVE YIELD ------------------------------------------------------------------------------- without a surrender charge or a purchase payment credit 3.28% 3.33% rider ------------------------------------------------------------------------------- with a surrender charge but without a purchase payment -2.62% -2.67% credit rider ------------------------------------------------------------------------------- without a surrender charge but with a purchase payment 2.68% 2.74% credit rider -------------------------------------------------------------------------------
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 for the Contract without the premium payment credit rider, the ending value is reduced by a surrender charge that decreases from 6% to 0% over a period of 7 years. For the calculations relating to the Contract with the premium payment credit rider, the ending value is reduced by a surrender charge that decreases from 8% to 0% over a period of 9 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, 2006 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 -------------------------------------------------------------- EFFECTIVE SINCE DIVISION DATE ONE YEAR FIVE YEARS TEN YEARS INCEPTION -------- --------- -------- ---------- --------- --------- AIM V.I. Basic Value September 10, 2001 5.77 4.56 4.88 AIM V.I. SmallCap Equity August 29, 2003 9.95 12.34 AllianceBernstein Small Cap Growth August 15, 1996 3.28 4.36 2.57 3.04 American Century VP Inflation Protection December 31, 2002 -5.71 1.18 American Century VP Ultra May 1, 2001 -10.62 -1.01 / -1.73 American Century VP Vista October 5, 2001 1.62 7.36 / 7.40 Dreyfus IP Technology Growth August 31, 1999 -3.29 -2.44 -5.30 Fidelity VIP Contrafund January 3, 1995 4.02 9.77 9.53 12.51 Fidelity VIP Equity-Income November 3, 1986 12.41 6.96 7.62 9.65 Fidelity VIP Growth October 31, 1986 -0.78 -0.58 4.93 9.00 Fidelity VIP Mid Cap December 28, 1998 4.98 13.65 17.60 Fidelity VIP Overseas January 28, 1987 10.28 10.64 6.05 6.28 Goldman Sachs VIT Structured Small Cap Equity February 13, 1998 4.85 9.57 6.38 Goldman Sachs VIT Mid Cap Value May 1, 1998 8.69 13.22 9.87 Lehman Brothers High Income Bond Portfolio September 15, 2004 0.10 0.64 Neuberger Berman AMT Fasciano July 12, 2002 -2.09 7.60 Neuberger Berman AMT Partners March 22, 1994 4.82 8.18 7.36 10.05 Neuberger Berman AMT Socially Responsive February 18, 1999 6.26 7.65 5.77 Principal VCF Asset Allocation June 1, 1994 5.34 4.60 6.10 7.19 Principal VCF Bond December 18, 1987 -2.68 3.26 4.34 6.14 Principal VCF Capital Value May 13, 1970 12.43 7.41 6.02 10.53 Principal VCF Diversified International May 2, 1994 20.35 14.44 7.24 8.11 Principal VCF Equity Growth June 1, 1994 -1.14 0.65 4.99 9.09 Principal VCF Equity Income I April 28, 1998 10.68 10.18 8.94 Principal VCF Equity Value August 30, 2004 12.04 11.53 Principal VCF Government & High Quality Bond April 9, 1987 -3.10 2.14 4.33 5.76 Principal VCF Growth May 2, 1994 2.52 1.93 2.43 4.90 Principal VCF International Emerging Markets October 24, 2000 30.58 25.60 18.03 Principal VCF International SmallCap May 1, 1998 22.73 21.26 / 13.67 Principal VCF LargeCap Blend May 1, 2002 8.35 / 5.54 Principal VCF LargeCap Stock Index May 3, 1999 8.10 3.90 0.44 Principal VCF LargeCap Value May 1, 2002 14.01 8.55 Principal VCF MidCap December 18, 1987 6.78 10.35 9.50 12.67 Principal VCF MidCap Growth May 1, 1998 2.26 5.74 2.47 Principal VCF MidCap Value May 3, 1999 5.84 11.68 / 12.12 Principal VCF Money Market March 18, 1983 -2.70 0.12 2.17 3.84 Principal VCF Principal LifeTime 2010 August 30, 2004 4.87 8.44 Principal VCF Principal LifeTime 2020 August 30, 2004 7.70 10.74 Principal VCF Principal LifeTime 2030 August 30, 2004 7.37 10.58 Principal VCF Principal LifeTime 2040 August 30, 2004 7.67 11.48 Principal VCF Principal LifeTime 2050 August 30, 2004 8.02 11.74 Principal VCF Principal LifeTime Strategic Income August 30, 2004 2.86 6.49 Principal VCF Real Estate Securities May 1, 1998 28.88 24.20 15.98 Principal VCF Short-Term Bond May 1, 2003 -2.88 -0.16 Principal VCF SmallCap Growth May 1, 1998 1.59 -1.60 0.79 Principal VCF SmallCap Value May 1, 1998 11.14 14.45 11.55 Principal VCF SAM Balanced June 3,1997 3.20 5.76 7.56 Principal VCF SAM Conservative Balanced April 23, 1998 1.41 5.19 4.23 Principal VCF SAM Conservative Growth June 3,1997 4.79 5.96 8.18 Principal VCF SAM Flexible Income September 9, 1997 -0.51 4.46 5.57 Principal VCF SAM Strategic Growth June 3, 1997 5.61 5.86 9.15 Principal VCF West Coast Equity April 28, 1998 4.62 6.93 10.50 T. Rowe Price Blue Chip Growth December 29, 2000 1.94 2.15 -0.50 T. Rowe Price Heath Sciences December 29, 2000 1.06 4.77 2.53
CONTRACT WITHOUT PURCHASE PAYMENT CREDIT RIDER WITHOUT SURRENDER CHARGE -------------------------------------------------------------- EFFECTIVE SINCE DIVISION DATE ONE YEAR FIVE YEARS TEN YEARS INCEPTION -------- --------- -------- ---------- --------- --------- AIM V.I. Basic Value September 10, 2001 11.77 5.06 5.19 AIM V.I. SmallCap Equity August 29, 2003 15.95 13.24 AllianceBernstein Small Cap Growth August 15, 1996 9.28 4.86 2.57 3.04 American Century VP Inflation Protection December 31, 2002 0.29 2.13 American Century VP Ultra May 1, 2001 -4.62 -0.39 / -1.35 American Century VP Vista October 5, 2001 7.62 7.81 / 7.68 Dreyfus IP Technology Growth August 31, 1999 2.71 -1.79 -5.30 Fidelity VIP Contrafund January 3, 1995 10.02 10.18 9.53 12.51 Fidelity VIP Equity-Income November 3, 1986 18.41 7.41 7.62 9.65 Fidelity VIP Growth October 31, 1986 5.22 0.03 4.93 9.00 Fidelity VIP Mid Cap December 28, 1998 10.98 14.01 / 17.60 Fidelity VIP Overseas January 28, 1987 16.28 11.04 6.05 6.28 Goldman Sachs VIT Structured Small Cap Equity February 13, 1998 10.85 9.99 6.38 Goldman Sachs VIT Mid Cap Value May 1, 1998 14.69 13.58 9.87 Lehman Brothers High Income Bond Portfolio September 15, 2004 6.10 2.77 Neuberger Berman AMT Fasciano July 12, 2002 3.91 8.11 Neuberger Berman AMT Partners March 22, 1994 10.82 8.61 7.36 10.05 Neuberger Berman AMT Socially Responsive February 18, 1999 12.26 8.09 5.77 Principal VCF Asset Allocation June 1, 1994 11.34 5.09 6.10 7.19 Principal VCF Bond December 18, 1987 3.32 3.79 4.34 6.14 Principal VCF Capital Value May 13, 1970 18.43 7.85 6.02 10.53 Principal VCF Diversified International May 2, 1994 26.35 14.79 7.24 8.11 Principal VCF Equity Growth June 1, 1994 4.86 1.23 4.99 9.09 Principal VCF Equity Income I April 28, 1998 16.68 10.58 8.94 Principal VCF Equity Value August 30, 2004 18.04 13.36 Principal VCF Government & High Quality Bond April 9, 1987 2.90 2.68 4.33 5.76 Principal VCF Growth May 2, 1994 8.52 2.48 2.43 4.90 Principal VCF International Emerging Markets October 24, 2000 36.58 25.84 18.03 Principal VCF International SmallCap May 1, 1998 28.73 21.53 13.67 Principal VCF LargeCap Blend May 1, 2002 14.35 6.07 Principal VCF LargeCap Stock Index May 3, 1999 14.10 4.41 0.44 Principal VCF LargeCap Value May 1, 2002 20.01 9.02 Principal VCF MidCap December 18, 1987 12.78 10.75 9.50 12.67 Principal VCF MidCap Growth May 1, 1998 8.26 6.21 2.47 Principal VCF MidCap Value May 3, 1999 11.84 12.06 12.12 Principal VCF Money Market March 18, 1983 3.30 0.71 2.17 3.84 Principal VCF Principal Lifetime 2010 August 30, 2004 10.87 10.34 Principal VCF Principal Lifetime 2020 August 30, 2004 13.70 12.59 Principal VCF Principal Lifetime 2030 August 30, 2004 13.37 12.43 Principal VCF Principal Lifetime 2040 August 30, 2004 13.67 13.31 Principal VCF Principal Lifetime 2050 August 30, 2004 14.02 13.57 Principal VCF Principal Lifetime Strategic Income August 30, 2004 8.86 8.43 Principal VCF Real Estate Securities May 1, 1998 34.88 24.45 15.98 Principal VCF Short-Term Bond May 1, 2003 3.12 0.92 Principal VCF SmallCap Growth May 1, 1998 7.59 -0.97 0.79 Principal VCF SmallCap Value May 1, 1998 17.14 14.80 11.55 Principal VCF SAM Balanced June 3,1997 9.20 6.23 7.56 Principal VCF SAM Conservative Balanced April 23, 1998 7.41 5.68 4.23 Principal VCF SAM Conservative Growth June 3,1997 10.79 6.44 8.18 Principal VCF SAM Flexible Income September 9, 1997 5.49 4.96 5.57 Principal VCF SAM Strategic Growth June 3, 1997 11.61 6.33 9.15 Principal VCF West Coast Equity April 28, 1998 10.62 7.39 10.50 T. Rowe Price Blue Chip Growth December 29, 2000 7.94 2.69 -0.50 T. Rowe Price Heath Sciences December 29, 2000 7.06 5.26 2.53
CONTRACT WITH PURCHASE PAYMENT CREDIT RIDER WITH SURRENDER CHARGE -------------------------------------------------------------- EFFECTIVE SINCE DIVISION DATE ONE YEAR FIVE YEARS TEN YEARS INCEPTION -------- --------- -------- ---------- --------- --------- AIM V.I. Basic Value September 10, 2001 3.10 3.75 4.09 AIM V.I. SmallCap Equity August 29, 2003 7.26 11.41 AllianceBernstein Small Cap Growth August 15, 1996 0.63 3.55 1.95 2.42 American Century VP Inflation Protection December 31, 2002 -8.30 0.30 American Century VP Ultra May 1, 2001 -13.19 -1.84 -2.53 American Century VP Vista October 5, 2001 -1.02 6.55 6.60 Dreyfus IP Technology Growth August 31, 1999 -5.90 -3.27 -6.07 Fidelity VIP Contrafund January 3, 1995 1.36 8.96 8.87 11.83 Fidelity VIP Equity-Income November 3, 1986 9.70 6.15 6.98 8.99 Fidelity VIP Growth October 31, 1986 -3.41 -1.41 4.30 8.34 Fidelity VIP Mid Cap December 28, 1998 2.31 12.84 16.90 Fidelity VIP Overseas January 28, 1987 7.59 9.83 5.41 5.64 Goldman Sachs VIT Structured Small Cap Equity February 13, 1998 2.18 8.76 5.74 Goldman Sachs VIT Mid Cap Value May 1, 1998 6.01 12.40 9.21 Lehman Brothers High Income Bond Portfolio September 15, 2004 -2.53 -0.43 Neuberger Berman AMT Fasciano July 12, 2002 -4.71 6.76 Neuberger Berman AMT Partners March 22, 1994 2.16 7.37 6.72 9.39 Neuberger Berman AMT Socially Responsive February 18, 1999 3.59 6.84 5.05 Principal VCF Asset Allocation June 1, 1994 2.68 3.78 5.47 6.55 Principal VCF Bond December 18, 1987 -5.30 2.45 3.72 5.50 Principal VCF Capital Value May 13, 1970 9.73 6.60 5.38 9.87 Principal VCF Diversified International May 2, 1994 17.59 13.63 6.60 7.46 Principal VCF Equity Growth June 1, 1994 -3.76 -0.17 4.36 8.44 Principal VCF Equity Income I April 28, 1998 7.98 9.36 8.29 Principal VCF Equity Value August 30, 2004 9.34 10.47 Principal VCF Government & High Quality Bond April 9, 1987 -5.71 1.32 3.70 5.13 Principal VCF Growth May 2, 1994 -0.12 1.11 1.82 4.28 Principal VCF International Emerging Markets October 24, 2000 27.76 24.76 17.18 Principal VCF International SmallCap May 1, 1998 19.96 20.43 12.99 Principal VCF LargeCap Blend May 1, 2002 5.67 4.72 Principal VCF LargeCap Stock Index May 3, 1999 5.42 3.08 -0.29 Principal VCF LargeCap Value May 1, 2002 11.29 7.72 Principal VCF MidCap December 18, 1987 4.11 9.54 8.85 11.99 Principal VCF MidCap Growth May 1, 1998 -0.39 4.93 1.85 Principal VCF MidCap Value May 3, 1999 3.17 10.87 11.39 Principal VCF Money Market March 18, 1983 -5.32 -0.71 1.56 3.21 Principal VCF Principal Lifetime 2010 August 30, 2004 2.21 7.38 Principal VCF Principal Lifetime 2020 August 30, 2004 5.02 9.68 Principal VCF Principal Lifetime 2030 August 30, 2004 4.69 9.52 Principal VCF Principal Lifetime 2040 August 30, 2004 4.99 10.41 Principal VCF Principal Lifetime 2050 August 30, 2004 5.34 10.68 Principal VCF Principal Lifetime Strategic Income August 30, 2004 0.21 5.43 Principal VCF Real Estate Securities May 1, 1998 26.08 23.36 15.28 Principal VCF Short-Term Bond May 1, 2003 -5.50 -1.06 Principal VCF SmallCap Growth May 1, 1998 -1.05 -2.43 0.19 Principal VCF SmallCap Value May 1, 1998 8.44 13.63 10.88 Principal VCF SAM Balanced June 3,1997 0.55 4.95 6.92 Principal VCF SAM Conservative Balanced April 23, 1998 -1.23 4.38 3.60 Principal VCF SAM Conservative Growth June 3,1997 2.12 5.15 7.53 Principal VCF SAM Flexible Income September 9, 1997 -3.14 3.65 4.94 Principal VCF SAM Strategic Growth June 3, 1997 2.95 5.06 8.49 Principal VCF West Coast Equity April 28, 1998 1.96 6.12 9.83 T. Rowe Price Blue Chip Growth December 29, 2000 -0.70 1.33 -1.45 T. Rowe Price Heath Sciences December 29, 2000 -1.58 3.95 1.61
CONTRACT WITH PURCHASE PAYMENT CREDIT RIDER WITHOUT SURRENDER CHARGE -------------------------------------------------------------- EFFECTIVE SINCE DIVISION DATE ONE YEAR FIVE YEARS TEN YEARS INCEPTION -------- --------- -------- ---------- --------- --------- AIM V.I. Basic Value September 10, 2001 11.10 4.43 4.56 AIM V.I. SmallCap Equity August 29, 2003 15.26 12.56 AllianceBernstein Small Cap Growth August 15, 1996 8.63 4.23 1.95 2.42 American Century VP Inflation Protection December 31, 2002 -0.30 1.52 American Century VP Ultra May 1, 2001 -5.19 -0.99 -1.94 American Century VP Vista October 5, 2001 6.98 7.16 7.03 Dreyfus IP Technology Growth August 31, 1999 2.10 -2.38 -5.87 Fidelity VIP Contrafund January 3, 1995 9.36 9.52 8.87 11.83 Fidelity VIP Equity-Income November 3, 1986 17.70 6.77 6.98 8.99 Fidelity VIP Growth October 31, 1986 4.59 -0.57 4.30 8.34 Fidelity VIP Mid Cap December 28, 1998 10.31 13.32 16.90 Fidelity VIP Overseas January 28, 1987 15.59 10.37 5.41 5.64 Goldman Sachs VIT Structured Small Cap Equity February 13, 1998 10.18 9.33 5.74 Goldman Sachs VIT Mid Cap Value May 1, 1998 14.01 12.90 9.21 Lehman Brothers High Income Bond Portfolio September 15, 2004 5.47 2.16 Neuberger Berman AMT Fasciano July 12, 2002 3.29 7.47 Neuberger Berman AMT Partners March 22, 1994 10.16 7.96 6.72 9.39 Neuberger Berman AMT Socially Responsive February 18, 1999 11.59 7.45 5.14 Principal VCF Asset Allocation June 1, 1994 10.68 4.46 5.47 6.55 Principal VCF Bond December 18, 1987 2.70 3.16 3.72 5.50 Principal VCF Capital Value May 13, 1970 17.73 7.21 5.38 9.87 Principal VCF Diversified International May 2, 1994 25.59 14.10 6.60 7.46 Principal VCF Equity Growth June 1, 1994 4.24 0.62 4.36 8.44 Principal VCF Equity Income I April 28,1998 15.98 9.92 8.29 Principal VCF Equity Value August 30, 2004 17.34 12.69 Principal VCF Government & High Quality Bond April 9, 1987 2.29 2.07 3.70 5.13 Principal VCF Growth May 2, 1994 7.88 1.86 1.82 4.28 Principal VCF International Emerging Markets October 24, 2000 35.76 25.09 17.32 Principal VCF International SmallCap May 1, 1998 27.96 20.81 12.99 Principal VCF LargeCap Blend May 1, 2002 13.67 5.43 Principal VCF LargeCap Stock Index May 3, 1999 13.42 3.78 -0.16 Principal VCF LargeCap Value May 1, 2002 19.29 8.37 Principal VCF MidCap December 18, 1987 12.11 10.09 8.85 11.99 Principal VCF MidCap Growth May 1, 1998 7.61 5.58 1.85 Principal VCF MidCap Value May 3, 1999 11.17 11.39 11.45 Principal VCF Money Market March 18, 1983 2.68 0.10 1.56 3.21 Principal VCF Principal Lifetime 2010 August 30, 2004 10.21 9.68 Principal VCF Principal Lifetime 2020 August 30, 2004 13.02 11.92 Principal VCF Principal Lifetime 2030 August 30, 2004 12.69 11.76 Principal VCF Principal Lifetime 2040 August 30, 2004 12.99 12.63 Principal VCF Principal Lifetime 2050 August 30, 2004 13.34 12.89 Principal VCF Principal Lifetime Strategic Income August 30, 2004 8.21 7.79 Principal VCF Real Estate Securities May 1, 1998 34.08 23.70 15.28 Principal VCF Short-Term Bond May 1, 2003 2.50 0.31 Principal VCF SmallCap Growth May 1, 1998 6.95 -1.56 0.19 Principal VCF SmallCap Value May 1, 1998 16.44 14.11 10.88 Principal VCF SAM Balanced June 3,1997 8.55 5.60 6.92 Principal VCF SAM Conservative Balanced April 23, 1998 6.77 5.04 3.60 Principal VCF SAM Conservative Growth June 3,1997 10.12 5.80 7.53 Principal VCF SAM Flexible Income September 9, 1997 4.86 4.33 4.94 Principal VCF SAM Strategic Growth June 3, 1997 10.95 5.71 8.49 Principal VCF West Coast Equity April 28, 1998 9.96 6.75 9.83 T. Rowe Price Blue Chip Growth December 29, 2000 7.30 2.08 -1.10 T. Rowe Price Heath Sciences December 29, 2000 6.42 4.63 1.91
TAXATION UNDER CERTAIN RETIREMENT PLANS INDIVIDUAL RETIREMENT ANNUITIES Contributions. Individuals may make contributions for individual retirement -------------- annuity (IRA) contracts. Individuals may make deductible contributions (for any year) up to the lesser of the amount shown in the chart or 100% of compensation. Individuals age 50 or over are also permitted to make additional "catch-up" contributions. The additional contribution is $1,000 in 2006 and beyond. Such individuals may establish a traditional IRA for a non-working spouse. The annual contribution for both spouses' contracts cannot exceed the lesser of the amount shown in the chart or 100% of the working spouse's compensation. No more than the individual IRA limit may be contributed to either spouse's IRA for any year.
IRA - MAXIMUM ANNUAL CONTRIBUTION ---------------------------------------------------------- YEAR INDIVIDUAL IRA INDIVIDUAL IRA + SPOUSAL IRA ---- -------------- ---------------------------- 2006 $4,000 $ 8,000 2007 $4,000 $ 8,000 2008 $5,000 $10,000
Starting in 2009, limits are indexed for cost-of-living. Contributions may be tax deductible. If an individual and his/her spouse do not participate in a qualified retirement plan, the contributions to an IRA are fully tax deductible regardless of income. If an individual is an active participant in a qualified retirement plan, his/her ability to deduct the contributions depends upon his/her income level. For individuals who are not active participants but whose spouses are, deductibility of traditional IRA contributions is phased out if the couple files a joint return and the Adjusted Gross Income is between $156,000 and $166,000 in 2007.
DEDUCTIBILITY OF TRADITIONAL IRA CONTRIBUTIONS FOR ACTIVE PARTICIPANTS ------------------------------------------------------------------------------------------------------------ MARRIED INDIVIDUALS (FILING JOINTLY) SINGLE INDIVIDUAL ----------------------------------------------------------------------- --------------------------------- LIMITED NO LIMITED NO YEAR DEDUCTION DEDUCTION YEAR DEDUCTION DEDUCTION ---- --------- --------- ---- --------- --------- 2006 $75,000 $ 85,000 2006 $50,000 $60,000 2007 $83,000 $103,000 2007 $52,000 $62,000
An individual may make non-deductible IRA contributions to the extent of the excess of: 1) The lesser of maximum annual contribution 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 591/2 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 701/2, and such distributions must be made over a period that does not exceed the uniform life distribution period established by the IRS. A penalty tax of 50% may 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 retirement plan, tax-deferred annuity plan or governmental 457(b) 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, tax-deferred annuity plan, or governmental 457(b) 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 Contributions. 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 100% of compensation or $45,000 for 2007. 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. The amount that an employee chooses to defer and contribute to the SAR/SEP is referred to as an elective deferral. These elective deferrals are subject to the same cap as elective deferrals to IRC Section 401(k) plans, see table below. In addition to the elective deferrals, SAR/SEP may permit additional elective deferrals by individuals age 50 or over, referred to as "catch-up contributions". No new SAR/SEP are permitted after 1996 for any employer, but those in effect prior to 1997 may continue to operate, receive contributions, and add new employees. Employees of tax-exempt organizations and state and local government agencies are not eligible for SAR/SEPs.
SALARY REDUCTION SIMPLIFIED EMPLOYEE PENSION PLAN (SAR-SEP) -------------------------------------------------------------- YEAR ELECTIVE DEFERRAL CATCH-UP CONTRIBUTION ---- ----------------- --------------------- 2006 $15,000 $5,000 2007 $15,500. $5,000
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) Contributions. 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. The amount that an employee chooses to defer and contribute to the SIMPLE IRA is referred to as an elective deferral. These elective deferrals cannot exceed the amounts shown in the chart. In addition to the elective deferrals, SIMPLE IRA may permit additional elective deferrals by individuals age 50 or over, referred to as "catch-up contributions". Elective contribution amounts made under the salary reduction portions (i.e., those subject to the $7,000 limit in 2002) of a SIMPLE IRA plan are counted in the overall limit on elective deferrals by any individual. For example, an individual under age 50 who defers the maximum of $7,000 to a SIMPLE IRA of one employer and participates in a 401(k) plan of another employer would be limited to an elective deferral of $4,000 in 2002 ($11,000 - $7,000) to the 401(k) plan. The employer generally must match either 100% of the employee's elective deferral, up to 3% of the employee's compensation or fixed nonelective contributions of 2% of compensation.
SAVINGS INCENTIVE MATCH PLAN FOR EMPLOYEES (SIMPLE IRA) ----------------------------------------------------------------------------------------------- YEAR ELECTIVE DEFERRAL CATCH-UP CONTRIBUTION OVERALL LIMIT ON ELECTIVE DEFERRALS ---- ----------------- --------------------- ----------------------------------- 2006 $10,000 $2,500 $15,000 2007 and beyond $10,500 $2,500 $15,500
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) Contribution. Under Section 408A of the Code, individuals may contribute to a ------------- Roth IRA on his/her own behalf up to the lesser of maximum annual contribution limit as shown in the chart or 100% of compensation. In addition, the contribution must be reduced by the amount of any contributions made to other IRAs for the benefit of the same individual. Individuals age 50 or over are also permitted to make additional "catch-up" contributions. The additional contribution is $500 for 2004 and 2005 and $1,000 in 2006 and beyond.
ROTH IRA - MAXIMUM ANNUAL CONTRIBUTION ------------------------------------------------ YEAR INDIVIDUAL ROTH IRA CATCH-UP CONTRIBUTION ---- ------------------- --------------------- 2006 $4,000 $1,000 2007 $4,000 $1,000 2008 $5,000 $1,000
Starting in 2009, individual Roth IRA limits are indexed for cost-of-living. The maximum 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 (see chart below). If taxable income is recognized on the traditional IRA, and IRA owner (with adjusted gross income of less than $100,000) may convert a traditional IRA into a Roth IRA. All IRA income will need to be recognized in the year of conversion. No IRS 10% tax penalty will apply to the conversion.
MODIFIED ADJUSTED GROSS INCOME ------------------------------------------------------------------------------------------------------------------------ SINGLE MARRIED FILING JOINT ROTH IRA CONTRIBUTION ------ -------------------- --------------------- $99,000 or less $156,000 Full Contribution $99,000 - $114,000 $156,000 - $166,0000 Partial Contribution* $114,000 & over $166,000 & over No Contribution *Those entitled to only a partial contribution should check with a tax advisor to determine the allowable contribution.
A person whose filing status is "married, filing separately" may not make a full Roth IRA contribution, unless the couple are separated and have been living apart for the entire year. Only a partial contribution is allowed if the Modified Adjusted Gross Income is less than $10,000. 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 591/2, 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. FINANCIAL STATEMENTS Report of Independent Registered Public Accounting Firm The Board of Directors and Participants Principal Life Insurance Company We have audited the accompanying statements of assets and liabilities of each of the divisions of Principal Life Insurance Company Separate Account B [comprised of the AIM V.I. Basic Value Series 1, AIM V.I. Capital Appreciation Series I, AIM V.I. Core Equity Series I, AIM V.I. Dynamics Series I, AIM V.I. Global Health Care Series I, AIM V.I. Small Cap Equity Series I, AIM V.I. Small Cap Growth Series I (formerly AIM V.I. Small Company Growth Series I), AIM V.I. Technology Series I, Alliance Bernstein VP Series Small Cap Growth Class A, American Century VP Income & Growth Class I, American Century VP Inflation Protection Class II, American Century VP Ultra Class I, American Century VP Ultra Class II, American Century VP Value Class II, American Century VP Vista Class I, Asset Allocation, Balanced, Bond, Capital Value, Diversified International, Dreyfus IP Founders Discovery Initial Shares, Dreyfus IP Technology Service Shares, Equity Growth, Equity Income, Equity Value, Fidelity VIP Equity-Income Service Class 2, Fidelity VIP Growth Service Class, Fidelity VIP Growth Service Class 2, Fidelity VIP Overseas Service Class 2, Fidelity VIP II Contrafund Service Class, Fidelity VIP II Contrafund Service Class 2, Fidelity VIP III Mid Cap Service Class 2, Goldman Sachs VIT Mid Cap Value Fund Service Class I, Goldman Sachs Structured Small Cap Equity Service Class I (formerly Goldman Sachs CORE Small Cap Equity Fund Service Class I), Government & High Quality Bond, Growth, International Emerging Markets, International SmallCap, Janus Aspen Mid Cap Growth Service Shares, LargeCap Blend, LargeCap Growth Equity, LargeCap Stock Index, LargeCap Value, MidCap, MidCap Growth, MidCap Value, Money Market, Neuberger Berman AMT Fasciano S Class, Neuberger Berman AMT High Income Bond S Class, Neuberger Berman AMT Partners I Class, Neuberger Berman AMT Socially Responsive I Class, Principal LifeTime Strategic Income, Principal LifeTime 2010, Principal LifeTime 2020, Principal LifeTime 2030, Principal LifeTime 2040, Principal LifeTime 2050, Real Estate Securities, Short-Term Bond, SmallCap, SmallCap Growth, SmallCap Value, T. Rowe Price Blue Chip Growth II, T. Rowe Price Health Science II, and Templeton Growth Securities Class 2 Divisions] as of December 31, 2006, and the related statements of operations and changes in net assets for the periods 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 the standards of the Public Company Accounting Oversight Board (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. We were not engaged to perform an audit of the Separate Account's internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Separate Account's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. Our procedures included confirmation of securities owned as of December 31, 2006 by correspondence with the transfer agents. 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 financial position of each of the respective divisions of Principal Life Insurance Company Separate Account B at December 31, 2006, and the results of their operations and the changes in their net assets for the periods described above, in conformity with U.S. generally accepted accounting principles. /s/ Ernst & Young LLP April 23, 2007
Principal Life Insurance Company Separate Account B Statements of Assets and Liabilities December 31, 2006 AIM V.1. AIM V.1. Capital Basic Value Appreciation Series I Series I Division Division Assets Investments in shares of mutual funds, at markel $ 1,072,800 $ 15,581,818 Liabilities Net assets $ 1,072,800 $ 15,581,818 - --------- ------------ Net assets Accumulation units: Bankers Flexible Annuity $ - $ - Pension Builder Plus - - Pension Builder Plus - Rollover IRA - - Personal Variable - - Premier Variable - - Principal Freedom Variable Annuity - - Principal Freedom 2 Variable Annuity - - The Principal Variable Annuity - 13,225,032 The Principal Variable Annuity With Purchase Payment Credit - 2,356,786 Rider Principal Investment Plus Variable Annuity 647,422 - Principal Investment Plus Variable Annuity With Purchase Rider 425,378 - Contracts in annuitization period: Bankers Flexible Annuity - - Pension Builder Plus - Rollover IRA - - - - Total net assets $ 1,072,800 $ 15,581,818 - --------- ------------ Investments in shares of mutual funds, at cost $ 1,040,800 $ 15,593,879 Shares ofmutual fund owned 80,299 594,272 Accumulation units outstanding: Bankers Flexible Annuity - - Pension Builder Plus - - Pension Builder Plus - Rollover IRA - - Personal Variable - - Premier Variable - - Principal Freedom Variable Annuity - - Principal Freedom 2 Variable Annuity - - The Principal Variable Annuity - 1,339,103 The Principal Variable Annuity With Purchase Payment Credit - 239,604 Rider Principal Investment Plus Variable Annuity 49,357 - Principal Investment Plus Variable Annuity With Purchase Rider 32,891 - Accumulation unit value: Bankers Flexible Annuity $ - $ - Pension Builder Plus - - Pension Builder Plus - Rollover IRA - - Personal Variable - - Premier Variable - - Principal Freedom Variable Annuity - - Principal Freedom 2 Variable Annuity - - The Principal Variable Annuity - 9.88 The Principal Variable Annuity With Purchase Payment Credit - 9.84 Rider Principal Investment Plus Variable Annuity 13.12 - Principal Investment Plus Variable Annuity With Purchase Rider 12.93 - Annuitized units outstanding: Bankers Flexible Annuity - - Pension Builder Plus - Rollover IRA - - Annuitized unit value: Bankers Flexible Annuity $ - $ - Pension Builder Plus - Rollover IRA - - See accompanying notes.
AIM V.I. AIM V.I. AIM V.L AIM V.L AIM V.I. Global Small Cap Small Cap AIM V.I. Core Equity Dynamics Health Care Equity Growth Technology Series I Series I Series I Series I Series I Series I Division Division Division Division Division Division -------- -------- -------- -------- -------- -------- ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------ $ 61,827,860 $ 3,067,981 $ 13,857,021 $ 774,825 $ 4,430,627 $ 6,147,933 ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------ $ 61,827,860 $ 3,067,981 $ 13,857,021 $ 774,825 $ 4,430,627 $ 6,147,933 - ---------- ----------- ------------ --------- ------------- --------- ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------ 47,804,740 1,748,048 8,446,568 - 2,994,033 3,788,705 14,023,120 1,319,933 5,410,453 - 1,436,594 2,359,228 - - - 356,159 - - 418,666 - - ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------ $ 61,827,860 $ 3,067,981 $ 13,857,021 $ 774,825 $ 4,430,627 (k,147,933 - ---------- ----------- ------------ --------- ----------- ---------- ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------ $ 58,252,864 $ 2,290,194 $ 10,957,723 $ 751,934 $ 3,332,105 $ 5,062,436 2,271,413 178,891 644,213 51,009 239,493 438,512 4,649,179 170,364 769,608 _ 300,366 625,345 1,414,651 133,054 509,879 _ 149,066 402,767 _ _ _ 25,062 _ _ 29,880 _ _ 10.28 10.26 10.98 _ 9.97 6.06 9.91 9.92 10.61 _ 9.64 5.86 _ _ _ 14.21 _ _ 14.01 _ _
Principal Life Insurance Company Separate Account B Statements of Assets and Liabilities (continued) December 31, 2006 Alliance Bernstein American VP Series Century VP Small Cap Income & Growth Growth Class A Class I Division Division -------- -------- Assets Investments in shares of mutual funds, at markel $ 994,036 $ 38,340,900 Liabilities Net assets $ 994,036 $ 38,340,900 - ------- ------------ Net assets Accumulation units: Bankers Flexible Annuity $ - $ - Pension Builder Plus - - Pension Builder Plus - Rollover IRA - - Personal Variable - - Premier Variable - - Principal Freedom Variable Annuity - 7,170,058 Principal Freedom 2 Variable Annuity - - The Principal Variable Annuity - 20,501,043 The Principal Variable Annuity With Purchase Payment Credit - 10,669,799 Rider Principal Investment Plus Variable Annuity 731,498 - Principal Investment Plus Variable Annuity With Purchase Rider 262,538 - Contracts in annuitization period: Bankers Flexible Annuity - - Pension Builder Plus - Rollover IRA - - - - Total net assets $ 994,036 $ 38,340,900 - ------- ------------ Investments in shares of mutual funds, at cost $ 921,900 $ 28,201,779 Shares ofmutual fund owned 73,252 4,442,746 Accumulation units outstanding: Bankers Flexible Annuity - - Pension Builder Plus - - Pension Builder Plus - Rollover IRA - - Personal Variable - - Premier Variable - - Principal Freedom Variable Annuity - 579,156 Principal Freedom 2 Variable Annuity - - The Principal Variable Annuity - 1,686,051 The Principal Variable Annuity With Purchase Payment Credit - 907,598 Rider Principal Investment Plus Variable Annuity 53,078 - Principal Investment Plus Variable Annuity With Purchase Rider 19,321 - Accumulation unit value: Bankers Flexible Annuity $ - $ - Pension Builder Plus - - Pension Builder Plus - Rollover IRA - - Personal Variable - - Premier Variable - - Principal Freedom Variable Annuity - 12.38 Principal Freedom 2 Variable Annuity - 11.25 The Principal Variable Annuity - 12.16 The Principal Variable Annuity With Purchase Payment Credit - 11.76 Rider Principal Investment Plus Variable Annuity 13.78 - Principal Investment Plus Variable Annuity With Purchase Rider 13.59 - Annuitized units outstanding: Bankers Flexible Annuity - - Pension Builder Plus - Rollover IRA - - Annuitized unit value: Bankers Flexible Annuity $ - $ - Pension Builder Plus - Rollover IRA - - See accompanying notes.
American Century VP American American American American Inflation Century VP Century VP Century VP Century VP Protection Ultra Ultra Value Vista Asset Class II Class I Class II Class II Class I Allocation Division Division Division Division Division Division -------- -------- -------- -------- -------- -------- ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------ $ 48,661,365 $ 9,446,138 $ 41,242,582 $ 50,565,063 $ 693,886 $ 84,221,248 ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------ $ 48,661,365 $ 9,446,138 $ 41,242,582 $ 50,565,063 $ 693,886 $ 84,221,248 - ---------- ----------- ------------ ------------ - --------- ---------- ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------ 2,684 _ 6,080,473 _ 33,115,958 _ 65,323,874 - 3,365,665 - 17,449,105 - 12,467,513 34,741,530 - 29,256,287 - 519,933 4,113,723 13,919,835 _ 11,986,295 _ 173,953 2,313,454 ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------ $ 48,661,365 $ 9,446,138 $ 41,242,582 $ 50,565,063 $ 693,886 - ---------- ----------- ------------ ------------ - ------- ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------ $ 49,357,651 $ 8,456,198 $ 41,023,836 $ 44,479,303 $ 643,203 $ 70,968,084 4,827,516 940,850 4,132,523 5,792,104 44,084 5,968,905 2,008 _ 672,286 _ 2,266,362 _ 2,706,025 _ 384,888 _ 1,227,739 _ 535,713 3,389,498 _ 2,714,276 _ 38,683 170,410 1,377,420 - 1,127,888 - 13,127 99,406 - - - - - 1.34 - 9.04 - 14.61 _ 24.14 - 8.74 - 14.21 _ 23.27 10.25 _ 10.78 _ 13.44 24.14 10.11 _ 10.63 _ 13.25 23.27
Principal Life Insurance Company Separate Account B Statements of Assets and Liabilities (continued) December 31, 2006 Balanced Bond Division Division Assets Investments in shares of mutual funds, at markel $ 92,320,337 $ 319,793,402 Liabilities Net assets $ 92,320,337 $ 319,793,402 - ---------- ------------- Net assets Accumulation units: Bankers Flexible Annuity $ - $ - Pension Builder Plus - - Pension Builder Plus - Rollover IRA - - Personal Variable 1,028,047 351,190 Premier Variable 3,730,855 3,055,802 Principal Freedom Variable Annuity - 15,130,770 Principal Freedom 2 Variable Annuity - 53,305 The Principal Variable Annuity 72,548,350 164,144,798 The Principal Variable Annuity With Purchase Payment Credit 15,013,085 62,581,173 Rider Principal Investment Plus Variable Annuity - 53,374,227 Principal Investment Plus Variable Annuity With Purchase Rider - 21,102,137 Contracts in annuitization period: Bankers Flexible Annuity - - Pension Builder Plus - Rollover IRA Total net assets $ 92,320,337 $ 319,793,402 - ---------- ------------- Investments in shares of mutual funds, at cost $ 82,673,782 $ 312,027,449 Shares ofmutual fund owned 5,684,750 26,451,067 Accumulation units outstanding: Bankers Flexible Annuity - - Pension Builder Plus - - Pension Builder Plus - Rollover IRA - - Personal Variable 474,221 171,287 Premier Variable 1,675,268 1,450,978 Principal Freedom Variable Annuity - 1,099,132 Principal Freedom 2 Variable Annuity - 5,148 The Principal Variable Annuity 3,525,538 8,677,485 The Principal Variable Annuity With Purchase Payment Credit 756,763 3,431,617 Rider Principal Investment Plus Variable Annuity - 2,821,626 Principal Investment Plus Variable Annuity With Purchase Rider - 1,157,131 Accumulation unit value: Bankers Flexible Annuity $ - $ - Pension Builder Plus - - Pension Builder Plus - Rollover IRA - - Personal Variable 1.95 2.05 Premier Variable 2.17 2.11 Principal Freedom Variable Annuity - 13.77 Principal Freedom 2 Variable Annuity - 10.36 The Principal Variable Annuity 20.58 18.92 The Principal Variable Annuity With Purchase Payment Credit 19.84 18.24 Rider Principal Investment Plus Variable Annuity - 18.92 Principal Investment Plus Variable Annuity With Purchase Rider - 18.24 Annuitized units outstanding: Bankers Flexible Annuity - - Pension Builder Plus - Rollover IRA - - Annuitized unit value: Bankers Flexible Annuity $ - $ - Pension Builder Plus - Rollover IRA - - See accompanying notes.
Dreyfus IP Founders Dreyfus IP Capital Diversified Discovery Technology Equity Value International Initial Shares Service Shares Growth Division Division Division Division Division ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------ $ 213,650,385 $ 290,731,308 $ 17,583,895 $ 451,722 $ 179,749,917 ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------ $ 213,650,385 $ 290,731,308 $ 17,583,895 $ 451,722 $ 179,749,917 - ----------- ------------- ------------ --------- - ----------- ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------ $ 2,439,807 - - - - 3,086,246 - - - - 277,653 - - - - 1,575,016 984,958 - - - 13,650,606 6,554,555 - - 2,214 7,981,412 9,353,333 - - - 22,697 72,978 - - - 149,483,317 195,794,392 11,219,916 - 151,078,953 25,046,661 55,159,610 6,363,979 - 22,911,297 6,154,360 16,563,735 - 307,975 3,873,868 3,670,918 6,247,747 - 143,747 1,883,585 9,232 - - - - 252,460 ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------ $ 213,650,385 $ 290,731,308 $ 17,583,895 $ 451,722 $ 179,749,917 - ----------- ------------- ------------ --------- - ----------- ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------ $ 178,045,665 $ 184,408,871 $ 14,700,220 $ 432,226 $ 172,565,077 5,721,756 14,085,819 1,697,287 48,677 9,822,400 57,383 - - - - 422,047 - - - - 32,920 - - - - 445,767 338,042 - - - 3,743,094 2,190,324 - - 2,092 651,626 574,978 - - - 2,009 6,064 - - - 5,087,290 7,233,866 1,281,517 - 5,028,952 884,166 2,113,901 751,818 - 791,083 209,449 611,970 - 25,294 128,949 129,587 239,435 - 11,974 65,037 $ 42.52 $ - $ - $ - $ - 7.31 - - - - 8.43 - - - - 3.53 2.91 - - - 3.65 2.99 - - 1.06 12.25 16.27 - - - 11.30 12.03 - - - 29.38 27.07 8.76 - 30.04 28.33 26.09 8.46 - 28.96 29.38 27.07 - 12.18 30.04 28.33 26.09 - 12.01 28.96 217 - - - - 29,934 - - - - $ 42.54 $ - $ - $ - $ - 8.43 - - - -
Principal Life Insurance Company Separate Account B Statements of Assets and Liabilities (continued) December 31, 2006 Equity Equity Income Value Division Division Assets Investments in shares of mutual funds, at markel $ 155,519,274 $ 3,927,407 Liabilities Net assets $ 155,519,274 $ 3,927,407 - ----------- ----------- Net assets Accumulation units: Bankers Flexible Annuity $ - $ - Pension Builder Plus - - Pension Builder Plus - Rollover IRA - - Personal Variable - - Premier Variable 171,342 - Principal Freedom Variable Annuity - - Principal Freedom 2 Variable Annuity - - The Principal Variable Annuity 44,276,994 - The Principal Variable Annuity With Purchase Payment Credit 14,278,889 - Rider Principal Investment Plus Variable Annuity 70,179,659 2,603,080 Principal Investment Plus Variable Annuity With Purchase Rider 26,612,390 1,324,327 Contracts in annuitization period: Bankers Flexible Annuity - - Pension Builder Plus - Rollover IRA Total net assets $ 155,519,274 $ 3,927,407 - ----------- ----------- Investments in shares of mutual funds, at cost $ 132,960,423 $ 3,530,619 Shares ofmutual fund owned 13,441,597 304,686 Accumulation units outstanding: Bankers Flexible Annuity - - Pension Builder Plus - - Pension Builder Plus - Rollover IRA - - Personal Variable - - Premier Variable 141,326 - Principal Freedom Variable Annuity - - Principal Freedom 2 Variable Annuity - - The Principal Variable Annuity 3,140,718 - The Principal Variable Annuity With Purchase Payment Credit 1,050,595 - Rider Principal Investment Plus Variable Annuity 4,978,096 193,898 Principal Investment Plus Variable Annuity With Purchase Rider 1,958,060 100,035 Accumulation unit value: Bankers Flexible Annuity $ - $ - Pension Builder Plus - - Pension Builder Plus - Rollover IRA - - Personal Variable - - Premier Variable 1.21 - Principal Freedom Variable Annuity - - Principal Freedom 2 Variable Annuity - - The Principal Variable Annuity 14.10 - The Principal Variable Annuity With Purchase Payment Credit 13.59 - Rider Principal Investment Plus Variable Annuity 14.10 13.43 Principal Investment Plus Variable Annuity With Purchase Rider 13.59 13.24 Annuitized units outstanding: Bankers Flexible Annuity - - Pension Builder Plus - Rollover IRA - - Annuitized unit value: Bankers Flexible Annuity $ - $ - Pension Builder Plus - Rollover IRA - - See accompanying notes.
Fidelity VIP Fidelity VIP Fidelity VIP Fidelity VIP Fidelity VIP II Equity-Income Growth Growth Overseas Contrafund Service Service Service Service Service Class 2 Class Class 2 Class 2 Class Division Division Division Division Division ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------ $ 77,174,324 $ 33,789,156 $ 4,364,661 $ 35,000,168 $ 118,477,727 ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------ $ 77,174,324 $ 33,789,156 $ 4,364,661 $ 35,000,168 $ 1184 7727 - ---------- ------------ ----------- ------------ - --------- ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------ 46,024,503 26,117,838 _ _ 92,142,440 24,346,731 7,671,318 - - 26,335,287 4,845,009 - 2,462,473 24,057,213 - 1,958,081 _ 1,902,188 10,942,955 - ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------ $ 77,174,324 $ 33,789,156 $ 4,364,661 $ 35,000,168 $ 118,477,727 - ---------- ------------ ----------- ------------ - ----------- ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------ $ 67,544,087 $ 39,935,409 $ 4,132,386 $ 29,884,103 $ 93,740,805 2,983,159 945,945 123,226 1,473,691 3,775,581 3,298,929 2,980,810 _ _ 6,229,617 1,794,179 908,170 _ - 1,846,847 347,281 _ 204,390 1,503,271 _ 144,297 _ 160,135 693,537 _ 13.95 8.76 _ _ 14.79 13.57 8.45 _ _ 14.26 13.95 _ 12.05 16.00 _ 13.57 _ 11.88 15.78 _
Principal Life Insurance Company Separate Account B Statements of Assets and Liabilities (continued) December 31, 2006 Fidelity VIP Fidelity VIP III II Contrafund Mid Cap Service Service Class 2 Class 2 Division Division Assets Investments in shares of mutual funds, at markel $ 23,281,029 $ 4,393,054 Liabilities Net assets $ 23,281,029 $ 4,393,054 - ---------- ----------- Net assets Accumulation units: Bankers Flexible Annuity $ - $ - Pension Builder Plus - - Pension Builder Plus - Rollover IRA - - Personal Variable - - Premier Variable - - Principal Freedom Variable Annuity - - Principal Freedom 2 Variable Annuity - - The Principal Variable Annuity - - The Principal Variable Annuity With Purchase Payment Credit - - Rider Principal Investment Plus Variable Annuity 17,880,716 3,086,991 Principal Investment Plus Variable Annuity With Purchase Rider 5,400,313 1,306,063 Contracts in annuitization period: Bankers Flexible Annuity - - Pension Builder Plus - Rollover IRA Total net assets $ 23,281,029 $ 4,393,054 - ---------- ----------- Investments in shares of mutual funds, at cost $ 23,059,803 $ 4,222,272 Shares ofmutual fund owned 748,345 128,264 Accumulation units outstanding: Bankers Flexible Annuity - - Pension Builder Plus - - Pension Builder Plus - Rollover IRA - - Personal Variable - - Premier Variable - - Principal Freedom Variable Annuity - - Principal Freedom 2 Variable Annuity - - The Principal Variable Annuity - - The Principal Variable Annuity With Purchase Payment Credit - - Rider Principal Investment Plus Variable Annuity 1,240,432 197,882 Principal Investment Plus Variable Annuity With Purchase Rider 379,971 84,914 Accumulation unit value: Bankers Flexible Annuity $ - $ - Pension Builder Plus - - Pension Builder Plus - Rollover IRA - - Personal Variable - - Premier Variable - - Principal Freedom Variable Annuity - - Principal Freedom 2 Variable Annuity - - The Principal Variable Annuity - - The Principal Variable Annuity With Purchase Payment Credit - - Rider Principal Investment Plus Variable Annuity 14.41 15.60 Principal Investment Plus Variable Annuity With Purchase Rider 14.21 15.38 Annuitized units outstanding: Bankers Flexible Annuity - - Pension Builder Plus - Rollover IRA - - Annuitized unit value: Bankers Flexible Annuity $ - $ - Pension Builder Plus - Rollover IRA - - See accompanying notes.
Goldman Sachs Goldman Sachs VIT Mid Cap Structured Value Fund Small Cap Government International Service Equity Service & High Emerging Class I Class I Quality Bond Growth Markets Division Division Division Division Division ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------ $ 12,621,326 $ 4,000,632 $ 276,598,302 $ 96,085,309 $ 104,347,151 ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------ $ 12,621,326 $ 4,000,632 $ 276,598,302 $ 96,085,309 $ 104,347,151 - ---------- ----------- ------------- ------------ - ----------- ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------ _ _ 152,304 _ _ _ _ 53,221 _ _ _ _ 370,079 1,158,524 _ - - 3,031,448 6,054,302 254,998 - - 7,567,716 - - _ _ 3,506 _ _ _ _ 179,537,833 77,146,750 59,746,465 - - 60,622,772 8,044,509 27,306,727 8,180,457 2,543,710 19,062,184 2,316,225 10,920,772 4,440,869 1,456,922 6,197,239 1,364,999 6,118,189 ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------ $ 12,621,326 $ 4,000,632 $ 276,598,302 $ 96,085,309 $ 104,347,151 - ---------- ----------- ------------- ------------ - ----------- ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------ $ 12,912,416 $ 4,074,501 $ 275,146,055 $ 101,918,518 $ 71,075,601 784,420 277,052 24,348,442 6,594,736 4,871,483 _ _ 54,132 _ _ _ _ 17,147 _ _ _ _ 175,534 608,844 _ _ _ 1,392,916 3,097,575 80,375 _ _ 709,414 _ _ _ _ 340 _ _ _ _ 9,750,649 4,178,663 2,014,594 _ _ 3,415,089 451,981 955,067 550,376 188,684 1,035,264 125,460 368,239 303,035 109,609 349,113 76,693 213,987 _ _ 2.81 _ _ _ _ 3.10 _ _ _ _ 2.11 1.90 - _ _ 2.18 1.95 3.17 _ _ 10.67 _ _ _ _ 10.33 - - _ _ 18.41 18.46 29.66 _ _ 17.75 17.80 28.59 14.86 13.48 18.41 18.46 29.66 14.65 13.29 17.75 17.80 28.59
Principal Life Insurance Company Separate Account B Statements of Assets and Liabilities (continued) December 31, 2006 Janus Aspen Mid Cap International Growth SmallCap Service Shares Division Division Assets Investments in shares of mutual funds, at markel $ 127,550,577 $ 19,322,587 Liabilities Net assets $ 127,550,577 $ 19,322,587 - ----------- ------------ Net assets Accumulation units: Bankers Flexible Annuity $ - $ - Pension Builder Plus - - Pension Builder Plus - Rollover IRA - - Personal Variable - - Premier Variable 135,445 - Principal Freedom Variable Annuity - - Principal Freedom 2 Variable Annuity - - The Principal Variable Annuity 83,817,333 12,075,899 The Principal Variable Annuity With Purchase Payment Credit 27,370,902 7,246,688 Rider Principal Investment Plus Variable Annuity 11,165,145 - Principal Investment Plus Variable Annuity With Purchase Rider 5,061,752 - Contracts in annuitization period: Bankers Flexible Annuity - - Pension Builder Plus - Rollover IRA Total net assets $ 127,550,577 $ 19,322,587 - ----------- ------------ Investments in shares of mutual funds, at cost $ 80,597,771 $ 14,254,808 Shares ofmutual fund owned 5,153,559 600,267 Accumulation units outstanding: Bankers Flexible Annuity - - Pension Builder Plus - - Pension Builder Plus - Rollover IRA - - Personal Variable - - Premier Variable 54,634 - Principal Freedom Variable Annuity - - Principal Freedom 2 Variable Annuity - - The Principal Variable Annuity 2,718,465 1,559,221 The Principal Variable Annuity With Purchase Payment Credit 920,810 970,582 Rider Principal Investment Plus Variable Annuity 362,122 - Principal Investment Plus Variable Annuity With Purchase Rider 170,287 - Accumulation unit value: Bankers Flexible Annuity $ - $ - Pension Builder Plus - - Pension Builder Plus - Rollover IRA - - Personal Variable - - Premier Variable 2.48 - Principal Freedom Variable Annuity - - Principal Freedom 2 Variable Annuity - - The Principal Variable Annuity 30.83 7.74 The Principal Variable Annuity With Purchase Payment Credit 29.72 7.47 Rider Principal Investment Plus Variable Annuity 30.83 - Principal Investment Plus Variable Annuity With Purchase Rider 29.72 - Annuitized units outstanding: Bankers Flexible Annuity - - Pension Builder Plus - Rollover IRA - - Annuitized unit value: Bankers Flexible Annuity $ - $ - Pension Builder Plus - Rollover IRA $ - $ - See accompanying notes.
LargeCap LargeCap LargeCap Growth Stock LargeCap Blend Equity Index Value MidCap Division Division Division Division Division -------- -------- -------- -------- -------- $ 192,106,445 $ 19,396,503 $ 152,650,034 $ 173,682,669 $ 367,161,013 $ 192,106,445 $ 19,396,503 $ 152,650,034 $ 173,682,669 $ 367,161,013 - ----------- ------------ ------------- ------------- - ----------- _ _ _ _ 1,812,069 - 2,709 773,353 - 7,988,655 - 2,793,503 20,103,518 - 6,517,146 _ 21,572 88,894 _ 11,872 80,831,763 10,762,371 85,094,495 77,635,254 254,405,357 39,746,843 5,816,348 32,620,886 31,528,136 52,376,009 50,749,045 - 9,422,159 45,756,562 31,325,702 20,778,794 _ 4,546,729 18,762,717 12,724,203 $ 192,106,445 $ 19,396,503 $ 152,650,034 $ 173,682,669 $ 367,161,013 - ----------- ------------ ------------- ------------- - ----------- $ 160,281,158 $ 17,908,609 $ 125,704,060 $ 134,746,693 $ 294,630,220 15,405,489 3,966,565 14,621,651 11,855,472 8,688,145 _ _ _ _ 446,879 - 3,473 632,387 - 1,917,776 _ 228,851 1,843,926 _ 321,758 _ 2,148 8,018 _ 1,073 6,213,213 1,892,712 8,048,208 5,281,587 6,620,901 3,141,077 1,061,039 3,200,277 2,205,179 1,413,882 3,900,883 _ 891,147 3,112,861 815,254 1,642,091 _ 446,059 1,312,328 343,489 4.05 - 0.78 1.22 _ 4.17 _ 12.21 10.90 _ 20.25 - 10.04 11.09 - 11.07 13.01 5.69 10.57 14.70 38.42 12.65 5.48 10.19 14.30 37.04 13.01 _ 10.57 14.70 38.42 12.65 _ 10.19 14.30 37.04
Principal Life Insurance Company Separate Account B Statements of Assets and Liabilities (continued) December 31, 2006 MidCap MidCap Growth Value Division Division Assets Investments in shares of mutual funds, at markel $ 57,787,473 $ 119,378,462 Liabilities Net assets $ 57,787,473 $ 119,378,462 - ---------- ------------- Net assets Accumulation units: Bankers Flexible Annuity $ - $ - Pension Builder Plus - - Pension Builder Plus - Rollover IRA - - Personal Variable - - Premier Variable 18,099 184,079 Principal Freedom Variable Annuity 1,938,457 10,681,587 Principal Freedom 2 Variable Annuity 10,663 21,777 The Principal Variable Annuity 36,775,105 52,636,985 The Principal Variable Annuity With Purchase Payment Credit 15,577,891 25,577,193 Rider Principal Investment Plus Variable Annuity 2,317,664 21,669,612 Principal Investment Plus Variable Annuity With Purchase Rider 1,149,594 8,607,229 Contracts in annuitization period: Bankers Flexible Annuity - - Pension Builder Plus - Rollover IRA Total net assets $ 57,787,473 $ 119,378,462 - ---------- ------------- Investments in shares of mutual funds, at cost $ 44,421,846 $ 101,574,455 Shares of mutual fund owned 4,835,772 7,118,573 Accumulation units outstanding: Bankers Flexible Annuity - - Pension Builder Plus - - Pension Builder Plus - Rollover IRA - - Personal Variable - - Premier Variable 13,813 100,849 Principal Freedom Variable Annuity 140,455 420,021 Principal Freedom 2 Variable Annuity 1,038 1,995 The Principal Variable Annuity 2,938,872 3,099,666 The Principal Variable Annuity With Purchase Payment Credit 1,291,325 1,557,819 Rider Principal Investment Plus Variable Annuity 185,216 1,276,075 Principal Investment Plus Variable Annuity With Purchase Rider 95,296 524,238 Accumulation unit value: Bankers Flexible Annuity $ - $ - Pension Builder Plus - - Pension Builder Plus - Rollover IRA - - Personal Variable - - Premier Variable 1.31 1.83 Principal Freedom Variable Annuity 13.80 25.43 Principal Freedom 2 Variable Annuity 10.27 10.91 The Principal Variable Annuity 12.51 16.98 The Principal Variable Annuity With Purchase Payment Credit 12.06 16.42 Rider Principal Investment Plus Variable Annuity 12.51 16.98 Principal Investment Plus Variable Annuity With Purchase Rider 12.06 16.42 Annuitized units outstanding: Bankers Flexible Annuity - - Pension Builder Plus - Rollover IRA - - Annuitized unit value: Bankers Flexible Annuity $ - $ - Pension Builder Plus - Rollover IRA - - See accompanying notes.
Neuberger Neuberger Neuberger Berman AMT Neuberger Berman AMT Berman AMT High Income Berman AMT Socially Money Fasciano Bond Partners Responsive Market S Class S Class I Class I Class Division Division Division Division Division -------- -------- -------- -------- -------- $ 94,506,379 $ 2,008,034 $ 2,063,611 $ 4,671,743 $ 2,519,107 $ 94,506,379 $ 2,008,034 $ 2,063,611 $ 4,671,743 $ 2,519,107 - ---------- ----------- ----------- ----------- - --------- 173,077 7,385 374,609 4,643,291 6,202,831 56,336,207 16,748,008 - - - - 5,108,202 1,200,273 1,354,544 3,161,736 1,955,849 4,912,769 807,761 709,067 1,510,007 563,258 $ 94,506,379 $ 2,008,034 $ 2,063,611 $ 4,671,743 $ 2,519,107 - ---------- ----------- ----------- ----------- - --------- $ 94,506,378 $ 1,976,187 $ 2,093,600 $ 4,693,978 $ 2,276,876 94,506,378 138,199 209,504 220,782 150,754 77,874 3,052 _ _ _ _ 241,428 _ _ _ _ 2,897,796 _ _ _ _ 525,746 _ _ _ _ 4,089,737 1,261,134 _ _ _ _ 370,831 103,672 127,025 208,718 143,632 369,935 70,763 67,413 101,101 41,953 2.22 _ _ _ _ 2.42 _ _ _ _ 1.55 _ _ _ _ 1.60 - - - - 11.81 10.32 - - - - 13.79 _ _ _ _ 13.29 _ _ _ _ 13.79 11.58 10.66 15.15 13.62 13.29 11.42 10.52 14.94 13.43
Principal Life Insurance Company Separate Account B Statements of Assets and Liabilities (continued) December 31, 2006 Principal LifeTime Principal Strategic LifeTime Income 2010 Division Division -------- -------- Assets Investments in shares of mutual funds, at markel $ 12,491,385 $ 26,166,066 Liabilities Net assets $ 12,491,385 $ 26,166,066 - ---------- ------------ Net assets Accumulation units: Bankers Flexible Annuity $ - $ - Pension Builder Plus - - Pension Builder Plus - Rollover IRA - - Personal Variable - - Premier Variable - - Principal Freedom Variable Annuity - - Principal Freedom 2 Variable Annuity - 512,558 The Principal Variable Annuity - - The Principal Variable Annuity With Purchase Payment Credit - - Rider Principal Investment Plus Variable Annuity 10,295,433 20,231,603 Principal Investment Plus Variable Annuity With Purchase Rider 2,195,952 5,421,905 Contracts in annuitization period: Bankers Flexible Annuity - - Pension Builder Plus - Rollover IRA Total net assets $ 12,491,385 $ 26,166,066 - ---------- ------------ Investments in shares of mutual funds, at cost $ 11,442,702 $ 23,580,736 Shares ofmutual fund owned 1,028,098 2,050,632 Accumulation units outstanding: Bankers Flexible Annuity - - Pension Builder Plus - - Pension Builder Plus - Rollover IRA - - Personal Variable - - Premier Variable - - Principal Freedom Variable Annuity - - Principal Freedom 2 Variable Annuity - 47,224 The Principal Variable Annuity - - The Principal Variable Annuity With Purchase Payment Credit - - Rider Principal Investment Plus Variable Annuity 850,780 1,605,358 Principal Investment Plus Variable Annuity With Purchase Rider 184,022 436,282 Accumulation unit value: Bankers Flexible Annuity $ - $ - Pension Builder Plus - - Pension Builder Plus - Rollover IRA - - Personal Variable - - Premier Variable - - Principal Freedom Variable Annuity - - Principal Freedom 2 Variable Annuity 10.71 10.85 The Principal Variable Annuity - - The Principal Variable Annuity With Purchase Payment Credit - - Rider Principal Investment Plus Variable Annuity 12.10 12.60 Principal Investment Plus Variable Annuity With Purchase Rider 11.93 12.43 Annuitized units outstanding: Bankers Flexible Annuity - - Pension Builder Plus - Rollover IRA - - Annuitized unit value: Bankers Flexible Annuity $ - $ - Pension Builder Plus - Rollover IRA - - See accompanying notes.
Principal Principal Principal Principal LifeTime LifeTime LifeTime LifeTime Real Estate 2020 2030 2040 2050 Securities Division Division Division Division Division -------- -------- -------- -------- -------- $ 95,944,655 $ 11,981,587 $ 5,191,353 $ 3,485,174 $ 181,645,070 $ 95,944,655 $ 11,981,587 $ 5,191,353 $ 3,485,174 $ 181,645,070 - ---------- ------------ ----------- ----------- - ----------- _ 642,260 109,372 34,182 99,508 _ 10,832 _ _ _ _ 114,151,469 - - - - 51,711,695 70,061,734 8,910,411 3,728,292 2,260,799 10,410,804 25,773,549 3,036,994 1,363,553 1,224,375 4,718,010 $ 95,944,655 $ 11,981,587 $ 5,191,353 $ 3,485,174 $ 181,645,070 - ---------- ------------ ----------- ----------- - ----------- $ 86,400,066 $ 10,808,094 $ 4,680,947 $ 3,214,755 $ 106,220,348 7,176,115 897,497 381,717 254,764 6,962,249 - - - - 201,900 9,906 3,106 9,037 _ 872 _ _ _ _ 3,137,709 _ _ _ _ 1,474,353 5,303,081 676,655 278,049 167,695 286,166 1,978,309 233,877 103,123 92,097 134,516 - - - - 3.18 11.04 11.01 11.01 11.02 12.42 _ _ _ _ 36.38 _ _ _ _ 35.07 13.21 13.17 13.41 13.48 36.38 13.03 12.99 13.22 13.29 35.07
Principal Life Insurance Company Separate Account B Statements of Assets and Liabilities (continued) December 31, 2006 Short-Term Bond SmallCap Division Division Assets Investments in shares of mutual funds, at markel $ 117,594,191 $ 71,751,761 Liabilities Net assets $ 117,594,191 $ 71,751,761 - ----------- ------------ Net assets Accumulation units: Bankers Flexible Annuity $ - $ - Pension Builder Plus - - Pension Builder Plus - Rollover IRA - - Personal Variable - - Premier Variable - 61,892 Principal Freedom Variable Annuity 5,151,694 6,794,350 Principal Freedom 2 Variable Annuity - - The Principal Variable Annuity 36,629,585 48,257,837 The Principal Variable Annuity With Purchase Payment Credit 13,983,289 16,637,682 Rider Principal Investment Plus Variable Annuity 44,122,654 - Principal Investment Plus Variable Annuity With Purchase Rider 17,706,969 - Contracts in annuitization period: Bankers Flexible Annuity - - Pension Builder Plus - Rollover IRA Total net assets $ 117,594,191 $ 71,751,761 - ----------- ------------ Investments in shares of mutual funds, at cost $ 114,741,416 $ 55,526,097 Shares ofmutual fund owned 11,439,124 6,656,007 Accumulation units outstanding: Bankers Flexible Annuity - - Pension Builder Plus - - Pension Builder Plus - Rollover IRA - - Personal Variable - - Premier Variable - 47,125 Principal Freedom Variable Annuity 491,407 401,917 Principal Freedom 2 Variable Annuity - - The Principal Variable Annuity 3,545,010 3,600,804 The Principal Variable Annuity With Purchase Payment Credit 1,383,056 1,287,720 Rider Principal Investment Plus Variable Annuity 4,270,198 - Principal Investment Plus Variable Annuity With Purchase Rider 1,751,361 - Accumulation unit value: Bankers Flexible Annuity $ - $ - Pension Builder Plus - - Pension Builder Plus - Rollover IRA - - Personal Variable - - Premier Variable - 1.31 Principal Freedom Variable Annuity 10.48 16.90 Principal Freedom 2 Variable Annuity 10.33 10.46 The Principal Variable Annuity 10.33 13.40 The Principal Variable Annuity With Purchase Payment Credit 10.11 12.92 Rider Principal Investment Plus Variable Annuity 10.33 - Principal Investment Plus Variable Annuity With Purchase Rider 10.11 - Annuitized units outstanding: Bankers Flexible Annuity - - Pension Builder Plus - Rollover IRA - - Annuitized unit value: Bankers Flexible Annuity $ - $ - Pension Builder Plus - Rollover IRA - - See accompanying notes.
Templeton T. Rowe Price T. Rowe Price Growth SmallCap SmallCap Blue Chip Health Securities Growth Value Growth H Science Class 2 Division Division Division H Division Division -------- -------- -------- ---------- -------- $ 48,773,224 $ 126,059,611 $ 1,028,135 $ 2,196,760 $ 3,028,725 $ 48,773,224 $ 126,059,611 $ 1,028,135 $ 2,196,760 $ 3,028,725 - ---------- ------------- ----------- ----------- - --------- 21,118 208,430 - - - 1,546,101 _ _ _ 3,028,725 10,698 19,534 _ _ _ 34,865,845 65,746,378 _ _ _ 8,551,657 26,045,485 - - - 2,629,046 24,693,527 631,459 1,541,750 - 1,148,759 9,346,257 396,676 655,010 - $ 48,773,224 $ 126,059,611 $ 1,028,135 $ 2,196,760 $ 3,028,725 - ---------- ------------- ----------- ----------- - --------- $ 56,135,363 $ 98,293,024 $ 927,351 $ 2,026,963 $ 2,370,806 4,511,862 6,755,606 98,764 174,346 190,127 26,490 103,681 160,031 _ _ _ 159,700 1,075 1,803 _ _ _ 3,241,061 2,529,921 _ _ _ 824,604 1,039,572 _ _ _ 244,392 950,210 50,543 113,169 _ 110,771 373,045 32,203 48,765 _ 0.80 2.01 - - - 9.66 _ _ - 18.97 9.96 10.84 _ _ _ 10.76 25.99 10.37 25.05 _ _ _ 10.76 25.99 12.49 13.62 - 10.37 25.05 12.32 13.43 -
Principal Life Insurance Company Separate Account B Statements of Assets and Liabilities (continued) December 31, 2006 AIM V.1. AIM V.I. Capital Basic Value Appreciation Series I Series I Division Division (1) Investment income (loss) Income: Dividends $ 2,949 $ 8,964 Expenses: Mortality and expense risks 5,141 134,487 Separate account rider charges 1,467 9,405 ----- ----- Net investment income (loss) (3,659) (134,928) ------- --------- Realized gains (losses) on investments Realized gains (losses) on sale of fund shares 331 (124,545) Capital gains distributions 32,602 - ------ - Total realized gains (losses) on investments 32,933 (124,545) Change in net unrealized appreciation or depreciation of investments 28,074 (12,061) ------ -------- Net increase (decrease) in net assets resulting from $ 57,348 $ (271,534) -------- ----------- operations (1) Commenced operations April 28, 2006 (2) Represented the operations of AIM V.I. Small Company Growth Series I Division until November 21, 2006 name change. See accompanying notes.
AIM V.1. AIM V.1. AIM V.1. AIM V.I. AIM V.I. Global Small Cap Small Cap AIM V.I. Core Equity Dynamics Health Care Equity Growth Technology Series I Series I Series I Series I Series I Series I Division Division Division Division Division (2) Division -------- -------- -------- -------- ------------ -------- ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------ $ 334,375 $ - $ - $ - $ - $ - 653,092 35,510 176,717 4,189 52,875 77,346 68,370 7,404 32,792 1,018 8,267 14,034 ------ ----- ------ ----- ----- ------ ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------ (387,087) (42,914) (209,509) (5,207) (61,142) (91,380) --------- -------- --------- ------- -------- -------- ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------ (195,530) 182,101 404,387 858 182,363 188,539 - - - 29,245 - - - - - ------ - - ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------ (195,530) 182,101 404,387 30,103 182,363 188,539 7,447,457 234,675 302,110 16,481 376,390 375,772 --------- ------- ------- ------ ------- ------- ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------ $ 6,864,840 $ 373,862 $ 496,988 $ 41,377 $ 497,611 $ 472,931 ------------- --------- --------- -------- --------- ------- ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------
Principal Life Insurance Company Separate Account B Statements of Operations (continued) For the Year Ended December 31, 2006 Alliance American Bernstein Century VP VP Series Small Cap Income & Growth Growth Class A Class I Division Division Investment income (loss) Income: Dividends $ - $ 650,417 Expenses: Mortality and expense risks 7,963 421,546 Separate account rider charges 879 60,774 --- ------ Net investment income (loss) (8,842) 168,097 ------- ------- Realized gains (losses) on investments Realized gains (losses) on sale of fund shares 929 823,225 Capital gains distributions - - - - Total realized gains (losses) on investments 929 823,225 Change in net unrealized appreciation or depreciation of investments 55,846 4,264,066 ------ --------- Net increase (decrease) in net assets resulting from operations $ 47,933 $ 5,255,388 ---------- --------- See accompanying notes.
American Century VP American American American American Inflation Century VP Century VP Century VP Century VP Protection Ultra Ultra Value Vista Asset Class II Class I Class II Class II Class I Allocation Division Division Division Division Division Division -------- -------- -------- -------- -------- -------- ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------ $ 1,113,086 $ - $ - $ 535,887 $ - $ 644,867 414,097 120,688 342,819 564,624 6,840 1,035,899 59,445 20,290 49,954 93,372 834 81,022 ------ ------ ------ ------ --- ------ ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------ 639,544 (140,978) (392,773) (7,674) (472,054) ------- --------- --------- ------- --------- (122,109) --------- ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------ (8,042) 163,057 (7,464) 102,307 (83) 1,512,207 - - - 3,801,384 1,292 1,132,258 - - - --------- ----- --------- ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------ (8,042) 163,057 (7,464) 3,903,691 1,209 2,644,465 (488,574) (499,141) (279,227) 3,397,417 37,166 6,670,543 --------- --------- --------- --------- ------ --------- ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------ $ 142,928 $ (477,062) $ (679,464) $ 7,178,999 $ 30,701 $ 8,842,954 ----------- ----------- ----------- --------- ---------- ---------
Principal Life Insurance Company Separate Account B Statements of Operations (continued) For the Year Ended December 31, 2006 Balanced Bond Division Division Investment income (loss) Income: Dividends $ 2,344,551 $ 11,414,865 Expenses: Mortality and expense risks 1,133,327 3,593,198 Separate account rider charges 86,374 452,150 ------ ------- Net investment income (loss) 1,124,850 7,369,517 --------- --------- Realized gains (losses) on investments Realized gains (losses) on sale of fund shares 809,832 (232,926) Capital gains distributions - - - - Total realized gains (losses) on investments 809,832 (232,926) Change in net unrealized appreciation or depreciation of investments 6,941,213 2,580,027 --------- --------- Net increase (decrease) in net assets resulting from operations $ 8,875,895 $ 9,716,618 ------------- --------- See accompanying notes.
Dreyfus IP Founders Dreyfus IP Capital Diversified Discovery Technology Equity Value International Initial Shares Service Shares Growth Division Division Division Division Division ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------ $ 3,204,877 $ 3,072,388 $ - $ - $ 2,235 2,373,109 3,111,638 207,493 4,058 2,254,890 150,975 314,077 35,766 515 136,900 ------- ------- ------ --- ------- ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------ 680,793 (353,327) (243,259) (4,573) (2,389,555) ------- --------- --------- ------- ----------- ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------ 3,024,007 7,519,959 186,316 (2,435) (806,811) 16,935,476 7,053,511 - - - ---------- --------- - - - ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------ 19,959,483 14,573,470 186,316 (2,435) (806,811) 13,835,149 45,587,524 780,163 13,971 11,159,020 ---------- ---------- ------- ------ ---------- ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------ $ 34,475,425 $ 59,807,667 $ 723,220 $ 6,963 $ 7,962,654 ------------ -------------- --------- ------- --------- ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------
Principal Life Insurance Company Separate Account B Statements of Operations (continued) For the Year Ended December 31, 2006 Equity Equity Income Value Division Division Investment income (loss) Income: Dividends $ 2,225,364 $ 46,348 Expenses: Mortality and expense risks 1,451,933 32,617 Separate account rider charges 186,043 4,764 ------- ----- Net investment income (loss) 587,388 8,967 ------- ----- Realized gains (losses) on investments Realized gains (losses) on sale of fund shares 826,373 6,180 Capital gains distributions - 39,842 - ------ Total realized gains (losses) on investments 826,373 46,022 Change in net unrealized appreciation or depreciation of investments 19,701,800 411,946 ---------- ------- Net increase (decrease) in net assets resulting from operations $ 21,115,561 $ 466,935 -------------- ------- See accompanying notes.
Fidelity VIP Fidelity VIP Fidelity VIP Fidelity VIP Fidelity VIP II Equity-Income Growth Growth Overseas Contrafund Service Service Service Service Service Class 2 Class Class 2 Class 2 Class Division Division Division Division Division ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------ $ 2,001,645 $ 104,964 $ 2,466 $ 99,476 $ 1,266,562 830,684 443,015 33,699 275,312 1,418,363 138,427 46,914 7,427 43,121 147,290 ------- ------ ----- ------ ------- ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------ 1,032,534 (384,965) (38,660) (218,957) (299,091) --------- --------- -------- --------- --------- ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------ 484,982 (1,687,364) 3,267 99,286 2,009,324 8,346,679 - - 86,213 9,439,876 --------- - - ------ --------- ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------ 8,831,661 (1,687,364) 3,267 185,499 11,449,200 1,495,173 3,854,234 186,391 3,744,132 (364,828) --------- --------- ------- --------- --------- ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------ $ 11,359,368 $ 1,781,905 $ 150,998 $ 3,710,674 $ 10,785,281 -------------- ----------- --------- ----------- ---------- ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------
Principal Life Insurance Company Separate Account B Statements of Operations (continued) For the Year Ended December 31, 2006 Fidelity VIP II Fidelity VIP III Contrafund Mid Cap Service Service Class 2 Class 2 Division Division Investment income (loss) Income: Dividends $ 164,362 $ 2,388 Expenses: Mortality and expense risks 174,615 31,640 Separate account rider charges 18,166 5,817 ------ ----- Net investment income (loss) (28,419) (35,069) -------- -------- Realized gains (losses) on investments Realized gains (losses) on sale of fund shares 17,861 (7,634) Capital gains distributions 1,695,870 159,199 --------- ------- Total realized gains (losses) on investments 1,713,731 151,565 Change in net unrealized appreciation or depreciation of investments (230,403) 107,362 --------- ------- Net increase (decrease) in net assets resulting from $ 1,454,909 $ 223,858 ----------- --------- operations
(1) Represented the operations of Goldman Sachs CORE Small Cap Equity Fund Service Class I Division until May 1, 2006 name change. See accompanying notes.
Goldman Sachs Goldman Sachs VIT Mid Cap Structured Government Value Fund Small Cap & High International Service Equity Service Quality Emerging Class I Class I Bond Growth Markets Division Division (1) Division Division Division -------- ------------ -------- -------- -------- ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------ $ 110,758 $ 25,532 $ 11,522,714 $ 265,891 $ - 90,237 32,135 3,395,215 1,146,343 1,037,801 15,917 5,515 388,953 47,844 160,320 ------ ----- ------- ------ ------- ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------ 4,604 (12,118) 7,738,546 (928,296) (1,198,121) ----- -------- --------- --------- ----------- ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------ (2,199) 102 (1,063,572) (2,538,476) 1,783,787 1,220,169 278,688 - - 2,426,233 --------- ------- - - --------- ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------ 1,217,970 278,790 (1,063,572) (2,538,476) 4,210,020 (136,992) (7,396) 814,645 11,298,287 22,245,938 --------- ------- ------- ---------- ---------- ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------ $ 1,085,582 $ 259,276 $ 7,489,619 $ 7,831,515 $ 25,257,837 ------------- --------- ----------- ----------- ---------- ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------
Principal Life Insurance Company Separate Account B Statements of Operations (continued) For the Year Ended December 31, 2006 Janus Aspen Mid Cap International Growth SmallCap Service Shares Division Division Investment income (loss) Income: Dividends $ 607,271 $ - Expenses: Mortality and expense risks 1,422,252 233,911 Separate account rider charges 167,269 41,028 ------- ------ Net investment income (loss) (274,939) --------- (982,250) Realized gains (losses) on investments Realized gains (losses) on sale of fund shares 5,178,605 682,671 Capital gains distributions 16,642,491 - ---------- - Total realized gains (losses) on investments 21,821,096 682,671 Change in net unrealized appreciation or depreciation of investments 7,745,584 1,671,571 --------- --------- Net increase (decrease) in net assets resulting from operations $ 28,584,430 $ 2,079,303 ------------ ----------- See accompanying notes.
LargeCap LargeCap LargeCap Growth Stock LargeCap Blend Equity Index Value MidCap Division Division Division Division Division ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------ $ 985,122 $ 397 $ 1,888,564 $ 1,329,514 $ 3,619,232 1,946,254 225,102 1,679,082 1,717,117 4,218,338 297,121 35,282 206,046 240,859 348,090 ------- ------ ------- ------- ------- ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------ (1,258,253) (259,987) 3,436 (628,462) (947,196) ----------- --------- ----- --------- --------- ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------ 795,506 96,102 2,482,860 1,105,086 7,087,013 4,037,942 - - 2,353,820 41,164,114 --------- - - --------- ---------- ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------ 4,833,448 96,102 2,482,860 3,458,906 48,251,127 18,223,956 413,343 16,248,616 22,939,744 (5,429,630) ---------- ------- ---------- ---------- ----------- ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------ $ 21,799,151 $ 249,458 $ 18,734,912 $ 25,770,188 $ 41,874,301 -------------- --------- ------------ ------------ ---------- ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------
Principal Life Insurance Company Separate Account B Statements of Operations (continued) For the Year Ended December 31, 2006 MidCap MidCap Growth Value Division Division Investment income (loss) Income: Dividends $ - $ 254,035 Expenses: Mortality and expense risks 696,401 1,272,336 Separate account rider charges 94,934 178,920 ------ ------- Net investment income (loss) (791,335) (1,197,221) --------- ----------- Realized gains (losses) on investments Realized gains (losses) on sale of fund shares 1,467,405 1,282,307 Capital gains distributions 1,501,987 10,378,946 --------- ---------- Total realized gains (losses) on investments 2,969,392 11,661,253 Change in net unrealized appreciation or depreciation of investments 2,147,445 1,515,777 --------- --------- Net increase (decrease) in net assets resulting from operations $ 4,325,502 $ 11,979,809 ------------- ---------- See accompanying notes.
Neuberger Neuberger Neuberger Berman AMT Neuberger Berman AMT Berman AMT High Income Berman AMT Socially Money Fasciano Bond Partners Responsive Market S Class S Class I Class I Class Division Division Division Division Division ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------ $ 3,965,867 $ - $ 107,061 $ 26,162 $ 2,297 1,019,389 15,885 15,259 31,181 19,624 119,424 3,056 3,332 5,541 1,974 ------- ----- ----- ----- ----- ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------ 2,827,054 (18,941) 88,470 (10,560) (19,301) --------- -------- ------ -------- -------- ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------ - 577 (2,604) (3,503) 6,882 - 42,308 - 402,956 16,311 - ------ - ------- ------ ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------ - 42,885 (2,604) 399,453 23,193 - 15,744 269 (48,810) 210,791 - ------ --- -------- ------- ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------ $ 2,827,054 $ 39,688 $ 86,135 $ 340,083 $214,683 ------------- -------- -------- --------- ------- ------------------------------------------------------------------------------------------------------------------------
Principal Life Insurance Company Separate Account B Statements of Operations (continued) For the Year Ended December 31, 2006 Principal LifeTime Principal Strategic LifeTime Income 2010 Division Division Investment income (loss) Income: Dividends $ 12,743 $ 9,224 Expenses: Mortality and expense risks 114,930 245,231 Separate account rider charges 7,830 24,008 ----- ------ Net investment income (loss) (110,017) (260,015) --------- --------- Realized gains (losses) on investments Realized gains (losses) on sale of fund shares 35,968 152,772 Capital gains distributions 3,277 128 ----- --- Total realized gains (losses) on investments 39,245 152,900 Change in net unrealized appreciation or depreciation of investments 890,547 2,249,381 ------- --------- Net increase (decrease) in net assets resulting from operations $ 819,775 $ 2,142,266 ----------- --------- See accompanying notes.
Principal Principal Principal Principal LifeTime LifeTime LifeTime LifeTime Real Estate 2020 2030 2040 2050 Securities Division Division Division Division Division ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------ $ - $ 846 $ 675 $ 227 $ 2,533,583 - - 698,243 89,548 37,838 21,404 1,937,680 94,207 11,582 4,997 4,143 286,480 ------ ------ ----- ----- ------- ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------ (792,450) (100,284) (42,160) (25,320) 309,423 --------- --------- -------- -------- ------- ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------ 22,096 85,632 11,774 9,899 5,932,195 - 391 338 73 7,183,688 - --- --- -- --------- ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------ 22,096 86,023 12,112 9,972 13,115,883 8,696,024 1,078,553 454,131 251,174 32,582,342 --------- --------- ------- ------- ---------- ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------ $ 7,925,670 $ 1,064,292 $ 424,083 $ 235,826 $ 46,007,648 ------------- ----------- --------- --------- ---------- ------------------------------------------------------------------------------------------------------------------------
Principal Life Insurance Company Separate Account B Statements of Operations (continued) For the Year Ended December 31, 2006 Short-Term Bond SmallCap Division Division Investment income (loss) Income: Dividends $ 2,231,910 $ 114,798 Expenses: Mortality and expense risks 1,208,466 864,845 Separate account rider charges 161,091 97,940 ------- ------ Net investment income (loss) 862,353 (847,987) ------- --------- Realized gains (losses) on investments Realized gains (losses) on sale of fund shares 12,952 1,714,779 Capital gains distributions - 4,658,605 - --------- Total realized gains (losses) on investments 12,952 6,373,384 Change in net unrealized appreciation or depreciation of investments 2,210,032 1,961,967 --------- --------- Net increase (decrease) in net assets resulting from operations $ 3,085,337 $ 7,487,364 ------------- --------- See accompanying notes.
Templeton T. Rowe Price T. Rowe Price Growth SmallCap SmallCap Blue Chip Health Securities Growth Value Growth 11 Science Class 2 Division Division Division II Division Division ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------ $ - $ 324,271 $ 1,968 $ - $ 32,756 610,217 1,372,397 9,892 17,264 21,407 56,496 183,933 1,980 2,442 - ------ ------- ----- ----- - ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------ (666,713) (1,232,059) (9,904) (19,706) 11,349 --------- ----------- ------- -------- ------ ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------ (1,332,510) 2,281,083 6,716 8,932 83,460 - 10,590,501 - - 91,257 - ---------- - - ------ ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------ (1,332,510) 12,871,584 6,716 8,932 174,717 5,430,781 5,413,590 76,937 129,496 303,044 --------- --------- ------ ------- ------- ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------ $ 3,431,558 $ 17,053,115 $ 73,749 $ 118,722 $ 489,110 ------------- ------------ -------- --------- ------- ------------------------------------------------------------------------------------------------------------------------
Principal Life Insurance Company Separate Account B Statements of Changes in Net Assets For the Year Ended December 31, 2006 and 2005, Except as Noted AIM V.I. Basic Value Series I Division (1) 2006 2005 ---- ---- Increase (decrease) in net assets from Operations: Net investment income (loss) $ (3,659) $ (562) Total realized gains (losses) on investments 32,933 1,299 Change in net unrealized appreciation or depreciation of investments 28,074 3,926 ------ ----- Net increase (decrease) in net assets resulting from operations 57,348 4,663 Changes from principal transactions: Purchase payments, less sales charges, per payment fees and applicable premium taxes 868,110 166,075 Administration charges - - Contingent sales charges (90) (5) Contract terminations (2,061) (139) Death benefit payments - - Flexible withdrawal option payments (1,240) - Transfer payments to other contracts (3,441) (16,420) Annuity payments - - - - Increase (decrease) in net assets from principal transactions 861,278 149,511 ------- ------- Total increase (decrease) 918,626 154,174 Net assets at beginning of period 154,174 - ------- - Net assets at end of period $ 1,072,800 $ 154,174 ------------- -------
(1) Commenced operations January 4, 2005. (2) Commenced operations April 28, 2006. See accompanying notes.
AIM V.1. Capital AIM V.I. AIM V.I. Appreciation Core Equity Dynamics Series I Series I Series I Division (2) Division Division ------------ -------- -------- 2006 2006 2005 2006 2005 ---- ---- ---- ---- ---- $ (134,928) $ (387,087) $ 28,719 $ (42,914) $ (36,161) (124,545) (195,530) (867,129) 182,101 116,490 (12,061) 7,447,457 2,086,682 234,675 130,333 -------- --------- --------- ------- ------- (271,534) 6,864,840 1,248,272 373,862 210,662 18,577,053 33,298,037 2,255,284 1,153,356 581,922 (2,245) (15,934) (10,169) (501) (359) (19,606) (74,585) (43,836) (1,985) (3,375) (1,480,327) (5,631,607) (2,926,767) (149,874) (171,346) (30,769) (179,214) (200,784) (4,814) - (164,626) (863,943) (603,415) (38,676) (23,921) (1,026,128) (4,856,530) (3,168,007) (821,442) (571,960) 15,853,352 21,676,224 (4,697,694) 136,064 (189,039) ---------- ---------- ----------- ------- --------- 15,581,818 28,541,064 (3,449,422) 509,926 21,623 - 33,286,796 36,736,218 2,558,055 2,536,432 - ---------- ---------- --------- --------- $ 15,581,818 $ 61,827,860 $ 33,286,796 $ 3,067,981 $ 2,558,055 -------------- ------------ ------------ ----------- ---------
Principal Life Insurance Company Separate Account B Statements of Changes in Net Assets (continued) For the Year Ended December 31, 2006 and 2005, Except as Noted AIM V.I. Global Health Care Series I Division 2006 2005 ---- ---- Increase (decrease) in net assets from Operations: Net investment income (loss) $ (209,509) $ (204,674) Total realized gains (losses) on investments 404,387 293,216 Change in net unrealized appreciation or depreciation of investments 302,110 810,312 ------- ------- Net increase (decrease) in net assets resulting from operations 496,988 898,854 Changes from principal transactions: Purchase payments, less sales charges, per payment fees and applicable premium taxes 1,935,468 1,941,412 Administration charges (3,518) (3,180) Contingent sales charges (11,055) (12,501) Contract terminations (834,732) (674,530) Death benefit payments (22,442) (168,998) Flexible withdrawal option payments (139,277) (109,315) Transfer payments to other contracts (1,840,171) (2,052,427) Annuity payments - - - - Increase (decrease) in net assets from principal transactions (915,727) (1,079,539) --------- ----------- Total increase (decrease) (418,739) (180,685) Net assets at beginning of period 14,275,760 14,456,445 ---------- ---------- Net assets at end of period $ 13,857,021 $ 14,275,760
(1) Commenced operations January 4, 2005. (2) Represented the operations of AIM V.I. Small Company Growth Series I Division until November 21, 2006 name change. See accompanying notes.
AIM V.I. AIM V.I. Small Cap Small Cap AIM V.I. Equity Growth Technology Series I Series I Series I Division Division Division (1) (2) --- --- ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------ 2006 2005 2006 2005 2006 2005 ---- ---- ---- ---- ---- ---- ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------ $ (5,207) $ (898) $ (61,142) $ (52,543) $ (91,380) $ (87,616) 30,103 93 182,363 88,370 188,539 96,061 16,481 6,410 376,390 100,668 375,772 (47) ------ ----- ------- ------- ------- ---- ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------ 41,377 5,605 497,611 136,495 472,931 8,398 598,904 155,320 1,047,203 827,753 1,511,964 1,538,179 (30) - (737) (554) (712) (623) (239) (34) (2,616) (2,696) (6,352) (9,089) (5,463) (1,012) (197,517) (198,444) (479,588) (417,850) - - (840) (8,307) (1,831) (12,726) (159) - (23,525) (14,678) (85,125) (93,415) (19,431) (13) (832,331) (698,764) (1,508,546) (1,505,905) ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------ 573,582 154,261 (10,363) (95,690) (570,190) (501,429) ------- ------- -------- -------- --------- --------- ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------ 614,959 159,866 487,248 40,805 (97,259) (493,031) 159,866 - 3,943,379 3,902,574 6,245,192 6,738,223 ------- - --------- --------- --------- --------- ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------ $ 774,825 $ 159,866 $ 4,430,627 $ 3,943,379 $ 6,147,933 $ 6,245,192 ----------- --------- ----------- ----------- ----------- --------- ------------------------------------------------------------------------------------------------------------------------
Principal Life Insurance Company Separate Account B Statements of Changes in Net Assets (continued) For the Year Ended December 31, 2006 and 2005, Except as Noted Alliance Bernstein VP Series Small Cap Growth Class A Division (1) 2006 2005 ---- ---- Increase (decrease) in net assets from Operations: Net investment income (loss) $ (8,842) $ (1,594) Total realized gains (losses) on investments 929 8,917 Change in net unrealized appreciation or depreciation of investments 55,846 16,290 ------ ------ Net increase (decrease) in net assets resulting from operations 47,933 23,613 Changes from principal transactions: Purchase payments, less sales charges, per payment fees and applicable premium taxes 750,260 381,090 Administration charges (25) - Contingent sales charges (286) - Contract terminations (6,534) - Death benefit payments (2,264) - Flexible withdrawal option payments (1,468) - Transfer payments to other contracts (64,650) (133,633) Annuity payments - - - - Increase (decrease) in net assets from principal transactions 675,033 247,457 ------- ------- Total increase (decrease) 722,966 271,070 Net assets at beginning of period 271,070 - ------- - Net assets at end of period $ 994,036 $ 271,070 ----------- -------
(1) Commenced operations January 4, 2005. See accompanying notes.
American American Century VP Century VP American Income & Inflation Century VP Growth Protection Ultra Class I Class II Class I Division Division (1) Division ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------ 2006 2005 2006 2005 2006 2005 ---- ---- ---- ---- ---- ---- ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------ $ 168,097 $ 206,125 $ 639,544 $ 235,250 $ (140,978) $ (150,361) 823,225 519,344 (8,042) (834) 163,057 155,591 4,264,066 401,647 (488,574) (207,7121 (499,141) 79,821 --------- ------- --------- --------- --------- ------ ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------ 5,255,388 1,127,116 142,928 26,704 (477,062) 85,051 4,209,364 6,188,005 37,947,828 19,722,757 1,209,485 1,866,477 (4,492) (4,995) (132,824) (11,481) (1,489) (1,275) (23,586) (35,148) (22,616) (697) (7,775) (9,065) (2,396,157) (2,587,800) (517,029) (20,840) (587,082) (489,596) (215,894) (131,054) (20,676) (35,080) (15,892) (17,559) (517,452) (471,975) (370,537) (46,556) (111,017) (100,565) (3,234,795) (2,675,022) (6,579,874) (1,420,642) (1,175,202) (1,413,386) ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------ (2,183,012) 282,011 30,304,272 18,187,461 (688,972) (164,969) ----------- ------- ---------- ---------- --------- --------- ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------ 3,072,376 1,409,127 30,447,200 18,214,165 (1,166,034) (79,918) 35,268,524 33,859,397 18,214,165 - 10,612,172 10,692,090 ---------- ---------- ---------- - ---------- ---------- ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------ $ 38,340,900 $ 35,268,524 $ 48,661,365 $ 18,214,165 $ 9,446,138 $ 10,612,172 -------------- ------------ ------------ ------------ ----------- ---------- ------------------------------------------------------------------------------------------------------------------------
Principal Life Insurance Company Separate Account B Statements of Changes in Net Assets (continued) For the Year Ended December 31, 2006 and 2005, Except as Noted American Century VP Ultra Class II Division (1) 2006 2005 ---- ---- Increase (decrease) in net assets from Operations: Net investment income (loss) $ (392,773) $ (72,331) Total realized gains (losses) on investments (7,464) 2,157 Change in net unrealized appreciation or depreciation of investments (279,227) 497,973 --------- ------- Net increase (decrease) in net assets resulting from operations (679,464) 427,799 Changes from principal transactions: Purchase payments, less sales charges, per payment fees and applicable premium taxes 34,022,878 16,409,114 Administration charges (123,722) (10,890) Contingent sales charges (17,642) (219) Contract terminations (403,333) (6,540) Death benefit payments (7,302) (6,524) Flexible withdrawal option payments (317,125) (44,519) Transfer payments to other contracts (6,767,373) (1,232,556) Annuity payments - - - - Increase (decrease) in net assets from principal transactions 26,386,381 15,107,866 ---------- ---------- Total increase (decrease) 25,706,917 15,535,665 Net assets at beginning of period 15,535,665 - ---------- - Net assets at end of period $ 41,242,582 $ 15,535,665 -------------- ----------
(1) Commenced operations January 4, 2005. See accompanying notes.
American American Century VP Century VP Value Vista Asset Class II Class I Allocation Division Division Division (1) ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------ 2006 2005 2006 2005 2006 2005 ---- ---- ---- ---- ---- ---- ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------ $ (122,109) $ (293,234) $ (7,674) $ (1,827) $ (472,054) $ 271,485 3,903,691 3,448,329 1,209 9,157 2,644,465 390,088 3,397,417 (1,759,872) 37,166 13,517 6,670,543 2,826,388 --------- ----------- ------ ------ --------- --------- ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------ 7,178,999 1,395,223 30,701 20,847 8,842,954 3,487,961 9,032,918 14,104,314 500,357 427,004 10,651,493 11,129,277 (8,861) (6,094) (9) - (32,578) (26,759) (33,303) (28,682) (524) - (126,352) (122,751) (2,514,552) (1,539,280) (11,987) - (9,622,485) (9,250,097) (157,182) (149,960) - - (322,443) (497,406) (415,415) (292,018) (1,840) - (1,757,125) (1,777,991) (4,239,478) (3,330,949) (136,073) (134,590) (7,657,393) (6,201,456) ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------ 1,664,127 8,757,331 349,924 292,414 (8,866,883) (6,747,183) --------- --------- ------- ------- ----------- ----------- ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------ 8,843,126 10,152,554 380,625 313,261 (23,929) (3,259,222) 41,721,937 31,569,383 313,261 - 84,245,177 87,504,399 ---------- ---------- ------- - ---------- ---------- ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------ $ 50,565,063 $ 41J21 937 $ 693,886 $ 313,261 $ 84,221,248 $ 84,245,177 -------------- ----------- --------- --------- ------------ ---------- ------------------------------------------------------------------------------------------------------------------------
Principal Life Insurance Company Separate Account B Statements of Changes in Net Assets (continued) For the Year Ended December 31, 2006 and 2005, Except as Noted Balanced Division 2006 2005 ---- ---- Increase (decrease) in net assets from Operations: Net investment income (loss) $ 1,124,850 $ 1,372,487 Total realized gains (losses) on investments 809,832 (201,841) Change in net unrealized appreciation or depreciation of investments 6,941,213 4,102,459 --------- --------- Net increase (decrease) in net assets resulting from operations 8,875,895 5,273,105 Changes from principal transactions: Purchase payments, less sales charges, per payment fees and applicable premium taxes 8,056,522 9,726,564 Administration charges (33,736) (45,131) Contingent sales charges (152,196) (137,291) Contract terminations (14,018,307) (18,037,134) Death benefit payments (785,944) (838,994) Flexible withdrawal option payments (1,970,221) (2,212,371) Transfer payments to other contracts (6,153,158) (4,730,178) Annuity payments - - - - Increase (decrease) in net assets from principal transactions (15,057,040) (16,274,535) ------------ ------------ Total increase (decrease) (6,181,145) (11,001,430) Net assets at beginning of period 98,501,482 109,502,912 ---------- ----------- Net assets at end of period $ 92,320,337 $ 98,501,482 -------------- ---------- See accompanying notes.
Capital Diversified Bond Value International Division Division Division ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------ 2006 2005 2006 2005 2006 2005 ---- ---- ---- ---- ---- ---- ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------ $ 7,369,517 $ 8,003,599 $ 680,793 $ (2,459,869) $ (353,327) $ (548,474) (232,926) 272,134 19,959,483 3,293,587 14,573,470 2,783,395 2,580,027 (5,313,482) 13,835,149 9,895,511 45,587,524 39,090,117 --------- ----------- ---------- --------- ---------- ---------- ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------ 9,716,618 2,962,251 34,475,425 10,729,229 59,807,667 41,325,038 94,706,932 80,647,948 24,644,269 22,371,876 60,826,753 45,089,775 (227,906) (91,568) (85,479) (80,024) (109,174) (81,611) (311,922) (302,013) (281,880) (256,948) (272,126) (207,692) (25,211,017) (26,804,906) (27,460,698) (33,656,312) (24,718,759) (21,403,532) (1,095,212) (1,547,143) (758,218) (1,190,772) (810,450) (864,314) (6,089,439) (5,680,552) (3,000,399) (2,974,530) (2,417,251) (1,876,646) (32,179,147) (21,188,674) (12,343,306) (10,800,882) (29,752,655) (17,805,731) - - (29,273) (28,499) - - - - -------- -------- - - ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------ 29,592,289 25,033,092 (19,314,984) (26,616,091) 2,746,338 2,850,249 ---------- ---------- ------------ ------------ --------- --------- ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------ 39,308,907 27,995,343 15,160,441 (15,886,862) 62,554,005 44,175,287 280,484,495 252,489,152 198,489,944 214,376,806 228,177,303 184,002,016 ----------- ----------- ----------- ----------- ----------- ----------- ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------ $ 319,793,402 $ 280,484,495 $ 213,650,385 $ 198,489,944 $ 290,731,308 $ 228,177 ,303 --------------- ----------- --------------- ------------- ------------- ------------ ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------
Principal Life Insurance Company Separate Account B Statements of Changes in Net Assets (continued) For the Year Ended December 31, 2006 and 2005, Except as Noted Dreyfus IP Founders Discovery Initial Shares Division 2006 2005 ---- ---- Increase (decrease) in net assets from Operations: Net investment income (loss) $ (243,259) $ (209,131) Total realized gains (losses) on investments 186,316 67,047 Change in net unrealized appreciation or depreciation of investments 780,163 29,224 ------- ------ Net increase (decrease) in net assets resulting from operations 723,220 (112,860) Changes from principal transactions: Purchase payments, less sales charges, per payment fees and applicable premium taxes 3,774,853 4,291,439 Administration charges (2,959) (1,802) Contingent sales charges (10,985) (9,232) Contract terminations (829,410) (450,825) Death benefit payments (60,329) (61,296) Flexible withdrawal option payments (102,797) (80,600) Transfer payments to other contracts (1,723,172) (1,078,447) Annuity payments - - - - Increase (decrease) in net assets from principal transactions 1,045,201 2,609,237 --------- --------- Total increase (decrease) 1,768,421 2,496,377 Net assets at beginning of period 15,815,474 13,319,097 ---------- ---------- Net assets at end of period $ 17,583,895 $ 15,815,474 -------------- ---------- (1) Commenced operations January 4, 2005. See accompanying notes.
Dreyfus IP Technology Equity Equity Service Shares Growth Income Division (1) Division Division ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------ 2006 2005 2006 2005 2006 2005 --------- ---- ---- ---- ---- ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------ $ (4,573) $ (570) $ (2,389,555) $ (2,529,058) $ 587,388 $ (738,442) (2,435) 181 (806,811) (2,880,009) 826,373 (10,370) 13,971 5,525 11,159,020 16,472,887 19,701,800 4,969,431 ------ ----- ---------- ---------- ---------- --------- ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------ 6,963 5,136 7,962,654 11,063,820 21,115,561 4,220,619 333,208 166,332 16,402,557 16,841,624 83,438,344 50,183,704 (30) - (58,784) (70,129) (281,701) (32,928) (215) - (291,847) (252,379) (97,952) (44,272) (4,904) - (21,927,878) (21,069,830) (5,545,007) (2,936,671) - - (629,787) (762,328) (294,040) (310,642) - - (2,048,902) (2,201,679) (1,754,716) (975,769) (42,742) (12,026) (14,876,321) (15,648,411) (24,194,286) (7,403,409) ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------ 285,317 154,306 (23,430,962) (23,163,132) 51,270,642 38,480,013 ------- ------- ------------ ------------ ---------- ---------- ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------ 292,280 159,442 (15,468,308) (12,099,312) 72,386,203 42,700,632 159,442 - 195,218,225 207,317,537 83,133,071 40,432,439 ------- - ----------- ----------- ---------- ---------- ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------ $ 451,722 $ 159,442 $ 179,749,917 $195,218,225 $ 155,519,274 $ 83,133,071 ----------- ------- ---------------------------- ------------- ---------- ------------------------------------------------------------------------------------------------------------------------
Principal Life Insurance Company Separate Account B Statements of Changes in Net Assets (continued) For the Year Ended December 31, 2006 and 2005, Except as Noted Equity Value Division (1) 2006 2005 ---- ---- Increase (decrease) in net assets from Operations: Net investment income (loss) $ 8,967 $ 6,546 Total realized gains (losses) on investments 46,022 34,821 Change in net unrealized appreciation or depreciation of investments 411,946 (15,158) ------- -------- Net increase (decrease) in net assets resulting from operations 466,935 26,209 Changes from principal transactions: Purchase payments, less sales charges, per payment fees and applicable premium taxes 2,659,094 1,545,224 Administration charges (8,122) (573) Contingent sales charges (467) (108) Contract terminations (10,680) (3,225) Death benefit payments - - Flexible withdrawal option payments (17,393) (1,679) Transfer payments to other contracts (672,960) (54,848) Annuity payments - - - - Increase (decrease) in net assets from principal transactions 1,949,472 1,484,791 --------- --------- Total increase (decrease) 2,416,407 1,511,000 Net assets at beginning of period 1,511,000 - --------- - Net assets at end of period $ 3,927,407 $ 1,511,000 ------------- --------- (1) Commenced operations January 4, 2005. See accompanying notes.
Fidelity VIP Fidelity VIP Fidelity VIP Equity-Income Growth Growth Service Service Service Class 2 Class Class 2 Division Division Division (1) -------- -------- ------------ ----------------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------------------- 2006 2005 2006 2005 2006 2005 ---- ---- ---- ---- ---- ---- ----------------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------------------- $ 1,032,534 $ (70,588) $ (384,965) $ (370,688) $ (38,660) $ (5,931) 8,831,661 1,957,131 (1,687,364) (2,091,900) 3,267 297 1,495,173 543,923 3,854,234 3,944,207 186,391 45,884 --------- ------- --------- --------- ------- ------ ----------------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------------------- 11,359,368 2,430,466 1,781,905 1,481,619 150,998 40,250 15,284,014 16,009,135 3,066,061 3,849,771 3,075,629 1,286,274 (13,052) (7,822) (9,332) (8,311) (315) (15) (47,741) (52,470) (49,910) (45,929) (3,691) (143) (3,464,029) (2,575,966) (3,768,487) (3,342,498) (84,384) (4,283) (211,352) (159,120) (89,237) (73,823) - - (656,130) (487,764) (394,785) (455,142) (3,699) (150) (4,984,308) (3,865,193) (4,985,354) (4,539,911) (78,955) (12,855) ----------------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------------------- 5,907,402 8,860,800 (6,231,044) (4,615,843) 2,904,585 1,268,828 --------- --------- ----------- ----------- --------- --------- ----------------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------------------- 17,266,770 11,291,266 (4,449,139) (3,134,224) 3,055,583 1,309,078 59,907,554 48,616,288 38,238,295 41,372,519 1,309,078 - ---------- ---------- ---------- ---------- --------- - ----------------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------------------- $ 77,174,324 $ 59,907,554 $ 33,789,156 $ 38,238,295 $ 4,364,661 $ 1,309,078 -------------- ------------ ------------ ------------ ----------- --------- -----------------------------------------------------------------------------------------------------------------------
Principal Life Insurance Company Separate Account B Statements of Changes in Net Assets (continued) For the Year Ended December 31, 2006 and 2005, Except as Noted Fidelity VIP Overseas Service Class 2 Division (1) 2006 2005 ---- ---- Increase (decrease) in net assets from Operations: Net investment income (loss) $ (218,957) $ (53,381) Total realized gains (losses) on investments 185,499 3,267 Change in net unrealized appreciation or depreciation of investments 3,744,132 1,371,933 --------- --------- Net increase (decrease) in net assets resulting from operations 3,710,674 1,321,819 Changes from principal transactions: Purchase payments, less sales charges, per payment fees and applicable premium taxes 24,282,769 11,768,680 Administration charges (65,330) (5,646) Contingent sales charges (18,630) (1,119) Contract terminations (425,913) (33,477) Death benefit payments (14,761) (8,799) Flexible withdrawal option payments (198,989) (23,776) Transfer payments to other contracts (4,366,018) (921,316) Annuity payments - - - - Increase (decrease) in net assets from principal transactions 19,193,128 10,774,547 ---------- ---------- Total increase (decrease) 22,903,802 12,096,366 Net assets at beginning of period 12,096,366 - ---------- - Net assets at end of period $ 35,000,168 $ 12,096,366 -------------- ---------- (1) Commenced operations January 4, 2005. See accompanying notes.
Fidelity VIP II Fidelity VIP II Fidelity VIP III Contrafund Contrafund Mid Cap Service Service Service Class Class 2 Class 2 Division Division (1) Division (1) -------- ------------ ------------ ----------------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------------------- 2006 2005 2006 2005 2006 2005 ---- ---- ---- ---- ---- ---- ----------------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------------------- $ (299,091) $ (1,098,190) $ (28,419) $ (30,094) $ (35,069) $ (4,460) 11,449,200 549,941 1,713,731 4,878 151,565 354 (364,828) 14,314,763 (230,403) 451,629 107,362 63,420 --------- ---------- --------- ------- ------- ------ ----------------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------------------- 10,785,281 13,766,514 1,454,909 426,413 223,858 59,314 23,146,783 25,822,964 17,924,390 6,783,954 3,515,016 955,913 (34,780) (33,552) (24,218) (1,861) (352) (59) (119,157) (87,565) (12,484) (1,291) (2,324) (110) (8,997,003) (6,000,560) (285,408) (38,609) (53,129) (3,289) (323,928) (261,864) (45,026) (10,839) - (4,562) (1,513,689) (1,150,600) (129,874) (13,687) (11,289) (929) (10,927,456) (8,564,511) (2,503,370) (241,970) (275,288) (9,716) ----------------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------------------- 1,230,770 9,724,312 14,924,010 6,475,697 3,172,634 937,248 --------- --------- ---------- --------- --------- ------- ----------------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------------------- 12,016,051 23,490,826 16,378,919 6,902,110 3,396,492 996,562 106,461,676 82,970,850 6,902,110 - 996,562 - ----------- ---------- --------- - ------- - ----------------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------------------- $ 118,477,727 $ 106,461,676 $ 23,281,029 $ 6,902,110 $ 4,393,054 $ 996,562 --------------- ------------- ------------ ----------- ----------- ------- -----------------------------------------------------------------------------------------------------------------------
Principal Life Insurance Company Separate Account B Statements of Changes in Net Assets (continued) For the Year Ended December 31, 2006 and 2005, Except as Noted Goldman Sachs VIT Mid Cap Value Fund Service Class I Division (1) 2006 2005 ---- ---- Increase (decrease) in net assets from Operations: Net investment income (loss) $ 4,604 $ 313 Total realized gains (losses) on investments 1,217,970 252,331 Change in net unrealized appreciation or depreciation of investments (136,992) (154,098) --------- --------- Net increase (decrease) in net assets resulting from operations 1,085,582 98,546 Changes from principal transactions: Purchase payments, less sales charges, per payment fees and applicable premium taxes 8,936,015 3,230,699 Administration charges (334) (12) Contingent sales charges (5,821) (249) Contract terminations (133,085) (7,458) Death benefit payments - - Flexible withdrawal option payments (20,246) (537) Transfer payments to other contracts (512,372) (49,402) Annuity payments - - - - Increase (decrease) in net assets from principal transactions 8,264,157 3,173,041 --------- --------- Total increase (decrease) 9,349,739 3,271,587 Net assets at beginning of period 3,271,587 - --------- - Net assets at end of period $ 12,621,326 $ 3,271,587 - ------------ ---------- (1) Commenced operations January 4, 2005. (2) Represented the operations of Goldman Sachs CORE Small Cap Equity Fund Service Class I Division until May 1, 2006 name change. See accompanying notes.
Goldman Sachs Government Structured & High Small Cap Equity Quality Service Class I Bond Growth Division Division Division (2) ----------------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------------------- 2006 2005 2006 2005 2006 2005 ---- ---- ---- ---- ---- ---- ----------------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------------------- $ (12,118) $ (2,328) $ 7,738,546 $ 9,113,411 $ (928,296) $ (484,271) 278,790 80,927 (1,063,572) (153,789) (2,538,476) (7,021,906) (7,396) (66,473) 814,645 (7,154,995) 11,298,287 18,191,234 ------- -------- ------- ----------- ---------- ---------- ----------------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------------------- 259,276 12,126 7,489,619 1,804,627 7,831,515 10,685,057 2,846,089 1,147,516 51,237,859 57,099,620 10,786,200 7,997,375 (312) (3) (120,919) (86,623) (27,067) (39,207) (1,765) (72) (336,842) (364,422) (148,948) (150,202) (40,340) (2,166) (27,409,954) (30,056,065) (15,103,459) (24,059,436) - - (1,159,067) (1,882,619) (311,498) (596,270) (8,448) - (7,246,983) (7,728,677) (1,489,018) (1,576,888) (199,644) (11,625) (32,654,568) (38,498,416) (6,652,910) (6,054,382) ----------------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------------------- 2,595,580 1,133,650 (17,690,474) (21,517,202) (12,946,700) (24,479,010) --------- --------- ------------ ------------ ------------ ------------ ----------------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------------------- 2,854,856 1,145,776 (10,200,855) (19,712,575) (5,115,185) (13,793,953) 1,145,776 - 286,799,157 306,511,732 101,200,494 114,994,447 --------- - ----------- ----------- ----------- ----------- ----------------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------------------- $ 4,000,632 $1,145,776 $ 276,598,302 $ 286,799,157 96,085,309 $ 101,200,494 ------------- --------- ----------------- ------------ ----------- -----------------------------------------------------------------------------------------------------------------------
Principal Life Insurance Company Separate Account B Statements of Changes in Net Assets (continued) For the Year Ended December 31, 2006 and 2005, Except as Noted International Emerging Markets Division 2006 2005 ---- ---- Increase (decrease) in net assets from Operations: Net investment income (loss) $ (1,198,121) $ (32,720) Total realized gains (losses) on investments 4,210,020 10,158,649 Change in net unrealized appreciation or depreciation of investments 22,245,938 3,497,252 ---------- --------- Net increase (decrease) in net assets resulting from operations 25,257,837 13,623,181 Changes from principal transactions: Purchase payments, less sales charges, per payment fees and applicable premium taxes 41,174,588 27,318,469 Administration charges (20,871) (11,467) Contingent sales charges (67,950) (40,411) Contract terminations (5,042,649) (2,551,229) Death benefit payments (86,161) (63,062) Flexible withdrawal option payments (659,423) (398,451) Transfer payments to other contracts (18,902,123) (7,424,355) Annuity payments - - - - Increase (decrease) in net assets from principal transactions 16,395,411 16,829,494 ---------- ---------- Total increase (decrease) 41,653,248 30,452,675 Net assets at beginning of period 62,693,903 32,241,228 ---------- ---------- Net assets at end of period $ 104,347,151 $ 62,693,903 --------------- ---------- See accompanying notes.
Janus Aspen Mid Cap Growth LargeCap International SmallCap Service Shares Blend Division Division Division ----------------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------------------- 2006 2005 2006 2005 2006 2005 ---- ---- ---- ---- ---- ---- ----------------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------------------- $ (982,250) $ (708,058) $ (274,939) $ (252,158) $ (1,258,253) $ (1,468,164) 21,821,096 2,846,657 682,671 222,986 4,833,448 546,753 7,745,584 19,453,336 1,671,571 1,755,995 18,223,956 4,879,243 --------- ---------- --------- --------- ---------- --------- ----------------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------------------- 28,584,430 21,591,935 2,079,303 1,726,823 21,799,151 3,957,832 27,541,124 26,030,408 3,209,439 1,786,952 66,986,175 51,631,602 (41,260) (33,312) (7,103) (6,410) (159,044) (26,781) (135,289) (84,485) (18,800) (23,031) (109,857) (76,909) (10,067,558) (5,948,626) (1,419,499) (1,078,285) (6,546,398) (3,916,684) (123,170) (197,758) (52,111) (39,107) (309,469) (435,063) (821,517) (646,486) (136,726) (105,081) (1,739,815) (1,120,809) (19,599,964) (12,975,410) (2,678,105) (1,580,278) (15,947,889) (8,212,523) ----------------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------------------- (3,247,634) 6,144,331 (1,102,905) (1,045,240) 42,173,703 37,842,833 ----------- --------- ----------- ----------- ---------- ---------- ----------------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------------------- 25,336,796 27,736,266 976,398 681,583 63,972,854 41,800,665 102,213,781 74,477,515 18,346,189 17,664,606 128,133,591 86,332,926 ----------- ---------- ---------- ---------- ----------- ---------- ----------------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------------------- $ 127,550,577 $ 102,213,781 $ 19,322,587 $ 18,346,189 $ 192,106,445 $ 128,133,591 --------------- ------------- ---------- - ------------ ------------- ----------- -----------------------------------------------------------------------------------------------------------------------
Principal Life Insurance Company Separate Account B Statements of Changes in Net Assets (continued) For the Year Ended December 31, 2006 and 2005, Except as Noted LargeCap Growth Equity Division 2006 2005 ---- ---- Increase (decrease) in net assets from Operations: Net investment income (loss) $ (259,987) $ (225,126) Total realized gains (losses) on investments 96,102 43,739 Change in net unrealized appreciation or depreciation of investments 413,343 583,363 ------- ------- Net increase (decrease) in net assets resulting from operations 249,458 401,976 Changes from principal transactions: Purchase payments, less sales charges, per payment fees and applicable premium taxes 4,410,753 3,093,201 Administration charges (3,400) (3,229) Contingent sales charges (17,272) (20,926) Contract terminations (1,745,073) (1,169,893) Death benefit payments (48,983) (35,771) Flexible withdrawal option payments (283,765) (238,139) Transfer payments to other contracts (1,985,359) (1,459,657) Annuity payments - - - - Increase (decrease) in net assets from principal transactions 326,901 165,586 ------- ------- Total increase (decrease) 576,359 567,562 Net assets at beginning of period 18,820,144 18,252,582 ---------- ---------- Net assets at end of period $ 19,396,503 $ 18,820,144 -------------- ---------- See accompanying notes.
LargeCap Stock LargeCap Index Value MidCap Division Division Division ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------ 2006 2005 2006 2005 2006 2005 ---- ---- ---- ---- ---- ---- ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------ $ 3,436 $(1,684,395) $ (628,462) $ (1,255,711) $ (947,196) $ (3,873,409) 2,482,860 1,070,226 3,458,906 810,694 48,251,127 11,717,740 16,248,616 4,661,687 22,939,744 4,306,244 (5,429,630) 16,931,983 ---------- --------- ---------- --------- ----------- ---------- ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------ 18,734,912 4,047,518 25,770,188 3,861,227 41,874,301 24,776,314 37,367,616 43,107,446 62,588,396 44,774,499 55,666,505 59,526,310 (37,773) (27,694) (137,843) (22,644) (195,978) (156,432) (128,463) (122,170) (102,324) (66,907) (420,156) (376,440) (11,387,803) (8,860,776) (6,266,471) (3,762,943) (36,371,234) (40,454,130) (325,744) (367,700) (309,860) (345,183) (1,065,007) (1,388,604) (1,754,326) (1,577,994) (1,471,953) (952,378) (4,145,830) (3,706,703) (24,506,917) (28,699,968) (16,166,449) (8,523,366) (27,505,687) (21,546,277) ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------ (773,410) 3,451,144 38,133,496 31,101,078 (14,037,387) (8,102,276) --------- --------- ---------- ---------- ------------ ----------- ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------ 17,961,502 7,498,662 63,903,684 34,962,305 27,836,914 16,674,038 134,688,532 127,189,870 109,778,985 74,816,680 339,324,099 322,650,061 ----------- ----------- ----------- ---------- ----------- ----------- ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------ $ 152,650,034 $ 134,688,532 $ 173,682,669 $ 109,778,985 $ 367,161,013 $ 339,324,099 --------------- ----------- --------------- ------------- ------------- ----------- ------------------------------------------------------------------------------------------------------------------------
Principal Life Insurance Company Separate Account B Statements of Changes in Net Assets (continued) For the Year Ended December 31, 2006 and 2005, Except as Noted MidCap Growth Division 2006 2005 ---- ---- Increase (decrease) in net assets from Operations: Net investment income (loss) $ (791,335) $ (689,415) Total realized gains (losses) on investments 2,969,392 643,728 Change in net unrealized appreciation or depreciation of investments 2,147,445 5,870,968 --------- --------- Net increase (decrease) in net assets resulting from operations 4,325,502 5,825,281 Changes from principal transactions: Purchase payments, less sales charges, per payment fees and applicable premium taxes 11,441,173 7,814,560 Administration charges (12,092) (11,195) Contingent sales charges (57,533) (56,883) Contract terminations (4,744,992) (3,592,508) Death benefit payments (75,590) (148,571) Flexible withdrawal option payments (555,400) (521,690) Transfer payments to other contracts (6,456,363) (4,067,244) Annuity payments - - - - Increase (decrease) in net assets from principal transactions (460,797) (583,531) --------- --------- Total increase (decrease) 3,864,705 5,241,750 Net assets at beginning of period 53,922,768 48,681,018 ---------- ---------- Net assets at end of period $ 57,787,473 $ 53,922,768 -------------- ---------- See accompanying notes.
Neuberger Berman AMT MidCap Money Fasciano Value Market S Class Division Division Division ----------------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------------------- 2006 2005 2006 2005 2006 2005 ---- ---- ---- ---- ---- ---- ----------------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------------------- $ (1,197,221) $ (1,073,726) $ 2,827,054 $ 1,101,944 $ (18,941) $ (2,978) 11,661,253 2,378,591 - - 42,885 2,037 1,515,777 6,041,151 - - 15,744 16,103 --------- --------- - - ------ ------ ----------------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------------------- 11,979,809 7,346,016 2,827,054 1,101,944 39,688 15,162 37,333,121 37,541,464 143,904,826 162,414,404 1,427,520 629,670 (76,671) (20,480) (43,345) (41,581) (58) (3) (87,955) (67,390) (284,219) (268,805) (1,806) (81) (7,300,904) (4,783,714) (28,527,008) (31,469,933) (41,291) (2,425) (247,049) (263,051) (456,823) (1,049,488) - - (1,317,978) (1,036,072) (2,431,149) (2,338,433) (735) (75) (15,808,585) (10,399,192) (102,645,410) (135,791,981) (55,634) (1,898) ----------------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------------------- 12,493,979 20,971,565 9,516,872 (8,545,817) 1,327,996 625,188 ---------- ---------- --------- ----------- --------- ------- ----------------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------------------- 24,473,788 28,317,581 12,343,926 (7,443,873) 1,367,684 640,350 94,904,674 66,587,093 82,162,453 89,606,326 640,350 - ---------- ---------- ---------- ---------- ------- - ----------------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------------------- $ 119,378,462 $ 94,904,674 $ 94,506,379 $ 82,162,453 $ 2,008,034 $ 640,350 --------------- ---------- -------------- ------------ ----------- -------
Principal Life Insurance Company Separate Account B Statements of Changes in Net Assets (continued) For the Year Ended December 31, 2006 and 2005, Except as Noted Neuberger Berman AMT High Income Bond S Class Division 2006 2005 ---- ---- Increase (decrease) in net assets from Operations: Net investment income (loss) $ 88,470 $ 33,176 Total realized gains (losses) on investments (2,604) 3,148 Change in net unrealized appreciation or depreciation of investments 269 (30,258) --- -------- Net increase (decrease) in net assets resulting from operations 86,135 6,066 Changes from principal transactions: Purchase payments, less sales charges, per payment fees and applicable premium taxes 1,271,721 1,047,612 Administration charges (60) - Contingent sales charges (2,768) (43) Contract terminations (63,286) (1,273) Death benefit payments (4,239) - Flexible withdrawal option payments (13,099) (3,486) Transfer payments to other contracts (96,440) (163,229) Annuity payments - - - - Increase (decrease) in net assets from principal transactions 1,091,829 879,581 --------- ------- Total increase (decrease) 1,177,964 885,647 Net assets at beginning of period 885,647 - ------- - Net assets at end of period $ 2,063,611 $ 885,647 ------------- ------- (1) Commenced operations January 4, 2005. See accompanying notes.
Neuberger Neuberger Berman AMT Principal Berman AMT Socially LifeTime Partners Responsive Strategic I Class I Class Income Division Division Division (1) -------- -------- ------------ ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------ 2006 2005 2006 2005 2006 2005 --------- --------- ---- ---- ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------ $ (10,560) $ 733 $ (19,301) $ (3,474) $ (110,017) $ (27,801) 399,453 335 23,193 2,103 39,245 1,775 (48,810) 26,575 210,791 31,440 890,547 158,136 -------- ------ ------- ------ ------- ------- ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------ 340,083 27,643 214,683 30,069 819,775 132,110 3,657,842 870,052 1,962,558 765,889 8,273,419 5,413,476 (108) (5) (4,686) (341) (24,298) (2,350) (2,594) (19) (1,576) (51) (4,582) (1,179) (59,305) (573) (36,029) (1,522) (104,747) (35,256) (7,257) (38) (16,015) (2,218) (232,741) (60,799) (141,255) (12,723) (372,993) (18,661) (1,681,371) (72) ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------ 3,447,323 856,694 1,531,259 743,096 6,225,680 5,313,820 --------- ------- --------- ------- --------- --------- ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------ 3,787,406 884,337 1,745,942 773,165 7,045,455 5,445,930 884,337 - 773,165 - 5,445,930 - ------- - ------- - --------- - ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------ $ 4,671,743 $ 884,337 $ 2,519,107 $ 773,165 $ 12,491,385 $ 5,445 930 ------------- --------- ----------- --------- ------------ --------- ------------------------------------------------------------------------------------------------------------------------
Principal Life Insurance Company Separate Account B Statements of Changes in Net Assets (continued) For the Year Ended December 31, 2006 and 2005, Except as Noted Principal LifeTime 2010 Division (1) 2006 2005 ---- ---- Increase (decrease) in net assets from Operations: Net investment income (loss) $ (260,015) $ (57,359) Total realized gains (losses) on investments 152,900 1,876 Change in net unrealized appreciation or depreciation of investments 2,249,381 335,949 --------- ------- Net increase (decrease) in net assets resulting from operations 2,142,266 280,466 Changes from principal transactions: Purchase payments, less sales charges, per payment fees and applicable premium taxes 18,536,685 12,646,396 Administration charges (81,503) (8,296) Contingent sales charges (12,977) (863) Contract terminations (296,674) (25,813) Death benefit payments (46,991) (15,817) Flexible withdrawal option payments (237,141) (58,655) Transfer payments to other contracts (6,617,950) (37,067) Annuity payments - - - - Increase (decrease) in net assets from principal transactions 11,243,449 12,499,885 ---------- ---------- Total increase (decrease) 13,385,715 12,780,351 Net assets at beginning of period 12,780,351 - ---------- - Net assets at end of period $ 26,166,066 $ 12,780,351 -------------- ---------- (1) Commenced operations January 4, 2005. See accompanying notes.
Principal Principal Principal LifeTime LifeTime LifeTime 2020 2030 2040 Division Division (1) Division (1) --------- ------------ ------------ (1) ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------ 2006 2005 2006 2005 2006 2005 ---- ---- ---- ---- ---- ---- ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------ $ (792,450) $ (118,424) $ (100,284) $ (13,655) $ (42,160) $ (6,059) 22,096 5,507 86,023 3,386 12,112 1,090 8,696,024 848,565 1,078,553 94,940 454,131 56,275 --------- ------- --------- ------ ------- ------ ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------ 7,925,670 735,648 1,064,292 84,671 424,083 51,306 71,870,521 26,175,123 9,214,113 3,233,221 3,572,102 1,444,809 (209,732) (17,487) (1,182) (24) (691) (24) (37,064) (339) (18,824) (36) (5,788) - (847,347) (10,134) (430,338) (1,089) (132,319) - (159,754) - - - - - (450,397) (86,889) (21,307) (6,081) (2,536) - (8,336,536) (606,628) (1,065,887) (69,942) (112,692) (46,897) ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------ 61,829,691 25,453,646 7,676,575 3,156,049 3,318,076 1,397,888 ---------- ---------- --------- --------- --------- --------- ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------ 69,755,361 26,189,294 8,740,867 3,240,720 3,742,159 1,449,194 26,189,294 - 3,240,720 - 1,449,194 - ---------- - --------- - --------- - ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------ $ 95,944,655 $ 26,189,294 $ 11,981,587 $ 3,240,720 $ 5,191,353 $ 1,449,194 -------------- ------------ ------------ ----------- ----------- --------- ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------
Principal Life Insurance Company Separate Account B Statements of Changes in Net Assets (continued) For the Year Ended December 31, 2006 and 2005, Except as Noted Principal LifeTime 2050 Division (1) 2006 2005 ---- ---- Increase (decrease) in net assets from Operations: Net investment income (loss) $ (25,320) $ (2,406) Total realized gains (losses) on investments 9,972 48 Change in net unrealized appreciation or depreciation of investments 251,174 19,245 ------- ------ Net increase (decrease) in net assets resulting from operations 235,826 16,887 Changes from principal transactions: Purchase payments, less sales charges, per payment fees and applicable premium taxes 2,714,081 756,727 Administration charges (210) - Contingent sales charges (2,724) - Contract terminations (62,267) - Death benefit payments - - Flexible withdrawal option payments (151) - Transfer payments to other contracts (172,996) 1 Annuity payments - - - - Increase (decrease) in net assets from principal transactions 2,475,733 756,728 --------- ------- Total increase (decrease) 2,711,559 773,615 Net assets at beginning of period 773,615 - ------- - Net assets at end of period $ 3,485,174 $ 773,615 ------------- ------- (1) Commenced operations January 4, 2005. See accompanying notes.
Real Estate Short-Term Securities Bond Division Division -------- -------- 2006 2005 2006 2005 ---- ---- ---- ---- $ 309,423 $ (1,690,858) $ 862,353 $ 122,773 13,115,883 4,534,634 12,952 (14,016) 32,582,342 13,908,697 2,210,032 206,477 ---------- ---------- --------- ------- 46,007,648 16,752,473 3,085,337 315,234 40,235,845 36,441,344 65,026,561 49,237,781 (46,137) (36,333) (190,796) (26,133) (145,722) (137,763) (70,643) (86,189) (11,311,914) (8,051,131) (4,444,438) (5,277,925) (566,980) (232,728) (237,166) (240,359) (1,726,837) (1,490,965) (2,685,156) (1,968,926) (24,593,554) (25,263,440) (24,418,649) (14,939,228) 1,844,701 1,228,984 32,979,713 26,699,021 --------- --------- ---------- ---------- 47,852,349 17,981,457 36,065,050 27,014,255 133,792,721 115,811,264 81,529,141 54,514,886 ----------- ----------- ---------- ---------- $ 181,645,070 $ 133,792,721 $ 117,594,191 $ 81,529,141 --------------- ----------- --------------- ----------
Principal Life Insurance Company Separate Account B Statements of Changes in Net Assets (continued) For the Year Ended December 31, 2006 and 2005, Except as Noted SmallCap Division 2006 2005 ---- ---- Increase (decrease) in net assets from Operations: Net investment income (loss) $ (847,987) $ (902,834) Total realized gains (losses) on investments 6,373,384 944,344 Change in net unrealized appreciation or depreciation of investments 1,961,967 3,803,135 --------- --------- Net increase (decrease) in net assets resulting from operations 7,487,364 3,844,645 Changes from principal transactions: Purchase payments, less sales charges, per payment fees and applicable premium taxes 8,399,835 12,663,736 Administration charges (12,807) (14,199) Contingent sales charges (65,437) (63,516) Contract terminations (5,714,276) (4,655,966) Death benefit payments (229,622) (133,597) Flexible withdrawal option payments (894,769) (882,813) Transfer payments to other contracts (8,073,020) (6,733,904) Annuity payments - - - - Increase (decrease) in net assets from principal transactions (6,590,096) 179,741 ----------- ------- Total increase (decrease) 897,268 4,024,386 Net assets at beginning of period 70,854,493 66,830,107 ---------- ---------- Net assets at end of period $ 71,751,761 $ 70,854,493 -------------- ---------- See accompanying notes.
SmallCap SmallCap Growth Value Division Division -------- -------- 2006 2005 2006 2005 ---- ---- ---- ---- $ (666,713) $ (601,543) $ (1,232,059) $ (1,142,554) (1,332,510) (2,102,024) 12,871,584 2,553,049 5,430,781 4,985,626 5,413,590 2,740,416 --------- --------- --------- --------- 3,431,558 2,282,059 17,053,115 4,150,911 10,721,896 7,548,846 37,625,778 31,112,444 (8,292) (7,140) (80,677) (22,644) (65,066) (51,282) (113,728) (80,735) (5,175,480) (3,729,551) (8,276,465) (5,107,789) (71,981) (112,852) (263,733) (324,717) (397,314) (394,403) (1,039,781) (855,206) (6,357,486) (5,384,370) (14,222,812) (11,791,879) (1,353,723) (2,130,752) 13,628,582 12,929,474 ----------- ----------- ---------- ---------- 2,077,835 151,307 30,681,697 17,080,385 46,695,389 46,544,082 95,377,914 78,297,529 ---------- ---------- ---------- ---------- $ 48,773,224 $ 46,695,389 $ 126,059,611 $ 95,377,914 -------------- ---------- --------------- ----------
Principal Life Insurance Company Separate Account B Statements of Changes in Net Assets (continued) For the Year Ended December 31, 2006 and 2005, Except as Noted T. Rowe Price Blue Chip Growth II Division 2006 2005 Increase (decrease) in net assets from Operations: Net investment income (loss) $ (9,904) $ (2,321) Total realized gains (losses) on investments 6,716 2,769 Change in net unrealized appreciation or depreciation of investments 76,937 23,847 ------ ------ Net increase (decrease) in net assets resulting from operations 73,749 24,295 Changes from principal transactions: Purchase payments, less sales charges, per payment fees and applicable premium taxes 417,431 682,192 Administration charges (21) - Contingent sales charges (3,617) (339) Contract terminations (82,700) (10,143) Death benefit payments (2,219) - Flexible withdrawal option payments (3,650) (141) Transfer payments to other contracts (14,665) (52,037) Annuity payments - - - - Increase (decrease) in net assets from principal transactions 310,559 619,532 ------- ------- Total increase (decrease) 384,308 643,827 Net assets at beginning of period 643,827 - ------- - Net assets at end of period $ 1,028,135 $ 643,827 ------------- ------- See accompanying notes.
Templeton T. Rowe Price Growth Health Securities Science Class 2 H Division Division ---------- -------- 2006 2005 2006 2005 ---- ---- ---- ---- $ (19,706) $ (2,119) $ 11,349 $ 4,826 8,932 1,933 174,717 39,915 129,496 40,301 303,044 118,794 ------- ------ ------- ------- 118,722 40,115 489,110 163,535 1,908,562 540,074 799,000 616,293 (2,173) (151) - - (748) (114) (1,546) (781) (17,106) (3,402) (359,768) (205,972) - - (5,116) (5,327) (6,446) (459) (26,698) (23,539) (354,679) (25,435) (153,658) (108,350) 1,527,410 510,513 252,214 272,324 --------- ------- ------- ------- 1,646,132 550,628 741,324 435,859 550,628 - 2,287,401 1,851,542 ------- - --------- --------- $ 2,196,760 $ 550,628 $ 3,028,725 $ 2,287,401 ------------- --------- ----------- ---------
Principal Life Insurance Company Separate Account B Notes to Financial Statements 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, 2006, contractholder investment options include the following open-end management investment companies: Principal Variable Contracts Fund, Inc. (1) Asset Allocation Account Balanced Account Bond Account Capital Value Account Diversified International Account Equity Growth Account Equity Income Account Equity Value Account (4) Government & High Quality Bond Account Growth Account International Emerging Markets Account International SmallCap Account LargeCap Blend Account (2) LargeCap Growth Equity Account LargeCap Stock Index Account LargeCap Value Account (2) MidCap Account MidCap Growth Account MidCap Value Account Money Market Account Principal LifeTime Strategic Income Account (4) Principal LifeTime 2010 Account (4) Principal LifeTime 2020 Account (4) Principal LifeTime 2030 Account (4) Principal LifeTime 2040 Account (4) Principal LifeTime 2050 Account(4) Real Estate Securities Account Short-Term Bond Account (3) SmallCap Account SmallCap Growth Account SmallCap Value Account 1. Investment and Accounting Policies (continued) AIM V.I. Basic Value Fund - Series I (4) AIM V.I. Capital Appreciation Fund Series I (5) AIM V.I. Core Equity Fund - Series I AIM V.I. Dynamics Fund - Series I AIM V.I. Global Health Care Fund - Series I AIM V.I. Small Cap Equity Fund - Series I (4) AIM V.I. Small Cap Growth Fund - Series I, formerly AIM V.I. Small Company Growth Fund - Series I, until November 21, 2006 name change AIM V.I. Technology Fund - Series I Alliance Bernstein VP Series Fund, Inc: Small Cap Growth Portfolio - Class A (4) American Century Variable Portfolios, Inc: VP Income & Growth Fund - I VP Inflation Protection Fund - II (4) VP Ultra Fund - I VP Ultra Fund - II (4) VP Value Fund - II (2) VP Vista Fund - I (4) Dreyfus Investment Portfolios: Founders Discovery Portfolio - Initial Shares Technology Growth Portfolio - Service Shares (4) Fidelity Variable Insurance Products Fund: Equity-Income Portfolio - SC2 Growth Portfolio - SC (2) Growth Portfolio - SC2 (4) Overseas Portfolio - SC2 (4) Fidelity Variable Insurance Products Fund II: Contrafund Portfolio - SC Contrafund Portfolio - SC2 (4) Fidelity Variable Insurance Products Fund III: Mid Cap Portfolio - SC2 (4) Franklin Templeton VIP Trust: Templeton Growth Securities Fund - Class 2 Goldman Sachs Variable Insurance Trust: Mid Cap Value Fund - SC I (4) Structured Small Cap Equity Fund - SC I, formerly Goldman Sachs CORE Small Cap Equity, until May 1, 2006 name change (4) Janus Aspen Series Mid Cap Growth Portfolio Neuberger Berman AMT Fasciano Portfolio - S Class (3) Neuberger Berman AMT High Income Bond Portfolio - S Class (4) Neuberger Berman AMT Partners Portfolio - I Class (3) Neuberger Berman AMT Socially Responsive Portfolio - I Class (3) T. Rowe Price Blue Chip Growth Portfolio - II (3) T. Rowe Price Health Sciences Portfolio - II (3) (1) Organized by Principal Life Insurance Company (2) Commenced operations May 18, 2002 (3) Commenced operations May 17, 2003 (4) Commenced operations January 4, 2005 (5) Commenced operations April 28, 2006 Commencement of operations date is the date that the division became available to contractholders. 1. Investment and Accounting Policies (continued) Investments are stated at the closing net asset values per share on December 31, 2006. 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. Separate Account B supports the following variable annuity contracts of Principal Life: Bankers Flexible Annuity; Pension Builder Plus; Pension Builder Plus - Rollover IRA; Personal Variable; Premier Variable; Principal Freedom Variable Annuity; Principal Freedom 2 Variable Annuity; The Principal Variable Annuity; The Principal Variable Annuity with Purchase Payment Credit Rider; Principal Investment Plus Variable Annuity, and Principal Investment Plus Variable Annuity with Purchase Rider. Principal Life no longer accepts contributions for Bankers Flexible Annuity Contracts, Pension Builder Plus Contracts and Pension Builder Plus-Rollover IRA Contracts. Contractholders are being given the option of withdrawing their funds or transferring to another contract. Contributions to the Personal Variable contracts are no longer accepted from new customers, only from existing customers beginning January 1998. Use of Estimates in the Preparation of Financial Statements The preparation of financial statements and accompanying notes of Separate Account B 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 and Related Party Transactions 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 daily charge resulting in a reduction of the unit value 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. Pension Builder Plus and Pension Builder Plus - Rollover IRA Contracts - Mortality and expense risks assumed by Principal Life are compensated for by a daily charge resulting in a reduction of the unit value equivalent to an annual rate of 1.50% (1% 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 ten years of a contract, except for withdrawals related to 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. Personal Variable Contracts - Mortality and expense risks assumed by Principal Life are compensated for by a daily charge resulting in a reduction of the unit value 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. Premier Variable Contracts - Mortality and expense risks assumed by Principal Life are compensated for by a daily charge resulting in a reduction of the unit value equivalent to an annual rate of 0.42% of the asset value of each contract. The Contractholder must also pay contract administration charges. The annual charge ranges from a minimum charge of $2,150 to $7,725 plus 0.03% of account values greater than $30,000,000. The amount varies by Plan document and account balance of contract. Recordkeeping charges are also paid by the Contractholder. The annual charge ranges from $2,250 to $25,316 plus $10 per participant. The amount varies by total plan participants. There were no contingent sales charges provided for in these contracts. Principal Freedom Variable Annuity - Mortality and expenses risk assumed by Principal Life are compensated for by a daily charge resulting in a reduction of the unit value 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 withdrawals related to 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. Principal Freedom 2 Variable Annuity - Mortality and expenses risk assumed by Principal Life are compensated for by a daily charge resulting in a reduction of the unit value equivalent to an annual rate of 0.95% of the asset value of each contract. A contingent sales charge up to 3% may be deducted from the withdrawals made during the first four years of a contract, except for withdrawals related to 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 Principal Variable Annuity - Mortality and expense risks assumed by Principal Life are compensated for by a daily charge resulting in a reduction of the unit value 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 withdrawals related to death, annuitization, permanent disability, confinement in a health care facility, or terminal illness. An annual administration charge of the lesser of 2% 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. Effective November 27, 2000, Principal Life added a purchase payment credit rider to the contract, at an annual rate of 0.6%. For electing participants, the rider is deducted from the daily unit value. The Principal Investment Plus Variable Annuity - Mortality and expense risks assumed by Principal Life are compensated for by a daily charge resulting in a reduction of the unit value 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 withdrawals related to death, annuitization, permanent disability, confinement in a health care facility, or terminal illness. An annual administration charge of the lesser of 2% 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. An optional premium payment credit rider can be added to the product at an annual rate of 0.6%. For electing participants, the rider is deducted from the daily unit value. During the year ended December 31, 2006, management fees were paid indirectly to Principal Management Corporation (wholly owned by Principal Financial Services, Inc.), an affiliate of Principal Life, in its capacity as advisor to Principal Variable Contracts Fund, Inc. Investment advisory and management fees are computed on an annual rate of 0.25% of the average daily net assets of the LargeCap Stock Index Account, 1% of the average daily net assets of the LargeCap Growth Equity Account, and 0.1225% of the average daily net assets of the Principal LifeTime Accounts. The investment advisory and management fees for certain Accounts of the Principal Variable Contracts Fund, Inc. are based on an annual rate of the average daily net assets, which decreases by 0.05% for each $100 million increase in net asset value above the initial $100 million of net assets for each Account, with the final decrease in the annual rate occurring when net assets exceed $400 million. This rate structure applies to the Accounts in the following table, which discloses the fee range for each Account from the first $100 million of net asset value to net asset values of over $400 million:
Account Fee Range ------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------ Bond, Government & High Quality Bond, Money Market, Short-Term Bond 0.50 - 0.30% Balanced, Equity Income 0.60 - 0.40 MidCap 0.65 - 0.45 Asset Allocation, Equity Growth 0.80 - 0.60 Equity Value, SmallCap 0.85 - 0.65 MidCap Growth, Real Estate Securities 0.90 - 0.70 SmallCap Growth 1.00 - 0.80 SmallCap Value 1.10 - 0.90 International SmallCap 1.20 - 1.00
The investment advisory and management fees for certain Accounts of the Principal Variable Contracts Fund, Inc. are based on an annual rate of the average daily net assets, which decreases by 0.05% for each $250 million increase in net asset value above the initial $250 million of net assets for each Account, with the final decrease in the annual rate occurring when net assets exceed $1 billion. This rate structure applies to the Accounts in the following table, which discloses the fee range for each Account from the first $250 million of net asset value to net asset values of over $1 billion: 2. Expenses and Related Party Transactions (continued) Account Fee Range --------------------------------------------------------------------------- --------------------------------------------------------------------------- Capital Value, Growth 0.60 - 0.40% LargeCap Blend, LargeCap Value 0.75 - 0.55 Diversified International 0.85 - 0.65 MidCap Value 1.05 - 0.85 International Emerging Markets 1.25 - 1.05 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 Investments The aggregate cost of purchases and proceeds from sales of investments were as follows during the year ended December 31, 2006:
Division Purchases Sales ---------------------------------------------------------------------------------------------------------- AIM V.I. Basic Value Series I Division: Principal Investment Plus Variable Annuity $ 581,271 $ 7,187 Principal Investment Plus Variable Annuity With Purchase Rider 322,390 6,253 AIM V.I. Capital Appreciation Series I Division: The Principal Variable Annuity 15,973,923 2,640,928 The Principal Variable Annuity With Purchase Payment Credit Rider 2,612,094 226,665 AIM V.I. Core Equity Series I Division: The Principal Variable Annuity 25,845,151 10,341,390 The Principal Variable Annuity With Purchase Payment Credit Rider 7,787,261 2,001,885 AIM V.I. Dynamics Series I Division: The Principal Variable Annuity 698,307 660,004 The Principal Variable Annuity With Purchase Payment Credit Rider 455,049 400,202 AIM V.I. Global Health Care Series I Division: The Principal Variable Annuity 796,129 1,619,267 The Principal Variable Annuity With Purchase Payment Credit Rider 1,139,339 1,441,437 AIM V.I. Small Cap Equity Series I Division: Principal Investment Plus Variable Annuity 296,242 27,665 Principal Investment Plus Variable Annuity With Purchase Rider 331,907 2,864
4. Purchases and Sales of Investments (continued)
Division Purchases Sales ---------------------------------------------------------------------------------------------------------- AIM V.I. Small Cap Growth Series I Division: The Principal Variable Annuity $ 810,852 $ 875,714 The Principal Variable Annuity With Purchase Payment Credit Rider 236,351 242,994 AIM V.I. Technology Series I Division: The Principal Variable Annuity 715,787 1,182,449 The Principal Variable Annuity With Purchase Payment Credit Rider 796,177 991,085 Alliance Bernstein VP Series Small Cap Growth Class A Division: Principal Investment Plus Variable Annuity 527,682 64,578 Principal Investment Plus Variable Annuity With Purchase Rider 222,578 19,491 American Century VP Income & Growth Class I Division: Principal Freedom Variable Annuity 1,545,184 1,348,073 The Principal Variable Annuity 2,315,670 3,686,509 The Principal Variable Annuity With Purchase Payment Credit Rider 998,927 1,840,114 American Century VP Inflation Protection Class II Division: Principal Investment Plus Variable Annuity 28,120,662 5,654,908 Principal Investment Plus Variable Annuity With Purchase Rider 10,940,252 2,462,190 American Century VP Ultra Class I Division: The Principal Variable Annuity 619,575 1,279,418 The Principal Variable Annuity With Purchase Payment Credit Rider 589,910 760,017
4. Purchases and Sales of Investments (continued)
Division Purchases Sales ---------------------------------------------------------------------------------------------------------- American Century VP Ultra Class II Division: Principal Investment Plus Variable Annuity $24,146,907 $ 5,069,747 Principal Investment Plus Variable Annuity With Purchase Rider 9,875,971 2,959,523 American Century VP Value Class II Division: The Principal Variable Annuity 8,284,822 5,282,938 The Principal Variable Annuity With Purchase Payment Credit Rider 5,085,367 2,743,849 American Century VP Vista Class I Division: Principal Investment Plus Variable Annuity 434,852 156,750 Principal Investment Plus Variable Annuity With Purchase Rider 66,797 1,357 Asset Allocation Division: Premier Variable 5,102 133,132 The Principal Variable Annuity 4,978,251 15,576,583 The Principal Variable Annuity With Purchase Payment Credit Rider 2,220,615 3,521,207 Principal Investment Plus Variable Annuity 2,985,375 806,064 Principal Investment Plus Variable Annuity With Purchase Rider 2,239,275 598,311 Balanced Division: Personal Variable 117,879 97,672 Premier Variable 1,125,404 2,455,126 The Principal Variable Annuity 6,448,010 18,826,738 The Principal Variable Annuity With Purchase Payment Credit Rider 2,709,780 2,953,727
4. Purchases and Sales of Investments (continued)
Division Purchases Sales ---------------------------------------------------------------------------------------------------------- Bond Division: Personal Variable $ 46,121 $ 81,925 Premier Variable 1,427,921 2,175,515 Principal Freedom Variable Annuity 3,844,619 3,102,447 Principal Freedom 2 Variable Annuity 53,582 39 The Principal Variable Annuity 28,223,254 39,735,083 The Principal Variable Annuity With Purchase Payment Credit Rider 14,317,420 12,097,429 Principal Investment Plus Variable Annuity 41,615,015 7,953,352 Principal Investment Plus Variable Annuity With Purchase Rider 16,593,865 4,014,201 Capital Value Division: Bankers Flexible Annuity 220,513 158,615 Pension Builder Plus 286,950 257,205 Pension Builder Plus - Rollover IRA 63,175 129,442 Personal Variable 273,814 167,000 Premier Variable 4,219,050 5,170,917 Principal Freedom Variable Annuity 3,078,512 1,619,134 Principal Freedom 2 Variable Annuity 22,734 13 The Principal Variable Annuity 23,307,419 34,723,664 The Principal Variable Annuity With Purchase Payment Credit Rider 6,151,987 3,331,406 Principal Investment Plus Variable Annuity 4,212,848 717,934 Principal Investment Plus Variable Annuity With Purchase Rider 2,947,620 208,007
4. Purchases and Sales of Investments (continued)
Division Purchases Sales ---------------------------------------------------------------------------------------------------------- Diversified International Division: Personal Variable $ 132,357 $ 31,223 Premier Variable 3,167,991 4,050,637 Principal Freedom Variable Annuity 4,562,758 2,741,894 Principal Freedom 2 Variable Annuity 69,708 56 The Principal Variable Annuity 33,341,144 41,552,104 The Principal Variable Annuity With Purchase Payment Credit Rider 12,337,144 10,470,189 Principal Investment Plus Variable Annuity 12,451,383 2,049,443 Principal Investment Plus Variable Annuity With Purchase Rider 4,890,167 610,584 Dreyfus IP Founders Discovery Initial Shares Division: The Principal Variable Annuity 2,456,071 1,932,143 The Principal Variable Annuity With Purchase Payment Credit Rider 1,318,782 1,040,768 Dreyfus IP Technology Service Shares Division: Principal Investment Plus Variable Annuity 229,006 50,217 Principal Investment Plus Variable Annuity With Purchase Rider 104,202 2,247 Equity Growth Division: Premier Variable 5,436 68,938 The Principal Variable Annuity 9,292,390 38,308,380 The Principal Variable Annuity With Purchase Payment Credit Rider 3,102,539 3,587,613 Principal Investment Plus Variable Annuity 2,591,979 141,612 Principal Investment Plus Variable Annuity With Purchase Rider 1,412,448 118,766
4. Purchases and Sales of Investments (continued)
Division Purchases Sales ---------------------------------------------------------------------------------------------------------- Equity Income Division: Premier Variable $ 187,759 $ 115,483 The Principal Variable Annuity 10,936,616 11,163,174 The Principal Variable Annuity With Purchase Payment Credit Rider 3,570,430 3,601,980 Principal Investment Plus Variable Annuity 51,323,389 12,701,526 Principal Investment Plus Variable Annuity With Purchase Rider 19,645,514 6,223,515 Equity Value Division: Principal Investment Plus Variable Annuity 1,758,792 492,877 Principal Investment Plus Variable Annuity With Purchase Rider 986,492 254,126 Fidelity VIP Equity - Income Service Class 2 Division: The Principal Variable Annuity 13,881,397 7,036,128 The Principal Variable Annuity With Purchase Payment Credit Rider 6,375,491 2,945,766 Principal Investment Plus Variable Annuity 4,034,332 324,178 Principal Investment Plus Variable Annuity With Purchase Rider 1,341,118 39,651 Fidelity VIP Growth Service Class Division: The Principal Variable Annuity 2,317,054 8,133,654 The Principal Variable Annuity With Purchase Payment Credit Rider 853,971 1,653,380 Fidelity VIP Growth Service Class 2 Division: Principal Investment Plus Variable Annuity 1,774,828 94,859 Principal Investment Plus Variable Annuity With Purchase Rider 1,303,267 117,311
4. Purchases and Sales of Investments (continued)
Division Purchases Sales ---------------------------------------------------------------------------------------------------------- Fidelity VIP Overseas Service Class 2 Division: Principal Investment Plus Variable Annuity $16,806,159 $ 3,439,659 Principal Investment Plus Variable Annuity With Purchase Rider 7,662,299 1,968,415 Fidelity VIP II Contrafund Service Class Division: The Principal Variable Annuity 24,158,339 18,776,177 The Principal Variable Annuity With Purchase Payment Credit Rider 9,694,882 4,705,489 Fidelity VIP II Contrafund Service Class 2 Division: Principal Investment Plus Variable Annuity 14,782,471 2,421,841 Principal Investment Plus Variable Annuity With Purchase Rider 5,002,151 771,320 Fidelity VIP III Mid Cap Service Class 2 Division: Principal Investment Plus Variable Annuity 2,847,506 325,163 Principal Investment Plus Variable Annuity With Purchase Rider 829,097 54,676 Goldman Sachs VIT Mid Cap Value Fund Service Class I Division: Principal Investment Plus Variable Annuity 6,756,039 617,835 Principal Investment Plus Variable Annuity With Purchase Rider 3,510,903 160,177 Goldman Sachs Structured Small Cap Equity Service Class I Division: Principal Investment Plus Variable Annuity 1,960,300 197,228 Principal Investment Plus Variable Annuity With Purchase Rider 1,190,009 90,931
4. Purchases and Sales of Investments (continued)
Division Purchases Sales ---------------------------------------------------------------------------------------------------------- Government & High Quality Bond Division: Pension Builder Plus $ 6,698 $ 23,509 Pension Builder Plus - Rollover IRA 3,944 3,131 Personal Variable 43,883 83,164 Premier Variable 749,724 1,731,029 Principal Freedom Variable Annuity 2,052,266 1,819,671 Principal Freedom 2 Variable Annuity 3,517 - The Principal Variable Annuity 26,586,641 49,023,949 The Principal Variable Annuity With Purchase Payment Credit Rider 12,838,927 15,263,967 Principal Investment Plus Variable Annuity 15,271,094 3,457,970 Principal Investment Plus Variable Annuity With Purchase Rider 5,203,879 1,306,111 Growth Division: Personal Variable 143,772 185,276 Premier Variable 1,755,226 3,754,563 The Principal Variable Annuity 4,514,433 19,509,132 The Principal Variable Annuity With Purchase Payment Credit Rider 1,480,788 1,219,282 Principal Investment Plus Variable Annuity 1,966,780 200,984 Principal Investment Plus Variable Annuity With Purchase Rider 1,191,092 57,850 International Emerging Markets Division: Premier Variable 249,589 343,767 The Principal Variable Annuity 23,312,726 17,231,656 The Principal Variable Annuity With Purchase Payment Credit Rider 8,472,999 6,633,980 Principal Investment Plus Variable Annuity 7,174,993 1,166,370 Principal Investment Plus Variable Annuity With Purchase Rider 4,390,514 601,525
4. Purchases and Sales of Investments (continued)
Division Purchases Sales ---------------------------------------------------------------------------------------------------------- International SmallCap Division: Premier Variable $ 194,619 $ 394,614 The Principal Variable Annuity 25,305,432 24,788,832 The Principal Variable Annuity With Purchase Payment Credit Rider 8,065,288 5,406,591 Principal Investment Plus Variable Annuity 7,663,350 1,266,610 Principal Investment Plus Variable Annuity With Purchase Rider 3,562,197 521,632 Janus Aspen Mid Cap Growth Service Shares Division: The Principal Variable Annuity 1,740,357 2,864,198 The Principal Variable Annuity With Purchase Payment Credit Rider 1,469,082 1,723,085 LargeCap Blend Division: The Principal Variable Annuity 13,957,226 12,453,871 The Principal Variable Annuity With Purchase Payment Credit Rider 6,900,461 4,605,592 Principal Investment Plus Variable Annuity 36,111,688 6,677,699 Principal Investment Plus Variable Annuity With Purchase Rider 15,039,864 3,318,685 LargeCap Growth Equity Division: Premier Variable 10,901 106,032 Principal Freedom Variable Annuity 921,198 638,980 Principal Freedom 2 Variable Annuity 21,236 18 The Principal Variable Annuity 2,311,247 2,277,517 The Principal Variable Annuity With Purchase Payment Credit Rider 1,146,568 1,321,689
4. Purchases and Sales of Investments (continued)
Division Purchases Sales ---------------------------------------------------------------------------------------------------------- LargeCap Stock Index Division: Premier Variable $ 387,096 $ 340,640 Principal Freedom Variable Annuity 3,739,860 3,806,138 Principal Freedom 2 Variable Annuity 87,250 67 The Principal Variable Annuity 20,532,364 26,115,808 The Principal Variable Annuity With Purchase Payment Credit Rider 4,386,303 7,433,810 Principal Investment Plus Variable Annuity 6,949,882 1,829,859 Principal Investment Plus Variable Annuity With Purchase Rider 3,173,425 499,832 LargeCap Value Division: The Principal Variable Annuity 14,166,969 12,304,846 The Principal Variable Annuity With Purchase Payment Credit Rider 5,993,718 4,527,962 Principal Investment Plus Variable Annuity 32,523,320 6,233,034 Principal Investment Plus Variable Annuity With Purchase Rider 13,587,723 3,347,034 MidCap Division: Personal Variable 329,151 114,789 Premier Variable 3,180,799 5,161,102 Principal Freedom Variable Annuity 2,065,123 1,722,967 Principal Freedom 2 Variable Annuity 11,908 5 The Principal Variable Annuity 47,296,113 52,934,084 The Principal Variable Annuity With Purchase Payment Credit Rider 14,906,010 8,071,475 Principal Investment Plus Variable Annuity 23,324,468 4,414,541 Principal Investment Plus Variable Annuity With Purchase Rider 9,336,279 1,851,357
4. Purchases and Sales of Investments (continued)
Division Purchases Sales ---------------------------------------------------------------------------------------------------------- MidCap Growth Division: Premier Variable $ 198,287 $ 283,578 Principal Freedom Variable Annuity 608,044 687,379 Principal Freedom 2 Variable Annuity 10,618 9 The Principal Variable Annuity 6,444,216 8,561,126 The Principal Variable Annuity With Purchase Payment Credit Rider 3,026,383 2,821,709 Principal Investment Plus Variable Annuity 1,586,909 183,401 Principal Investment Plus Variable Annuity With Purchase Rider 1,068,703 156,103 MidCap Value Division: Premier Variable 134,438 451,653 Principal Freedom Variable Annuity 3,524,068 2,277,588 Principal Freedom 2 Variable Annuity 21,461 20 The Principal Variable Annuity 15,128,244 14,551,756 The Principal Variable Annuity With Purchase Payment Credit Rider 6,349,436 4,114,660 Principal Investment Plus Variable Annuity 16,461,141 3,477,232 Principal Investment Plus Variable Annuity With Purchase Rider 6,347,314 1,417,489 Money Market Division: Pension Builder Plus 8,132 23,725 Pension Builder Plus - Rollover IRA 338 395 Personal Variable 1,016,462 1,057,094 Premier Variable 4,493,358 5,553,581 Principal Freedom Variable Annuity 11,325,966 10,826,325 Principal Freedom 2 Variable Annuity - 1 The Principal Variable Annuity 80,081,975 71,647,603 The Principal Variable Annuity With Purchase Payment Credit Rider 22,134,228 22,969,391 Principal Investment Plus Variable Annuity 15,642,119 12,794,496 Principal Investment Plus Variable Annuity With Purchase Rider 13,168,115 10,654,156 Neuberger Berman AMT Fasciano S Class Division: Principal Investment Plus Variable Annuity $ 865,378 $ 75,405 Principal Investment Plus Variable Annuity With Purchase Rider 604,450 43,060 Neuberger Berman AMT High Income Bond S Class Division: Principal Investment Plus Variable Annuity 1,095,525 113,174 Principal Investment Plus Variable Annuity With Purchase Rider 283,257 85,309 Neuberger Berman AMT Partners I Class Division: Principal Investment Plus Variable Annuity 2,824,848 179,784 Principal Investment Plus Variable Annuity With Purchase Rider 1,262,112 67,457 Neuberger Berman AMT Socially Responsive I Class Division: Principal Investment Plus Variable Annuity 1,524,684 405,976 Principal Investment Plus Variable Annuity With Purchase Rider 456,482 46,921 Principal LifeTime Strategic Income Division: Principal Investment Plus Variable Annuity 6,359,281 1,816,916 Principal Investment Plus Variable Annuity With Purchase Rider 1,930,158 353,583 Principal LifeTime 2010 Division: Principal Freedom 2 Variable Annuity 510,584 227 Principal Investment Plus Variable Annuity 14,367,646 6,357,953 Principal Investment Plus Variable Annuity With Purchase Rider 3,667,807 1,204,295 Principal LifeTime 2020 Division: Principal Freedom 2 Variable Annuity $ 109,050 $ 49 Principal Investment Plus Variable Annuity 52,350,394 8,130,342 Principal Investment Plus Variable Annuity With Purchase Rider 19,411,077 2,702,889 Principal LifeTime 2030 Division: Principal Freedom 2 Variable Annuity 34,166 10 Principal Investment Plus Variable Annuity 7,187,234 1,371,508 Principal Investment Plus Variable Annuity With Purchase Rider 1,993,950 267,150 Principal LifeTime 2040 Division: Principal Freedom 2 Variable Annuity 99,728 21 Principal Investment Plus Variable Annuity 2,473,943 196,340 Principal Investment Plus Variable Annuity With Purchase Rider 999,444 100,500 Principal LifeTime 2050 Division: Principal Investment Plus Variable Annuity 1,904,960 123,306 Principal Investment Plus Variable Annuity With Purchase Rider 809,421 140,589 Real Estate Securities Division: Premier Variable 534,075 642,746 Principal Freedom 2 Variable Annuity 10,878 5 The Principal Variable Annuity 26,396,502 28,300,308 The Principal Variable Annuity With Purchase Payment Credit Rider 12,398,242 10,350,757 Principal Investment Plus Variable Annuity 7,708,749 1,012,396 Principal Investment Plus Variable Annuity With Purchase Rider 2,904,670 309,092 Short-Term Bond Division: Principal Freedom Variable Annuity $ 1,289,313 $ 1,158,580 The Principal Variable Annuity 10,290,346 10,278,005 The Principal Variable Annuity With Purchase Payment Credit Rider 4,534,631 6,686,402 Principal Investment Plus Variable Annuity 37,035,910 10,742,313 Principal Investment Plus Variable Annuity With Purchase Rider 14,108,271 4,551,105 SmallCap Division: Premier Variable 39,489 135,975 Principal Freedom Variable Annuity 1,849,501 1,859,373 The Principal Variable Annuity 8,092,213 10,870,804 The Principal Variable Annuity With Purchase Payment Credit Rider 3,192,035 3,086,564 SmallCap Growth Division: Premier Variable 187,766 291,381 Principal Freedom Variable Annuity 490,910 509,047 Principal Freedom 2 Variable Annuity 10,618 9 The Principal Variable Annuity 5,549,930 9,763,220 The Principal Variable Annuity With Purchase Payment Credit Rider 1,423,980 1,787,197 Principal Investment Plus Variable Annuity 2,131,737 274,412 Principal Investment Plus Variable Annuity With Purchase Rider 926,955 117,066 SmallCap Value Division: Premier Variable $ 239,066 $ 460,115 Principal Freedom 2 Variable Annuity 19,483 10 The Principal Variable Annuity 17,355,308 15,520,048 The Principal Variable Annuity With Purchase Payment Credit Rider 5,041,278 4,305,359 Principal Investment Plus Variable Annuity 18,598,663 3,611,445 Principal Investment Plus Variable Annuity With Purchase Rider 7,286,752 1,656,549 T. Rowe Price Blue Chip Growth II Division: Principal Investment Plus Variable Annuity 295,362 114,801 Principal Investment Plus Variable Annuity With Purchase Rider 124,037 3,943 T. Rowe Price Health Science II Division: Principal Investment Plus Variable Annuity 1,331,858 334,301 Principal Investment Plus Variable Annuity With Purchase Rider 576,704 66,557 Templeton Growth Securities Class 2 Division: Principal Freedom Variable Annuity 923,013 568,193
5. Changes in Units Outstanding Transactions in units were as follows for each of the years ended December 31:
2006 2005 ----------------------------- ----------------------------- ----------------------------- ----------------------------- Division Purchased Redeemed Purchased Redeemed ---------------------------------------------------------------------------- ----------------------------- AIM V.I. Basic Value Series I Division: Principal Investment Plus Variable Annuity 44,769 299 6,367 1,480 Principal Investment Plus Variable Annuity With Purchase Rider 24,831 261 8,343 22 AIM V.I. Capital Appreciation Series I Division: The Principal Variable Annuity 1,604,644 265,541 - - The Principal Variable Annuity With Purchase Payment Credit Rider 262,395 22,791 - - AIM V.I. Core Equity Series I Division: The Principal Variable Annuity 2,712,521 1,023,089 182,189 700,618 The Principal Variable Annuity With Purchase Payment Credit Rider 817,295 198,050 83,559 112,903 AIM V.I. Dynamics Series I Division: The Principal Variable Annuity 74,055 67,373 39,509 64,943 The Principal Variable Annuity With Purchase Payment Credit Rider 48,257 40,852 30,947 28,819 AIM V.I. Global Health Care Series I Division: The Principal Variable Annuity 75,291 142,787 125,963 216,628 The Principal Variable Annuity With Purchase Payment Credit Rider 107,748 127,105 72,679 89,609 AIM V.I. Small Cap Equity Series I Division: Principal Investment Plus Variable Annuity 20,580 1,631 6,198 85 Principal Investment Plus Variable Annuity With Purchase Rider 23,057 169 6,992 - AIM V.I. Small Cap Growth Series I Division: The Principal Variable Annuity 87,827 89,198 67,178 88,661 The Principal Variable Annuity With Purchase Payment Credit Rider 25,600 24,750 33,757 23,741 AIM V.I. Technology Series I Division: The Principal Variable Annuity 126,710 204,622 127,135 249,894 The Principal Variable Annuity With Purchase Payment Credit Rider 140,942 171,507 169,450 143,422 Alliance Bernstein VP Series Small Cap Growth Class A Division: Principal Investment Plus Variable Annuity 39,842 4,441 28,175 10,498 Principal Investment Plus Variable Annuity With Purchase Rider 16,806 1,340 3,855 - American Century VP Income & Growth Class I Division: Principal Freedom Variable Annuity 127,862 116,010 167,505 117,550 The Principal Variable Annuity 178,512 311,947 307,300 372,721 The Principal Variable Annuity With Purchase Payment Credit Rider 77,006 155,708 134,835 88,797 American Century VP Inflation Protection Class II Division: Principal Investment Plus Variable Annuity 2,686,844 524,266 1,331,568 104,648 Principal Investment Plus Variable Annuity With Purchase Rider 1,045,307 228,269 606,856 46,474 American Century VP Ultra Class I Division: The Principal Variable Annuity 69,732 132,150 141,195 155,232 The Principal Variable Annuity With Purchase Payment Credit Rider 66,394 78,502 65,745 68,046 American Century VP Ultra Class II Division: Principal Investment Plus Variable Annuity 2,246,146 443,055 1,004,732 93,547 Principal Investment Plus Variable Annuity With Purchase Rider 918,663 258,638 495,430 27,567 American Century VP Value Class II Division: The Principal Variable Annuity 428,487 370,493 776,851 340,667 The Principal Variable Annuity With Purchase Payment Credit Rider 263,013 192,426 404,667 106,369 American Century VP Vista Class I Division: Principal Investment Plus Variable Annuity 33,596 12,000 27,608 10,521 Principal Investment Plus Variable Annuity With Purchase Rider 5,161 104 8,075 5 Asset Allocation Division: Premier Variable 1,881 108,196 25,009 28,316 The Principal Variable Annuity 171,970 660,319 311,479 780,567 The Principal Variable Annuity With Purchase Payment Credit Rider 76,710 149,270 127,820 81,637 Principal Investment Plus Variable Annuity 133,369 34,993 73,834 1,800 Principal Investment Plus Variable Annuity With Purchase Rider 100,038 25,974 27,948 2,606 Balanced Division: Personal Variable 46,700 45,001 113,041 805,381 Premier Variable 496,201 1,182,858 584,600 2,936,302 The Principal Variable Annuity 254,827 923,924 308,236 956,929 The Principal Variable Annuity With Purchase Payment Credit Rider 107,091 144,954 164,084 96,787 Bond Division: Personal Variable 15,435 40,495 70,149 484,266 Premier Variable 640,111 1,069,740 805,392 2,707,154 Principal Freedom Variable Annuity 244,757 223,326 330,448 205,777 Principal Freedom 2 Variable Annuity 5,148 - - - The Principal Variable Annuity 1,207,660 2,046,575 1,716,617 1,944,452 The Principal Variable Annuity With Purchase Payment Credit Rider 612,636 623,084 826,795 513,875 Principal Investment Plus Variable Annuity 2,235,096 413,274 1,086,923 87,119 Principal Investment Plus Variable Annuity With Purchase Rider 891,238 208,587 504,530 30,050 Capital Value Division: Bankers Flexible Annuity - 3,981 - 18,260 Pension Builder Plus 213 32,603 6,059 70,218 Pension Builder Plus - Rollover IRA 928 16,173 1,203 9,977 Personal Variable 41,544 49,884 75,619 731,236 Premier Variable 897,758 1,582,528 695,815 3,461,397 Principal Freedom Variable Annuity 219,757 139,854 229,404 144,972 Principal Freedom 2 Variable Annuity 2,009 - - - The Principal Variable Annuity 364,750 1,226,653 491,072 1,308,505 The Principal Variable Annuity With Purchase Payment Credit Rider 96,276 117,686 141,435 128,558 Principal Investment Plus Variable Annuity 150,650 25,014 85,022 1,209 Principal Investment Plus Variable Annuity With Purchase Rider 105,406 7,247 32,906 1,47 Diversified International Division: Personal Variable 38,560 10,259 126,349 720,719 Premier Variable 1,105,938 1,558,734 861,323 2,176,234 Principal Freedom Variable Annuity 296,918 185,717 306,312 166,825 Principal Freedom 2 Variable Annuity 6,064 - - - The Principal Variable Annuity 1,111,032 1,633,791 1,355,902 1,527,468 The Principal Variable Annuity With Purchase Payment Credit Rider 411,113 411,679 543,778 330,883 Principal Investment Plus Variable Annuity 509,038 81,499 195,587 11,156 Principal Investment Plus Variable Annuity With Purchase Rider 199,920 24,281 68,768 4,972 Dreyfus IP Founders Discovery Initial Shares Division: The Principal Variable Annuity 290,476 208,216 351,335 143,259 The Principal Variable Annuity With Purchase Payment Credit Rider 155,970 112,157 183,487 65,615 Dreyfus IP Technology Service Shares Division: Principal Investment Plus Variable Annuity 19,250 4,042 11,135 1,049 Principal Investment Plus Variable Annuity With Purchase Rider 8,759 181 3,396 - Equity Growth Division: Premier Variable 5,464 68,565 40,897 135,796 The Principal Variable Annuity 331,249 1,282,286 421,473 1,386,045 The Principal Variable Annuity With Purchase Payment Credit Rider 110,597 120,087 155,503 112,385 Principal Investment Plus Variable Annuity 92,806 4,109 41,826 1,574 Principal Investment Plus Variable Annuity With Purchase Rider 50,573 3,446 19,669 1,759 Equity Income Division: Premier Variable 168,754 105,755 20,287 23,560 The Principal Variable Annuity 784,428 834,723 895,163 596,865 The Principal Variable Annuity With Purchase Payment Credit Rider 256,089 269,337 441,810 185,311 Principal Investment Plus Variable Annuity 4,022,636 998,950 2,150,107 195,697 Principal Investment Plus Variable Annuity With Purchase Rider 1,539,780 489,467 977,858 70,111 Equity Value Division: Principal Investment Plus Variable Annuity 141,283 39,471 92,205 119 Principal Investment Plus Variable Annuity with Purchase Rider 79,244 20,350 46,570 5,429 Fidelity VIP Equity - Income Service Class 2 Division: The Principal Variable Annuity 576,400 509,443 854,692 448,302 The Principal Variable Annuity With Purchase Payment Credit Rider 264,731 213,285 427,935 186,446 Principal Investment Plus Variable Annuity 274,638 21,680 96,818 2,495 Principal Investment Plus Variable Annuity With Purchase Rider 91,297 2,652 57,001 1,349 Fidelity VIP Growth Service Class Division: The Principal Variable Annuity 266,086 918,686 376,691 967,849 The Principal Variable Annuity With Purchase Payment Credit Rider 98,068 186,747 115,127 112,377 Fidelity VIP Growth Service Class 2 Division: Principal Investment Plus Variable Annuity 152,457 6,576 59,039 530 Principal Investment Plus Variable Annuity With Purchase Rider 111,949 8,131 57,368 1,051 Fidelity VIP Overseas Service Class 2 Division: Principal Investment Plus Variable Annuity 1,159,278 237,005 641,857 60,859 Principal Investment Plus Variable Annuity With Purchase Rider 528,540 135,631 323,473 22,845 Fidelity VIP II Contrafund Service Class Division: The Principal Variable Annuity 1,193,196 1,262,384 1,703,115 1,086,838 The Principal Variable Annuity With Purchase Payment Credit Rider 478,837 316,366 428,550 232,052 Fidelity VIP II Contrafund Service Class 2 Division: Principal Investment Plus Variable Annuity 983,733 169,877 440,469 13,893 Principal Investment Plus Variable Annuity With Purchase Rider 332,880 54,103 112,985 11,791 Fidelity VIP III Mid Cap Service Class 2 Division: Principal Investment Plus Variable Annuity 181,985 20,016 36,744 831 Principal Investment Plus Variable Annuity With Purchase Rider 52,988 3,366 35,863 571 Goldman Sachs VIT Mid Cap Value Fund Service Class I Division: Principal Investment Plus Variable Annuity 427,680 39,535 165,089 2,858 Principal Investment Plus Variable Annuity With Purchase Rider 222,252 10,250 92,978 1,945 Goldman Sachs Structured Small Cap Equity Fund Service Class I Division: Principal Investment Plus Variable Annuity 138,890 13,282 63,166 90 Principal Investment Plus Variable Annuity With Purchase Rider 84,314 6,124 32,490 1,071 Government & High Quality Bond Division: Pension Builder Plus - 7,737 304 21,855 Pension Builder Plus - Rollover IRA 616 851 - 848 Personal Variable 13,491 39,705 56,258 578,611 Premier Variable 288,847 819,544 569,148 2,818,166 Principal Freedom Variable Annuity 169,424 169,553 280,194 116,851 Principal Freedom 2 Variable Annuity 340 - - - The Principal Variable Annuity 1,093,278 2,607,301 1,622,431 2,939,390 The Principal Variable Annuity With Purchase Payment Credit Rider 527,955 811,803 834,862 1,014,630 Principal Investment Plus Variable Annuity 838,711 184,970 400,753 19,230 Principal Investment Plus Variable Annuity With Purchase Rider 285,805 69,865 140,788 7,615 Growth Division: Personal Variable 78,668 101,479 194,981 1,279,611 Premier Variable 953,374 2,027,299 1,102,032 5,423,394 The Principal Variable Annuity 249,369 1,061,354 282,634 1,294,541 The Principal Variable Annuity With Purchase Payment Credit Rider 81,796 66,332 52,287 51,551 Principal Investment Plus Variable Annuity 112,878 10,313 23,468 573 Principal Investment Plus Variable Annuity With Purchase Rider 68,360 2,968 11,366 65 International Emerging Markets Division: Premier Variable 94,190 127,362 159,195 168,123 The Principal Variable Annuity 871,720 670,407 961,914 418,371 The Principal Variable Annuity With Purchase Payment Credit Rider 316,827 258,099 332,500 140,399 Principal Investment Plus Variable Annuity 280,531 42,977 133,420 2,735 Principal Investment Plus Variable Annuity With Purchase Rider 171,662 22,165 68,081 3,591 International SmallCap Division: Premier Variable 75,126 188,136 125,149 89,670 The Principal Variable Annuity 483,213 878,871 807,865 802,049 The Principal Variable Annuity With Purchase Payment Credit Rider 154,009 191,687 236,474 146,635 Principal Investment Plus Variable Annuity 258,596 42,524 169,187 23,137 Principal Investment Plus Variable Annuity With Purchase Rider 120,204 17,513 73,645 6,049 Janus Aspen Mid Cap Growth Service Shares Division: The Principal Variable Annuity 247,057 378,635 184,396 295,219 The Principal Variable Annuity With Purchase Payment Credit Rider 208,548 227,784 99,327 157,240 LargeCap Blend Division: The Principal Variable Annuity 955,434 954,033 1,665,882 788,653 The Principal Variable Annuity With Purchase Payment Credit Rider 472,367 352,813 747,005 282,375 Principal Investment Plus Variable Annuity 2,995,386 542,102 1,595,224 147,625 Principal Investment Plus Variable Annuity With Purchase Rider 1,247,524 269,414 702,911 38,930 LargeCap Growth Equity Division: Premier Variable 14,019 139,639 55,702 23,063 Principal Freedom Variable Annuity 78,448 53,055 68,176 33,441 Principal Freedom 2 Variable Annuity 2,148 - - - The Principal Variable Annuity 425,913 393,275 259,692 307,444 The Principal Variable Annuity With Purchase Payment Credit Rider 211,288 228,225 161,977 163,498 LargeCap Stock Index Division: Premier Variable 336,080 305,759 335,254 324,881 Principal Freedom Variable Annuity 348,082 365,693 530,429 448,641 Principal Freedom 2 Variable Annuity 8,018 - - - The Principal Variable Annuity 1,996,937 2,590,763 2,809,794 3,061,779 The Principal Variable Annuity With Purchase Payment Credit Rider 426,603 737,455 830,251 788,447 Principal Investment Plus Variable Annuity 720,597 179,811 446,472 96,111 Principal Investment Plus Variable Annuity With Purchase Rider 329,036 49,116 183,143 17,004 LargeCap Value Division: The Principal Variable Annuity 923,652 861,982 1,485,373 825,237 The Principal Variable Annuity With Purchase Payment Credit Rider 390,776 317,194 514,417 214,074 Principal Investment Plus Variable Annuity 2,444,235 462,888 1,217,470 85,956 Principal Investment Plus Variable Annuity With Purchase Rider 1,021,162 248,563 571,563 31,834 MidCap Division: Personal Variable 31,499 28,030 85,399 655,393 Premier Variable 515,768 1,355,836 596,852 2,769,980 Principal Freedom Variable Annuity 67,392 89,862 142,979 86,085 Principal Freedom 2 Variable Annuity 1,073 - - - The Principal Variable Annuity 476,213 1,399,632 896,681 1,443,913 The Principal Variable Annuity With Purchase Payment Credit Rider 150,085 213,418 321,974 222,156 Principal Investment Plus Variable Annuity 616,321 120,085 350,636 31,618 Principal Investment Plus Variable Annuity With Purchase Rider 246,700 50,361 156,911 9,761 MidCap Growth Division: Premier Variable 157,010 224,413 104,943 91,265 Principal Freedom Variable Annuity 41,828 51,644 36,431 23,914 Principal Freedom 2 Variable Annuity 1,038 - - - The Principal Variable Annuity 462,986 675,344 434,182 593,647 The Principal Variable Annuity With Purchase Payment Credit Rider 217,431 222,590 168,023 166,202 Principal Investment Plus Variable Annuity 132,342 13,964 68,890 2,052 Principal Investment Plus Variable Annuity With Purchase Rider 89,126 11,886 20,345 2,289 MidCap Value Division: Premier Variable 45,913 268,218 207,570 188,247 Principal Freedom Variable Annuity 105,991 93,429 158,020 76,248 Principal Freedom 2 Variable Annuity 1,995 - - - The Principal Variable Annuity 599,528 877,430 1,164,219 766,731 The Principal Variable Annuity With Purchase Payment Credit Rider 251,626 248,102 418,594 186,157 Principal Investment Plus Variable Annuity 992,839 214,712 559,975 62,027 Principal Investment Plus Variable Annuity With Purchase Rider 382,833 87,527 241,962 13,030 Money Market Division: Pension Builder Plus - 9,633 384 4,082 Pension Builder Plus - Rollover IRA - 134 - 19 Personal Variable 659,980 696,725 718,770 1,356,563 Premier Variable 2,738,336 3,549,757 4,073,127 5,471,646 Principal Freedom Variable Annuity 953,660 929,446 1,437,054 1,473,792 The Principal Variable Annuity 5,774,948 5,280,670 6,730,051 7,295,228 The Principal Variable Annuity With Purchase Payment Credit Rider 1,596,165 1,692,921 2,808,233 2,981,840 Principal Investment Plus Variable Annuity 1,159,710 955,115 480,620 314,384 Principal Investment Plus Variable Annuity With Purchase Rider 976,287 795,338 583,556 394,570 Neuberger Berman AMT Fasciano S Class Division: Principal Investment Plus Variable Annuity 73,912 5,588 35,579 231 Principal Investment Plus Variable Annuity With Purchase Rider 51,626 3,191 22,510 182 Neuberger Berman AMT High Income Bond S Class Division: Principal Investment Plus Variable Annuity 98,304 10,158 46,152 7,273 Principal Investment Plus Variable Annuity With Purchase Rider 25,417 7,657 59,567 9,914 Neuberger Berman AMT Partners I Class Division: Principal Investment Plus Variable Annuity 179,544 10,806 40,729 749 Principal Investment Plus Variable Annuity With Purchase Rider 80,218 4,055 25,255 317 Neuberger Berman AMT Socially Responsive I Class Division: Principal Investment Plus Variable Annuity 120,677 31,429 55,633 1,249 Principal Investment Plus Variable Annuity With Purchase Rider 36,130 3,632 10,187 732 Principal LifeTime Strategic Income Division: Principal Investment Plus Variable Annuity 557,460 152,573 454,594 8,701 Principal Investment Plus Variable Annuity With Purchase Rider 169,199 29,692 44,924 409 Principal LifeTime 2010 Division: Principal Freedom 2 Variable Annuity 47,224 - - - Principal Investment Plus Variable Annuity 1,233,411 532,289 914,472 10,236 Principal Investment Plus Variable Annuity With Purchase Rider 314,868 100,824 225,132 2,894 Principal LifeTime 2020 Division: Principal Freedom 2 Variable Annuity 9,906 - - - Principal Investment Plus Variable Annuity 4,288,239 642,607 1,715,786 58,337 Principal Investment Plus Variable Annuity With Purchase Rider 1,590,042 213,631 607,160 5,262 Principal LifeTime 2030 Division: Principal Freedom 2 Variable Annuity 3,106 - - - Principal Investment Plus Variable Annuity 590,464 103,406 196,380 6,783 Principal Investment Plus Variable Annuity With Purchase Rider 163,812 20,142 90,209 2 Principal LifeTime 2040 Division: Principal Freedom 2 Variable Annuity 9,037 - - - Principal Investment Plus Variable Annuity 198,440 13,605 93,214 - Principal Investment Plus Variable Annuity With Purchase Rider 80,168 6,964 34,291 4,372 Principal LifeTime 2050 Division: Principal Investment Plus Variable Annuity 149,677 8,991 27,009 - Principal Investment Plus Variable Annuity With Purchase Rider 63,599 10,252 38,750 - Real Estate Securities Division: Premier Variable 181,814 247,683 186,305 226,555 Principal Freedom 2 Variable Annuity 872 - - - The Principal Variable Annuity 638,236 860,171 927,650 1,094,905 The Principal Variable Annuity With Purchase Payment Credit Rider 299,775 314,605 421,996 327,487 Principal Investment Plus Variable Annuity 234,136 28,988 97,233 16,215 Principal Investment Plus Variable Annuity With Purchase Rider 88,223 8,850 58,730 3,587 Short-Term Bond Division: Principal Freedom Variable Annuity 113,337 109,009 190,054 105,730 The Principal Variable Annuity 929,646 981,173 1,366,139 1,238,003 The Principal Variable Annuity With Purchase Payment Credit Rider 409,665 638,307 652,853 654,555 Principal Investment Plus Variable Annuity 3,627,110 1,027,928 1,825,846 154,830 Principal Investment Plus Variable Annuity With Purchase Rider 1,381,692 435,493 922,574 117,412 SmallCap Division: Premier Variable 24,204 107,948 133,080 88,492 Principal Freedom Variable Annuity 88,140 113,423 159,787 71,808 The Principal Variable Annuity 397,569 811,665 588,849 790,056 The Principal Variable Annuity With Purchase Payment Credit Rider 156,824 230,457 318,081 205,747 SmallCap Growth Division: Premier Variable 228,895 359,449 81,215 53,534 Principal Freedom Variable Annuity 51,907 52,509 23,002 34,958 Principal Freedom 2 Variable Annuity 1,075 - - - The Principal Variable Annuity 527,387 881,582 549,852 868,199 The Principal Variable Annuity With Purchase Payment Credit Rider 135,315 161,377 127,292 125,921 Principal Investment Plus Variable Annuity 203,913 24,149 66,134 1,506 Principal Investment Plus Variable Annuity With Purchase Rider 88,669 10,302 38,073 5,669 SmallCap Value Division: Premier Variable 104,875 245,405 90,199 111,651 Principal Freedom 2 Variable Annuity 1,803 - - - The Principal Variable Annuity 420,233 608,245 677,136 662,733 The Principal Variable Annuity With Purchase Payment Credit Rider 122,067 168,731 236,261 153,960 Principal Investment Plus Variable Annuity 733,984 146,089 388,912 26,597 Principal Investment Plus Variable Annuity With Purchase Rider 287,567 67,010 162,198 9,710 T. Rowe Price Blue Chip Growth II Division: Principal Investment Plus Variable Annuity 25,266 8,655 37,322 3,390 Principal Investment Plus Variable Annuity With Purchase Rider 10,611 297 24,161 2,272 TT. Rowe Price Health Science II Division: Principal Investment Plus Variable Annuity 103,613 24,937 36,469 1,976 Principal Investment Plus Variable Annuity With Purchase Rider 44,865 4,965 9,438 573 Templeton Growth Securities Class 2 Division: Principal Freedom Variable Annuity 46,421 32,395 41,729 23,338
6. Financial Highlights Principal Life sells a number of variable annuity products, which have unique combinations of features and fees that are charged against the contract owner's account balance. Differences in the fee structures result in a variety of unit values, expense ratios, and total returns. Separate Account B has presented the following disclosures for 2006, 2005, 2004, 2003, and 2002 in accordance with AICPA Audit and Accounting Guide for Investment Companies, which was effective January 1, 2001. Information for years prior to 2002 is not required to be presented. The following table was developed by determining which products issued by Principal Life have the lowest and highest total return. Only product designs within each division that had units outstanding during the respective periods were considered when determining the lowest and highest total return. The summary may not reflect the minimum and maximum contract charges offered by Principal Life as contract owners may not have selected all available and applicable contract options as discussed in Note 2.
Total Return (3) Unit Fair Value Expense Corresponding to Corresponding to Net Investment Ratio (2) Lowest to Units Lowest to Highest Assets Income Lowest to Highest Expense Division (000's) Expense Ratio (000's) Ratio (1) Highest Ratio ------------------------------------------------------------------------------------------------------- AIM V.I. Basic Value Series I Division: 2006 82 $13.12 to $12.93 $ 1,073 0.64% 1.25% to 1.85% 11.80% to 11.13% 2005 (6) 13 11.73 to 11.64 154 0.19 1.25 to 1.85 4.36 to 3.84 AIM V.I. Capital Appreciation Series I Division: 2006 (7) 1,579 9.88 to 9.84 15,582 0.07 1.25 to 1.85 (1.12) to (1.52) AIM V.I. Core Equity Series I Division: 2006 6,064 10.28 to 9.91 61,828 0.61 1.25 to 1.85 15.26 to 14.57 2005 3,755 8.92 to 8.65 33,287 1.45 1.25 to 1.85 3.96 to 3.35 2004 4,303 8.58 to 8.37 36,736 0.95 1.25 to 1.85 7.65 to 7.03 2003 4,760 7.97 to 7.82 37,821 1.03 1.25 to 1.85 22.88 to 22.14 (16.63) to 2002 5,123 6.49 to 6.41 33,171 0.31 1.25 to 1.85 (17.13) AIM V.I. Dynamics Series I Division: 2006 303 10.26 to 9.92 3,068 - 1.25 to 1.85 14.68 to 13.99 2005 289 8.95 to 8.70 2,558 - 1.25 to 1.85 9.41 to 8.61 2004 313 8.18 to 8.01 2,536 - 1.25 to 1.85 11.90 to 11.25 2003 281 7.31 to 7.20 2,039 - 1.25 to 1.85 36.11 to 35.30 (32.75) to 2002 67 5.37 to 5.32 357 - 1.25 to 1.85 (33.15) AIM V.I. Global Health Care Series I Division: 2006 1,279 $10.98 to $10.61 $13,857 -% 1.25% to 1.85% 3.93% to 3.31% 2005 1,366 10.56 to 10.27 14,276 - 1.25 to 1.85 6.77 to 6.20 2004 1,474 9.89 to 9.67 14,456 - 1.25 to 1.85 6.23 to 5.57 2003 1,324 9.31 to 9.16 12,246 - 1.25 to 1.85 26.20 to 25.44 (25.14) to 2002 867 7.38 to 7.30 6,374 0.21 1.25 to 1.85 (25.59) AIM V.I. Small Cap Equity Series I Division: 2006 55 14.21 to 14.01 775 - 1.25 to 1.85 15.98 to 15.29 2005 (6) 13 12.25 to 12.15 160 - 1.25 to 1.85 6.71 to 6.11 AIM V.I. Small Cap Growth Series I Division: 2006 449 9.97 to 9.64 4,431 - 1.25 to 1.85 12.71 to 12.04 2005 450 8.84 to 8.60 3,943 - 1.25 to 1.85 3.88 to 3.24 2004 461 8.51 to 8.33 3,903 - 1.25 to 1.85 12.42 to 11.81 2003 331 7.57 to 7.45 2,497 - 1.25 to 1.85 31.78 to 30.99 (31.97) to 2002 214 5.74 to 5.69 1,224 - 1.25 to 1.85 (32.38) AIM V.I. Technology Series I Division: 2006 1,028 6.06 to 5.86 6,148 - 1.25 to 1.85 9.11 to 8.46 2005 1,137 5.55 to 5.40 6,245 - 1.25 to 1.85 0.91 to 0.37 2004 1,233 5.50 to 5.38 6,738 - 1.25 to 1.85 3.19 to 2.67 2003 1,053 5.33 to 5.24 5,578 - 1.25 to 1.85 43.49 to 42.63 (47.51) to 2002 367 3.71 to 3.68 1,357 - 1.25 to 1.85 (47.82) Alliance Bernstein VP Series Small Cap Growth Class A Division: 2006 72 13.78 to 13.59 994 - 1.25 to 1.85 9.31 to 8.66 2005 (6) 22 12.61 to 12.50 271 - 1.25 to 1.85 3.96 to 3.31 American Century VP Income & Growth Class I Division: 2006 3,173 $12.38 to $11.76 $38,341 1.80% 0.85% to 1.85% 16.10% to 14.95% 2005 3,373 10.66 to 10.23 35,269 1.94 0.85 to 1.85 3.70 to 2.71 2004 3,343 10.28 to 9.96 33,859 1.29 0.85 to 1.85 12.10 to 10.91 2003 2,731 8.98 to 9.12 24,814 1.11 0.85 to 1.85 26.98 to 27.75 (20.05) to 2002 1,905 7.15 to 7.07 13,565 0.72 0.85 to 1.85 (20.85) American Century VP Inflation Protection Class II Division: 2006 4,767 10.25 to 10.11 48,661 3.17 1.25 to 1.85 0.33 to (0.27) 2005 (6) 1,787 10.22 to 10.13 18,214 4.75 1.25 to 1.85 0.29 to (0.39) American Century VP Ultra Class I Division: 2006 1,057 9.04 to 8.74 9,446 - 1.25 to 1.85 (4.47) to (5.04) 2005 1,132 9.47 to 9.21 10,612 - 1.25 to 1.85 0.96 to 0.33 2004 1,148 9.38 to 9.18 10,692 - 1.25 to 1.85 9.20 to 8.64 2003 931 8.59 to 8.45 7,952 - 1.25 to 1.85 23.35 to 22.61 (23.67) to 2002 698 6.96 to 6.89 4,849 0.24 1.25 to 1.85 (24.13) American Century VP Ultra Class II Division: 2006 3,842 10.78 to 10.63 41,243 - 1.25 to 1.85 (4.59) to (5.16) 2005 (6) 1,379 11.30 to 11.20 15,536 - 1.25 to 1.85 0.71 to 0.09 American Century VP Value Class II Division: 2006 3,494 14.61 to 14.21 50,565 1.17 1.25 to 1.85 17.00 to 16.30 2005 3,366 12.49 to 12.22 41,722 0.65 1.25 to 1.85 3.57 to 2.95 2004 2,631 12.06 to 11.87 31,569 0.60 1.25 to 1.85 12.71 to 12.09 2003 1,123 10.70 to 10.59 11,981 0.47 1.25 to 1.85 27.21 to 26.45 (14.96) to 2002 (4) 282 8.41 to 8.38 2,364 - 1.25 to 1.85 (15.28) American Century VP Vista Class I Division: 2006 52 $13.44 to $13.25 $694 -% 1.25% to 1.85% 7.66% to 7.01% 2005 (6) 25 12.48 to 12.38 313 - 1.25 to 1.85 6.76 to 6.08 Asset Allocation Division: 2006 3,514 1.34 to 23.27 84,221 0.77 0.42 to 1.85 12.29 to 10.71 2005 4,008 1.19 to 21.02 84,245 1.65 0.42 to 1.85 5.31 to 3.85 2004 4,337 1.13 to 20.24 87,504 3.26 0.42 to 1.85 7.62 to 6.47 2003 4,408 1.05 to 19.01 84,285 1.93 0.42 to 1.85 21.08 to 19.38 (12.78) to 2002 4,620 0.86 to 15.92 74,399 - 0.42 to 1.85 (14.54) Balanced Division: 2006 6,432 2.17 to 19.84 92,320 2.49 0.42 to 1.85 10.73 to 9.40 2005 7,824 2.01 to 18.13 98,501 2.59 0.42 to 1.85 6.35 to 4.80 2004 11,449 1.84 to 17.30 109,503 2.12 0.42 to 1.85 8.88 to 8.06 2003 13,310 1.72 to 16.01 109,671 2.96 0.42 to 1.85 18.33 to 16.65 (13.55) to 2002 14,617 1.46 to 13.73 98,582 3.17 0.42 to 1.85 (14.78) Bond Division: 2006 18,814 2.11 to 18.24 319,793 3.87 0.42 to 1.85 4.21 to 2.73 2005 17,587 2.02 to 17.75 280,484 4.32 0.42 to 1.85 2.02 to 0.62 2004 18,219 1.92 to 17.64 252,489 4.56 0.42 to 1.85 1.59 to 3.04 2003 18,246 1.89 to 17.12 234,069 4.19 0.42 to 1.85 4.15 to 2.67 2002 17,899 1.82 to 16.67 210,777 4.09 0.42 to 1.85 8.80 to 7.26 Capital Value Division: 2006 11,695 3.65 to 28.33 213,650 1.57 0.42 to 1.85 19.45 to 17.76 2005 13,018 3.05 to 24.06 198,490 0.01 0.42 to 1.85 6.27 to 4.88 2004 17,135 2.87 to 22.94 214,377 1.43 0.42 to 1.85 11.67 to 10.29 2003 18,722 2.57 to 20.80 205,389 1.44 0.42 to 1.85 24.97 to 23.20 (14.02) to 2002 21,252 2.05 to 16.88 175,700 0.78 0.42 to 1.85 (15.25) Diversified International Division: 2006 13,309 2.99 to 26.09 290,731 1.18 0.42 to 1.85 27.43 to 25.63 2005 13,536 2.35 to 20.77 228,177 1.03 0.42 to 1.85 23.04 to 21.53 2004 15,016 1.91 to 17.09 184,002 0.94 0.42 to 1.85 20.89 to 18.76 2003 14,422 1.47 to 14.39 137,068 1.04 0.42 to 1.85 31.78 to 29.91 (16.42) to 2002 14,934 1.20 to 11.07 100,045 0.49 0.42 to 1.85 (17.61) Dreyfus IP Founders Discovery Initial Shares Division: 2006 2,033 $8.76 to $8.46 $17,584 -% 1.25% to 1.85% 4.51% to 3.89% 2005 1,907 8.38 to 8.15 15,815 - 1.25 to 1.85 (1.30) to (1.93) 2004 1,581 8.49 to 8.31 13,319 - 1.25 to 1.85 8.43 to 7.92 2003 848 7.83 to 7.70 6,592 - 1.25 to 1.85 34.49 to 33.69 (34.06) to 2002 235 5.82 to 5.76 1,361 - 1.25 to 1.85 (34.46) Dreyfus IP Technology Service Shares Division: 2006 37 12.18 to 12.00 452 - 1.25 to 1.85 2.75 to 2.13 2005 (6) 13 11.85 to 11.75 159 - 1.25 to 1.85 2.16 to 1.56 Equity Growth Division: 2006 6,016 1.06 to 28.96 179,750 - 0.42 to 1.85 5.71 to 4.27 2005 6,904 1.00 to 27.78 195,218 - 0.42 to 1.85 7.53 to 5.59 2004 7,862 0.93 to 26.31 207,318 0.53 0.42 to 1.85 8.14 to 7.34 2003 8,445 0.86 to 24.51 208,587 0.41 0.42 to 1.85 25.42 to 23.64 (28.02) to 2002 8,938 0.68 to 19.82 178,521 0.27 0.42 to 1.85 (29.04) Equity Income Division: 2006 11,269 1.21 to 13.59 155,519 1.85 0.42 to 1.85 20.79 to 19.08 2005 7,195 1.00 to 11.41 83,133 0.08 0.42 to 1.85 7.53 to 6.64 2004 3,782 0.93 to 10.70 40,432 4.10 1.25 to 1.85 17.72 to 15.44 2003 2,907 0.79 to 9.27 27,203 4.44 0.42 to 1.85 13.36 to 11.74 2002 2,743 0.70 to 8.29 22,961 4.42 0.42 to 1.85 (3.82) to (14.21) Equity Value Division: 2006 294 13.42 to 13.24 3,927 1.70 1.25 to 1.85 18.08 to 17.37 2005 (6) 133 11.37 to 11.28 1,511 2.48 1.25 to 1.85 2.52 to 1.90 Fidelity VIP Equity-Income Service Class 2 Division: 2006 5,585 13.95 to 13.57 77,174 2.96 1.25 to 1.85 18.44 to 17.74 2005 5,125 11.78 to 11.53 59,908 1.31 1.25 to 1.85 4.25 to 3.69 2004 4,327 11.30 to 11.12 48,616 1.05 1.25 to 1.85 9.92 to 9.23 2003 2,353 10.28 to 10.18 24,125 0.70 1.25 to 1.85 28.41 to 27.65 (19.14) to 2002 (4) 517 8.01 to 7.98 4,138 - 1.25 to 1.85 (19.44) Fidelity VIP Growth Service Class Division: 2006 3,889 $8.76 to $8.45 $33,789 0.30% 1.25% to 1.85% 5.41% to 4.78% 2005 4,630 8.31 to 8.06 38,238 0.40 1.25 to 1.85 4.40 to 3.73 2004 5,219 7.96 to 7.77 41,373 0.16 1.25 to 1.85 1.92 to 1.30 2003 5,302 7.81 to 7.67 41,286 0.19 1.25 to 1.85 31.13 to 30.35 (31.07) to 2002 (4) 5,325 5.96 to 5.88 31,670 0.15 1.25 to 1.85 (31.48) Fidelity VIP Growth Service Class 2 Division: 2006 364 12.05 to 11.88 4,365 0.09 1.25 to 1.85 5.25 to 4.62 2005 (6) 115 11.45 to 11.35 1,309 - 1.25 to 1.85 4.19 to 3.56 Fidelity VIP Overseas Service Class 2 Division: 2006 2,197 16.00 to 15.78 35,000 0.42 1.25 to 1.85 16.31 to 15.62 2005 (6) 882 13.76 to 13.65 12,096 - 1.25 to 1.85 17.31 to 16.67 Fidelity VIP II Contrafund Service Class Division: 2006 8,076 14.79 to 14.26 118,478 1.10 1.25 to 1.85 10.21 to 9.55 2005 7,983 13.42 to 13.02 106,462 0.19 1.25 to 1.85 15.39 to 14.71 2004 7,170 11.63 to 11.35 82,971 0.23 1.25 to 1.85 13.91 to 13.27 2003 6,094 10.21 to 10.02 62,014 0.33 1.25 to l.85 26.76 to 26.00 (10.55) to 2002 5,347 8.05 to 7.95 42,986 0.68 1.25 to 1.85 (11.09) Fidelity VIP II Contrafund Service Class 2 Division: 2006 1,620 14.41 to 14.21 23,281 1.10 1.25 to 1.85 10.05 to 9.39 2005 (6) 528 13.10 to 12.99 6,902 - 1.25 to 1.85 15.22 to 14.45 Fidelity VIP III Mid Cap Service Class 2 Division: 2006 283 $15.60 to$ 15.38 $4,393 0.09% 1.25% to 1.85% 11.01% to 10.35% 2005 (6) 71 14.05 to 13.94 997 - 1.25 to 1.85 16.50 to 15.88 Goldman Sachs VIT Mid Cap Value Fund Service Class I Division: 2006 853 14.86 to 14.65 12,621 1.43 1.25 to 1.85 14.72 to 14.04 2005 (6) 253 12.96 to 12.85 3,272 1.31 1.25 to 1.85 11.44 to 10.78 Goldman Sachs Structured Small Cap Equity Service Class I Division: 2006 298 13.48 to 13.29 4,001 0.94 1.25 to 1.85 10.88 to 10.22 2005 (6) 94 12.16 to 12.06 1,146 0.60 1.25 to 1.85 4.74 to 4.15 Government & High Quality Bond Division: 2006 16,900 2.18 to 17.75 276,598 4.15 0.42 to 1.85 3.79 to 2.32 2005 18,392 2.10 to 17.35 286,799 4.41 0.42 to 1.85 1.45 to 0.17 2004 22,005 2.07 to 17.32 306,512 4.73 0.42 to 1.85 3.50 to 1.64 2003 25,536 2.00 to 17.04 341,730 3.41 0.42 to 1.85 1.41 to (0.03) 2002 26,265 1.97 to 17.05 318,208 3.45 0.42 to 1.85 8.34 to 6.80 Growth Division: 2006 8,539 1.95 to 17.80 96,085 0.27 0.42 to 1.85 9.46 to 7.91 2005 10,265 1.79 to 16.49 101,200 0.73 0.42 to 1.85 11.88 to 10.01 2004 16,647 1.60 to 14.99 114,994 0.33 0.42 to 1.85 8.84 to 7.38 2003 19,553 1.47 to 13.96 123,359 0.23 0.42 to 1.85 25.93 to 24.15 (29.37) to 2002 22,176 1.17 to 11.24 111,599 0.02 0.42 to 1.85 (30.37) International Emerging Markets Division: 2006 3,632 $3.17 to $28.59 $104,347 -% 0.42% to 1.85% 37.74% to 35.79% 2005 3,018 2.30 to 21.05 62,694 1.34 0.42 to 1.85 33.72 to 31.81 2004 2,096 1.72 to 15.97 32,241 0.79 0.42 to 1.85 24.46 to 22.56 2003 1,274 1.38 to 13.03 16,414 1.11 0.42 to 1.85 56.56 to 54.32 2002 768 8.55 to 8.44 6,532 0.14 0.42 to 1.85 (8.78) to (9.32) International SmallCap Division: 2006 4,226 2.48 to 29.72 127,551 0.52 0.42 to 1.85 29.83 to 28.00 2005 4,454 1.91 to 23.22 102,214 0.53 0.42 to 1.85 28.19 to 26.75 2004 4,109 1.49 to 18.32 74,478 0.76 0.42 to 1.85 29.57 to 27.84 2003 3,557 1.15 to 14.33 51,540 1.36 0.42 to 1.85 53.55 to 51.33 2002 3,225 0.88 to 9.47 30,873 0.27 0.42 to 1.85 (2.56) to (17.74) Janus Aspen Mid Cap Growth Service Shares Division: 2006 2,530 7.74 to 7.47 19,323 - 1.25 to 1.85 11.90 to 11.23 2005 2,681 6.92 to 6.71 18,346 - 1.25 to 1.85 10.54 to 10.00 2004 2,849 6.26 to 6.10 17,665 - 1.25 to 1.85 19.01 to 18.22 2003 2,855 5.26 to 5.16 14,913 - 1.25 to 1.85 33.09 to 32.30 2002 2,550 3.95 to 3.90 10,028 - 1.25 to 1.85 (29.01) to (29.44) LargeCap Blend Division: 2006 14,897 13.01 to 12.65 192,106 0.62 1.25 to 1.85 14.38 to 13.70 2005 11,345 11.37 to 11.13 128,134 0.01 1.25 to 1.85 3.36 to 2.87 2004 7,891 11.00 to 10.82 86,333 1.18 1.25 to 1.85 9.02 to 8.31 2003 4,990 10.09 to 9.99 50,195 0.98 1.25 to 1.85 22.22 to 21.49 2002 (4) 1,412 8.25 to 8.22 11,648 0.87 1.25 to 1.85 (16.46) to (16.76) LargeCap Growth Equity Division: 2006 3,188 0.78 to 5.48 19,397 - 0.42 to 1.85 2.30 to 0.85 2005 3,271 0.76 to 5.44 18,820 0.15 0.42 to 1.85 2.70 to 1.87 2004 3,253 0.74 to 5.34 18,253 0.28 0.42 to 1.85 2.78 to 1.14 2003 2,824 0.72 to 5.28 15,478 - 0.42 to 1.85 22.63 to 20.89 2002 855 4.42 to 4.36 3,761 - 1.25 to 1.85 (34.10) to (34.50) LargeCap Stock Index Division: 2006 15,070 $1.22 to$ 10.19 $152,650 1.33% 0.42% to 1.85% 15.09% to 13.46% 2005 15,133 1.06 to 8.98 134,689 0.03 0.42 to 1.85 3.92 to 2.51 2004 14,735 1.02 to 8.76 127,190 1.60 0.42 to 1.85 9.68 to 8.42 2003 11,654 0.93 to 8.08 93,977 1.41 0.42 to 1.85 27.78 to 25.97 2002 8,549 0.73 to 6.42 55,031 1.21 0.42 to 1.85 (22.77) to (23.86) LargeCap Value Division: 2006 11,912 14.70 to 14.30 173,683 0.94 1.25 to 1.85 20.04 to 19.33 2005 9,023 12.24 to 11.98 109,779 0.01 1.25 to 1.85 4.08 to 3.45 2004 6,391 11.76 to 11.58 74,817 1.59 1.25 to 1.85 11.68 to 11.03 2003 4,011 10.53 to 10.43 42,122 1.63 1.25 to 1.85 26.46 to 25.71 2002 (4) 1,317 8.33 to 8.29 10,958 1.89 1.25 to 1.85 (15.99) to (16.30) MidCap Division: 2006 11,881 4.17 to 37.04 367,161 1.03 0.42 to 1.85 13.75 to 12.14 2005 13,033 3.66 to 33.03 339,324 0.09 0.42 to 1.85 8.61 to 7.21 2004 15,701 3.37 to 30.81 322,650 1.18 0.42 to 1.85 17.42 to 15.57 2003 16,473 2.87 to 26.66 277,286 1.06 0.42 to 1.85 32.25 to 30.38 2002 17,766 2.17 to 20.44 209,892 0.96 0.42 to 1.85 (9.13) to (10.42) MidCap Growth Division: 2006 4,666 1.31 to 12.06 57,787 - 0.42 to 1.85 9.20 to 7.64 2005 4,764 1.20 to 11.21 53,923 - 0.42 to 1.85 13.21 to 11.65 2004 4,811 1.06 to 10.04 48,681 - 0.42 to 1.85 11.58 to 9.73 2003 4,535 0.95 to 9.15 41,402 - 0.42 to 1.85 39.99 to 38.00 2002 2,226 0.68 to 6.63 14,937 - 0.42 to 1.85 (39.86) to (27.62) MidCap Value Division: 2006 6,981 1.83 to 16.42 119,378 0.24 0.42 to 1.85 12.80 to 11.20 2005 6,389 1.62 to 14.76 94,905 - 0.42 to 1.85 10.20 to 8.53 2004 4,931 1.47 to 13.60 66,587 0.10 0.42 to 1.85 22.50 to 20.35 2003 3,343 1.20 to 11.30 37,406 0.08 0.42 to 1.85 35.92 to 33.99 2002 1,878 0.89 to 8.43 16,144 0.73 0.42 to 1.85 (10.34) to (11.61) Money Market Division: 2006 9,838 1.60 to 13.28 94,506 4.53 0.42 to 1.85 4.32 to 2.71 2005 9,888 1.54 to 12.93 82,162 2.64 0.42 to 1.85 2.67 to 0.70 2004 12,349 1.50 to 2.13 89,606 0.88 0.42 to 2.16 - to (0.93) 2003 15,091 1.50 to 12.96 107,056 0.78 0.42 to 1.85 0.31 to (1.11) 2002 20,955 1.49 to 13.11 157,262 1.40 0.42 to 1.85 0.99 to (0.45) Neuberger Berman AMT Fasciano S Class Division: -% 1.25% to 2006 174 $11.58 to $11.42 $2,008 1.85% 3.95% to 3.33% 2005 (6) 58 11.14 to 11.05 640 - 1.25 to 1.85 1.64 to 1.01 Neuberger Berman AMT High Income Bond S Class Division: 2006 194 10.66 to 10.52 2,064 8.30 1.25 to 1.85 6.13 to 5.50 2005 (6) 89 10.05 to 9.97 886 10.56 1.25 to 1.85 - to (0.70) Neuberger Berman AMT Partners I Class Division: 2006 310 15.15 to 14.94 4,672 0.96 1.25 to 1.85 10.85 to 10.19 2005 (6) 65 13.67 to 13.55 884 1.51 1.25 to 1.85 16.64 to 15.81 Neuberger Berman AMT Socially Responsive I Class Division: 2006 186 13.62 to 13.43 2,519 0.14 1.25 to 1.85 12.29 to 11.62 2005 (6) 64 12.13 to 12.03 773 - 1.25 to 1.85 5.57 to 4.88 Principal LifeTime Strategic Income Division: 2006 1,035 12.10 to 11.93 12,491 0.13 1.25 to 1.85 8.89 to 8.24 2005 (6) 490 11.11 to 11.02 5,446 - 1.25 to 1.85 3.64 to 2.99 Principal LifeTime 2010 Division: 2006 2,089 10.85 to 12.43 26,166 0.04 0.95 to 1.85 8.55 to 10.24 2005 (6) 1,126 11.36 to 11.27 12,780 - 1.25 to 1.85 4.32 to 3.78 Principal LifeTime 2020 Division: 2006 7,291 $11.04 to $13.03 $95,945 -% 0.95% to 1.85% 10.43% to 13.06% 2005 (6) 2,259 11.62 to 11.52 26,189 - 1.25 to 1.85 5.44 to 4.82 Principal LifeTime 2030 Division: 2006 914 11.01 to 12.99 11,982 0.01 0.95 to 1.85 10.17 to 12.73 2005 (6) 280 11.61 to 11.52 3,241 - 1.25 to 1.85 5.45 to 4.82 Principal LifeTime 2040 Division: 2006 390 11.01 to 13.22 5,191 0.02 0.95 to 1.85 10.22 to 13.03 2005 (6) 123 11.79 to 11.70 1,449 - 1.25 to 1.85 5.93 to 5.31 Principal LifeTime 2050 Division: 2006 260 13.48 to 13.29 3,485 0.01 1.25 to 1.85 14.06 to 13.38 2005 (6) 66 11.82 to 11.73 774 - 1.25 to 1.85 6.20 to 5.68 Real Estate Securities Division: 2006 5,236 3.18 to 35.07 181,645 1.59 0.42 to 1.85 36.04 to 34.11 2005 5,253 2.34 to 26.15 133,793 0.02 0.42 to 1.85 15.27 to 13.75 2004 5,230 2.03 to 22.99 115,811 2.28 0.42 to 1.85 34.44 to 32.05 2003 4,200 1.51 to 17.41 71,203 3.69 0.42 to 1.85 38.33 to 36.37 2002 2,762 1.09 to 12.77 34,861 4.15 0.42 to 1.85 7.27 to 5.75 Short-Term Bond Division: 2006 11,441 10.48 to 10.11 117,594 2.22 0.85 to 1.85 3.56 to 2.53 2005 8,171 10.12 to 9.86 81,529 1.51 0.85 to 1.85 0.90 to (0.10) 2004 5,485 10.03 to 9.87 54,515 - 0.85 to 1.85 0.50 to (0.50) 2003 (5) 2,055 9.98 to 9.92 20,446 2.63 0.85 to 1.85 (0.25) to (0.86) SmallCap Division: 2006 5,338 1.31 to 12.92 71,752 0.16 0.42 to 1.85 12.23 to 10.64 2005 5,934 1.17 to 11.68 70,854 0.02 0.42 to 1.85 6.36 to 5.13 2004 5,891 1.10 to 11.11 66,830 - 0.42 to 1.85 19.57 to 17.57 2003 5,224 0.92 to 9.45 50,283 0.10 0.42 to 1.85 36.29 to 34.32 (27.63) to 2002 3,608 0.68 to 7.03 25,858 0.09 0.42 to 1.85 (28.66) SmallCap Growth Division: 2006 4,608 $0.80 to $10.37 $48,773 -% 0.42% to 1.85% 8.52% to 6.98% 2005 4,861 0.73 to 9.69 46,695 - 0.42 to 1.85 5.80 to 4.64 2004 5,065 0.69 to 9.26 46,544 - 0.42 to 1.85 11.29 to 9.20 2003 4,956 0.62 to 8.48 41,566 - 0.42 to 1.85 45.04 to 42.98 (44.13) to 2002 4,236 0.43 to 5.93 25,168 - 0.42 to 1.85 (46.85) SmallCap Value Division: 2006 4,998 2.01 to 25.05 126,060 0.29 0.42 to 1.85 18.15 to 16.47 2005 4,563 1.70 to 21.51 95,378 0.04 0.42 to 1.85 5.59 to 4.27 2004 3,973 1.61 to 20.63 78,298 0.17 0.42 to 1.85 22.90 to 20.86 2003 3,375 1.31 to 17.07 56,509 0.44 0.42 to 1.85 49.98 to 47.85 2002 2,672 0.88 to 11.55 30,766 0.66 0.42 to 1.85 (9.25) to (10.54) T. Rowe Price Blue Chip Growth II Division: 2006 83 12.49 to 12.32 1,028 0.24 1.25 to 1.85 7.97 to 7.33 2005 (6) 56 11.57 to 11.48 644 0.28 1.25 to 1.85 4.33 to 3.70 T. Rowe Price Health Science II Division: 2006 162 13.62 to 13.43 2,197 - 1.25 to 1.85 7.09 to 6.45 2005 (6) 43 12.72 to 12.62 551 - 1.25 to 1.85 11.78 to 11.09 Templeton Growth Securities Class 2 Division: 2006 160 18.97 3,029 1.28 0.85 20.78 2005 146 15.70 2,287 1.07 0.85 7.90 2004 127 14.55 1,852 1.11 0.85 15.11 2003 94 12.64 1,193 1.48 0.85 31.02 2002 85 9.65 824 2.44 0.85 (19.18)
(1) These amounts represent the dividends, excluding distributions of capital gains, received by the division from the underlying mutual fund, net of management fees assessed by the fund manager, divided by the average net assets. These ratios exclude those expenses, such as mortality and expense charges, that result in direct reductions in the unit values. The recognition of investment income by the subaccount is affected by the timing of the declaration of dividends by the underlying fund in which the subaccounts invest. (2) These ratios represent the annualized contract expenses of Separate Account B, consisting primarily of mortality and expense charges, for each period indicated. The ratios include only those expenses that result in a direct reduction to unit values. Charges made directly to contract owner accounts through the redemption of units and expenses of the underlying fund are excluded. (3) These amounts represent the total return for the periods indicated, including changes in the value of the underlying fund, and reflect deductions for all items included in the expense ratio. The total return does not include any expenses assessed through the redemption of units; inclusion of these expenses in the calculation would result in a reduction in the total return presented. Investment options with a date notation indicate the effective date of that investment option in the variable account. The total return is calculated for the period indicated or from the effective date through the end of the reporting period. (4) Commencement of operations, May 18, 2002. Investment income ratio and expense ratio have been annualized for the period ended December 31, 2002. (5) Commencement of operations, May 17, 2003. Investment income ratio and expense ratio have been annualized for the period ended December 31, 2003. (6) Commencement of operations, January 4, 2005. Investment income ratio and expense ratio have been annualized for the period ended December 31, 2005. (7) Commencement of operations, April 28, 2006. Investment income ratio and expense ratio have been annualized for the period ended December 31, 2005. There are divisions that have total return outside of the ranges indicated above. The following is a list of the divisions and corresponding lowest total return and highest total return. 2006 Total Division Return Range --------------------------------------------------------------------------- American Century VP Income & Growth Class I Division 12.69% to 16.10% Capital Value Division 13.20 to 19.45 Diversified International Division 19.66 to 27.43 LargeCap Stock Index Division 11.23 to 15.09 LargeCap Growth Equity Division 0.84 to 2.30 MidCap Division 11.04 to 13.75 MidCap Growth Division 3.08 to 9.20 MidCap Value Division 8.72 to12.80 Principal LifeTime 2010 Division 8.55 to 10.91 Principal LifeTime 2020 Division 10.43 to 13.73 Principal LifeTime 2030 Division 10.17 to 13.40 Principal LifeTime 2040 Division 10.22 to 13.70 Principal LifeTime 2050 Division 10.41 to 14.06 Real Estate Securities Division 23.83 to 36.04 SmallCap Division 5.04 to 12.23 SmallCap Growth Division 0.12 to 8.52 SmallCap Value Division 8.88 to 18.15 2005 Total Division Return Range --------------------------------------------------------------------------- Balanced Division 4.80% to 6.52% Bond Division 0.62 to 2.60 Capital Value Division 4.88 to 6.47 Diversified International Division 21.53 to 23.12 Government & High Quality Bond Division 0.17 to 1.49 LargeCap Growth Equity Division 1.87 to 2.74 MidCap Division 7.21 to 8.84 2004 Total Division Return Range --------------------------------------------------------------------------- Balanced Division 8.06% to 9.88% Bond Division 1.59 to 7.03 Capital Value Division 10.29 to 12.12 Money Market Division (1.00) to - Small Cap Division 17.57 to 39.04 2003 Total Division Return Range --------------------------------------------------------------------------- American Century VP Income & Growth Class I Division 26.98% to 28.26% Government Securities Division (0.69) to 1.41 LargeCap Growth Equity Division 17.63 to 22.63 2002 Total Division Return Range --------------------------------------------------------------------------- LargeCap Growth Equity Division (31.57)% to (30.46)% MidCap Growth Division (39.86) to (26.89) Report of Independent Registered Public Accounting Firm The Board of Directors and Stockholder Principal Life Insurance Company We have audited the accompanying consolidated statements of financial position of Principal Life Insurance Company ("the Company") as of December 31, 2006 and 2005, 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, 2006. 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 the standards of the Public Company Accounting Oversight Board (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. We were not engaged to perform an audit of the Company's internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and 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, 2006 and 2005, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2006, in conformity with U.S. generally accepted accounting principles. As discussed in Note 1 to the consolidated financial statements, in response to new accounting standards, the Company changed its methods of accounting for certain fixed and variable contract features effective January 1, 2004, certain non-monetary exchanges of similar productive assets (primarily real estate) effective July 1, 2005, and its pension and other post-retirement benefits effective December 31, 2006. /s/Ernst & Young LLP Des Moines, Iowa March 5, 2007 Principal Life Insurance Company Consolidated Statements of Financial Position December 31, 2006 2005 (in millions) Assets Fixed maturities, available-for-sale $42,168.8 $39,949.0 Fixed maturities, trading 197.9 105.0 Equity securities, available-for-sale 645.3 702.9 Equity securities, trading 148.2 60.1 Mortgage loans 11,141.9 10,979.2 Real estate 854.8 888.4 Policy loans 850.7 827.7 Other investments 933.6 716.5 Total investments 56,941.2 54,228.8 Cash and cash equivalents 1,898.0 1,715.1 Accrued investment income 715.2 668.7 Premiums due and other receivables 839.4 564.4 Deferred policy acquisition costs 2,265.9 2,069.9 Property and equipment 404.7 406.7 Goodwill 229.5 207.8 Other intangibles 197.1 94.8 Separate account assets 69,451.7 58,670.8 Assets of discontinued operations -- 103.2 Other assets 1,509.4 1,268.7 Total assets $134,452.1 $119,998.9 Liabilities Contractholder funds $36,782.7 $33,598.6 Future policy benefits and claims 15,004.2 14,650.3 Other policyholder funds 613.6 654.1 Short-term debt 412.2 719.1 Long-term debt 298.6 313.5 Income taxes currently payable 9.1 -- Deferred income taxes 758.1 875.5 Separate account liabilities 69,451.7 58,670.8 Liabilities of discontinued operations -- 4.5 Other liabilities 4,320.6 3,429.9 Total liabilities 127,650.8 112,916.3 Stockholder's equity Common stock, par value $1 per share - 5.0 million shares authorized, 2.5 million shares issued and outstanding (wholly owned indirectly by Principal Financial Group, Inc.) 2.5 2.5 Additional paid-in capital 5,515.3 5,354.8 Retained earnings 670.9 870.4 Accumulated other comprehensive income 612.6 854.9 Total stockholder's equity 6,801.3 7,082.6 Total liabilities and stockholder's equity $134,452.1 $119,998.9 ========================================================== See accompanying notes. Principal Life Insurance Company Consolidated Statements of Operations
For the year ended December 31, 2006 2005 2004 (in millions) Revenues Premiums and other considerations $4,066.2 $3,727.4 $3,468.9 Fees and other revenues 1,634.3 1,486.6 1,279.7 Net investment income 3,350.2 3,133.1 3,027.5 Net realized/unrealized capital gains (losses) 30.4 (17.5) (109.7) Total revenues 9,081.1 8,329.6 7,666.4 Expenses Benefits, claims, and settlement expenses 5,293.3 4,873.6 4,602.2 Dividends to policyholders 290.7 293.0 296.7 Operating expenses 2,231.0 2,063.0 1,876.5 Total expenses 7,815.0 7,229.6 6,775.4 Income from continuing operations before income taxes 1,266.1 1,100.0 891.0 Income taxes 319.1 286.8 225.4 Income from continuing operations, net of related income taxes 947.0 813.2 665.6 Income from discontinued operations, net of related income taxes 30.6 18.9 104.6 Income before cumulative effect of accounting change 977.6 832.1 770.2 Cumulative effect of accounting change, net of related income taxes -- -- (2.4) Net income $977.6 $832.1 $767.8
See accompanying notes. Principal Life Insurance Company Consolidated Statements of Stockholder's Equity
Accumulated Additional other Total Common paid-in Retained comprehensive stockholder's stock capital earnings income equity (in millions) Balances at January 1, 2004 $2.5 $5,052.1 $594.6 $1,216.8 $6,866.0 Return of capital to parent -- (0.6) -- -- (0.6) Capital transactions of equity ---------------- method investee, net of related income taxes -- 20.4 -- -- 20.4 Stock-based compensation and additional related tax benefits -- 40.8 -- -- 40.8 Dividends to parent -- -- (1,124.1) -- (1,124.1) Comprehensive income: Net income -- -- 767.8 -- 767.8 Net unrealized gains, net -- -- -- 89.4 89.4 Foreign currency translation adjustment -- -- -- (0.6) (0.6) Minimum pension liability, net of related income taxes -- -- -- (2.8) (2.8) Comprehensive income 853.8 Balances at December 31, 2004 2.5 5,112.7 238.3 1,302.8 6,656.3 Capital contributions -- 34.0 -- -- 34.0 Capital transactions of equity method investee, net of related income taxes -- (0.1) -- -- (0.1) Stock-based compensation and additional related tax benefits -- 44.4 -- -- 44.4 Tax benefits related to demutualization -- 163.8 -- -- 163.8 Dividends to parent -- -- (200.0) -- (200.0) Comprehensive income: Net income -- -- 832.1 -- 832.1 Net unrealized losses, net -- -- -- (442.4) (442.4) Foreign currency translation adjustment -- -- -- 0.7 0.7 Minimum pension liability, net of related income taxes -- -- -- (6.2) (6.2) Comprehensive income 384.2 Balances at December 31, 2005 $2.5 $5,354.8 $870.4 $854.9 $7,082.6
============================================================================== Principal Life Insurance Company Consolidated Statements of Stockholder's Equity (continued)
Accumulated Additional other Total Common paid-in Retained comprehensive stockholder's stock capital earnings income equity (in millions) Balances at January 1, 2006 $2.5 $5,354.8 $870.4 $854.9 $7,082.6 Capital contributions -- 93.8 -- -- 93.8 Capital transactions of equity method investee, net of related income taxes -- 1.7 -- -- 1.7 Stock-based compensation and additional related tax benefits -- 65.0 (0.9) -- 64.1 Dividends to parent -- -- (1,176.2) -- (1,176.2) Transition adjustment related to post-retirement benefit obligations, net of related income taxes -- -- -- 23.3 23.3 Comprehensive income: Net income -- -- 977.6 -- 977.6 Net unrealized losses, net -- -- -- (269.9) (269.9) Foreign currency translation adjustment -- -- -- 1.6 1.6 Minimum pension liability, net of related income taxes -- -- -- 2.7 2.7 Comprehensive income 712.0 Balances at December 31, 2006 $2.5 $5,515.3 $670.9 $612.6 $6,801.3
============================================================================ See accompanying notes. Principal Life Insurance Company Consolidated Statements of Cash Flows
For the year ended December 31, 2006 2005 2004 (in millions) Operating activities Net income $977.6 $832.1 $767.8 Adjustments to reconcile net income to net cash provided by operating activities: Income from discontinued operations, net of related income taxes (30.6) (18.9) (104.6) Cumulative effect of accounting change, net of related income taxes -- -- 2.4 Amortization of deferred policy acquisition costs 236.8 238.8 207.7 Additions to deferred policy acquisition costs (445.8) (440.6) (457.8) Accrued investment income (46.5) 0.9 (27.0) Net cash flows from (for) trading securities (93.0) (29.4) 6.3 Premiums due and other receivables (98.7) (63.3) (21.4) Contractholder and policyholder liabilities and dividends 1,692.9 1,585.2 1,414.0 Current and deferred income taxes 125.0 (445.1) 34.3 Net realized/unrealized capital (gains) losses (30.4) 17.5 109.7 Depreciation and amortization expense 83.3 83.4 93.2 Mortgage loans held for sale, acquired or originated (382.6) (2,177.5) (1,045.7) Mortgage loans held for sale, sold or repaid, net of gain 719.7 2,238.6 845.1 Real estate acquired through operating activities (82.3) (44.6) (45.8) Real estate sold through operating activities 91.4 41.9 84.7 Stock-based compensation 63.8 44.4 39.4 Other (266.8) 127.9 (517.8) Net adjustments 1,536.2 1,159.2 616.7 Net cash provided by operating activities 2,513.8 1,991.3 1,384.5 Investing activities Available-for-sale securities: Purchases (7,399.7) (8,243.4) (9,126.9) Sales 1,094.0 2,759.5 1,759.8 Maturities 3,453.5 3,734.0 4,082.0 Mortgage loans acquired or originated (2,501.0) (2,293.8) (2,612.3) Mortgage loans sold or repaid 2,002.0 2,563.2 2,380.8 Real estate acquired (29.1) (92.2) (327.5) Real estate sold 211.1 319.3 345.4 Net purchases of property and equipment (39.5) (37.6) (42.3) Net proceeds from sales of subsidiaries -- -- 674.6 Purchases of interest in subsidiaries, net of cash acquired (37.2) (57.9) (87.2) Net change in other investments 94.2 35.6 154.6 Net cash used in investing activities $(3,151.7) $(1,313.3) $(2,799.0)
------------------------------------------------------------------------------ Principal Life Insurance Company Consolidated Statements of Cash Flows (continued)
For the year ended December 31, 2006 2005 2004 (in millions) Financing activities Proceeds from financing element derivatives $132.1 $168.4 $110.6 Payments for financing element derivatives (141.0) (123.2) (84.6) Excess tax benefits from share-based payment arrangements 8.4 -- -- Dividends to parent (1,176.2) (200.0) (1,124.1) (Return of capital)/capital contribution (from)/to parent (5.8) 34.0 (0.6) Issuance of long-term debt 1.0 38.3 12.1 Principal repayments of long-term debt (16.0) (72.6) (246.7) Net proceeds (repayments) of short-term borrowings (306.9) 21.4 220.6 Investment contract deposits 8,925.7 7,250.0 7,312.4 Investment contract withdrawals (6,859.4) (6,504.5) (5,294.9) Net increase (decrease) in banking operation deposits 258.9 41.9 (5.0) Net cash provided by financing activities 820.8 653.7 899.8 Discontinued operations Net cash provided by (used in) operating activities (1.1) 125.1 (628.0) Net cash used in investing activities (0.9) (125.0) (471.7) Net cash provided by financing activities -- -- 600.0 Net cash provided by (used in) discontinued operations (2.0) 0.1 (499.7) Net increase (decrease) in cash and cash equivalents 180.9 1,331.8 (1,014.4) Cash and cash equivalents at beginning of year 1,717.1 385.3 1,399.7 Cash and cash equivalents at end of year $1,898.0 $1,717.1 $385.3 Cash and cash equivalents of discontinued operations included above At beginning of year $2.0 $1.9 $501.6 At end of year $ -- $2.0 $1.9 Schedule of noncash transactions Capital contribution related to the allocation of intangible assets $99.9 $-- $-- Tax benefits related to demutualization $ -- $163.8 $--
================================================================================ See accompanying notes. Principal Life Insurance Company Notes to Consolidated Financial Statements December 31, 2006 1. Nature of Operations and Significant Accounting Policies Description of Business Principal Life Insurance Company along with its consolidated subsidiaries is a diversified financial services organization engaged in promoting retirement savings and investment and insurance products and services in the U.S. We are a direct wholly owned subsidiary of Principal Financial Services, Inc., which in turn is a direct wholly owned subsidiary of Principal Financial Group, Inc. Basis of Presentation The accompanying consolidated financial statements, which include our majority-owned subsidiaries and consolidated variable interest entities ("VIEs"), have been prepared in conformity with U.S. generally accepted accounting principles ("U.S. GAAP"). Less than majority-owned entities in which we had at least a 20% interest and LLCs, partnerships and real estate joint ventures in which we had at least a 5% interest, are reported on the equity basis in the consolidated statements of financial position as other investments. Investments in LLCs, partnerships and real estate joint ventures in which we have an ownership percentage of 3% to 5% are accounted for under the equity or cost method depending upon the specific facts and circumstances of our ownership and involvement. All significant intercompany accounts and transactions have been eliminated. Information included in the notes to the financial statements excludes information applicable to less than majority-owned entities reported on the equity and cost methods, unless otherwise noted. Closed Block We operate a closed block ("Closed Block") for the benefit of individual participating dividend-paying policies in force at the time of the 1998 mutual insurance holding company ("MIHC") formation. See Note 9, Closed Block, for further details. Use of Estimates in the Preparation of Financial Statements The preparation of our 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. Recent Accounting Pronouncements The Financial Accounting Standards Board (the "FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 158, Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106 and 132R ("SFAS 158"), on September 29, 2006. SFAS 158 requires an entity to recognize in its statement of financial position an asset for a defined benefit postretirement plan's overfunded status or a liability for a plan's underfunded status. This statement eliminates the ability to choose a measurement date, by requiring that plan assets and benefit obligations be measured as of the annual balance sheet date. The requirement to recognize the funded status of a defined benefit postretirement plan and the disclosure requirements are effective for fiscal years ending after December 15, 2006, and did not have a material impact on our consolidated financial statements. The requirement to measure plan assets and benefit obligations as of the annual balance sheet date is effective for fiscal years ending after December 15, 2008. See Note 14, Employee and Agent Benefits, for further details. On September 15, 2006, the FASB issued SFAS No. 157, Fair Value Measurements ("SFAS 157"). This standard, which provides guidance for using fair value to measure assets and liabilities, applies whenever other standards require or permit assets or liabilities to be measured at fair value, but does not expand the use of fair value in any new circumstances. SFAS 157 establishes a fair value hierarchy that gives the highest priority to quoted prices in active markets and the lowest priority to unobservable data, and requires fair value measurements to be separately disclosed by level within the hierarchy. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007. We are still evaluating the impact this guidance will have on our consolidated financial statements. Principal Life Insurance Company Notes to Consolidated Financial Statements (continued) 1. Nature of Operations and Significant Accounting Policies (continued) The staff of the United States Securities and Exchange Commission ("SEC") published Staff Accounting Bulletin ("SAB") No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements ("SAB 108"), on September 13, 2006. SAB 108 addresses quantifying the financial statement effects of misstatements, specifically, how the effects of prior year uncorrected errors must be considered in quantifying misstatements in the current year financial statements. Under SAB 108, registrants are required to quantify the effects on the current year financial statements of correcting all misstatements, including both the carryover and reversing effects of uncorrected prior year misstatements. After considering all relevant quantitative and qualitative factors, if a misstatement is material, a registrant's prior year financial statements must be restated. SAB 108 offers special transition provisions only for circumstances where its application would have altered previous materiality conclusions. When applying the special transition provisions, instead of restating prior period financial statements, a registrant must record the effect as a cumulative-effect adjustment to beginning-of-year retained earnings. SAB 108 is effective for fiscal years ending after November 15, 2006. SAB 108 did not have a material impact on our consolidated financial statements. On July 13, 2006, the FASB issued FASB Interpretation ("FIN") No. 48, Accounting for Uncertainty in Income Taxes ("FIN 48"). FIN 48, which is an interpretation of SFAS No. 109, Accounting for Income Taxes, prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken, or expected to be taken, in a tax return. FIN 48 requires the affirmative evaluation that it is more likely than not, based on the technical merits of a tax position, that an enterprise is entitled to economic benefits resulting from positions taken in income tax returns. If a tax position does not meet the more-likely-than-not recognition threshold, the benefit of that position is not recognized in the financial statements. FIN 48 also requires companies to disclose additional quantitative and qualitative information in their financial statements about uncertain tax positions. FIN 48 is effective for fiscal years beginning after December 15, 2006, and the cumulative effect of applying this Interpretation shall be reported as an adjustment to the opening balance of retained earnings for that fiscal year. FIN 48 is not expected to have a material impact on our consolidated financial statements. On March 17, 2006, the FASB issued SFAS No. 156, Accounting for Servicing of Financial Assets ("SFAS 156"), which amends SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities ("SFAS 140"). This Statement (1) requires an entity to recognize a servicing asset or liability each time it undertakes an obligation to service a financial asset by entering into a servicing contract in specified situations, (2) requires all separately recognized servicing assets and liabilities to be initially measured at fair value, (3) for subsequent measurement of each class of separately recognized servicing assets and liabilities, allows an entity to elect either the amortization or fair value measurement method, (4) permits a one-time reclassification of available-for-sale ("AFS") securities to trading securities by an entity with recognized servicing rights, without calling into question the treatment of other AFS securities, provided the AFS securities are identified in some manner as offsetting the entity's exposure to changes in fair value of servicing assets or liabilities that a servicer elects to subsequently measure at fair value, and (5) requires separate presentation of servicing assets and liabilities measured at fair value in the statement of financial position and also requires additional disclosures. The initial measurement requirements of this statement should be applied prospectively to all transactions entered into after the fiscal year beginning after September 15, 2006. The election related to the subsequent measurement of servicing assets and liabilities is also effective the first fiscal year beginning after September 15, 2006. SFAS 156 is not expected to have a material impact on our consolidated financial statements. On February 16, 2006, the FASB issued SFAS No. 155, Accounting for Certain Hybrid Financial Instruments - an amendment of FASB Statements No. 133 and 140 ("SFAS 155"), which amends SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities ("SFAS 133") and SFAS 140. SFAS 155 (1) permits fair value remeasurement for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation, (2) clarifies which interest-only and principal-only strips are not subject to the requirements of SFAS 133, (3) establishes a requirement to evaluate interests in securitized financial assets to identify interests that are freestanding derivatives or that are hybrid financial instruments that contain an embedded derivative requiring bifurcation, (4) clarifies that concentrations of credit risk in the form of subordination are not embedded derivatives, and (5) amends SFAS 140 to eliminate the prohibition on a qualifying special-purpose entity from holding a derivative financial instrument that pertains to a beneficial interest other than another derivative financial instrument. This Statement is effective for all financial instruments acquired or issued after the beginning of an entity's fiscal year that begins after September 15, 2006. At adoption, the fair value election may also be Principal Life Insurance Company Notes to Consolidated Financial Statements (continued) 1. Nature of Operations and Significant Accounting Policies (continued) applied to hybrid financial instruments that have been bifurcated under SFAS 133 prior to adoption of this Statement. Any changes resulting from the adoption of this Statement should be recognized as a cumulative effect adjustment to beginning retained earnings. SFAS 155 is not expected to have a material impact on our consolidated financial statements. On September 19, 2005, the Accounting Standards Executive Committee ("AcSEC") issued Statement of Position ("SOP") 05-1, Accounting by Insurance Enterprises for Deferred Acquisition Costs in Connection With Modifications or Exchanges of Insurance Contracts ("SOP 05-1"). AcSEC defines an internal replacement as a modification in product benefits, features, rights, or coverages that occurs by the exchange of a contract for a new contract, or by amendment, endorsement, or rider to a contract, or by the election of a feature or coverage within a contract. An internal replacement that is determined to result in a replacement contract that is substantially unchanged from the replaced contract should be accounted for as a continuation of the replaced contract. Contract modifications resulting in a replacement contract that is substantially changed from the replaced contract should be accounted for as an extinguishment of the replaced contract and any unamortized deferred policy acquisition costs, unearned revenue liabilities, and deferred sales inducement costs from the replaced contract should be written off and acquisition costs on the new contracts capitalized as appropriate. This SOP is effective for internal replacements occurring in fiscal years beginning after December 15, 2006. SOP 05-1 is not expected to have a material impact on our consolidated financial statements. On May 30, 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections, a replacement of APB Opinion No. 20 and FASB Statement No. 3 ("SFAS 154"), which changes the requirements for the accounting and reporting of a change in accounting principle. Under SFAS 154, a change in accounting principle should be retrospectively applied to all prior periods, unless it is impracticable to do so. This retrospective application requirement replaces the Accounting Principles Board ("APB") Opinion No. 20, Accounting Changes ("APB 20"), requirement to recognize changes in accounting principle by including the cumulative effect of the change in net income during the current period. SFAS 154 applies to all voluntary changes in accounting principles where we are changing to a more preferable accounting method, as well as to changes required by an accounting pronouncement that does not contain specific transition provisions. SFAS 154 carries forward without change the guidance contained in APB 20 for reporting the correction of an error in previously issued financial statements and a change in accounting estimate. SFAS 154 is effective for accounting changes on or after January 1, 2006. SFAS 154 does not change the transition provisions of any existing accounting pronouncements. On December 16, 2004, the FASB issued SFAS No. 123 (revised 2004), Share-Based Payment ("SFAS 123R"). SFAS 123R requires all share-based payments to employees to be recognized at fair value in the financial statements. SFAS 123R replaces SFAS No. 123, Accounting for Stock-Based Compensation ("SFAS 123"), supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees ("APB 25"), and SFAS No. 148, Accounting for Stock-Based Compensation-Transition and Disclosure - an Amendment of FASB Statement No. 123 and amends SFAS No. 95, Statement of Cash Flows. On April 14, 2005, the SEC approved a new rule delaying the effective date of SFAS 123R to annual periods that begin after June 15, 2005. Accordingly, Principal Financial Group, Inc. adopted SFAS 123R effective January 1, 2006 using the modified-prospective method. The provisions of our stock awards allow approved retirees to retain all or a portion of their awards if they retire prior to the end of the required service period. SFAS 123R considers this to be a nonsubstantive service condition. Accordingly, it is appropriate to recognize compensation cost either immediately for stock awards granted to retirement eligible employees, or over the period from the grant date to the date retirement eligibility is achieved, if retirement eligibility is expected to occur during the nominal vesting period. Our approach was to follow the widespread practice of recognizing compensation cost over the explicit service period (up to the date of actual retirement). For any awards that are granted after our adoption of SFAS 123R on January 1, 2006, we recognize compensation cost through the period that the employee first becomes eligible to retire and is no longer required to provide service to earn the award. If we had applied the nonsubstantive vesting provisions of SFAS 123R to awards granted prior to January 1, 2006, our consolidated financial statements would not have been materially impacted. SFAS 123R requires that the benefits of tax deductions in excess of recognized compensation cost be reported as a financing cash flow, rather than as an operating cash flow. This requirement reduces net operating cash flows and increases net financing cash flows in periods after the effective date. Principal Life Insurance Company Notes to Consolidated Financial Statements (continued) 1. Nature of Operations and Significant Accounting Policies (continued) Under the modified-prospective method, any excess income tax deduction realized for awards accounted for under SFAS 123R (regardless of the type of award or the jurisdiction in which the tax benefit is generated) is eligible to absorb write-offs of deferred income tax assets for any awards accounted for under SFAS 123R. SFAS 123R does not require separate pools of excess income tax benefits for separate types of awards, rather the excess income tax benefits of employee and nonemployee awards may be combined in a single pool of excess tax benefits. Our policy is to pool the employee and nonemployee awards together in this manner. Deferred income tax asset write-offs resulting from deficient deductions on employee awards may be offset against previous excess income tax benefits arising from nonemployee awards, and vice versa. This Statement did not have a material impact on our consolidated financial statements as we began expensing all stock options using a fair-value based method effective for the year beginning January 1, 2002. In addition, any stock options granted prior to January 1, 2002 were fully vested at the time of adoption of SFAS 123R. The Black-Scholes formula is used to estimate the value of stock options granted to employees. The prospective method of transition as prescribed by SFAS 123 was applied when Principal Financial Group, Inc. elected to begin expensing stock-based compensation in 2002. The cumulative effect of the change in accounting principle as a result of adopting SFAS 123R is immaterial. Therefore, the pre-tax cumulative effect of the change in accounting principle is reflected in operating expenses. See Note 20, Stock-Based Compensation Plans, for further details. In December, 2004, SFAS No. 153, Exchange of Nonmonetary Assets, an amendment of APB Opinion No. 29 ("SFAS 153"), was issued. APB Opinion No. 29, Accounting for Nonmonetary Transactions ("APB 29"), provided the basic principle that exchanges of nonmonetary assets should be measured based on the fair value of the assets exchanged. However, APB 29 provided an exception that allowed certain exchanges of similar productive assets to be recorded at book value. SFAS 153 amends APB 29 to eliminate this exception and requires non-monetary exchanges that meet certain criteria to be accounted for at fair value. We adopted SFAS 153 and are applying its guidelines to nonmonetary exchanges occurring on or after July 1, 2005. On March 9, 2004, the SEC Staff issued SAB No.105, Application of Accounting Principles to Loan Commitments ("SAB 105"), in which the SEC Staff expressed their view that the fair value of recorded loan commitments, including interest rate lock commitments ("IRLCs"), that are required to follow derivative accounting under SFAS 133, should not consider the expected future cash flows related to the associated servicing of the loan. We record IRLCs at zero value at date of issuance with subsequent gains or losses measured by changes in market interest rates. Therefore, this SAB did not have a material impact on our consolidated financial statements. On July 7, 2003, the AcSEC issued SOP 03-1, Accounting and Reporting by Insurance Enterprises for Certain Nontraditional Long Duration Contracts and for Separate Accounts ("SOP 03-1"). This SOP addresses an insurance enterprise's accounting for certain fixed and variable contract features not covered by other authoritative accounting guidance. We adopted SOP 03-1 effective January 1, 2004, and recorded a cumulative effect of accounting change of $(2.4) million, which is net of income tax benefits of $1.3 million. The accounting change impacted our Life and Health Insurance and U.S. Asset Management and Accumulation segments. SOP 03-1 addresses the classification of contracts and calculation of an additional liability for contracts that contain significant insurance features. The adoption of the guidance required the recognition of an additional liability in cases where the insurance benefit feature resulted in gains in early years followed by losses in later years. The accrual and release of the additional liability also impacted the amortization of deferred policy acquisition costs ("DPAC"). As of January 1, 2004, we increased future policyholder benefits due to our no lapse guarantee feature of our universal life and variable universal life products within our Life and Health Insurance segment and for variable annuities with guaranteed minimum death benefits in our U.S. Asset Management and Accumulation segment. This resulted in an after-tax cumulative effect of $(0.9) million in the Life and Health Insurance segment and $(1.5) million in the U.S. Asset Management and Accumulation segment. In addition, the guidance clarifies the accounting and classification for sales inducements. Although the valuation impacts were immaterial, we reclassified $30.3 million of sales inducements from DPAC to other assets as of January 1, 2004. Principal Life Insurance Company Notes to Consolidated Financial Statements (continued) 1. Nature of Operations and Significant Accounting Policies (continued) 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 We classify our fixed maturity and equity investments into one of two categories: available-for-sale or trading. We determine the appropriate classification of fixed maturity securities at the time of purchase. Fixed maturity securities include bonds, mortgage-backed securities and redeemable preferred stock. We classify fixed maturity securities as either available-for-sale or trading and, accordingly, carry them at fair value. (See Note 17, Fair Value of Financial Instruments, for policies related to the determination of fair value.) Unrealized gains and losses related to available-for-sale securities, excluding those in fair value hedging relationships, are reflected in stockholder's equity, net of adjustments related to DPAC, sales inducements, unearned revenue reserves, policyholder dividend obligation ("PDO"), derivatives in cash flow hedge relationships and applicable income taxes. Unrealized gains and losses related to trading securities and available-for-sale securities in fair value hedging relationships are reflected in net income. The cost of fixed maturity securities is adjusted for amortization of premiums and accrual of discounts, both computed using the interest method. The cost of fixed maturity securities is adjusted for declines in value that are other than temporary. Impairments in value deemed to be other than temporary are reported in net income as a component of net realized/unrealized capital gains (losses). For loan-backed and structured securities, we recognize income using a constant effective yield based on currently anticipated prepayments using a tool which models the prepayment behavior of the underlying collateral based on the current interest rate environment. Equity securities include mutual funds, common stock and nonredeemable preferred stock. The cost of equity securities is adjusted for declines in value that are other than temporary. Impairments in value deemed to be other than temporary are reported in net income as a component of net realized/unrealized capital gains (losses). Equity securities are classified as available-for-sale or trading and, accordingly, are carried at fair value. (See Note 17, Fair Value of Financial Instruments, for policies related to the determination of fair value.) Unrealized gains and losses related to available-for-sale securities are reflected in stockholder's equity, net of related DPAC, sales inducements, unearned revenue reserves, PDO, and applicable income taxes. Unrealized gains and losses related to trading securities are reflected in net income as net realized/unrealized capital gains (losses). 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 fair market values of the properties at the time of foreclosure or the outstanding loan balance. 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. We recognize impairment losses for 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 to fair value. 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 in net income. Commercial and residential mortgage loans are generally reported at cost adjusted for amortization of premiums and accrual of discounts, computed using the interest method, net of valuation allowances, and direct write-downs for impairment. Any changes in the valuation allowances are reported in net income as net realized/unrealized capital gains (losses). We measure impairment based upon the present value of expected cash flows discounted at the loan's effective interest rate or the loan's observable market price. If foreclosure is probable, the measurement of any valuation allowance is based upon the fair value of the collateral. We have commercial mortgage loans held-for-sale in the amount of $77.3 million and $412.1 million at December 31, 2006 and 2005, respectively, which are carried at lower of cost or fair value, less cost to sell, and reported as mortgage loans in the statements of financial position. Principal Life Insurance Company Notes to Consolidated Financial Statements (continued) 1. Nature of Operations and Significant Accounting Policies (continued) Net realized capital gains and losses on sales of investments are determined on the basis of specific identification. In general, in addition to realized capital gains and losses on investment sales, unrealized gains and losses related to other than temporary impairments, trading securities, certain seed money investments, fair value hedge ineffectiveness, derivatives not designated as hedges and changes in the mortgage loan allowance are reported in net income as net realized/unrealized capital gains (losses). Investment gains and losses on sales of certain real estate held-for-sale, which do not meet the criteria for classification as a discontinued operation, are reported as net investment income and are excluded from net realized/unrealized capital gains (losses). Policy loans and other investments, excluding investments in unconsolidated entities, are primarily reported at cost. Securitizations We, along with other contributors, sell commercial mortgage loans to trusts that, in turn, securitize the assets. As these trusts are classified as qualifying special purpose entities ("QSPE") pursuant to the guidance of SFAS 140, we recognize the gain on the sale of the loans to the trust and the trusts are not required to be consolidated under the provisions of FIN No. 46 (Revised 2003), Consolidation of Variable Interest Entities ("FIN 46R"). There is significant judgment used to determine whether a trust is a QSPE. To maintain QSPE status, the trust must continue to meet the QSPE criteria both initially and in subsequent periods. We have analyzed the governing pooling and servicing agreements for each of our securitizations and believe that the terms are industry standard and are consistent with the QSPE criteria. If at any time we determine a trust no longer qualifies as a QSPE, each trust will need to be reviewed to determine if there is a need to recognize the commercial mortgage loan asset in the statement of financial position along with the offsetting liability. In addition, certain industry practices related to the qualifying status of QSPE's are being discussed by the FASB and could impact the accounting for existing and/or future transactions. Derivatives Overview. Derivatives are financial instruments whose values are derived from interest rates, foreign exchange rates, financial indices or the values of securities. Derivatives generally used by us include interest rate swaps, swaptions, futures, currency swaps, currency forwards, credit default swaps, total return swaps, interest rate lock commitments, bond forwards, mortgage-backed forwards, commodity swaps and options. Derivatives may be exchange traded or contracted in the over-the-counter market. Derivative positions are either assets or liabilities in the consolidated statements of financial position and are measured at fair value, generally by obtaining quoted market prices or through the use of pricing models. Fair values can be affected by changes in interest rates, foreign exchange rates, financial indices, values of securities, credit spreads, and market volatility and liquidity. Accounting and Financial Statement Presentation. We designate derivatives as either: (a) a hedge of the exposure to changes in the fair value of a recognized asset or liability or an unrecognized firm commitment, including those denominated in a foreign currency ("fair value" hedge); (b) a hedge of a forecasted transaction or the exposure to variability of cash flows to be received or paid related to a recognized asset or liability, including those denominated in a foreign currency ("cash flow" hedge) ; (c) a derivative not designated as a hedging instrument.Our accounting for the ongoing changes in fair value of a derivative depends on the intended use of the derivative and the designation, as described above, and is determined when the derivative contract is entered into or at the time of redesignation under SFAS 133. Hedge accounting is used for derivatives that are specifically designated in advance as hedges and that reduce our 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. Principal Life Insurance Company Notes to Consolidated Financial Statements (continued) 1. Nature of Operations and Significant Accounting Policies (continued) Fair Value Hedges. When a derivative is designated as a fair value hedge and is determined to be highly effective, changes in its fair value, along with changes in the fair value of the hedged asset, liability or firm commitment attributable to the hedged risk, are reported in net realized/unrealized capital gains (losses). Any difference between the net change in fair value of the derivative and the hedged item represents hedge ineffectiveness. Cash Flow Hedges. When a derivative is designated as a cash flow hedge and is determined to be highly effective, changes in its fair value are recorded as a component of other comprehensive income. Any hedge ineffectiveness is recorded immediately in net income. At the time the variability of cash flows being hedged impact net income, the related portion of deferred gains or losses on the derivative instrument is reclassified and reported in net income. Non-Hedge Derivatives. If a derivative does not qualify or is not designated for hedge accounting, all changes in fair value are reported in net income without considering the changes in the fair value of the economically associated assets or liabilities. In our commercial mortgage backed securitization operation, we enter into commitments to fund commercial mortgage loans at specified interest rates and other applicable terms within specified periods of time. These commitments are legally binding agreements to extend credit to a counterparty. Loan commitments that will be held for sale are recognized as derivatives and are recorded at fair value. Hedge Documentation and Effectiveness Testing. We formally document all relationships between hedging instruments and hedged items, as well as our risk management objective and strategy for undertaking various hedge transactions. This process includes associating all derivatives designated as fair value or cash flow hedges with specific assets or liabilities on the statement of financial position or with specific firm commitments or forecasted transactions. Effectiveness of the hedge is formally assessed at inception and throughout the life of the hedging relationship. Even if a derivative is highly effective and qualifies for hedge accounting treatment, the hedge might have some ineffectiveness. We use qualitative and quantitative methods to assess hedge effectiveness. Qualitative methods may include monitoring changes to terms and conditions and counterparty credit ratings. Quantitative methods may include statistical tests including regression analysis and minimum variance and dollar offset techniques. If we determine a derivative is no longer highly effective as a hedge, we prospectively discontinue hedge accounting. Termination of Hedge Accounting. We prospectively discontinue hedge accounting when (1) the criteria to qualify for hedge accounting is no longer met, e.g., a derivative is determined to no longer be highly effective in offsetting the change in fair value or cash flows of a hedged item; (2) the derivative expires, is sold, terminated or exercised; or (3) we remove the designation of the derivative being the hedging instrument for a fair value or cash flow hedge. If it is determined that a derivative no longer qualifies as an effective hedge, the derivative will continue to be carried on the statement of financial position at its fair value, with changes in fair value recognized currently in net realized/unrealized capital gains (losses). The asset or liability under a fair value hedge will no longer be adjusted for changes in fair value pursuant to hedging rules and the existing basis adjustment is amortized to the statement of operations line associated with the asset or liability. The component of other comprehensive income related to discontinued cash flow hedges that are no longer highly effective is amortized to the statement of operations consistent with the net income impacts of the original hedged cash flows. If a cash flow hedge is discontinued because a hedged forecasted transaction is no longer probable, the deferred gain or loss is immediately reclassified from other comprehensive income into net income. Embedded Derivatives. We purchase and issue financial instruments and products that contain a derivative that is embedded in the financial instrument or product. We assess whether this embedded derivative is clearly and closely related to the asset or liability that serves as its host contract. If we deem that the embedded derivative's terms are not clearly and closely related to the host contract, and a separate instrument with the same terms would qualify as a derivative instrument, the derivative is bifurcated from that contract and held at fair value on the statement of financial position, with changes in fair value reported in net income. Principal Life Insurance Company Notes to Consolidated Financial Statements (continued) 1. Nature of Operations and Significant Accounting Policies (continued) 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, traditional and group life insurance, accident and health insurance and disability income policies, as well as a provision for dividends on participating policies. Investment contracts are contractholders' funds on deposit with us and generally include reserves for pension and annuity contracts. Reserves on investment contracts are equal to the cumulative deposits less any applicable charges and withdrawals plus credited interest. Reserves for universal life insurance contracts are equal to cumulative deposits less charges plus credited interest, which represents the account balances that accrue to the benefit of the policyholders. We hold additional reserves on certain long duration contracts where benefit features result in gains in early years followed by losses in later years, universal life/variable universal life contracts that contain no lapse guarantee features, or annuities with guaranteed minimum death benefits. Reserves for nonparticipating term life insurance and disability income contracts are computed on a basis of assumed investment yield, mortality, morbidity and expenses, including a provision for adverse deviation, which generally varies by plan, year of issue and policy duration. Investment yield is based on our experience. Mortality, morbidity and withdrawal rate assumptions are based on our experience 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 rates and mortality rates guaranteed in calculating the cash surrender values described in the contract. Participating business represented approximately 20%, 24% and 28% of our life insurance in force and 61%, 63% and 67% of the number of life insurance policies in force at December 31, 2006, 2005 and 2004, respectively. Participating business represented approximately 71%, 76% and 77% of life insurance premiums for the years ended December 31, 2006, 2005 and 2004, respectively. The amount of dividends to policyholders is approved annually by our Board of Directors. The amount of dividends to be paid to policyholders is determined after consideration of several factors including interest, mortality, morbidity and other expense experience for the year and judgment as to the appropriate level of statutory surplus to be retained by us. At the end of the reporting period, we establish a dividend liability for the pro rata portion of the dividends expected to be paid on or before the next policy anniversary date. Some of our 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 in relation to the emergence of estimated gross profit margins. 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, we believe 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. Recognition of Premiums and Other Considerations, Fees and Other Revenues and Benefits Traditional individual life insurance products include those products with fixed and guaranteed premiums and benefits and consist principally of whole life and term life insurance policies. Premiums from these products are recognized as premium revenue when due. Related policy benefits and expenses for individual life and annuity products are associated with earned premiums and result in the recognition of profits over the expected term of the policies and contracts. Immediate annuities with life contingencies include products with fixed and guaranteed annuity considerations and benefits and consist principally of group and individual single premium annuities with life contingencies. Annuity considerations from these products are recognized as revenue. However, the collection of these annuity considerations does not represent the completion of the earnings process, as we establish annuity reserves, using estimates for mortality and investment assumptions, which include provision for adverse deviation as required by U.S. GAAP. We anticipate profits to emerge over the life of the annuity products as we earn investment income, pay benefits and release reserves. Principal Life Insurance Company Notes to Consolidated Financial Statements (continued) 1. Nature of Operations and Significant Accounting Policies (continued) Group life and health insurance premiums are generally recorded as premium revenue over the term of the coverage. Certain group contracts contain experience premium refund provisions based on a pre-defined formula that reflects their claim experience. Experience premium refunds are recognized over the term of the coverage and adjusted to reflect current experience. 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 group life and health insurance products are associated with earned premiums and result in the recognition of profits over the term of the policies and contracts. Universal life-type policies are insurance contracts with terms that are not fixed. 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 and investment income. 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 us to significant risks arising from policyholder mortality or morbidity and consist primarily of Guaranteed Investment Contracts ("GICs"), funding agreements 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. Fees and other revenues are earned for asset management services provided to retail and institutional clients based largely upon contractual rates applied to the market value of the client's portfolio. Additionally, fees and other revenues are earned for administrative services performed including recordkeeping and reporting services for retirement savings plans. Fees and other revenues received for performance of asset management and administrative services are recognized as revenue when the service is performed or earned. Deferred Policy Acquisition Costs Commissions and other costs (underwriting, issuance and field 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. Maintenance costs and acquisition costs that are not deferrable are charged to operations as incurred. DPAC for universal life-type insurance contracts, 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. For investment contracts pertaining to individual and group annuities which have separate account investment options, we utilize a mean reversion method (reversion to the mean assumption), a common industry practice, to determine the future domestic equity market growth assumption used for the amortization of DPAC. This amortization is adjusted in the current period when estimates of estimated gross profit are revised. The DPAC of nonparticipating 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. DPAC are subject to recoverability testing at the time of policy issue and loss recognition testing on an annual basis or when an event occurs that may warrant loss recognition. If loss recognition is necessary, DPAC would be written off to the extent that it is determined that future policy premiums and investment income or gross profits are not adequate to cover related losses and expenses. Long-Term Debt Long-term debt includes notes payable, nonrecourse mortgages and other debt with a maturity date greater than one year at the date of issuance. Current maturities of long term debt are classified as long-term debt in our statement of financial position. Principal Life Insurance Company Notes to Consolidated Financial Statements (continued) 1. Nature of Operations and Significant Accounting Policies (continued) Reinsurance We enter into reinsurance agreements with other companies in the normal course of business. We may assume reinsurance from or cede reinsurance to other companies. Assets and liabilities related to reinsurance ceded are reported on a gross basis. Premiums and expenses are reported net of reinsurance ceded. We are contingently liable with respect to reinsurance ceded to other companies in the event the reinsurer is unable to meet the obligations it has assumed. At December 31, 2006, 2005 and 2004, respectively, we had reinsured $21.7 billion, $21.2 billion and $20.1 billion of life insurance in force, representing 13%, 14%, and 15%, respectively, of total net life insurance in force through a single third-party reinsurer. To minimize the possibility of losses, we regularly evaluate the financial condition of our reinsurers and monitor concentrations of credit risk. The effects of reinsurance on premiums and other considerations and policy and contract benefits were as follows:
For the year ended December 31, 2006 2005 2004 (in millions) Premiums and other considerations: Direct $4,229.3 $3,966.6 $3,693.1 Assumed 117.3 56.6 67.0 Ceded (280.4) (295.8) (291.2) Net premiums and other considerations $4,066.2 $3,727.4 $3,468.9 Benefits, claims and settlement expenses: Direct $5,472.2 $5,062.2 $4,740.9 Assumed 141.8 77.0 83.2 Ceded (320.7) (265.6) (221.9) Net benefits, claims and settlement expenses $5,293.3 $4,873.6 $4,602.2
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 us for contracts with equity, real estate and fixed-income investments. The separate account contract owner, rather than us, 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 of our other business. We receive fees for mortality, withdrawal, and expense risks, as well as administrative, maintenance and investment advisory services, that are included in the consolidated statements of operations. Net 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. At December 31, 2006 and 2005, the separate accounts include a separate account valued at $768.4 million and $726.6 million, respectively, which primarily includes shares of Principal Financial Group, Inc. stock that were allocated and issued to eligible participants of qualified employee benefit plans administered by us as part of the policy credits issued under the Principal Mutual Holding Company's 2001 demutualization. The separate account shares are recorded at fair value and are reported as separate account assets and separate account liabilities in the consolidated statements of financial position. Changes in fair value of the separate account shares are reflected in both the separate account assets and separate account liabilities and do not impact our results of operations. Income Taxes Our ultimate parent, Principal Financial Group, Inc., files a U.S. consolidated income tax return that includes us and all of our qualifying subsidiaries. Principal Financial Group, Inc. allocates income tax expenses and benefits to companies in the group generally based upon pro rata contribution of taxable income or operating losses. We are 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 income tax assets and deferred income tax liabilities of a change in tax rates is recognized in operations in the period in which the change is enacted. Principal Life Insurance Company Notes to Consolidated Financial Statements (continued) 1. Nature of Operations and Significant Accounting Policies (continued) Goodwill and Other Intangibles Goodwill and other intangibles include the cost of acquired subsidiaries in excess of the fair value of the net tangible assets recorded in connection with acquisitions. Goodwill and indefinite-lived intangible assets are not amortized. Rather, goodwill and indefinite-lived intangible assets are tested for impairment at one level below our operating segments on an annual basis during the fourth quarter each year, or more frequently if events or changes in circumstances indicate that the asset might be impaired. Impairment testing for indefinite-lived intangible assets consists of a comparison of the fair value of the intangible asset with its carrying value. Intangible assets with a finite useful life are amortized as related benefits emerge over a period of 5 to 15 years and are reviewed periodically for indicators of impairment in value. If facts and circumstances suggest possible impairment, the sum of the estimated undiscounted future cash flows expected to result from the use of the asset is compared to the current carrying value of the asset. If the undiscounted future cash flows are less than the carrying value, an impairment loss is recognized for the excess of the carrying amount of assets over their fair value. Stock-Based Compensation Our ultimate parent, Principal Financial Group, Inc., has several stock-based compensation plans, which are described more fully in Note 20, Stock-Based Compensation Plans. The fair value method is applied to all stock-based awards granted subsequent to January 1, 2002. For stock-based awards granted prior to this date, the intrinsic value method is used. Awards under these plans vest over periods ranging from one year to three years. The cost related to stock-based compensation included in the determination of net income for 2004 is less than that which would have been recognized if the fair value based method had been applied to all awards since the inception of our stock-based compensation plans. Had compensation expense for our stock option awards and employees' purchase rights been determined based upon fair values at the grant dates for awards under the plans in accordance with SFAS 123, our net income would have been reduced to the pro forma amounts indicated below. For the purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period.
For the year ended December 31, 2006 2005 2004 (in millions) Net income $977.6 $832.1 $767.8 Add: Stock-based compensation expense included in reported net income, net of related tax effects 37.2 29.8 26.7 Deduct: Total stock-based compensation expense determined under fair value based method for all awards, net of related tax effects 37.2 29.8 29.3 Pro forma net income $977.6 $832.1 $765.2
================================================================================ Reclassifications Reclassifications have been made to the 2005 and 2004 consolidated financial statements to conform to the 2006 presentation. Principal Life Insurance Company Notes to Consolidated Financial Statements (continued) 2. Related Party Transactions We have entered into various related party transactions with our ultimate parent and its other affiliates. During the years ended December 31, 2006, 2005 and 2004, we received $118.2 million, $114.3 million and $94.8 million, respectively, of expense reimbursements from affiliated entities. We and our direct parent, Principal Financial Services, Inc., are parties to a cash advance agreement, which allows us, collectively, to pool our available cash in order to more efficiently and effectively invest our cash. The cash advance agreement allows (i) us to advance cash to Principal Financial Services, Inc. in aggregate principal amounts not to exceed $3.1 billion, with such advanced amounts earning interest at the daily 30-day LIBOR rate (the "Internal Crediting Rate"); and (ii) Principal Financial Services, Inc. to advance cash to us in aggregate principal amounts not to exceed $1.1 billion , with such advance amounts paying interest at the Internal Crediting Rate plus 10 basis points to reimburse Principal Financial Services, Inc. for the costs incurred in maintaining short-term investing and borrowing programs. Under this cash advance agreement, we had a receivable from Principal Financial Services, Inc. of $201.1 million and $229.6 million at December 31, 2006 and 2005, respectively, and earned interest of $13.5 million, $12.3 million and $8.5 million during 2006, 2005 and 2004, respectively. Pursuant to certain regulatory requirements or otherwise in the ordinary course of business, we guarantee certain payments of our subsidiaries and have agreements with affiliates to provide and/or receive management, administrative and other services, all of which, individually and in the aggregate, are immaterial to our business, financial condition and net income. 3. Discontinued Operations Real Estate Investments In 2005 and 2006, we sold certain real estate properties previously held for investment purposes. These properties qualify for discontinued operations treatment. Therefore, the income from discontinued operations has been removed from our results of continuing operations for all periods presented. The gains on disposal are reported as other after-tax adjustments in our Corporate and Other segment. All assets, including cash, and liabilities of the discontinued operations have been reclassified to separate discontinued asset and liability line items on the consolidated statements of financial position. We have separately disclosed the operating, investing and financing portions of the cash flows attributable to our discontinued operations in our consolidated statements of cash flows. Additionally, the information included in the notes to the financial statements excludes information applicable to these properties, unless otherwise noted. The properties were sold to take advantage of positive real estate market conditions in specific geographic locations and to further diversify our real estate portfolio. Principal Life Insurance Company Notes to Consolidated Financial Statements (continued) 3. Discontinued Operations (continued) Selected financial information for the discontinued operations is as follows:
December 31, ----------------------------------- 2006 2005 ----------------- ---------------- (in millions) Assets Real estate $-- $99.3 All other assets -- 3.9 ----------------- ---------------- ----------------- ---------------- Total assets $-- $103.2 ================= ================ Liabilities All other liabilities $-- $4.5 ----------------- ---------------- ----------------- ---------------- Total liabilities $-- $4.5 ================= ================
For the year ended December 31, 2006 2005 2004 (in millions) Total revenues $(0.5) $2.8 $2.5 Income from discontinued operations: Income (loss) before income taxes $(0.5) $2.8 $2.5 Income taxes (benefits) (0.2) 1.0 0.9 Gain on disposal of discontinued operations 47.5 34.3 -- Income taxes on disposal 16.6 12.0 -- Net income $30.6 $24.1 $1.6
================================================================================ Principal Residential Mortgage, Inc. On July 1, 2004, we closed the sale of Principal Residential Mortgage, Inc. to CitiMortgage, Inc. Our total after-tax proceeds from the sale were approximately $620.0 million. Our Mortgage Banking segment, which included Principal Residential Mortgage, Inc., is accounted for as a discontinued operation, and therefore, the income from discontinued operations (excluding corporate overhead) has been removed from our results of continuing operations and segment operating earnings for all periods presented. The gain (loss) on disposal is reported as an other after-tax adjustment in our Mortgage Banking segment. We have separately disclosed the operating, investing and financing portions of the cash flows attributable to our discontinued operations in our consolidated statements of cash flows. Corporate overhead allocated to our Mortgage Banking segment does not qualify for discontinued operations treatment and is included in our results of continuing operations and segment operating earnings for all periods prior to July 1, 2004. Additionally, the information included in the notes to the financial statements excludes information applicable to Principal Residential Mortgage, Inc., unless otherwise noted. The decision to sell Principal Residential Mortgage, Inc. was made with a view toward intensifying our strategic focus on our core retirement and risk protection business as well as achieving our longer-term financial objectives. In addition, the sale was also viewed as a positive move for Principal Financial Group, Inc.'s stockholders as it enabled us to move forward from an improved capital position, with better financial flexibility and greater stability of earnings. Principal Life Insurance Company Notes to Consolidated Financial Statements (continued) 3. Discontinued Operations (continued) Selected financial information for the discontinued operations of our Mortgage Banking segment is as follows:
For the year ended December 31, 2006 2005 2004 (in millions) Total revenues $-- $-- $446.9 Loss from continuing operations, net of related income taxes (represents corporate overhead) $-- $-- $(10.3) Income (loss) from discontinued operations Income before income taxes (1) -- -- 22.4 Income taxes (1) -- -- 8.7 Gain (loss) on disposal of discontinued operations -- (1.7) 134.7 Income taxes on disposal -- 3.5 41.9 Income (loss) from discontinued operations, net of related income taxes -- (5.2) 106.5 Net income (loss) $-- $(5.2) $96.2
=============================================================================== 21 (1) The 2004 summary results of operations information is for the six months ended prior to the July 1, 2004, sale of Principal Residential Mortgage, Inc. and, accordingly, there is no statement of operations data to present subsequent to the date of the sale. Our U.S. Asset Management and Accumulation segment held residential mortgage banking escrow deposits (reported as other liabilities) as of December 31, 2003. The purchaser (or acquirer) closed out the banking escrow deposit accounts as a result of the sale. U.S. Asset Management and Accumulation total revenues from this arrangement reclassified to discontinued operations for the year ended December 31, 2004 was $(5.6) million. Loss from discontinued operations net of related income taxes, for the year ended December 31, 2004 was $3.5 million. 4. Goodwill and Other Intangible Assets The changes in the carrying amount of goodwill reported in our operating segments for 2005 and 2006 were as follows:
U.S. Asset Management Life and and Accumulation Health Insurance Consolidated (in millions) Balances at January 1, 2005 $91.8 $69.5 $161.3 Goodwill from acquisitions 46.5 -- 46.5 Balances at December 31, 2005 138.3 69.5 207.8 Goodwill from acquisitions 21.7 -- 21.7 Balances at December 31, 2006 $160.0 $69.5 $229.5
============================================================================== Amortized intangible assets were as follows:
December 31, 2006 2005 Gross Net Gross Net carrying Accumulated carrying carrying Accumulated carrying amount amortization amount amount amortization amount (in millions) Intangibles with finite useful .8 lives $116.9 $19.7 $97.2 $107.2 $12.4 $94
=============================================================================== Principal Life Insurance Company Notes to Consolidated Financial Statements (continued) 4. Goodwill and Other Intangible Assets (continued) The amortization expense for intangible assets with finite useful lives was $7.6 million, $6.1 million and $4.2 million for 2006, 2005 and 2004, respectively. At December 31, 2006, the estimated amortization expense for the next five years is as follows (in millions): Year ending December 31: 2007 $8.2 2008 8.3 2009 8.5 2010 8.5 2011 8.0 In connection with our parent's December 31, 2006, acquisition of WM Advisors, Inc., we were allocated $99.9 million of the purchase price based on the fact that we will benefit from our parent's acquisition. Of the $99.9 million, $94.5 million related to investment management contracts that are not subject to amortization, $3.2 million related to goodwill and $2.2 million was related to other amortizable intangible assets that will be subject to a three-year amortization period. 5. Variable Interest Entities We have relationships with various types of special purpose entities and other entities where we have a variable interest. The following serves as a discussion of investments in entities that meet the definition of a VIE. Consolidated Variable Interest Entities Synthetic Collateralized Debt Obligation. On May 26, 2005, we invested $130.0 million in a secured limited recourse credit linked note issued by a grantor trust. The trust entered into a credit default swap providing credit protection on the first 45% of loss of seven mezzanine tranches totaling $288.9 million of seven synthetic reference portfolios. Our risk of loss for the seven referenced mezzanine tranches begins at 4.85% and ends at 10.85% of loss on each of the seven synthetic reference portfolios. Therefore, defaults in an underlying reference portfolio will only affect the credit-linked note if cumulative losses exceed 4.85% of a synthetic reference portfolio. We have determined that this grantor trust is a variable interest entity and that we are the primary beneficiary of the trust due to our interest in the variable interest entity and management of the synthetic reference portfolios. Upon consolidation of the trust, as of December 31, 2006 and 2005, our consolidated statements of financial position include $130.3 million and $130.0 million, respectively, of available-for-sale fixed maturity securities, which represent the collateral held by the trust. As of December 31, 2006 and 2005, the credit default swap entered into by the trust has an outstanding notional amount of $130.0 million. During the year ended December 31, 2006 and 2005, the credit default swaps had a change in fair value that resulted in a $4.4 million pre-tax gain and a $0.4 million pre-tax loss, respectively. The creditors of the grantor trusts have no recourse to our assets. Grantor Trusts. We contributed undated subordinated floating rate notes to three grantor trusts. The trusts separated the cash flows of the underlying notes by issuing an interest-only certificate and a residual certificate related to each note contributed. Each interest-only certificate entitles the holder to interest on the stated note for a specified term while the residual certificate entitles the holder to interest payments subsequent to the term of the interest-only certificate and to all principal payments. We retained the interest-only certificate and the residual certificates were subsequently sold to a third party. Principal Life Insurance Company Notes to Consolidated Financial Statements (continued) 5. Variable Interest Entities (continued) We have determined that these grantor trusts are VIEs as our interest-only certificates are exposed to the majority of the risk of loss. The restricted interest periods end between 2016 and 2020 and, at that time, the residual certificate holders' certificates are redeemed by the trust in return for the notes. We have determined that it will be necessary for us to consolidate these entities until the expiration of the interest-only period. As of December 31, 2006 and 2005, our consolidated statements of financial position include $366.2 million and $364.1 million, respectively, of undated subordinated floating rate notes of the grantor trusts, which are classified as available-for-sale fixed maturity securities and represent the collateral held by the trust. The obligation to deliver the underlying securities to the residual certificate holders of $156.8 million and $147.4 million as of December 31, 2006 and 2005, respectively, is classified as an other liability and contains an embedded derivative of the forecasted transaction to deliver the underlying securities. The creditors of the grantor trusts have no recourse to our assets. Other. In addition to the entities above, we have a number of relationships with a disparate group of entities, which meet the criteria for VIEs. Due to the nature of our direct investment in the equity and/or debt of these VIEs, we are the primary beneficiary of such entities, which requires us to consolidate them. These entities include seven private investment trusts, a financial services company and a hedge fund. The consolidation of these VIEs did not have a material effect on either our consolidated statement of financial position as of December 31, 2006 or 2005, or results of operations and for the years ended December 31, 2006, 2005 and 2004. For the majority of these entities, the creditors have no recourse to our assets. The carrying amount and classification of consolidated VIE assets that are collateral the VIEs have designated for their own obligations and the debt of the VIEs are as follows: December 31, 2006 2005 (in millions) Fixed maturity securities, available-for-sale $178.0 $88.3 Fixed maturity securities, trading 14.0 -- Equity securities, available-for-sale -- 39.6 Equity securities, trading 59.5 -- Real estate -- 12.4 Cash and other assets 83.2 71.6 Total assets pledged as collateral $334.7 $211.9 Long-term debt $206.4 $120.2 =============================================================================== As of December 31, 2006 and 2005, $334.7 million and $211.9 million, respectively, of assets were pledged as collateral for the VIE entities' other obligations. Additionally, as of December 31, 2006 and 2005, these entities had long-term debt of $206.4 million and $120.2 million, respectively, of which $206.4 million and $106.8 million, respectively, was issued to our affiliates and, therefore, eliminated upon consolidation. Significant Unconsolidated Variable Interest Entities We hold a significant variable interest in a number of VIEs where we are not the primary beneficiary. These entities include private investment trusts and custodial relationships that have issued trust certificates or custodial receipts that are recorded as available-for-sale fixed maturity securities in the consolidated financial statements. On June 21, 2006, we invested $285.0 million in a secured limited recourse note issued by a segregated portfolio company. The note represents Class B notes. Class A notes are senior and Class C through Class F notes are subordinated to Class B notes. The entity entered into a credit default swap with a third party providing credit protection in exchange for a fee. Defaults in an underlying reference portfolio will only affect the note if cumulative losses of a synthetic reference portfolio exceed the loss attachment point on the portfolio. We have determined we are not the primary beneficiary, as we do not hold the majority of the risk of loss. Our maximum exposure to loss as a result of our involvement with this entity is our recorded investment of $285.3 million as of December 31, 2006. Principal Life Insurance Company Notes to Consolidated Financial Statements (continued) 5. Variable Interest Entities (continued) Between October 3, 1996 and September 21, 2001, we entered into seven separate but similar transactions where various third parties transferred funds to either a custodial account or a trust. The custodians or trusts purchased shares of specific money market funds and then separated the cash flows of the money market shares into share receipts and dividend receipts. The dividend receipts entitle the holder to dividends paid for a specified term while the share receipts, purchased at a discount, entitle the holder to dividend payments subsequent to the term of the dividend receipts and the rights to the underlying shares. We have purchased the share receipts. After the restricted dividend period ends between 2017 and 2021, we, as the share receipt holder, have the right to terminate the custodial account or trust agreement and will receive the underlying money market fund shares. We determined the primary beneficiary is the dividend receipt holder, which has the majority of the risk of loss. Our maximum exposure to loss as a result of our involvement with these entities is our recorded investment of $235.7 million and $224.5 million as of December 31, 2006 and 2005, respectively. On June 20, 1997, we entered into a transaction in which we purchased a residual trust certificate. The trust separated the cash flows of an underlying security into an interest-only certificate that entitles the third party certificate holder to the stated interest on the underlying security through May 15, 2017, and into a residual certificate entitling the holder to interest payments subsequent to the term of the interest-only certificates and any principal payments. Subsequent to the restricted interest period, we, as the residual certificate holder, have the right to terminate the trust agreement and will receive the underlying security. We determined the primary beneficiary is the interest-only certificate holder, which has the majority of the risk of loss. Our maximum exposure to loss as a result of our involvement with this entity is our recorded investment of $78.7 million and $77.0 million as of December 31, 2006 and 2005, respectively. 6. Investments Fixed Maturities and Equity Securities The cost, gross unrealized gains and losses and fair value of fixed maturities and equity securities available-for-sale as of December 31, 2006 and 2005, are summarized as follows:
Gross Gross unrealized unrealized Cost gains losses Fair value (in millions) December 31, 2006 Fixed maturities, available-for-sale: U.S. government and agencies $522.3 $0.8 $3.6 $519.5 Non-U.S. governments 384.9 36.1 0.4 420.6 States and political subdivisions 1,557.7 45.4 4.9 1,598.2 Corporate -- public 19,223.3 661.0 137.3 19,747.0 Corporate -- private 10,282.1 373.9 75.7 10,580.3 Mortgage-backed and other asset-backed securities 9,163.8 217.2 77.8 9,303.2 Total fixed maturities, available-for-sale $41,134.1 $1,334.4 $299.7 $42,168.8 Total equity securities, available-for-sale $638.0 $11.6 $4.3 $645.3 December 31, 2005 Fixed maturities, available-for-sale: U.S. government and agencies $549.4 $1.7 $4.0 $547.1 Non-U.S. governments 416.2 47.2 0.3 463.1 States and political subdivisions 1,222.6 45.7 3.8 1,264.5 Corporate -- public 18,763.0 887.0 104.6 19,545.4 Corporate -- private 9,463.7 484.3 52.3 9,895.7 Mortgage-backed and other asset-backed securities 8,043.5 267.7 78.0 8,233.2 Total fixed maturities, available-for-sale $38,458.4 $1,733.6 $243.0 $39,949.0 Total equity securities, available-for-sale $683.8 $24.4 $5.3 $702.9
=============================================================================== Principal Life Insurance Company Notes to Consolidated Financial Statements (continued) 6. Investments (continued) The cost and fair value of fixed maturities available-for-sale at December 31, 2006, by expected maturity, were as follows: Cost Fair value (in millions) Due in one year or less $2,210.2 $2,209.9 Due after one year through five years 9,193.2 9,364.8 Due after five years through ten years 11,137.5 11,309.7 Due after ten years 9,429.4 9,981.3 31,970.3 32,865.7 Mortgage-backed and other asset-backed securities 9,163.8 9,303.1 Total $41,134.1 $42,168.8 =============================================================================== The above summarized activity is based on expected maturities. Actual maturities may differ because borrowers may have the right to call or prepay obligations. Corporate private placement bonds represent a primary area of credit risk exposure. The corporate private placement bond portfolio is diversified by issuer and industry. We monitor the restrictive bond covenants, which are intended to regulate the activities of issuers and control their leveraging capabilities. Net Investment Income Major categories of net investment income are summarized as follows: For the year ended December 31, 2006 2005 2004 (in millions) Fixed maturities, available-for-sale $2,463.8 $2,291.7 $2,183.6 Fixed maturities, trading 10.6 7.3 9.4 Equity securities, available-for-sale 54.6 48.5 46.9 Equity securities, trading 0.4 -- -- Mortgage loans 708.1 723.7 731.5 Real estate 64.7 63.9 65.8 Policy loans 50.9 50.3 51.1 Cash and cash equivalents 60.1 42.6 20.6 Derivatives 38.6 14.2 16.9 Other 51.9 43.7 25.3 Total 3,503.7 3,285.9 3,151.1 Less investment expenses (153.5) (152.8) (123.6) Net investment income $3,350.2 $3,133.1 $3,027.5 =============================================================================== Principal Life Insurance Company Notes to Consolidated Financial Statements (continued) 6. Investments (continued) Net Realized/Unrealized Capital Gains and Losses The major components of net realized/unrealized capital gains (losses) on investments are summarized as follows:
For the year ended December 31, 2006 2005 2004 (in millions) Fixed maturities, available-for-sale: Gross gains $31.8 $107.5 $42.3 Gross losses (62.9) (85.1) (83.4) Hedging (net) (14.6) (45.8) (0.7) Fixed maturities, trading (4.6) (1.7) (1.1) Equity securities, available-for-sale: Gross gains 1.4 6.8 7.7 Gross losses (0.1) (6.4) (10.4) Equity securities, trading 20.1 5.7 4.4 Mortgage loans 3.2 1.1 (12.1) Derivatives (4.9) 14.6 (116.9) Other 61.0 (14.2) 60.5 Net realized/unrealized capital gains (losses) $30.4 $(17.5) $(109.7)
=============================================================================== Proceeds from sales of investments (excluding call and maturity proceeds) in fixed maturities were $1.3 billion, $2.4 billion and $1.7 billion in 2006, 2005 and 2004, respectively. We recognize impairment losses for fixed maturities and equity securities when declines in value are other than temporary. Gross realized losses related to other than temporary impairments of fixed maturity securities were $14.6 million, $28.6 million and $60.6 million in 2006, 2005 and 2004, respectively. As a result of the need to fund our parent's acquisition of WM Advisors, Inc. we also recognized $17.2 million of write-downs in 2006 that resulted from our determination that we no longer had the ability and intent to hold certain fixed maturity securities until they recovered in value. We also recognized gross realized losses as the result of credit triggered sales of $22.2 million, $30.8 million and $18.9 million in 2006, 2005 and 2004, respectively. In 2005, we also recognized an $11.0 million loss related to a large investment that was called from us. Principal Life Insurance Company Notes to Consolidated Financial Statements (continued) 6. Investments (continued) Gross Unrealized Losses for Fixed Maturities and Equity Securities For fixed maturities and equity securities available-for-sale with unrealized losses as of December 31, 2006 and 2005, the gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position are summarized as follows:
December 31, 2006 Less than Greater than or equal twelve months to twelve months Total Gross Gross Gross Carrying unrealized Carrying unrealized Carrying unrealized value losses value losses value losses (in millions) Fixed maturities, available-for-sale: U.S. government and agencies $32.0 $0.2 $315.9 $3.4 $347.9 $3.6 Non-U.S. governments 44.7 0.1 11.7 0.3 56.4 0.4 States and political subdivisions 278.1 0.7 347.0 4.2 625.1 4.9 Corporate -- public 2,529.7 27.7 4,591.0 109.6 7,120.7 137.3 Corporate -- private 1,635.2 11.4 2,375.8 64.3 4,011.0 75.7 Mortgage-backed and other asset-backed securities 1,312.2 9.7 2,751.5 68.1 4,063.7 77.8 Total fixed maturities, available-for-sale $5,831.9 $49.8 $10,392.9 $249.9 $16,224.8 $299.7 Total equity securities, available-for-sale $1.4 $-- $134.0 $4.3 $135.4 $4.3
=============================================================================== As of December 31, 2006, we held $16,224.8 million in available-for-sale fixed maturity securities with unrealized losses of $299.7 million. Our portfolio consists of fixed maturity securities where 98% are investment grade (rated AAA through BBB-) with an average price of 98 (carrying value/amortized cost). For those securities that have been in a loss position for less than twelve months, our portfolio holds 643 securities with a carrying value of $5,831.9 million and unrealized losses of $49.8 million reflecting an average price of 99. Of this portfolio, 97% was investment grade (rated AAA through BBB-) at December 31, 2006, with associated unrealized losses of $48.3 million. The losses on these securities can primarily be attributed to changes in market interest rates and changes in credit spreads since the securities were acquired. For those securities that have been in a continuous loss position greater than or equal to twelve months, our portfolio holds 1,186 securities with a carrying value of $10,392.9 million and unrealized losses of $249.9 million. The average rating of this portfolio is A with an average price of 98 at December 31, 2006. Of the $249.9 million in unrealized losses, the Corporate-public and Corporate-private sectors account for $173.9 million in unrealized losses with an average price of 98 and an average credit rating of BBB+. The remaining unrealized losses consist primarily of $68.1 million in unrealized losses within the mortgage-backed and other asset-backed securities sector. The average price of the mortgage-backed and other asset-backed securities sector is 98 and the average credit rating is AA+. The losses on these securities can primarily be attributed to changes in market interest rates and changes in credit spreads since the securities were acquired. Principal Life Insurance Company Notes to Consolidated Financial Statements (continued) 6. Investments (continued)
December 31, 2005 Less than twelve Greater than or equal months to twelve months Total Gross Gross Gross Carrying unrealized Carrying unrealized Carrying unrealized value losses value losses value losses (in millions) Fixed maturities, available-for-sale: U.S. government and agencies $406.3 $3.5 $43.5 $0.5 $449.8 $4.0 Non-U.S. governments 7.9 0.1 11.7 0.2 19.6 0.3 States and political subdivisions 374.2 2.9 55.2 0.9 429.4 3.8 Corporate -- public 4,617.6 80.4 877.1 24.2 5,494.7 104.6 Corporate -- private 2,297.4 36.3 488.9 16.0 2,786.3 52.3 Mortgage-backed and other asset-backed securities 2,847.4 53.8 795.0 24.2 3,642.4 78.0 Total fixed maturities, available-for-sale $10,550.8 $177.0 $2,271.4 $66.0 $12,822.2 $243.0 Total equity securities, available-for-sale $144.5 $2.6 $287.7 $2.7 $432.2 $5.3
=============================================================================== Of these amounts, our portfolio represented $12,822.2 million in available-for-sale fixed maturity securities with unrealized losses of $243.0 million. Our portfolio consisted of fixed maturity securities where 97% are investment grade (rated AAA through BBB-) with an average price of 98 (carrying value/amortized cost). For those securities that had been in a loss position for less than twelve months, our portfolio held 1,199 securities with a carrying value of $10,550.8 million and unrealized losses of $177.0 million reflecting an average price of 98. Of this portfolio, 97% was investment grade (rated AAA through BBB-) at December 31, 2005, with associated unrealized losses of $167.1 million. The losses on these securities can primarily be attributed to changes in market interest rates and changes in credit spreads since the securities were acquired. For those securities that had been in a continuous loss position greater than or equal to twelve months, our portfolio held 337 securities with a carrying value of $2,271.4 million and unrealized losses of $66.0 million. The average rating of this portfolio was A+ with an average price of 97 at December 31, 2005. Of the $66.0 million in unrealized losses, the Corporate-public and Corporate-private sectors account for $40.2 million in unrealized losses with an average price of 97 and an average credit rating of BBB+. The remaining unrealized losses consist primarily of $24.2 million in unrealized losses within the mortgage-backed and other asset-backed securities sector. The average price of the mortgage-backed and other asset-backed securities sector is 97 and the average credit rating is AA+. We closely monitor our below investment grade holdings and those investment grade names where we have concerns. While we are in an unrealized loss position on these securities, all securities except those identified as previously impaired continue to make payments. We consider relevant facts and circumstances in evaluating whether the impairment of a security is other than temporary. Relevant facts and circumstances considered include: (1) the length of time the fair value has been below cost; (2) the financial position and access to capital of the issuer, including the current and future impact of any specific events; and (3) our ability and intent to hold the security to maturity or until it recovers in value. To the extent we determine that a security is deemed to be other than temporarily impaired, the difference between amortized cost and fair value is charged to earnings. Principal Life Insurance Company Notes to Consolidated Financial Statements (continued) 6. Investments (continued) Net Unrealized Gains and Losses on Available-for-Sale Securities The net unrealized gains and losses on investments in fixed maturities and equity securities available-for-sale are reported as a separate component of stockholder's equity. The cumulative amount of net unrealized gains and losses on available-for-sale securities was as follows:
December 31, 2006 2005 (in millions) Net unrealized gains on fixed maturities, available-for-sale(1) $1,036.3 $1,490.5 Net unrealized gains on equity securities, available-for-sale 7.2 19.2 Adjustments for assumed changes in amortization patterns (128.1) (136.2) Net unrealized gains on derivative instruments 39.9 39.6 Net unrealized losses on policyholder dividend obligation -- (33.7) Net unrealized losses on equity method subsidiaries and minority interest adjustments (24.6) (31.3) Provision for deferred income taxes (327.1) (474.6) Net unrealized gains on available-for-sale securities $603.6 $873.5
=============================================================================== 21 (1) Excludes net unrealized gains (losses) on fixed maturities, available-for-sale included in fair value hedging relationships. Principal Life Insurance Company Notes to Consolidated Financial Statements (continued) 6. Investments (continued) Commercial Mortgage Loans Commercial mortgage loans represent a primary area of credit risk exposure. At December 31, 2006 and 2005, the commercial mortgage portfolio is diversified by geographic region and specific collateral property type as follows:
December 31, 2006 2005 Carrying Percent Carrying Percent amount of total amount of total ($ in millions) Geographic distribution New England $397.6 3.9% $353.0 3.6% Middle Atlantic 1,817.4 18.0 1,822.3 18.4 East North Central 847.0 8.4 775.2 7.8 West North Central 525.6 5.2 458.3 4.6 South Atlantic 2,550.9 25.3 2,531.2 25.7 East South Central 285.6 2.8 348.0 3.5 West South Central 682.4 6.8 674.1 6.8 Mountain 845.5 8.4 823.7 8.3 Pacific 2,170.5 21.5 2,138.1 21.6 Valuation allowance (32.2) (0.3) (33.2) (0.3) Total $10,090.3 100.0% $9,890.7 100.0% Property type distribution Office $2,672.3 26.5% $2,706.5 27.4% Retail 2,808.8 27.7 3,036.5 30.6 Industrial 2,740.1 27.2 2,812.3 28.4 Apartments 1,440.3 14.3 1,078.5 10.9 Hotel 41.7 0.4 44.8 0.5 Mixed use/other 419.3 4.2 245.3 2.5 Valuation allowance (32.2) (0.3) (33.2) (0.3) Total $10,090.3 100.0% $9,890.7 100.0%
=============================================================================== Commercial Mortgage Loan Loss Allowance Mortgage loans on real estate are considered impaired when, based on current information and events, it is probable that we will be unable to collect all amounts due according to contractual terms of the loan agreement. When we determine that a loan is impaired, a valuation allowance is established equal to 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 change in the valuation allowance is included in net realized/unrealized capital gains (losses) on our consolidated statements of operations. Principal Life Insurance Company Notes to Consolidated Financial Statements (continued) 6. Investments (continued) The allowance for losses is maintained at a level believed adequate by management to absorb estimated probable credit losses. Management's periodic evaluation and assessment of the adequacy of the allowance for losses and the need for mortgage impairments is based on known and inherent risks in the portfolio, adverse situations that may affect a 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 of our loan specific reserve component is also subjective, as it requires estimating the amounts and timing of future cash flows expected to be received on impaired loans. Impaired mortgage loans, along with the related allowance for losses, were as follows: December 31, 2006 2005 (in millions) Impaired loans $0.1 $23.8 Allowance for losses -- (2.3) Net impaired loans $0.1 $21.5 ============================================================================== The average recorded investment in impaired mortgage loans and the interest income recognized on impaired mortgage loans were as follows: For the year ended December 31, 2006 2005 2004 (in millions) Average recorded investment in impaired loans $4.3 $51.6 $105.2 Interest income recognized on impaired loans 0.5 5.1 7.0 ------------------------------------------------------------------------------- When it is determined that a loan is impaired, interest accruals are stopped and all interest income is recognized on the cash basis. A summary of the changes in the commercial mortgage loan allowance for losses is as follows:
For the year ended December 31, 2006 2005 2004 (in millions) Balance at beginning of year $33.2 $42.4 $49.6 Provision for losses 1.3 6.7 14.4 Releases due to write-downs, sales and foreclosures (2.3) (15.9) (21.6) Balance at end of year $32.2 $33.2 $42.4
=============================================================================== Real Estate Depreciation expense on invested real estate was $34.2 million, $27.8 million and $31.8 million in 2006, 2005 and 2004, respectively. Accumulated depreciation was $228.3 million and $199.7 million as of December 31, 2006 and 2005, respectively. Principal Life Insurance Company Notes to Consolidated Financial Statements (continued) 6. Investments (continued) Other Investments Other investments include minority interests in unconsolidated entities and properties owned jointly with venture partners and operated by the partners. Such investments are generally accounted for using the equity method. In applying the equity method, we record our share of income or loss reported by the equity investees. Changes in the value of our investment in equity investees attributable to capital transactions of the investee, such as an additional offering of stock, are recorded directly to stockholder's equity. Total assets of the unconsolidated entities were $5,957.3 million and $4,756.9 million at December 31, 2006 and 2005, respectively. Total revenues of the unconsolidated entities were $1,245.0 million, $1,026.7 million and $700.4 million in 2006, 2005 and 2004, respectively. During 2006, 2005 and 2004, we included $43.5 million, $46.1 million and $30.5 million, respectively, in net investment income representing our share of current year net income of the unconsolidated entities. At December 31, 2006 and 2005, our net investment in unconsolidated entities was $97.1 million and $62.8 million, respectively. In the ordinary course of our business and as part of our investment operations, we have also entered into long term contracts to make and purchase investments aggregating $677.2 million and $882.8 million at December 31, 2006 and 2005, respectively. Derivative assets are carried at fair value and reported as a component of other investments. Certain seed money investments are carried at fair value with changes in fair value included in net income as net realized/unrealized capital gains or losses. 7. Securitization Transactions We, along with other contributors, sell commercial mortgage loans in securitization transactions to trusts. As these trusts are classified as a qualifying special purpose entity, they are not subject to the VIE consolidation rules. We purchase primary servicing responsibilities and may retain other interests. The investors and the securitization entities have no recourse to our other assets for failure of debtors to pay when due. The value of our retained interests is subject primarily to credit risk. In 2006, 2005, and 2004, we recognized gains of $13.6 million, $39.8 million and $14.4 million, respectively, on the securitization of commercial mortgage loans. Key economic assumptions used in measuring the other retained interests at the date of securitization resulting from transactions completed included a cumulative foreclosure rate between 2% and 10% during 2006, 5% and 18% during 2005, and 4% and 10% during 2004. The assumed range of the loss severity, as a percentage of defaulted loans, was between 2% and 31% during 2006, 3% and 29% during 2005, and 13% and 31% during 2004. The low end of the loss severity range relates to a portfolio of seasoned loans. The high end of the loss severity range relates to a portfolio of newly issued loans. At December 31, 2006 and 2005, the fair values of other retained interests related to the securitizations of commercial mortgage loans were $345.3 million and $321.0 million, respectively. Only $0.5 million in 2006 and $0.8 million in 2005 represented equity investments. All other interests are classified as available-for-sale securities and are carried at fair value. At December 31, 2006 and 2005, respectively, $156.2 million and $181.3 million of these available-for-sale securities were interest-only investments. Cash flows are continuously monitored for adverse deviations from original expectations and impairments are recorded when necessary. Key economic assumptions and the sensitivity of the current fair values of residual cash flows were tested to one and two standard deviations from the expected rates. The changes in the fair values at December 31, 2006 and 2005, as a result of this sensitivity analysis were not significant. Principal Life Insurance Company Notes to Consolidated Financial Statements (continued) 7. Securitization Transactions (continued) The table below summarizes cash flows for securitization transactions:
For the year ended December 31, 2006 2005 2004 (in millions) Proceeds from new securitizations $698.6 $2,270.4 $871.1 Servicing fees received 1.3 1.1 1.1 Other cash flows received on retained interests 37.4 36.0 31.1
------------------------------------------------------------------------------- 8. Derivative Financial Instruments Derivatives are generally used to hedge or reduce exposure to market risks (primarily 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. Derivatives are used to change the characteristics of our asset/liability mix consistent with our risk management activities. Additionally, derivatives are also used in asset replication strategies. We do not buy, sell or hold these investments for trading purposes. Types of Derivative Instruments Interest rate swaps are contracts in which we agree with other parties to exchange, at specified intervals, the difference between fixed rate and floating rate interest amounts based upon designated market rates or rate indices and an agreed upon notional principal amount. Generally, no cash is exchanged at the outset of the contract and no principal payments are made by either party. Cash is paid or received based on the terms of the swap. These transactions are entered into pursuant to master agreements that provide for a single net payment to be made by one counterparty at each due date. We use interest rate swaps primarily to more closely match the interest rate characteristics of assets and liabilities arising from timing mismatches between assets and liabilities (including duration mismatches). We also use interest rate swaps to hedge against changes in the value of assets we anticipate acquiring and other anticipated transactions and commitments. Interest rate swaps are used to hedge against changes in the value of the guaranteed minimum withdrawal benefit ("GMWB") liability. The GMWB rider on our variable annuity products provides for guaranteed minimum withdrawal benefits regardless of the actual performance of various equity and/or fixed income funds available with the product. In exchange-traded futures transactions, we agree to purchase or sell a specified number of contracts, the values of which are determined by the values of designated classes of securities, and to post variation margin on a daily basis in an amount equal to the difference in the daily market values of those contracts. We enter into exchange-traded futures with regulated futures commissions merchants who are members of a trading exchange. In a mortgage-backed securities ("MBS") forward transaction, we agree to purchase or sell a specified MBS on a future date. We have used exchange-traded futures and MBS forwards to reduce market risks from changes in interest rates, to alter mismatches between the assets in a portfolio and the liabilities supported by those assets, and to hedge against changes in the value of securities we own or anticipate acquiring or selling. We use exchange-traded futures to hedge against changes in the value of the GMWB liability related to the GMWB rider on our variable annuity product, as previously explained. A swaption is an option to enter into an interest rate swap at a future date. We write these options and receive a premium in order to transform our callable liabilities into fixed term liabilities. In addition, we may sell an investment-type contract with attributes tied to market indices (an embedded derivative as noted below), in which case we write an equity call option to convert the overall contract into a fixed-rate liability, essentially eliminating the equity component altogether. Equity call spreads are purchased to fund the equity participation rates promised to contractholders in conjunction with our fixed deferred annuity products that credit interest based on changes in an external equity index. Equity put options are used to hedge against changes in the value of the GMWB liability related to the GMWB rider on our variable annuity products, as previously explained. Principal Life Insurance Company Notes to Consolidated Financial Statements (continued) 8. Derivative Financial Instruments (continued) Total return swaps are contracts in which we agree with other parties to exchange, at specified intervals, an amount determined by the difference between the previous spread and the current spread on referenced indices based upon an agreed upon notional principal amount plus an additional amount determined by the financing spread. Generally, no cash is exchanged at the outset of the contract and no principal payments are made by either party. Cash is paid or received based on the terms of the swap. These transactions are entered into pursuant to master agreements that provide for a single net payment to be made by one counterparty at each due date. These derivatives have been used in our commercial mortgage securitization operation to hedge its long spread position. Currency forwards are contracts in which we agree with other parties to deliver a specified amount of an identified currency at a specified future date. Typically, the price is agreed upon at the time of the contract and payment for such a contract is made at the specified future date. Currency swaps are contracts in which we agree with other parties to exchange, at specified intervals, the difference between one currency and another at a forward exchange rate as calculated by reference to an agreed principal amount. Generally, the principal amount of each currency is exchanged at the beginning and termination of the currency swap by each party. These transactions are entered into pursuant to master agreements that provide for a single net payment to be made by one counterparty for payments made in the same currency at each due date. We use currency forwards and currency swaps to reduce market risks from changes in currency exchange rates with respect to investments or liabilities denominated in foreign currencies that we either hold or intend to acquire or sell. We use credit default swaps to enhance the return on our investment portfolio by providing comparable exposure to fixed income securities that might not be available in the primary market. They are also occasionally used to hedge credit exposures in our investment portfolio. Credit derivatives are used to sell or buy credit protection on an identified name or names on an unfunded or synthetic basis in return for receiving or paying a quarterly premium. At the same time we enter into these synthetic transactions, we buy a quality cash bond to match against the credit default swap. The premium generally corresponds to a referenced name's credit spread at the time the agreement is executed. When selling protection, if there is an event of default by the referenced name, as defined by the agreement, we are obligated to pay the counterparty the referenced amount of the contract and receive in return the referenced security in an amount equal to the notional value of the credit default swap. In our commercial mortgage backed securitization operation, we enter into commitments to fund commercial mortgage loans at specified interest rates and other applicable terms within specified periods of time. These commitments are legally binding agreements to extend credit to a counterparty. Loan commitments that will be held for sale are recognized as interest rate lock commitment derivatives that are recorded at fair value. Fair value is determined by discounting the expected total cash flows using market rates that are applicable to the yield, credit quality and maturity of each commitment. Loan commitments that are related to the origination of mortgage loans that will be held for investment are not accounted for as derivatives and, accordingly, are not recognized in our financial statements. Commodity swaps are used to sell or buy protection on commodity prices in return for receiving or paying a quarterly premium. We purchased a AAA rated secured limited recourse note from a VIE that is consolidated in our financial results. This VIE uses a commodity swap to enhance the return on an investment portfolio by selling protection on a static portfolio of commodity trigger swaps, each referencing a base or precious metal. The portfolio of commodity trigger swaps is a portfolio of deep out-of-the-money European puts on various base or precious metals. The VIE provides mezzanine protection that the average spot rate will not fall below a certain trigger price on each commodity trigger swap in the portfolio and receives guaranteed quarterly premiums in return until maturity. At the same time the VIE enters into this synthetic transaction, it buys a quality cash bond to match against the commodity swap. Principal Life Insurance Company Notes to Consolidated Financial Statements (continued) 8. Derivative Financial Instruments (continued) Exposure Our risk of loss is typically limited to the fair value of our 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. We are also exposed to credit losses in the event of nonperformance of the counterparties. Our current credit exposure is limited to the value of derivatives that have become favorable to us. This credit risk is minimized by purchasing such agreements from financial institutions with high credit ratings and by establishing and monitoring exposure limits. We also utilize various credit enhancements, including collateral and credit triggers to reduce the credit exposure to our derivative instruments. Our derivative transactions are generally documented under International Swaps and Derivatives Association, Inc. Master Agreements. Management believes that such agreements provide for legally enforceable set-off and close-out netting of exposures to specific counterparties. Under such agreements, in connection with an early termination of a transaction, we are permitted to set off our receivable from a counterparty against our payables to the same counterparty arising out of all included transactions. Prior to the application of the aforementioned credit enhancements, the gross exposure to credit risk with respect to these derivative instruments was $737.3 million and $461.9 million at December 31, 2006 and 2005, respectively. Subsequent to the application of such credit enhancements, the net exposure to credit risk was $539.8 million and $364.3 million at December 31, 2006 and 2005, respectively. Principal Life Insurance Company Notes to Consolidated Financial Statements (continued) 8. Derivative Financial Instruments (continued) The notional amounts and credit exposure of our derivative financial instruments by type were as follows: December 31, 2006 2005 (in millions) Notional amounts of derivative instruments Interest rate swaps $11,900.4 $8,531.3 Foreign currency swaps 5,307.0 3,830.4 Credit default swaps 1,550.9 1,297.6 Embedded derivative financial instruments 1,277.6 802.5 Swaptions 643.4 684.5 Call options 314.0 189.8 Currency forwards 235.3 509.2 Futures 28.1 32.2 Bond options 21.0 38.5 Commodity swaps 20.0 -- Interest rate lock commitments 8.8 392.3 Total return swaps -- 100.0 Mortgage-backed forwards and options -- 39.3 $21,306.5 $16,447.6 Gross credit exposure of derivative instruments Foreign currency swaps $560.5 $338.4 Interest rate swaps 129.1 89.3 Call options 30.6 18.0 Credit default swaps 15.7 14.0 Commodity swaps 0.7 -- Bond options 0.4 0.6 Currency forwards 0.3 1.6 Total credit exposure at end of year $737.3 $461.9 =============================================================================== The net interest effect of interest rate swap, currency swap and credit default swap transactions is recorded as an adjustment to net investment income or interest expense, as appropriate, over the periods covered by the agreements. The fair value of our derivative instruments classified as assets at December 31, 2006 and 2005, was $695.5 million and $419.3 million, respectively, and was reported with other investments on the consolidated statements of financial position. The fair value of derivative instruments classified as liabilities at December 31, 2006 and 2005, was $267.9 million and $190.1 million, respectively, and was reported with other liabilities on the consolidated statements of financial position. Principal Life Insurance Company Notes to Consolidated Financial Statements (continued) 8. Derivative Financial Instruments (continued) Fair Value Hedges We use fixed-to-floating rate interest rate swaps to more closely align the interest rate characteristics of certain assets and liabilities. In general, these swaps are used in asset and liability management to modify duration. We enter into currency exchange swap agreements to convert certain foreign denominated assets and liabilities into U.S. dollar floating-rate denominated instruments to eliminate the exposure to future currency volatility on those items. We use interest rates swaps and have used total return swaps to hedge interest rate and spread risk in our commercial mortgage securitization operations. We also sell callable investment-type agreements and use written interest rate swaptions to transform the callable liability into a fixed term liability. We recognized a pre-tax net gain (loss) of $4.7 million, $(11.8) million and $(28.7) million in 2006, 2005 and 2004, respectively, relating to the ineffective portion of our fair value hedges, which was reported with net realized/unrealized capital gains (losses) on our consolidated statements of operations. All gains or losses on derivatives were included in the assessment of hedge effectiveness. Cash Flow Hedges We also utilize floating-to-fixed rate interest rate swaps to eliminate the variability in cash flows of recognized financial assets and liabilities and forecasted transactions. We entered into currency exchange swap agreements to convert both principal and interest payments of certain foreign denominated assets and liabilities into U.S. dollar denominated fixed-rate instruments to eliminate the exposure to future currency volatility on those items. In 2006, 2005 and 2004, we recognized a $0.2 million, $27.0 million and $57.8 million after-tax increase in value, respectively, related to cash flow hedges in accumulated other comprehensive income. During this time period, none of our cash flow hedges have been discontinued because it was probable that the original forecasted transaction would not occur by the end of the originally specified time period. We reclassified $0.7 million, $21.3 million, and $5.2 million in net losses from accumulated comprehensive income into net income during 2006, 2005, and 2004 respectively, which are the portion of deferred losses related to the variability in cash flows that were hedged and impacted net income in those periods. We expect to reclassify net losses of $3.9 million in the next 12 months. For the years ended December 31, 2006, 2005 and 2004, we recognized a pre-tax gain of $2.5 million, $1.2 million, and $1.9 million in net income due to cash flow ineffectiveness, respectively. All gains or losses on derivatives were included in the assessment of hedge effectiveness. The maximum length of time that we are hedging our exposure to the variability in future cash flows for forecasted transactions, excluding those related to the payments of variable interest on existing financial assets and liabilities, is 12.5 years. Principal Life Insurance Company Notes to Consolidated Financial Statements (continued) 8. Derivative Financial Instruments (continued) Derivatives Not Designated as Hedging Instruments Our use of futures, MBS forwards, certain swaptions and swaps, equity call options, bond options, currency forwards, and interest rate lock commitments are effective from an economic standpoint, but they have not been designated as hedges under SFAS 133. As such, periodic changes in the market value of these instruments flow directly into net income. For the years ended December 31, 2006, 2005 and 2004, gains (losses) of $8.2 million, $10.5 million and $(64.4) million, respectively, were recognized in income from market value changes of derivatives not receiving hedge accounting treatment. Embedded Derivatives We may purchase or issue financial instruments or products that contain a derivative instrument that is embedded in the financial instrument or product. When it is determined that the embedded derivative possesses economic characteristics that are not clearly or closely related to the economic characteristics of the host contract and a separate instrument with the same terms would qualify as a derivative instrument, the embedded derivative is bifurcated from the host for measurement purposes. The embedded derivative, which is reported with the host instrument in the consolidated statements of financial position, is carried at fair value with changes in fair value reported in net income. We sell investment-type liability contracts in which the return is tied to an external equity index, a leveraged inflation index or leveraged reference swap. These returns are embedded options that are bifurcated from the host investment-type contract and accounted for separately. We economically hedge the embedded equity derivative by writing equity call options with identical features to convert the overall contract into a fixed-rate liability, effectively eliminating the equity component altogether. For the years ended December 31, 2006, 2005 and 2004, respectively, we recognized a $3.1 million, $1.0 million and $3.2 million pre-tax gain on the purchased equity call options and a $3.1 million, $1.0 million and $3.2 million pre-tax loss on the change in fair value of the embedded derivatives. We economically hedge the leveraged embedded derivatives with interest rate swaps and currency swaps to convert them to a fixed-rate liability or floating rate U.S. dollar liability. For the year ended December 31, 2006, we recognized a $2.6 million pre-tax loss on the swaps and a $6.0 million pre-tax gain on the change in fair value of the embedded derivatives. We contributed undated subordinated floating rate notes to three grantor trusts. The trusts separated the cash flows of the underlying notes by issuing an interest-only certificate and a residual certificate related to each note contributed. We retained the interest-only certificates and the residual certificates were subsequently sold to a third party. We have determined these grantor trusts are variable interest entities and it is necessary for us to consolidate these entities. The obligation to deliver the underlying securities to residual certificate holders of $156.8 million as of December 31, 2006, and $147.4 million as of December 31, 2005 is classified as an other liability and contains an embedded derivative of the forecasted transaction to deliver the underlying securities. For the years ended December 31, 2006, 2005 and 2004, respectively, we recognized a $7.2 million pre-tax gain, a $2.7 million pre-tax gain and a $28.2 million pre-tax loss on the change in fair value of the obligation, which is reflected in accumulated other comprehensive income on the consolidated statements of financial position. Principal Life Insurance Company Notes to Consolidated Financial Statements (continued) 8. Derivative Financial Instruments (continued) During 2005, we purchased existing Class A units of a trust that represent interest payments on the underlying security within the trust. The trust also issued Class B units representing the residual interests in the underlying security. We have determined that this trust is a variable interest entity and subsequent to this purchase it is necessary for us to consolidate this entity. The obligation to deliver the underlying security to the Class B unit holder of $12.0 million and $10.5 million as of December 31, 2006 and 2005, respectively, is classified as an other liability and contains an embedded derivative of the forecasted transaction to deliver the underlying security. For the years ended December 31, 2006 and 2005, respectively, we recognized a $0.5 million and $0.4 million pre-tax loss on the change in fair value of the obligation, which is reflected in accumulated other comprehensive income on the consolidated statements of financial position. We offer a fixed deferred annuity product that credits interest based on changes in an external equity index. It contains an embedded derivative that has been bifurcated and accounted for separately, with changes in fair value reported in net realized/unrealized gains (losses). We economically hedge the fixed deferred annuity product by purchasing options that match the product's profile. For the years ended December 31, 2006, 2005 and 2004, respectively, we recognized a $5.3 million, $1.5 million and $0.5 million pre-tax gain on the call spread options purchased and a $6.1 million, $2.3 million and $0.2 million pre-tax loss on the change in fair value of the embedded derivatives. We offer certain variable annuity products with a GMWB rider. The GMWB provides that the contractholder will receive at least their principal deposit back through withdrawals of up to a specified annual amount, even if the account value is reduced to zero. The GMWB represents an embedded derivative in the variable annuity contract that is required to be reported separately from the host variable annuity contract. Declines in the equity market may increase our exposure to benefits under contracts with the GMWB. We economically hedge the GMWB exposure using futures, options and interest rate swaps. For the years ended December 31, 2006, and 2005, respectively, we recognized in net income a $4.2 million and $0.5 million pre-tax loss on the hedging instruments and a $2.8 million pre-tax gain and $0.2 million pre-tax loss on the change in fair value of the embedded derivatives, respectively. 9. Closed Block In connection with the 1998 MIHC formation, we formed a Closed Block to provide reasonable assurance to policyholders included therein that, after the formation of the MIHC, assets would be available to maintain dividends in aggregate in accordance with the 1997 policy dividend scales, if the experience underlying such scales continued. Certain of our assets were allocated to the Closed Block in an amount that produces cash flows which, together with anticipated revenue from policies and contracts included in the Closed Block, were expected to be sufficient to support the Closed Block policies, including, but not limited to, provisions for payment of claims, certain expenses, charges and taxes, and to provide for continuation of policy and contract dividends in aggregate in accordance with the 1997 dividend scales, if the experience underlying such scales continues, and to allow for appropriate adjustments in such scales, if such experience changes. Due to adjustable life policies being included in the Closed Block, the Closed Block is charged with amounts necessary to properly fund for certain adjustments, such as face amount and premium increases, that are made to these policies after the Closed Block inception date. These amounts are referred to as Funding Adjustment Charges and are treated as capital transfers from the Closed Block. Assets allocated to the Closed Block inure solely to the benefit of the holders of policies included in the Closed Block. Closed Block assets and liabilities are carried on the same basis as other similar assets and liabilities. We will continue to pay guaranteed benefits under all policies, including the policies within 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, we will be required to make such payments from their general funds. No additional policies were added to the Closed Block, nor was the Closed Block affected in any other way, as a result of the demutualization. A PDO is required to be established for earnings in the Closed Block that are not available to stockholders. A model of the Closed Block was established to produce the pattern of expected earnings in the Closed Block (adjusted to eliminate the impact of related amounts in accumulated other comprehensive income). Principal Life Insurance Company Notes to Consolidated Financial Statements (continued) 9. Closed Block (continued) If actual cumulative earnings of the Closed Block are greater than the expected cumulative earnings of the Closed Block, only the expected cumulative earnings will be recognized in income with the excess recorded as a PDO. This PDO represents undistributed accumulated earnings that will be paid to Closed Block policyholders as additional policyholder dividends unless offset by future performance of the Closed Block that is less favorable than originally expected. If actual cumulative performance is less favorable than expected, only actual earnings will be recognized in income. At December 31, 2006 and 2005, cumulative actual earnings have been less than cumulative expected earnings. As of December 31, 2006, cumulative net unrealized gains were not greater than expected. Therefore, there was no PDO liability as of December 31, 2006. However, cumulative net unrealized gains were greater than expected, resulting in the recognition of a PDO of $33.7 million, and $118.5 million as of December 31, 2005 and 2004, respectively. Closed Block liabilities and assets designated to the Closed Block were as follows:
December 31, 2006 2005 (in millions) Closed Block liabilities Future policy benefits and claims $5,376.0 $5,387.1 Other policyholder funds 26.4 27.3 Policyholder dividends payable 357.4 361.0 Policyholder dividend obligation -- 33.7 Other liabilities 61.5 57.0 Total Closed Block liabilities 5,821.3 5,866.1 Assets designated to the Closed Block Fixed maturities, available-for-sale 3,023.7 2,989.8 Equity securities, available-for-sale 65.9 71.5 Mortgage loans 640.3 716.4 Policy loans 755.2 754.6 Other investments 84.4 47.7 Total investments 4,569.5 4,580.0 Cash and cash equivalents 50.9 34.3 Accrued investment income 70.8 71.0 Deferred income tax asset 72.8 73.6 Premiums due and other receivables 17.7 20.2 Other assets 42.3 35.9 Total assets designated to the Closed Block 4,824.0 4,815.0 Excess of Closed Block liabilities over assets designated to the Closed Block 997.3 1,051.1 Amounts included in other comprehensive income 55.7 61.5 Maximum future earnings to be recognized from Closed Block assets and liabilities $1,053.0 $1,112.6
Principal Life Insurance Company =============================================================================== Notes to Consolidated Financial Statements (continued) 9. Closed Block (continued) Closed Block revenues and expenses were as follows:
For the year ended December 31, 2006 2005 2004 (in millions) Revenues Premiums and other considerations $596.7 $617.7 $648.7 Net investment income 293.2 294.4 301.6 Net realized/unrealized capital gains (losses) (0.9) 2.3 (4.1) Total revenues 889.0 914.4 946.2 Expenses Benefits, claims and settlement expenses 497.0 518.8 515.1 Dividends to policyholders 287.0 285.3 289.1 Operating expenses 5.5 9.1 11.6 Total expenses 789.5 813.2 815.8 Closed Block revenue, net of Closed Block expenses, before income taxes 99.5 101.2 130.4 Income taxes 32.2 32.4 42.6 Closed Block revenue, net of Closed Block expenses and income taxes 67.3 68.8 87.8 Funding adjustment charges (7.7) (8.7) (10.1) Closed Block revenue, net of Closed Block expenses, income tax and funding adjustment charges $59.6 $60.1 $77.7
============================================================================== The change in maximum future earnings of the Closed Block was as follows: For the year ended December 31, 2006 2005 2004 (in millions) Beginning of year $1,112.6 $1,172.7 $1,250.4 End of year 1,053.0 1,112.6 1,172.7 Change in maximum future earnings $(59.6) $(60.1) $(77.7) =============================================================================== We charge the Closed Block with federal income taxes, payroll taxes, state and local premium taxes and other state or local taxes, licenses and fees as provided in the plan of reorganization. 10. Deferred Policy Acquisition Costs Policy acquisition costs deferred and amortized in 2006, 2005 and 2004 were as follows: For the year ended December 31, 2006 2005 2004 (in millions) Balance at beginning of year $2,069.9 $1,770.9 $1,519.6 Cost deferred during the year 445.8 440.6 457.8 Amortized to expense during the year (236.8) (238.8) (207.7) Effect of unrealized gains (losses) (13.0) 97.2 31.5 Other (1) -- -- (30.3) Balance at end of year $2,265.9 $2,069.9 $1,770.9 [GRAPHIC OMITTED] ============================================================================== 21 (1) Due to the January 1, 2004 adoption of SOP 03-1, we reclassified $30.3 million of sales inducements from DPAC to other assets. Principal Life Insurance Company Notes to Consolidated Financial Statements (continued) 11. Insurance Liabilities Contractholder Funds Major components of contractholder funds in the consolidated statements of financial position are summarized as follows: December 31, 2006 2005 (in millions) Liabilities for investment-type contracts: GICs $12,307.3 $12,601.6 Funding agreements 14,242.4 11,832.0 Other investment-type contracts 1,277.8 1,362.9 Total liabilities for investment-type contracts 27,827.5 25,796.5 Liabilities for individual annuities 6,427.6 5,413.7 Universal life and other reserves 2,527.6 2,388.4 Total contractholder funds $36,782.7 $33,598.6 =============================================================================== Our GICs and funding agreements contain provisions limiting early surrenders, which typically include penalties for early surrenders, minimum notice requirements or, in the case of funding agreements with survivor options, minimum pre-death holding periods and specific maximum amounts. Funding agreements include those issued directly to nonqualified institutional investors, as well as to three separate programs where the funding agreements have been issued directly or indirectly to unconsolidated special purpose entities. Claims for principal and interest under funding agreements are afforded equal priority to claims of life insurance and annuity policyholders under insolvency provisions of Iowa Insurance Laws. We are authorized to issue up to $4.0 billion of funding agreements under a program established in 1998 to support the prospective issuance of medium term notes by an unaffiliated entity in non-U.S. markets. As of December 31, 2006 and 2005, $3,770.4 million and $3,203.6 million, respectively, of liabilities are outstanding with respect to the issuance outstanding under this program. We do not anticipate any new issuance activity under this program as we are authorized to issue up to Euro 4.0 billion (approximately USD$5.3 billion) of funding agreements under a program established in 2006 to support the prospective issuance of medium term notes by an unaffiliated entity in non-U.S. markets. The unaffiliated entity is an unconsolidated special purpose vehicle. As of December 31, 2006, $474.1 million of liabilities are outstanding with respect to the issuance outstanding under this new program. In addition, we were authorized to issue up to $7.0 billion of funding agreements under a program established in 2001 to support the prospective issuance of medium term notes by an unaffiliated entity in both domestic and international markets. The unaffiliated entity is an unconsolidated qualifying special purpose entity. As of December 31, 2006 and 2005, $3,747.9 million and $4,744.5 million, respectively, of liabilities are being held with respect to the issuance outstanding under this program. We do not anticipate any new issuance activity under this program, given our December 2005 termination of the dealership agreement for this program and the availability of the SEC-registered program described in the following paragraph. Principal Life Insurance Company Notes to Consolidated Financial Statements (continued) 11. Insurance Liabilities (continued) We were authorized to issue up to $4.0 billion of funding agreements under a program established in March 2004 to support the prospective issuance of medium term notes by unaffiliated entities in both domestic and international markets. In recognition of the use of nearly all $4.0 billion of initial issuance authorization, this program was amended in February 2006 to authorize issuance of up to an additional $5.0 billion. Under this program, both the notes and the supporting funding agreements are registered with the SEC. As of December 31, 2006 and 2005, $5,831.4 million and $3,667.9 million, respectively, of liabilities are being held with respect to the issuance outstanding under this program. In contrast with direct funding agreements, GIC issuances and the other two funding agreement-backed medium term note programs described above, our payment obligations on each funding agreement issued under this SEC-registered program are guaranteed by Principal Financial Group, Inc. Future Policy Benefits and Claims 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: For the year ended December 31, 2006 2005 2004 (in millions) Balance at beginning of year $814.8 $747.6 $719.5 Incurred: Current year 2,047.5 1,787.0 1,682.9 Prior years (37.5) (22.0) (28.8) Total incurred 2,010.0 1,765.0 1,654.1 Payments: Current year 1,666.9 1,444.0 1,376.2 Prior years 280.7 253.8 249.8 Total payments 1,947.6 1,697.8 1,626.0 Balance at end of year: Current year 380.6 343.0 306.7 Prior years 496.6 471.8 440.9 Total balance at end of year $877.2 $814.8 $747.6 =============================================================================== The activity summary in the liability for unpaid accident and health claims shows a decrease of $37.5 million, $22.0 million and $28.8 million for the years ended December 31, 2006, 2005 and 2004, respectively, relating to prior years. Such liability adjustments, which affected current operations during 2006, 2005 and 2004, respectively, resulted in part 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. We also had claim adjustment expense liabilities of $33.4 million, $30.6 million and $28.3 million, and related reinsurance recoverables of $4.9 million, $3.5 million and $3.6 million in 2006, 2005 and 2004, respectively, which are not included in the rollforward above. Principal Life Insurance Company Notes to Consolidated Financial Statements (continued) 12. Debt Short-Term Debt The components of short-term debt as of December 31, 2006 and 2005, were as follows: December 31, 2006 2005 (in millions) Nonrecourse short-term debt $61.0 $71.4 Revolving line of credit with parent 351.2 647.7 Total short-term debt $412.2 $719.1 =============================================================================== As of December 31, 2006, we had credit facilities with various financial institutions in an aggregate amount of $1.1 billion. As of December 31, 2006 and 2005, we had $412.2 million and $719.1 million of outstanding borrowings related to our credit facilities, with $74.5 million and $80.7 million of assets pledged as support, respectively. Assets pledged consisted primarily of commercial mortgages and securities. Our short-term debt consists of a payable to Principal Financial Services, Inc. of $351.2 million and $647.7 million as of December 31, 2006 and 2005, respectively. Interest paid on intercompany debt was $23.8 million, $22.0 million and $6.2 million during 2006, 2005 and 2004, respectively. The weighted-average interest rates on short-term borrowings as of December 31, 2006 and 2005, were 5.6% and 4.5% respectively. Long-Term Debt The components of long-term debt as of December 31, 2006 and 2005, were as follows: December 31, 2006 2005 (in millions) 8% surplus notes payable, due 2044 $99.2 $99.2 Nonrecourse mortgages and notes payable 160.5 162.2 Other mortgages and notes payable 38.9 52.1 Total long-term debt $298.6 $313.5 =============================================================================== The amounts included above are net of the discount and premium associated with issuing these notes, which are being amortized to expense over their respective terms using the interest method. On March 10, 1994, we issued $100.0 million of surplus notes due March 1, 2044, at an 8% annual interest rate. None of our affiliates 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 we have sufficient surplus earnings to make such payments. Interest for the years ended December 31, 2006, 2005 and 2004 of $8.0 million, $8.0 million and $10.6 million, respectively, was approved by the Commissioner, and charged to expense. Principal Life Insurance Company Notes to Consolidated Financial Statements (continued) 12. Debt (continued) Subject to Commissioner approval, the notes due March 1, 2044, may be redeemed at our 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 non-recourse mortgages, other mortgages and notes payable are primarily financings for real estate developments. We, including certain subsidiaries, had $135.0 million in credit facilities as of December 31, 2006, with various financial institutions, in addition to obtaining loans with various lenders to finance these developments. Outstanding principal balances as of December 31, 2006, range from $0.3 million to $96.2 million per development with interest rates generally ranging from 5.5% to 8.6%. Outstanding principal balances as of December 31, 2005, range from $0.3 million to $97.5 million per development with interest rates generally ranging from 5.5% to 8.6%. Outstanding debt is secured by the underlying real estate properties, which were reported as real estate on our consolidated statements of financial position with a carrying value of $246.2 million and $284.1 million as of December 31, 2006 and 2005, respectively. At December 31, 2006, future annual maturities of the long-term debt were as follows (in millions): Year ending December 31: 2007 $113.5 2008 62.9 2009 0.5 2010 0.6 2011 0.6 Thereafter 120.5 Total future maturities of the long-term debt $298.6 =============================================================================== Cash paid for interest for 2006, 2005 and 2004, was $31.8 million, $91.1 million and $37.4 million, respectively. These amounts include interest paid on taxes during these years. 13. Income Taxes Our income tax expense from continuing operations was as follows: For the year ended December 31, 2006 2005 2004 (in millions) Current income taxes: U.S. federal $233.0 $190.1 $290.9 State and foreign 49.0 43.2 34.6 ---------------------------------------------- ---------------------------------------------- Total current income taxes 282.0 233.3 325.5 Deferred income taxes (benefits) 37.1 53.5 (100.1) Total income taxes $319.1 $286.8 $225.4 =============================================================================== Principal Life Insurance Company Notes to Consolidated Financial Statements (continued) 13. Income Taxes (continued) Our provision for income taxes may not have the customary relationship of taxes to income. A reconciliation between the corporate income tax rate and the effective tax rate from continuing operations is as follows: For the year ended December 31, 2006 2005 2004 Statutory corporate tax rate 35% 35% 35% Dividends received deduction (8) (7) (9) Interest exclusion from taxable income (1) (2) (1) Federal tax settlement for prior years (1) (1) -- Other -- 1 -- Effective tax rate 25% 26% 25% =============================================================================== Significant components of our net deferred income taxes were as follows:
December 31, 2006 2005 (in millions) Deferred income tax assets (liabilities): Insurance liabilities $299.4 $322.6 Other deferred tax assets 88.6 124.3 Total deferred tax assets 388.0 446.9 Deferred policy acquisition costs (679.2) (615.0) Net unrealized gains on available-for-sale securities (327.0) (474.6) Other deferred tax liabilities (139.9) (232.8) Total deferred tax liabilities (1,146.1) (1,322.4) Total net deferred income tax liabilities $(758.1) $(875.5)
=============================================================================== The Internal Revenue Service (the "Service") has completed examinations of the U.S. consolidated federal income tax returns for 2003 and prior years. The Service's completion of the examinations for the years 1999 - 2001 resulted in notices of deficiency dated December 29, 2004, and March 1, 2005. We paid the deficiencies (approximately $444.0 million for 1999 and 2000, and $1.3 million for 2001, including interest) in the first quarter of 2005 and have filed, or will file, claims for refund relating to the disputed adjustments. The examination for the years 2002 and 2003 resulted in a refund of approximately $176.7 million (including interest) of which $161.5 million related to deficiencies previously paid as a result of the 1999 through 2001 examination. We believe that we have adequate defenses against, or sufficient provisions for, the contested issues, but final resolution of the contested issues could take several years while legal remedies are pursued. Consequently, we do not expect the ultimate resolution of issues in tax years 1999 - 2003 to have a material impact on our net income. Similarly, we believe there are adequate defenses against, or sufficient provisions for, any challenges that might arise in tax years subsequent to 2003. Net cash paid for income taxes was $177.3 million in 2006, which included a $155.1 million audit refund pertaining to prior tax years; $676.9 million in 2005, primarily due to the notices of deficiency noted above; and $626.9 million in 2004, of which $444.3 million was attributable to the sale of Principal Residential Mortgage, Inc. Principal Life Insurance Company Notes to Consolidated Financial Statements (continued) 14. Employee and Agent Benefits We have post-retirement benefit plans covering substantially all of our employees and certain agents, including employees of other companies affiliated with our ultimate parent, Principal Financial Group, Inc. ("affiliated companies"). Actuarial information regarding the status of the post-retirement benefit plans is calculated for the total plan only. The affiliated company portion of the actuarial present value of the accumulated or projected benefit obligations, or net assets available for benefits, is not separately determined. However, we are reimbursed for employee benefits related to the affiliated companies. The reimbursement is not reflected in our employee and agent benefits disclosures. We have defined benefit pension plans covering substantially all our employees and certain agents. Some of these plans provide supplemental pension benefits to employees with salaries and/or pension benefits in excess of the qualified plan limits imposed by federal tax law. The employees and agents are generally first eligible for the pension plans when they reach age 21. For plan participants employed prior to January 1, 2002, the pension benefits are based on the greater of a final average pay benefit or a cash balance benefit. The final average pay benefit is 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 final average pay 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 cash balance portion of the plan started on January 1, 2002. An employee's account will be credited with an amount based on the employee's salary, age and service. These credits will accrue with interest. For plan participants hired on and after January 1, 2002, only the cash balance plan applies. Our policy is to fund the cost of providing pension benefits in the years that the employees and agents are providing service to us. Our funding policy for the qualified defined benefit plan is to contribute an amount annually at least equal to the minimum annual contribution required under the Employee Retirement Income Security Act ("ERISA"), and, generally, not greater than the maximum amount that can be deducted for federal income tax purposes. Our funding policy for the non-qualified benefit plan is to fund the plan in the years that the employees are providing service to us using a methodology similar to the calculation of the net periodic benefit cost under U.S. GAAP, but using long-term assumptions. However, if the U.S. GAAP funded status is positive, no deposit is made. While we designate assets to cover the computed liability of this plan, the assets are not included as part of the asset balances presented in this footnote as they do not qualify as plan assets in accordance with U.S. GAAP. We also provide certain health care, life insurance and long-term care benefits for retired employees. Subsidized retiree health benefits are provided for employees hired prior to January 1, 2002. Employees hired after December 31, 2001, will have access to retiree health benefits but are intended to pay for the full cost of the coverage. The health care plans are contributory with participants' contributions adjusted annually; the contributions are based on the number of years of service and age at retirement for those hired prior to January 1, 2002. As part of the substantive plan, the retiree health contributions are assumed to be adjusted in the future as claim levels change. The life insurance plans are contributory for a small group of previously grandfathered participants that have elected supplemental coverage and dependent coverage. Covered employees are first eligible for the medical and life postretirement benefits when they reach age 57 and have completed ten years of service with us. Retiree long-term care benefits are provided for employees whose retirement was effective prior to July 1, 2000. 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. Our policy is to fund the cost of providing retiree benefits in the years that the employees are providing service to us using a methodology similar to the calculation of the net periodic benefit cost under U.S. GAAP, but using long-term assumptions. However, if the U.S. GAAP funded status is positive, no deposit is made. We use a measurement date of October 1 for the pension and other postretirement benefit plans. Principal Life Insurance Company Notes to Consolidated Financial Statements (continued) 14. Employee and Agent Benefits (continued) Obligations and Funded Status The plans' combined funded status, reconciled to amounts recognized in the consolidated statements of financial position and consolidated statements of operations, was as follows:
Other postretirement Pension benefits benefits December 31, December 31, 2006 2005 2006 2005 (in millions) Change in benefit obligation Benefit obligation at beginning of year $(1,441.7) $(1,312.1) $(287.3) $(287.8) Service cost (47.0) (49.7) (9.5) (10.0) Interest cost (81.6) (77.4) (16.2) (16.9) Actuarial gain (loss) 43.0 (121.1) 47.1 19.8 Participant contributions -- -- (4.1) (3.6) Benefits paid 47.3 44.7 13.0 11.2 Plan amendments (0.6) 73.9 -- -- Other -- -- (0.9) -- Benefit obligation at end of year $(1,480.6) $(1,441.7) $(257.9) $(287.3) Change in plan assets Fair value of plan assets at beginning of year $1,297.8 $1,156.4 $448.9 $408.5 Actual return on plan assets 129.8 165.7 26.2 47.5 Employer contribution 29.8 20.4 0.5 0.5 Participant contributions -- -- 4.1 3.6 Benefits paid (47.3) (44.7) (13.0) (11.2) Fair value of plan assets at end of year $1,410.1 $1,297.8 $466.7 $448.9 Reconciliation of funded status to amount recognized Funded (under funded) status $-- $(143.9) $-- $161.6 Unrecognized net actuarial (gain) loss -- 201.2 -- (18.3) Unrecognized prior service benefit -- (71.3) -- (17.2) Net prepaid benefit asset (benefit obligation) $-- $(14.0) $-- $126.1 Amounts recognized in statement of financial position (Pre-SFAS 158) consist of Prepaid benefit cost $-- $172.3 $-- $126.1 Accrued benefit liability, including minimum liability -- (203.9) -- -- Accumulated other comprehensive income -- 17.6 -- -- Net amount recognized $-- $(14.0) $-- $126.1 Amount recognized in statement of financial position (Post-SFAS 158) Other assets $205.1 $-- $208.9 $-- Other liabilities (275.6) -- (0.1) -- Total $(70.5) $-- $208.8 $--
=============================================================================== Principal Life Insurance Company Notes to Consolidated Financial Statements (continued) 14. Employee and Agent Benefits (continued)
Other postretirement Pension benefits benefits December 31, December 31, 2006 2005 2006 2005 (in millions) Amount recognized in accumulated other comprehensive income (Post-SFAS 158) Total net actuarial (gain) loss $113.5 $-- $(59.5) $-- Prior service benefit (61.7) -- (14.6) -- Pre-tax accumulated other comprehensive income (gain) loss $51.8 $-- $(74.1) $--
=============================================================================== Prior to SFAS 158, a company booked on its statement of financial position the net prepaid benefit asset or benefit obligation for the fiscal year end. Under SFAS 158, a company now recognizes the over funded or under funded status of the pension and postretirement plans as an asset or liability in its statement of financial position. The incremental effect of applying SFAS 158 on individual line items in the statement of financial position as of December 31, 2006, is as follows:
Before Adjustment flows through application of accumulated other After application of SFAS 158 comprehensive income SFAS 158 (in millions) Assets for pension plans $184.2 $20.9 $205.1 Assets for other post-retirement benefits plans 134.8 74.1 208.9 Liability for pension plans (203.0) (72.6) (275.6) Liability for other post-retirement benefits plan -- (0.1) (0.1) Additional minimum pension liability (13.4) 13.4 -- Pre-tax accumulated other comprehensive income (13.4) 35.7 22.3
------------------------------------------------------------------------------- Employer contributions to the pension plans include contributions made directly to the qualified pension plan assets and contributions from corporate assets to pay nonqualified pension benefits. Benefits paid from the pension plans include both qualified and nonqualified plan benefits. Nonqualified pension plan assets are not included as part of the asset balances presented in this footnote. The nonqualified pension plan assets are held in a Rabbi trust for the benefit of all nonqualified plan participants. The assets held in a Rabbi trust are available to satisfy the claims of general creditors only in the event of bankruptcy. Therefore, these assets are fully consolidated in our consolidated statements of financial position and are not reflected in our funded status as they do not qualify as plan assets. The market value of assets held in these trusts was $216.0 million as of December 31, 2006, and $198.3 million as of December 31, 2005. Principal Life Insurance Company Notes to Consolidated Financial Statements (continued) 14. Employee and Agent Benefits (continued) Pension Plan Changes and Plan Gains/Losses As of January 1, 2006, changes were made to our retirement program, including the Principal Select Saving Plan ("401(k)"), the Principal Pension Plan ("Pension Plan") and to the corresponding nonqualified plans. The qualified and nonqualified pension plan changes include a reduction to the traditional and cash balance formulas, a change in the early retirement factors, and the removal of the cost of living adjustments for traditional benefits earned after January 1, 2006. The qualified and nonqualified 401(k) plan's company match increased from 50% of a contribution rate up to a maximum of 3% of the participant's compensation to 75% of a contribution rate up to a maximum of 6% of the participant's compensation. Employees who were at least 47 years old, with a minimum of 10 years of service as of December 31, 2005, were given the choice to remain under the current pension and 401(k) arrangement or move to the new plan design. The vast majority of this group chose to remain under the current pension and 401(k) arrangement. The Pension Plan changes were recognized as a prior service benefit and resulted in a reduction of liabilities of $73.9 million. For the year ended December 31, 2006, the pension plans had an actuarial gain of $43.0 million, this gain was primarily due to the increase in the discount rate and was partially offset by greater than expected salary increases. For the year ended December 31, 2005, the pension plans had an actuarial loss of $121.1 million, which was primarily due to the decrease in the discount rate. The accumulated benefit obligation for all defined benefit pension plans was $1,274.3 million and $1,239.2 million at December 31, 2006, and 2005, respectively. The Principal Residential Mortgage, Inc. divestiture in 2004 resulted in a curtailment for the plans that provided benefits to the Principal Residential Mortgage, Inc. participants. A mid-year re-measurement to reflect the curtailment occurred as of the date of sale, July 1, 2004. Curtailment gains of $25.1 million and $3.9 million occurred under the pension and other postretirement benefit plans, respectively in 2004. This did not affect the pension plans or other postretirement benefit plans covering agents and managers. In addition, this did not affect the long-term care plan because these plans consist of only retired participants. Due to the Principal Residential Mortgage, Inc. divestiture, we provided for contractual termination benefits in connection with termination of employment for a select group of Principal Residential Mortgage, Inc. management employees. The pension plan recognized $1.8 million in special termination benefits liability in 2004. Other Post Retirement Plan Changes and Plan Gains/Losses On December 8, 2003, the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the "Medicare Modernization Act") was signed into law. The Medicare Modernization Act introduced a prescription drug benefit under Medicare ("Medicare Part D") as well as a federal subsidy to sponsors of retiree medical benefit plans. The prescription drug benefits offered by the sponsor must be at least actuarially equivalent to benefits offered under Medicare Part D to qualify for the subsidy. This subsidy is effective in 2006 and would only apply to benefits paid for qualifying retirees who have not enrolled in Medicare Part D. An actuarial gain of $47.1 million occurred during 2006 for the other postretirement benefit plans. This was due to a less than assumed increase in health care claim costs and trend assumption, as well as an increase in the discount rate. Retiree contributions also increased more than health care claim costs. An actuarial gain of $19.8 million occurred during 2005 for the other postretirement benefit plans. This was due to a less than assumed increase in health care claim costs and trend assumption, as well as a refinement in the recognition of Medicare Part D government subsidy. The gain was partially offset by a decrease in the discount rate. Principal Life Insurance Company Notes to Consolidated Financial Statements (continued) 14. Employee and Agent Benefits (continued) On July 26, 2004, the Centers of Medicare and Medicaid Services issued proposed regulations that provided guidance on the definition of actuarially equivalent retiree prescription drug coverage. These regulations aided in our third quarter of 2004 determination that the majority of our retiree prescription drug benefit coverage is actuarially equivalent to Medicare's Part D prescription drug plan and thus makes us eligible for the tax-free subsidy beginning in 2006. Accordingly, we conducted a mid-year re-measurement during third quarter of 2004 of our retiree medical plans to reflect the recognition of the Medicare Modernization Act in accordance with FSP No. 106-2, Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003. This caused an actuarial gain of approximately $22.5 million for the medical plans. In addition, it also caused the net periodic benefit cost for 2004 to change for the fourth quarter. The 2004 service cost decreased by approximately $0.2 million, interest cost decreased approximately $0.4 million and the actuarial loss amortization decreased by $0.1 million. During 2006, the total Medicare subsidies we received and accrued for were $0.9 million. Information for pension plans with an accumulated benefit obligation in excess of plan assets: The obligations below relate only to the nonqualified pension plan liabilities. As noted previously, the nonqualified plans have assets that are deposited in trusts that fail to meet the requirements to be included in plan assets; however, these assets are included in our consolidated statements of financial position. December 31, 2006 2005 (in millions) Projected benefit obligation $275.6 $255.7 Accumulated benefit obligation 216.4 203.9 ------------------------------------------------------------------------------- Information for other postretirement benefit plans with an accumulated postretirement benefit obligation in excess of plan assets: December 31, 2006 2005 (in millions) Accumulated postretirement benefit obligation $2.1 $2.3 Fair value of plan assets 2.0 1.6 ------------------------------------------------------------------------------- Components of net periodic benefit cost:
Pension benefits Other postretirement benefits For the year ended December 31, 2006 2005 2004 2006 2005 2004 (in millions) Service cost $47.0 $49.7 $49.6 $9.5 $10.0 $8.7 Interest cost 81.6 77.4 73.8 16.2 16.9 15.4 Expected return on plan assets (105.4) (96.2) (87.4) (32.4) (29.4) (27.6) Amortization of prior service cost (benefit) (9.0) 1.3 1.8 (2.6) (2.6) (2.8) Amortization of transition asset -- -- (0.1) -- -- -- Recognized net actuarial loss 20.4 16.4 14.1 0.2 0.5 0.5 Special termination and benefits -- -- 1.8 -- -- -- Curtailment gain -- -- (13.8) -- -- (5.4) Net periodic benefit cost (income) $34.6 $48.6 $39.8 $(9.1) $(4.6) $(11.2)
=============================================================================== The pension plans' actuarial gains and losses are amortized using a straight-line amortization method over the average remaining service period of employees. For the qualified pension plan, there is no corridor recognized in determining the amount to amortize; for the nonqualified pension plans, the corridor allowed under SFAS 87 is used. Principal Life Insurance Company Notes to Consolidated Financial Statements (continued) 14. Employee and Agent Benefits (continued)
Other postretirement Pension benefits benefits For the year ended December 31, 2006 2005 2006 2005 (in millions) Other changes recognized in accumulated other comprehensive income (Post- SFAS 158) Net actuarial (gain)/loss $113.5 $-- $(59.5) $-- Prior service benefit (61.7) -- (14.6) -- Total recognized in accumulated other comprehensive income $51.8 $-- $(74.1) $-- Total recognized in net periodic benefit cost and accumulated other comprehensive income $86.4 $-- $(83.2) $--
=============================================================================== For 2006, net actuarial (gain) loss and net prior service benefits are immediately recognized in accumulated other comprehensive income. The estimated net actuarial loss and prior service (benefit) that will be amortized from accumulated other comprehensive income into net periodic benefit cost for the pension benefits during the 2007 fiscal year are $10.0 million and $(8.3) million, respectively. The estimated net actuarial (gain) and prior service (benefit) for the postretirement benefits that will be amortized from accumulated other comprehensive income into net periodic benefit cost during the 2007 fiscal year are $(1.9) million and $(2.6) million, respectively. Additional information:
Other postretirement Pension benefits benefits For the year ended December 31, 2006 2005 2006 2005 (in millions) Increase (decrease) in minimum liability included in other comprehensive income (Pre-SFAS 158) $(4.2) $9.5 $-- $--
------------------------------------------------------------------------------- Assumptions: Weighted-average assumptions used to determine benefit obligations as disclosed under the Obligations and Funded Status section Other postretirement Pension benefits benefits December 31, 2006 2005 2006 2005 Discount rate 6.15% 5.75% 6.15% 5.75% Rate of compensation increase 5.00% 5.00% 5.00% 5.00% -------------------------------------------------------------------------------- Principal Life Insurance Company Notes to Consolidated Financial Statements (continued) 14. Employee and Agent Benefits (continued) Weighted-average assumptions used to determine net periodic benefit cost
Pension benefits Other postretirement benefits For the year ended December 31, 2006 2005 2004 2006 2005 2004 Discount rate 5.75% 6.00% 6.25%/6.50%* 5.75% 6.00% 6.25%/6.50%* Expected long-term return on plan assets 8.25% 8.50% 8.50% 7.30% 7.30% 7.31% Rate of compensation increase 5.00% 5.00% 5.00% 5.00% 5.00% 5.00%
-------------------------------------------------------------------------------- * The discount rate used to calculate the benefit expense for the first three quarters of 2004 expense related to the home office pension and other postretirement benefit plans and retiree medical plans was 6.25%. The discount rate used to calculate the benefit expense for the last quarter of 2004 was 6.50%. The change in rates occurred due to the third quarter 2004 remeasurement for the Principal Residential Mortgage, Inc. divestiture and Medicare Modernization Act. A remeasurement did not occur on the agents and managers pension and other non-medical postretirement benefit plans. For other postretirement benefits, the 7.30% rate for 2006 is based on the weighted average expected long-term asset returns for the medical, life and long-term care plans. The expected long-term rates for the medical, life and long-term care plans are 7.25%, 7.75% and 5.85%, respectively. The expected return on plan assets is the long-term rate we expect to be earned based on the plans' investment strategy. Historical and expected future returns of multiple asset classes were analyzed to develop a risk free rate of return and risk premiums for each asset class. The overall rate for each asset class was developed by combining a long-term inflation component, the risk free real rate of return and the associated risk premium. A weighted average rate was developed based on those overall rates and the target asset allocation of the plans. Based on a review in 2005, the long term expected return on plan assets was lowered for the 2006 pension expense calculation. Assumed health care cost trend rates
December 31, 2006 2005 Health care cost trend rate assumed for next year under age 65 12.0% 13.0% Health care cost trend rate assumed for next year age 65 and over 11.0% 13.0% Rate to which the cost trend rate is assumed to decline (the ultimate trend rate) 5.0% 5.0% Year that the rate reaches the ultimate trend rate 2018 2017
------------------------------------------------------------------------------- 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:
1-percentage- 1-percentage- point increase point decrease (in millions) Effect on total of service and interest cost components $5.5 $(4.3) Effect on accumulated postretirement benefit obligation (44.8) 36.6
------------------------------------------------------------------------------- Principal Life Insurance Company Notes to Consolidated Financial Statements (continued) 14. Employee and Agent Benefits (continued) Pension Plan Assets The qualified pension plan's weighted-average asset allocations by asset category as of the two most recent measurement dates are as follows: October 1, Asset category 2006 2005 Domestic equity securities 54% 54% International equity securities 14 14 Domestic debt securities 23 23 Real estate 9 9 Total 100% 100% =============================================================================== Our investment strategy is to achieve the following: o Obtain a reasonable long-term return consistent with the level of risk assumed and at a cost of operation within prudent levels. Performance benchmarks are monitored. o Ensure sufficient liquidity to meet the emerging benefit liabilities for the plan. o Provide for diversification of assets in an effort to avoid the risk of large losses and maximize the investment return to the pension plan consistent with market and economic risk. In administering the qualified pension plan's asset allocation strategy, we consider the projected liability stream of benefit payments, the relationship between current and projected assets of the plan and the projected actuarial liabilities streams, the historical performance of capital markets adjusted for the perception of future short- and long-term capital market performance and the perception of future economic conditions. The overall target asset allocation for the qualified plan assets is: Asset category Target allocation Domestic equity securities 40% - 60% International equity securities 5% - 15% Domestic debt securities 20% - 30% International debt securities 0% - 7% Real estate 3% - 10% Other 0% - 7% ------------------------------------------------------------------------------- For 2006 and 2005, respectively, the plan assets include none of our stock. Prior to April 30, 2005, the plan held our stock in a separate account under an annuity contract. These assets were received in the qualified defined benefit plan as a result of the 2001 demutualization. These holdings were liquidated as of April 30, 2005. Other Postretirement Benefit Plan Assets The other postretirement benefit plans' weighted-average asset allocations by asset category as of the two most recent measurement dates are as follows: October 1, Asset category 2006 2005 Equity securities 58% 55% Debt securities 42 45 Total 100% 100% Principal Life Insurance Company =============================================================================== Notes to Consolidated Financial Statements (continued) 14. Employee and Agent Benefits (continued) The weighted average target asset allocation for the other postretirement benefit plans is: Asset category Target allocation Equity securities 50 - 70% Debt securities 30 - 50% -------------------------------------------------------------------------------- The investment strategies and policies for the other postretirement benefit plans are similar to those employed by the qualified pension plan. Contributions We expect to contribute approximately $1.0 million to our other postretirement benefit plans in 2007. Our funding policy for the qualified pension plan is to fund the plan annually in an amount at least equal to the minimum annual contribution required under ERISA and, generally, not greater than the maximum amount that can be deducted for federal income tax purposes. We do not anticipate that we will be required to fund a minimum annual contribution under ERISA for the qualified pension plan. At this time, it is too early to estimate the amount that may be contributed, but it is possible that we may fund the plans in 2007 in the range of $20-$50 million. This includes funding for both our qualified and nonqualified pension plans. Estimated Future Benefit Payments The following benefit payments, which reflect expected future service, expected to be paid and the amount of tax-free subsidy receipts under Medicare Part D expected to be received are:
Other postretirement benefits (gross benefit payments, including prescription Amount of Medicare Part D Pension benefits drug benefits) subsidy receipts (in millions) Year ending December 31: 2007 $51.5 $18.7 $1.0 2008 55.1 20.5 1.2 2009 59.1 22.6 1.3 2010 63.9 25.0 1.5 2011 69.7 27.7 1.7 2012-2016 448.4 182.0 12.2
-------------------------------------------------------------------------------- The above table reflects the total estimated future benefits to be paid from the plan, including both our share of the benefit cost and the participants' share of the cost, which is funded by their contributions to the plan. The assumptions used in calculating the estimated future benefit payments are the same as those used to measure the benefit obligation for the year ended December 31, 2006. The information that follows shows supplemental information for our defined benefit pension plans. Certain key summary data is shown separately for qualified and non-qualified plans. Principal Life Insurance Company Notes to Consolidated Financial Statements (continued) 14. Employee and Agent Benefits (continued)
For the year ended December 31, 2006 2005 Qualified Nonqualified Qualified Nonqualified plan plans Total plan plans Total (in millions) Reconciliation of funded status to amount recognized Benefit obligation, end of the year $-- $-- $-- $(1,186.0) $(255.7) $(1,441.7) Fair value of plan assets, end of the year -- -- -- 1,297.8 -- 1,297.8 Funded (underfunded) status -- -- -- 111.8 (255.7) (143.9) Unrecognized net actuarial loss -- -- -- 111.5 89.7 201.2 Unrecognized prior service benefit -- -- -- (51.0) (20.3) (71.3) Net amount recognized $-- $-- $-- $172.3 $(186.3) $(14.0) Amounts recognized in statement of financial position (Pre-SFAS 158) Prepaid benefit cost $-- $-- $-- $172.3 $-- $172.3 Accrued benefit liability including ============== -- -- minimum liability -- -- (203.9) (203.9) Accumulated other comprehensive income -- -- -- -- 17.6 17.6 Net amount recognized $-- $-- $-- $172.3 $(186.3) $(14.0) Amount recognized in statement of financial position (Post-SFAS 158) Other assets $205.1 $-- $205.1 $-- $-- $-- Other liabilities -- (275.6) (275.6) -- -- -- Total $205.1 $(275.6) $(70.5) $-- $-- $-- Amount recognized in accumulated other comprehensive income (Post-SFAS 158) Total net actuarial loss $24.2 $89.3 $113.5 $-- $-- $-- Prior service benefit (45.1) (16.6) (61.7) -- -- -- Total accumulated other comprehensive income (not adjusted for applicable tax) $(20.9) $72.7 $51.8 $-- $-- $-- Components of net periodic benefit cost Service cost $39.3 $7.7 $47.0 $41.9 $7.8 $49.7 Interest cost 67.2 14.4 81.6 63.7 13.7 77.4 Expected return on plan assets (105.4) -- (105.4) (96.2) -- (96.2) Amortization of prior service cost (benefit) (5.9) (3.1) (9.0) 2.8 (1.5) 1.3 Recognized net actuarial loss 12.9 7.5 20.4 11.2 5.2 16.4 Net periodic benefit cost $8.1 $26.5 $34.6 $23.4 $25.2 $48.6 Total recognized in net periodic benefit cost and accumulated other comprehensive income $(12.8) $99.2 $86.4 $-- $-- $--
=============================================================================== Principal Life Insurance Company Notes to Consolidated Financial Statements (continued) 14. Employee and Agent Benefits (continued) In addition, we have defined contribution plans that are generally available to all employees and agents. Eligible participants could not contribute more than $15,000 of their compensation to the plans in 2006. Effective January 1, 2006, we made several changes to the retirement programs. In general, the pension and supplemental executive retirement plan benefit formulas were reduced, and the 401(k) matching contribution was increased. Employees who were age 47 or older with at least ten years of service on December 31, 2005, could elect to retain the prior benefit provisions and forgo receipt of the additional matching contributions. The employees who elected to retain the prior benefit provisions are referred to as "Grandfathered Choice Participants". In 2006, we matched the Grandfathered Choice Participant's contribution at a 50% contribution rate up to a maximum contribution of 3% of the participant's compensation. For all other participants, we matched the participant's contributions at a 75% contribution rate up to a maximum of 6% of the participant's compensation. The defined contribution plans allow employees to choose among various investment options, including our common stock. We contributed $36.4 million, $19.0 million and $18.6 million in 2006, 2005, and 2004, respectively, to our qualified defined contribution plans. We also have a nonqualified defined contribution plan available to select employees and agents which allows them to contribute amounts in excess of limits imposed by federal tax law. In 2006, we matched the Grandfathered Choice Participant's Contribution at a 50% contribution rate up to a maximum contribution of 3% of the participant's compensation. For all other participants, we matched the participant's contributions at a 75% contribution rate up to a maximum contribution of 6% of the participant's compensation. We contributed $8.0 million, $4.8 million and $4.5 million in 2006, 2005, and 2004, respectively, to our nonqualified defined contribution plans. 15. Contingencies, Guarantees and Indemnifications Litigation We are regularly involved in litigation, both as a defendant and as a plaintiff, but primarily as a defendant. Litigation naming us as a defendant ordinarily arises out of our business operations as a provider of asset management and accumulation products and services, life, health and disability insurance. Some of the lawsuits are class actions, or purport to be, and some include claims for punitive damages. In addition, regulatory bodies, such as state insurance departments, the SEC, the National Association of Securities Dealers, Inc., the Department of Labor and other regulatory bodies regularly make inquiries and conduct examinations or investigations concerning our compliance with, among other things, insurance laws, securities laws, ERISA and laws governing the activities of broker-dealers. Several lawsuits have been filed against other insurance companies and insurance brokers alleging improper conduct relating to the payment and non-disclosure of contingent compensation and bid-rigging activity. Several of these suits were filed as purported class actions. Several state attorneys general and insurance regulators have initiated industry-wide inquiries or other actions relating to compensation arrangements between insurance brokers and insurance companies and other industry issues. Beginning in March of 2005, we have received subpoenas and interrogatories from the offices of the Attorneys General of New York and Connecticut seeking information related to compensation agreements with brokers and agents and the sale of retirement products and services. We are cooperating with these inquiries. To date, none of these Attorneys General investigations has resulted in any action against us. We are, however, engaged in discussions with the Connecticut and New York Attorney General's Office with respect to broker payments relating to sales of our single premium group annuity products, which primarily fund terminating defined benefit plans. At this point, we cannot predict the outcome of these discussions. We have received other requests from regulators and other governmental authorities relating to other industry issues and may receive additional such requests, including subpoenas and interrogatories, in the future. Principal Life Insurance Company Notes to Consolidated Financial Statements (continued) 15. Contingencies, Guarantees and Indemnifications (continued) On December 23, 2004, a lawsuit was filed in Iowa state court against us, Principal Financial Group, Inc. and Principal Financial Services, Inc., on behalf of a proposed class comprised of the settlement class in our sales practices class action settlement, which was approved in April 2001 by the United States District Court for the Southern District of Iowa. This more recent lawsuit claims that the treatment of the settlement costs of that sales practices litigation in relation to the allocation of demutualization consideration to our policyholders was inappropriate. Demutualization allocation was done pursuant to the terms of a plan of demutualization approved by the policyholders in July 2001 and the Commissioner in August 2001. The lawsuit further claims that such allocation was not accurately described to policyholders during the demutualization process and is a breach of the sales practices settlement. On January 27, 2005, we filed a notice to remove the action from state court to the United States District Court for the Southern District of Iowa. On July 22, 2005, the plaintiff's motion to remand the action to state court was denied, and our motion to dismiss the lawsuit was granted. On September 21, 2005, the plaintiff's motion to alter or amend the judgment was denied. On October 4, 2005, the plaintiff filed a notice of appeal to the United States Court of Appeals for the Eighth Circuit. Oral argument was held on April 20, 2006. On October 20, 2006, the Court of Appeals affirmed our motion to dismiss. On November 8, 2006, a trustee of Fairmount Park Inc. Retirement Savings Plan filed a putative class action lawsuit in the United States District Court for the Southern District of Illinois against us. The complaint alleges, among other things, that we breached our alleged fiduciary duties while performing services to 401(k) plans by failing to disclose, or adequately disclose, to employers or plan participants the fact that we receive "revenue sharing fees from mutual funds that are included in its pre-packaged 401(k) plans" and allegedly failed to use the revenue to defray the expenses of the services provided to the plans. We have filed an Answer and a Motion to Transfer and intend to aggressively defend the lawsuit. Plaintiff further alleges that these acts constitute prohibited transactions under ERISA. Plaintiff seeks to certify a class of all retirement plans to which we were a service provider and for which we received and retained "revenue sharing" fees from mutual funds. Plaintiff seeks declaratory, injunctive and monetary relief. We intend to aggressively defend the lawsuit. 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 our business or financial position. The outcome of litigation is always uncertain, and unforeseen results can occur. It is possible that such outcomes could materially affect net income in a particular quarter or annual period. Guarantees and Indemnifications In the normal course of business, we have provided guarantees to third parties primarily related to a former subsidiary, joint ventures and industrial revenue bonds. These agreements generally expire through 2019. The maximum exposure under these agreements as of December 31, 2006, was approximately $171.0 million; however, we believe the likelihood is remote that material payments will be required and therefore have not accrued for a liability on our consolidated statements of financial position. Should we be required to perform under these guarantees, we generally could recover a portion of the loss from third parties through recourse provisions included in agreements with such parties, the sale of assets held as collateral that can be liquidated in the event that performance is required under the guarantees or other recourse generally available to us, therefore, such guarantees would not result in a material adverse effect on our business or financial position. It is possible that such outcomes could materially affect net income in a particular quarter or annual period. The fair value of such guarantees is not material. We are also subject to various other indemnification obligations issued in conjunction with certain transactions, primarily the sale of Principal Residential Mortgage, Inc. and other divestitures, acquisitions and financing transactions whose terms range in duration and often are not explicitly defined. Certain portions of these indemnifications may be capped, while other portions are not subject to such limitations; therefore, the overall maximum amount of the obligation under the indemnifications cannot be reasonably estimated. While we are unable to estimate with certainty the ultimate legal and financial liability with respect to these indemnifications, we believe the likelihood is remote that material payments would be required under such indemnifications and therefore such indemnifications would not result in a material adverse effect on our business or financial position. It is possible that such outcomes could materially affect net income in a particular quarter or annual period. The fair value of such indemnifications was determined to be insignificant. Principal Life Insurance Company Notes to Consolidated Financial Statements (continued) 15. Contingencies, Guarantees and Indemnifications (continued) Operating Leases As a lessee, we lease office space, data processing equipment, office furniture and office equipment under various operating leases. Rental expense for the year ended December 31, 2006, 2005 and 2004, respectively, was $47.3 million, $50.8 million and $44.9 million. At December 31, 2006, the future minimum lease payments are $186.3 million. The following represents payments due by period for operating lease obligations as of December 31, 2006 (in millions). Year ending December 31: 2007 $50.9 2008 43.3 2009 35.1 2010 25.8 2011 16.7 2012 and thereafter 28.1 199.9 Less future sublease rental income on noncancelable leases 13.6 Total future minimum lease payments $186.3 ================================================================================ Capital Lease As a lessee, we lease an aircraft under a capital lease. As of December 31, 2006 and 2005, respectively, the aircraft had a gross asset balance of $14.4 million and accumulated depreciation of $1.1 million and $0.5 million. Depreciation expense for both the years ended December 31, 2006 and 2005, was $0.6 million. At December 31, 2006, the future minimum lease payments are $17.9 million. The following represents payments due by period for capital lease obligations as of December 31, 2006 (in millions). Year ending December 31: 2007 $0.9 2008 1.0 2009 1.1 2010 1.1 2011 1.2 2012 and thereafter 12.6 Total $17.9 ================================================================================ Securities Posted as Collateral We posted $484.5 million in securities under collateral agreements at December 31, 2006, to satisfy collateral requirements primarily associated with our derivatives credit support agreements and a reinsurance arrangement with our U.S. Asset Management and Accumulation segment. Principal Life Insurance Company Notes to Consolidated Financial Statements (continued) 16. Stockholder's Equity Accumulated Other Comprehensive Income Comprehensive income includes all changes in stockholder's equity during a period except those resulting from investments by stockholders and distributions to stockholders. The components of accumulated other comprehensive income were as follows:
Net unrealized gains Net unrealized Foreign Accumulated on available- losses currency Minimum other for-sale on derivative translation pension comprehensive securities instruments adjustment liability income (in millions) Balances at January 1, 2004 $1,285.1 $(58.6) $(7.2) $(2.5) $1,216.8 Net change in unrealized gains on fixed maturities, available-for-sale 67.6 -- -- -- 67.6 Net change in unrealized gains on equity securities, available-for-sale 0.2 -- -- -- 0.2 Net change in unrealized gains on equity method subsidiaries and minority interest adjustments (28.2) -- -- -- (28.2) Adjustments for assumed changes in amortization pattern 28.2 -- -- -- 28.2 Net change in unrealized losses on derivative instruments -- 88.9 -- -- 88.9 Net change in unrealized gains on policyholder dividend obligation (19.5) -- -- -- (19.5) Change in net foreign currency translation adjustment -- -- (0.6) -- (0.6) Change in minimum pension liability adjustment -- -- -- (4.3) (4.3) Net change in provision for deferred income tax benefit (expense) (16.7) (31.1) -- 1.5 (46.3) Balances at December 31, 2004 $1,316.7 $(0.8) $(7.8) $(5.3) $1,302.8
-------------------------------------------------------------------------------- Principal Life Insurance Company Notes to Consolidated Financial Statements (continued) 16. Stockholder's Equity (continued)
Net unrealized Net gains unrealized Foreign Accumulated on available- gains (losses) currency Minimum other for-sale on derivative translation pension comprehensive securities instruments adjustment liability income (in millions) Balances at January 1, 2005 $1,316.7 $(0.8) $(7.8) $(5.3) $1,302.8 Net change in unrealized gains on fixed maturities, available-for-sale (902.3) -- -- -- (902.3) Net change in unrealized gains on equity securities, available-for-sale 5.8 -- -- -- 5.8 Net change in unrealized gains on equity method subsidiaries and minority interest adjustments 5.3 -- -- -- 5.3 Adjustments for assumed changes in amortization pattern 94.7 -- -- -- 94.7 Net change in unrealized losses on derivative instruments -- 41.7 -- -- 41.7 Net change in unrealized gains on policyholder dividend obligation 84.7 -- -- -- 84.7 Change in net foreign currency translation adjustment -- -- 0.7 -- 0.7 Change in minimum pension liability adjustment -- -- -- (9.5) (9.5) Net change in provision for deferred income tax benefit 244.2 (16.5) -- 3.3 231.0 Balances at December 31, 2005 $849.1 $24.4 $(7.1) $(11.5) $854.9
-------------------------------------------------------------------------------- Principal Life Insurance Company Notes to Consolidated Financial Statements (continued) 16. Stockholder's Equity (continued)
Minimum Net unrealized Net pension gains unrealized Foreign Unrecognized liability Accumulated on available- gains currency post-retiremen other for-sale on derivative translation benefit comprehensive securities instruments adjustment obligations t income (in millions) Balances at January 1, 2006 $849.1 $24.4 $(7.1) $-- $(11.5) $854.9 Net change in unrealized gains on ------------- fixed maturities, available-for-sale (454.2) -- -- -- -- (454.2) Net change in unrealized gains on equity securities, available-for-sale (12.0) -- -- -- -- (12.0) Net change in unrealized gains on equity method subsidiaries and minority interest adjustments 6.7 -- -- -- -- 6.7 Adjustments for assumed changes in amortization pattern 8.1 -- -- -- -- 8.1 Net change in unrealized gains on derivative instruments -- 0.3 -- -- -- 0.3 Net change in unrealized gains on policyholder dividend obligation 33.7 -- -- -- -- 33.7 Change in net foreign currency translation adjustment -- -- 1.6 -- -- 1.6 Change in minimum pension liability -- -- -- -- 4.2 4.2 Transition adjustment related to post-retirement benefit obligations -- -- -- 22.3 13.4 35.7 Net change in provision for deferred income tax benefit (expense) 147.6 (0.1) -- (7.8) (6.1) 133.6 Balances at December 31, 2006 $579.0 $24.6 $(5.5) $14.5 $-- $612.6
================================================================================ 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:
For the year ended December 31, 2006 2005 2004 (in millions) Unrealized gains (losses) on available-for-sale securities arising during the year $(255.0) $(430.1) $113.5 Adjustment for realized losses on available-for-sale securities included in net income (14.9) (12.3) (24.1) Unrealized gains (losses) on available-for-sale securities, as adjusted $(269.9) $(442.4) $89.4
=============================================================================== The above table is presented net of income tax, derivatives in cash flow hedge relationships, PDO and related changes in the amortization patterns of DPAC, sales inducements and unearned revenue reserves. Principal Life Insurance Company Notes to Consolidated Financial Statements (continued) 16. Stockholder's Equity (continued) Dividend Limitations Under Iowa law, we may pay stockholder dividends only from the earned surplus arising from its business and must receive the prior approval of the Commissioner to pay a stockholder dividend if such a stockholder dividend would exceed certain statutory limitations. The current statutory limitation is the greater of 10% of our policyholder surplus as of the preceding year-end or the net gain from operations from the previous calendar year. Based on this limitation and 2006 statutory results, we could pay approximately $660.4 million in stockholder dividends in 2007 without exceeding the statutory limitation. 17. Fair Value of Financial Instruments The following discussion describes the methods and assumptions we utilize in estimating our fair value disclosures for financial instruments. Certain financial instruments, particularly policyholder liabilities other than investment-type 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 our 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 our financial instruments. We define 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 us 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 and residential 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 policy loans are estimated by discounting expected cash flows using a risk-free rate based on the U.S. Treasury curve. The fair values for assets classified as other investments excluding equity investments in subsidiaries and cash and cash equivalents in the accompanying consolidated statements of financial position approximate their carrying amounts. The fair values of our reserves and liabilities for investment-type insurance contracts 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. Investment-type insurance contracts include 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. Insurance contracts include insurance, annuity and other policy contracts that do involve significant mortality or morbidity risk. The fair values for our insurance contracts, other than investment-type contracts, are not required to be disclosed. We do 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 our incremental borrowing rate for similar borrowing arrangements. Principal Life Insurance Company Notes to Consolidated Financial Statements (continued) 17. Fair Value of Financial Instruments (continued) The carrying amounts and estimated fair values of our financial instruments were as follows:
December 31, 2006 2005 Carrying amount Fair value Carrying amount Fair value (in millions) Assets (liabilities) Fixed maturities, available-for-sale $42,168.8 $42,168.8 $39,949.0 $39,949.0 Fixed maturities, trading 197.9 197.9 105.0 105.0 Equity securities, available-for-sale 645.3 645.3 702.9 702.9 Equity securities, trading 148.2 148.2 60.1 60.1 Mortgage loans 11,141.9 11,644.7 10,979.2 11,796.6 Policy loans 850.7 930.7 827.7 925.6 Other investments 836.5 836.5 648.4 648.4 Cash and cash equivalents 1,898.0 1,898.0 1,715.1 1,715.1 Investment-type insurance contracts (34,255.1) (33,652.9) (31,210.2) (31,120.4) Short-term debt (412.2) (412.2) (719.1) (719.1) Long-term debt (298.6) (311.9) (313.5) (329.4)
-------------------------------------------------------------------------------- 18. Statutory Insurance Financial Information We prepare 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 (the "State of Iowa"). The State of Iowa recognizes only statutory accounting practices prescribed or permitted by the State of Iowa for determining and reporting the financial condition and results of operations of an insurance company to determine its solvency under the Iowa Insurance Law. The National Association of Insurance Commissioners' ("NAIC") Accounting Practices and Procedures Manual has been adopted as a component of prescribed practices by the State of Iowa. The Commissioner has the right to permit other specific practices that deviate from prescribed practices. Life and 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 and health insurance company is to be determined based on the various risk factors related to it. At December 31, 2006, we meet the minimum RBC requirements. Statutory net income and statutory surplus were as follows: As of or for the year ended December 31, 2006 2005 2004 (in millions) Statutory net income $684.9 $666.2 $512.7 Statutory surplus 3,596.1 3,657.8 3,044.3 ------------------------------------------------------------------------------- Principal Life Insurance Company Notes to Consolidated Financial Statements (continued) 19. Segment Information We provide financial products and services through the following segments: U.S. Asset Management and Accumulation and Life and Health Insurance. In addition, there is a Mortgage Banking (discontinued operations) and Corporate and Other segment. The segments are managed and reported separately because they provide different products and services, have different strategies or have different markets and distribution channels. The U.S. Asset Management and Accumulation segment provides retirement and related financial products and services primarily to businesses, their employees and other individuals and provides asset management services to our asset accumulation business, the life and health insurance operations, the Corporate and Other segment and third-party clients. The Life and Health insurance segment provides individual life insurance, group health insurance and specialty benefits, which consists of group dental and vision insurance, individual and group disability insurance and group life insurance, throughout the United States. On July 1, 2004, we closed the sale of Principal Residential Mortgage, Inc. to CitiMortgage, Inc. The results of operations (excluding corporate overhead) for our Mortgage Banking segment, which includes Principal Residential Mortgage, Inc., are reported as other after-tax adjustments for all periods presented. See Note 3, Discontinued Operations, for further explanation. The Corporate and Other segment manages the assets representing capital that has not been allocated to any other segment. Financial results of the Corporate and Other segment primarily reflect our financing activities (including interest expense), income on capital not allocated to other segments, inter-segment eliminations, income tax risks and certain income, expenses and other after-tax adjustments not allocated to the segments based on the nature of such items. Management uses segment operating earnings for goal setting, determining employee compensation and evaluating performance on a basis comparable to that used by securities analysts. We determine segment operating earnings by adjusting U.S. GAAP net income for net realized/unrealized capital gains and losses, as adjusted, and other after-tax adjustments which management believes are not indicative of overall operating trends. Net realized/unrealized capital gains and losses, as adjusted, are net of income taxes, related changes in the amortization pattern of DPAC and sales inducements, recognition of front-end fee revenues for sales charges on pension products and services, net realized capital gains and losses distributed, minority interest capital gains and losses and certain market value adjustments to fee revenues. Segment operating revenues exclude net realized/unrealized capital gains and their impact on recognition of front-end fee revenues and certain market value adjustments to fee revenues. While these items may be significant components in understanding and assessing the consolidated financial performance, management believes the presentation of segment operating earnings enhances the understanding of our results of operations by highlighting earnings attributable to the normal, ongoing operations of the business. The accounting policies of the segments are consistent with the accounting policies for the consolidated financial statements, with the exception of income tax allocation. The Corporate and Other segment functions to absorb the risk inherent in interpreting and applying tax law. The segments are allocated tax adjustments consistent with the positions we took on tax returns. The Corporate and Other segment results reflect any differences between the tax returns and the estimated resolution of any disputes. Principal Life Insurance Company Notes to Consolidated Financial Statements (continued) 19. Segment Information (continued) The following tables summarize selected financial information by segment and reconcile segment totals to those reported in the consolidated financial statements: December 31, 2006 2005 (in millions) Assets: U.S. Asset Management and Accumulation $117,105.9 $103,424.9 Life and Health Insurance 14,336.6 14,053.2 Corporate and Other 3,009.6 2,520.8 Total consolidated assets $134,452.1 $119,998.9 ===============================================================================
For the year ended December 31, 2006 2005 2004 (in millions) Operating revenues by segment: U.S. Asset Management and Accumulation $4,340.8 $4,003.2 $3,639.7 Life and Health Insurance 4,722.6 4,372.9 4,153.2 Corporate and Other (12.7) (15.1) (4.2) Total segment operating revenues 9,050.7 8,361.0 7,788.7 Add: Net realized/unrealized capital gains (losses), including recognition of front-end fee revenues and certain market value adjustments to fee revenues 29.9 (28.6) (119.8) Subtract: Operating revenues from discontinued real estate investments (0.5) 2.8 2.5 Total revenues per consolidated statements of operations $9,081.1 $8,329.6 $7,666.4 Operating earnings (loss) by segment, net of related income taxes: U.S. Asset Management and Accumulation $616.8 $520.0 $498.5 Life and Health Insurance 285.3 277.4 257.7 Mortgage Banking -- -- (10.3) Corporate and Other 26.6 10.6 (1.0) Total segment operating earnings, net of related income taxes 928.7 808.0 744.9 Net realized/unrealized capital gains (losses), as adjusted 7.7 (26.8) (77.7) Other after-tax adjustments (1) 41.2 50.9 100.6 Net income per consolidated statements of operations $977.6 $832.1 $767.8
[GRAPHIC OMITTED] ================================================================================ 21 (1) In 2006, other after-tax adjustments of $41.2 million included (1) the positive effect of: (a) gain on sales of real estate properties that qualify for discontinued operations treatment ($30.9 million) and (b) a favorable court ruling on a contested IRS issue for 1991 and later years ($18.8 million) and (2) the negative effect from a contribution to the Principal Financial Group, Inc. Foundation ($8.5 million). In 2005, other after-tax adjustments of $50.9 million included (1) the positive effect of: (a) a decrease in income tax reserves established for IRS tax matters ($33.8 million); (b) gains on sales of real estate properties that qualify for discontinued operations treatment ($22.3 million) and (2) the negative effect from a change in the estimated gain on disposal of Principal Residential Mortgage, Inc. ($5.2 million). Principal Life Insurance Company Notes to Consolidated Financial Statements (continued) 19. Segment Information (continued) In 2004, other after-tax adjustments of $100.6 million included (1) the positive effect of: the discontinued operations and estimated gain on disposal of Principal Residential Mortgage, Inc. ($103.0 million) and (2) the negative effect from a cumulative change in accounting principle related to the implementation of SOP 03-1 ($2.4 million). The following is a summary of income tax expense (benefit) allocated to our segments for purposes of determining operating earnings. Segment income taxes are reconciled to income taxes reported on our consolidated statements of operations.
For the year ended December 31, 2006 2005 2004 (in millions) Income tax expense (benefit) by segment: U.S. Asset Management and Accumulation $169.5 $151.6 $147.8 Life and Health Insurance 144.1 139.9 130.6 Mortgage Banking -- -- (6.4) Corporate and Other 10.9 10.4 (5.1) Total segment income taxes from operating earnings 324.5 301.9 266.9 Add: Tax expense (benefits) related to net realized/unrealized capital gains (losses), as adjusted 8.3 (10.6) (40.6) Tax benefits related to other after-tax adjustments (13.9) (3.5) -- Subtract: Income tax expense (benefit) from discontinued real estate (0.2) 1.0 0.9 Total income tax expense per consolidated statements of operations $319.1 $286.8 $225.4
================================================================================ Principal Life Insurance Company Notes to Consolidated Financial Statements (continued) 19. Segment Information (continued) The following table summarizes operating revenues for our products and services:
For the year ended December 31, 2006 2005 2004 (in millions) U.S. Asset Management and Accumulation: Full-service accumulation $1,382.7 $1,267.4 $1,177.2 Individual annuities 582.8 471.6 393.8 Bank and trust services 53.0 38.8 33.7 Eliminations (5.0) (3.4) (1.9) Total Accumulation 2,013.5 1,774.4 1,602.8 Investment only 1,080.7 1,002.3 931.6 Full-service payout 830.8 863.5 811.8 Total Guaranteed 1,911.5 1,865.8 1,743.4 Total U.S. Asset Accumulation 3,925.0 3,640.2 3,346.2 Principal Global Investors 485.4 414.3 338.5 Eliminations (69.6) (51.3) (45.0) Total U.S. Asset Management and Accumulation 4,340.8 4,003.2 3,639.7 Life and Health Insurance: Individual life insurance 1,344.7 1,361.7 1,370.4 Health insurance 2,063.8 1,879.7 1,778.8 Specialty benefits insurance 1,316.0 1,131.5 1,004.0 Eliminations (1.9) -- -- Total Life and Health Insurance 4,722.6 4,372.9 4,153.2 Corporate and Other (12.7) (15.1) (4.2) Total operating revenues $9,050.7 $8,361.0 $7,788.7 Total operating revenues $9,050.7 $8,361.0 $7,788.7 Net realized/unrealized capital gains (losses), including recognition of front-end fee revenues and certain market value adjustments to fee revenues 29.9 (28.6) (119.8) Operating revenues from discontinued real estate investments 0.5 (2.8) (2.5) Total revenues per consolidated statements of operations $9,081.1 $8,329.6 $7,666.4
=============================================================================== Principal Life Insurance Company Notes to Consolidated Financial Statements (continued) 20. Stock-Based Compensation Plans The Stock-Based Compensation Plans footnote represents all share based compensation data related to us and our subsidiaries' employees. As of December 31, 2006, our ultimate parent, Principal Financial Group, Inc. has the 2005 Stock Incentive Plan, the Employee Stock Purchase Plan the Stock Incentive Plan and the Long-Term Performance Plan ("Stock-Based Compensation Plans"). As of May 17, 2005, no new grants will be made under the Stock Incentive Plan or the Long-Term Performance Plan. Under the terms of the 2005 Stock Incentive Plan, grants may be nonqualified stock options, incentive stock options qualifying under Section 422 of the Internal Revenue Code, restricted stock, restricted stock units, stock appreciation rights, performance shares, performance units, or other stock based awards. To date, Principal Financial Group, Inc.has not granted any incentive stock options, restricted stock, or performance units. For awards with graded vesting, we use an accelerated expense attribution method. The compensation cost that was charged against income for the Stock-Based Compensation Plans is as follows: For the year ended December 31, 2006 2005 2004 (in millions) Compensation cost $58.0 $47.4 $43.2 Related income tax benefit 19.0 15.5 13.8 Capitalized as part of an asset 3.4 1.6 2.6 -------------------------------------------------------------------------------- Nonqualified Stock Options Nonqualified stock options were granted to certain employees under the 2005 Stock Incentive Plan and the Stock Incentive Plan. Options outstanding under the 2005 Stock Incentive Plan and the Stock Incentive Plan were granted at an exercise price equal to the fair market value of Principal Financial Group, Inc.'s common stock on the date of grant, and expire ten years after the grant date. These options have graded or cliff vesting over a three-year period, except in the case of approved retirement. As of December 31, 2006, there were $11.4 million of total unrecognized compensations costs related to nonvested stock options. The cost is expected to be recognized over a weighted-average service period of approximately 1.7 years. The fair value of stock options is estimated using the Black-Scholes option pricing model that uses the assumptions noted in the following table. Expected volatilities are based on historical volatility of Principal Financial Group, Inc.'s stock and other factors. Due to Principal Financial Group, Inc.'s limited public company history, we use peer data to estimate option exercise and employee termination within the valuation model. Separate groups of employees that have similar historical exercise behavior are considered separately for valuation purposes. The expected term of options granted is estimated based on peer data and represents the period of time that options granted are expected to be outstanding. The risk-free rate for periods within the expected life of the option is based on the U.S. Treasury risk-free interest rate in effect at the time of grant. The dividend yield is based on historical dividend distributions compared to the closing price of Principal Financial Group, Inc.'s common shares on the grant date. The following is a summary of assumptions for the stock options granted during the period: For the year ended December 31, ------------------------------------- ------------------------------------- Options 2006 2005 2004 ------------------------------------- --------- ---------- ------------------------------------- --------- Dividend yield 1.32% 1.41% 1.26% =========== ========= ========== =========== ========= ========== Expected volatility 16.2% 19.1% 39.2% =========== ========= ========== =========== ========= ========== Risk-free interest rate 4.6% 4.1% 3.3% =========== ========= ========== =========== ========= ========== Expected life (in years) 6 6 6 =========== ========= ========== Principal Life Insurance Company Notes to Consolidated Financial Statements (continued) 20. Stock-Based Compensation Plans (continued) Using the Black-Scholes option valuation model, the weighted-average estimated fair value of stock options granted was $11.41, $9.18 and $13.55 per share during 2006, 2005 and 2004, respectively. The total intrinsic value of stock options exercised was $38.4 million, $27.8 million and $12.4 million during 2006, 2005 and 2004, respectively. The weighted-average remaining contractual lives for stock options exercisable is approximately 7 years as of December 31, 2006. Performance Share Awards Beginning in 2006, performance share awards were granted to certain employees under the 2005 Stock Incentive Plan. The performance share awards are treated as an equity award and are paid in shares. Whether the performance shares are earned depends upon the participant's continued employment through the performance period (except in the case of an approved retirement) and Principal Financial Group, Inc.'s performance against three-year goals set at the beginning of the performance period. A return on equity objective and an earnings per share objective must be achieved for any of the performance shares to be earned. If the performance requirements are not met, the performance shares will be forfeited and no compensation cost is recognized and any previously recognized compensation cost is reversed. There is no maximum contractual term on these awards. As of December 31, 2006, there were $15.7 million of total unrecognized compensation costs related to nonvested performance share awards granted. The cost is expected to be recognized over a weighted-average service period of approximately 2.0 years. The fair value of performance share awards is determined based on the closing stock price of Principal Financial Group, Inc.'s shares on the grant date. The weighted-average grant-date fair value of performance share awards granted during 2006 was $49.40. Because no performance share awards vested or were paid out, the intrinsic value of performance share awards vested and the actual tax benefits realized for tax deductions for performance share award payouts are $0.0 million in 2006. Restricted Stock Units Restricted stock units are issued under the 2005 Stock Incentive Plan and Stock Incentive Plan. Restricted stock units are treated as an equity award. The fair value of restricted stock units is determined based on the closing stock price of Principal Financial Group, Inc.'s common shares on the grant date. There is no maximum contractual term on these awards. Restricted stock units were issued to certain employees and agents pursuant to the Stock Incentive Plan and 2005 Stock Incentive Plan. Under these plans, awards have a graded or cliff vesting over a three-year service period. When service for the Company ceases (except in the case of an approved retirement), all vesting stops and unvested units are forfeited. The weighted-average grant-date fair value of restricted stock units granted during 2006, 2005 and 2004 was $50.08, $39.51 and $36.32, respectively. As of December 31, 2006, there were $7.3 million of total unrecognized compensation costs related to nonvested restricted stock unit awards granted under these plans. The cost is expected to be recognized over a weighted-average period of approximately 1.5 years. The total intrinsic value of restricted stock units vested was $15.0 million, $1.0 million and $0.8 million during 2006, 2005 and 2004, respectively. Principal Life Insurance Company Notes to Consolidated Financial Statements (continued) 20. Stock-Based Compensation Plans (continued) Employee Stock Purchase Plan Under our Employee Stock Purchase Plan, participating employees have the opportunity to purchase shares of Principal Financial Group, Inc.'s common stock on a quarterly basis. Employees may purchase up to $25,000 worth of company stock each year. Employees may purchase shares of Principal Financial Group, Inc.'s common stock at a price equal to 85% of the shares' fair market value as of the beginning or end of the quarter, whichever is lower. We recognize compensation expense for the fair value of the discount granted to employees participating in the employee stock purchase plan in the quarter of grant. Shares of the Employee Stock Purchase Plan are treated as an equity award. The weighted-average fair value of the discount on the stock purchased was $10.34, $7.97 and $7.16 during 2006, 2005 and 2004, respectively. The total intrinsic value of the Employee Stock Purchase Plan settled was $6.2 million, $5.4 million and $5.7 million during 2006, 2005 and 2004, respectively. Long-Term Performance Plan Principal Financial Group, Inc. also maintains the Long-Term Performance Plan, which provides the opportunity for eligible executives to receive additional awards if specified minimum corporate performance objectives are achieved over a three-year period. This plan utilizes stock as an option for payment and is treated as a liability award during vesting and a liability award or equity award subsequent to vesting, based on the participant payment election. Effective with stockholder approval of the 2005 Stock Incentive Plan, no further grants will be made under the Long-Term Performance Plan, and any future awards earned under the Long-Term Performance Plan will be issued under the 2005 Stock Incentive Plan. As of December 31, 2005, all awards under this plan were fully vested and no awards were granted under this plan in 2006 or 2005. There is no maximum contractual term on these awards. The amount of cash used to settle Long-Term Performance Plan units granted was $10.2 million for 2006. The total intrinsic value of Long-Term Performance Plan units settled was $10.4 million, $6.1 million and $7.8 million during 2006, 2005 and 2004, respectively. The fair value of Long-Term Performance Plan liability units is determined as of each reporting period based on the Black-Scholes option pricing model that uses the assumptions noted in the following table: For the year ended December 31, Long-Term Performance Plan 2006 ----------------------------- ------------------------- ----------------------------- ------------------------- Dividend yield --% ========================= ========================= Expected volatility 11.2% ========================= ========================= Risk-free interest rate 4.8% ========================= ========================= Expected life (in years) 2 ========================= Principal Life Insurance Company Notes to Consolidated Financial Statements (continued) 21. Quarterly Results of Operations (Unaudited) The following is a summary of unaudited quarterly results of operations for 2006 and 2005:
For the three months ended December 31 September 30 June 30 March 31 (in millions) 2006 Total revenues $2,369.2 $2,230.2 $2,258.0 $2,223.7 Total expenses 2,057.3 1,917.7 1,974.0 1,866.0 Income from continuing operations, net of related income taxes 232.4 230.7 208.8 275.1 Income (loss) from discontinued operations, net of related income taxes 30.1 0.4 (0.1) 0.2 Net income 262.5 231.1 208.7 275.3 2005 Total revenues $2,266.3 $2,045.9 $2,033.2 $1,984.2 Total expenses 1,991.5 1,779.1 1,748.6 1,710.4 Income from continuing operations, net of related income taxes 218.4 191.9 203.5 199.4 Income from discontinued operations, net of related income taxes 2.4 0.2 15.7 0.6 Net income 220.8 192.1 219.2 200.0
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