485BPOS 1 fva-c19.txt FVA 485B PART C-19 5/1/2003 Registration No. 33-74232 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM N-4 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 Pre-Effective Amendment No. _____ _____ Post-Effective Amendment No. _19__ __X__ and/or REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 Amendment No. __________ (Check appropriate box or boxes) Principal Life Insurance Company Separate Account B -------------------------------------------------------------------------------- (Exact Name of Registrant) Principal Life Insurance Company -------------------------------------------------------------------------------- (Name of Depositor) The Principal Financial Group, Des Moines, Iowa 50392 -------------------------------------------------------------------------------- (Address of Depositor's Principal Executive Offices) (Zip Code) Depositor's Telephone Number, including Area Code (515) 248-3842 M. D. Roughton, The Principal Financial Group, Des Moines, Iowa 50392 -------------------------------------------------------------------------------- (Name and Address of Agent for Service) It is proposed that this filing will become effective (check appropriate box) _____ immediately upon filing pursuant to paragraph (b) of Rule 485 __X__ on May 1, 2003 pursuant to paragraph (b) of Rule 485 _____ 60 days after filing pursuant to paragraph (a)(1) of Rule 485 _____ on (date) pursuant to paragraph (a)(1) of Rule 485 _____ 75 days after filing pursuant to paragraph (a)(2) of Rule 485 _____ on (date) pursuant to paragraph (a)(2) of Rule 485 If appropriate, check the following box: _____ This post-effective amendment designates a new effective date for a previously filed post-effective amendment. PRINCIPAL LIFE INSURANCE COMPANY SEPARATE ACCOUNT B FLEXIBLE VARIABLE ANNUITY ("FVA") CONTRACT Registration Statement on Form N-4 Cross Reference Sheet Form N-4 Item Caption in Prospectus Part A 1. Cover Page Principal Life Insurance Company Separate Account B Flexible Variable Annuity ("FVA") Contract 2. Definitions Glossary 3. Synopsis Summary of Expense Information 4. Condensed Financial Condensed Financial Information Information Independent Auditors, Financial Statements 5. General Description of Summary, The Company, Registrant The Separate Account, Voting Rights, The Underlying Mutual Funds 6. Deductions Summary, Charges and Deductions, Annual Fee, Mortality and Expense Risks Charge, Transaction Fee, Premium Taxes, Surrender Charge, Administrative Charge Distribution of the Contract 7. General Description of Summary, The Contract, Variable Annuity Contract To Buy a Contract, Purchase Payments, Right to Examine the Contract, Exchange Credit, Prior to the Retirement Date, Performance Calculation, The Accumulation Period, The Value of Your Contract, Separate Account Division, Unscheduled Transfers, Scheduled Transfers, Automatic Portfolio Rebalancing, Surrenders, Total Surrender, Unscheduled Partial Surrender, Scheduled Partial Surrender, Death Benefit Payment of Death Benefit, The Annuity payment Period, Annuity Payment Date, Annuity Payment Options, Transfers, The Separate Account, General Provisions, Rights Reserved by the Company, Customer Inquiries 8. Annuity Period Annuity Payment Period, Annuity Payment Date, Annuity Payment Options 9. Death Benefit Death Benefit, Payment of Death Benefit, Federal Tax Matters, Non-Qualified Contracts, Required Distributions for Non- Qualified Contracts, IRA, SEP and SIMPLE-IRA, Rollover IRAs 10. Purchase and Contract Value Summary, The Contract, To Buy a Contract, Purchase Payments, Right to Examine the Contract, Replacement Contracts, The Accumulation Period, The Value of Your Contract, Purchase Payments, Separate Account Division Transfers, Delay of Payments, Distribution of the Contract 11. Redemptions Summary, Annuity Payment Options, Surrenders, Delay of Payments 12. Taxes Summary, Annuity Payment Options, Federal Tax Matters, Non-Qualified Contracts, Required Distributions for Non-Qualified Contracts, IRA, SEP, SAR/SEP and SIMPLE-IRA, Rollover IRAs, Withholding, Mutual Fund Diversification 13. Legal Proceedings Legal Proceedings 14. Table of Contents of the Table of Contents of the Statement of Additional Statement of Additional Information Information Part B Statement of Additional Information Caption** 15. Cover Page Principal Life Insurance Company Separate Account B Flexible Variable Annuity ("FVA") Contract 16. Table of Contents Table of Contents 17. General Information and None History 18. Services Independent Auditors**, Independent Auditors 19. Purchase of Securities Summary**, Purchase Payments Being Offered Distribution of the Contract 20. Underwriters Summary**, Distribution of the Contract** 21. Calculation of Performance Calculation of Yield and Data Total Return 22. Annuity Payments Annuity Payment Options** 23. Financial Statements Financial Statements ** Prospectus caption given where appropriate. FLEXIBLE VARIABLE ANNUITY Issued by Principal Life Insurance Company (the "Company") This prospectus is dated May 1, 2003. The individual deferred annuity contract ("Contract") described in this prospectus is funded with the Principal Life Insurance Company Separate Account B ("Separate Account"), dollar cost averaging fixed accounts ("DCA Plus Accounts") and a Fixed Account. 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:
AIM V.I. Core Equity Fund - Series I Capital Value Account AIM V.I. Growth Fund - Series I Equity Growth Account AIM V.I. Premier Equity Fund - Series I Government Securities Account American Century Variable Portfolios, Inc. Growth Account VP Income & Growth Fund - Class I International Account VP Ultra Fund - Class I International Emerging Markets Account VP Value Fund - Class II International SmallCap Account Dreyfus Investment Portfolios LargeCap Blend Account Founders Discovery Portfolio - Service Class LargeCap Growth Account/(//2//)/ Fidelity Variable Insurance Products Fund LargeCap Growth Equity Account Contrafund/(R)/ Portfolio - Service Class LargeCap Stock Index Account Equity-Income Portfolio - Service Class 2 LargeCap Value Account Growth Portfolio - Service Class Limited Term Bond/(//3//)/ INVESCO Variable Investment Funds, Inc. MicroCap Account/(//2//)/ Dynamics Fund MidCap Account Health Sciences Fund MidCap Growth Account Small Company Growth MidCap Growth Equity Account/(//2//)/ Technology Fund MidCap Value Account Janus Aspen Series Money Market Account Mid Cap Growth Portfolio - Service Shares/(1)/ Real Estate Account Principal Variable Contracts Fund, Inc. SmallCap Account Asset Allocation Account SmallCap Growth Account Balanced Account SmallCap Value Account Bond Account Utilities Account
/(1)/ formerly Janus Aspen Series - Aggressive Growth Portfolio /(2)/ not available after May 19, 2003 /(//3//)/ available May 19, 2003 This prospectus provides information about the Contract and the Separate Account that you, as owner, should know before investing. It should be read and retained for future reference. Additional information about the Contract is included in the Statement of Additional Information ("SAI"), dated May 1, 2003, 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 Flexible Variable Annuity Principal Financial Group P. O. Box 9382 Des Moines, Iowa 50306-9382 Telephone: 1-800-852-4450 An investment in the Contract is not a deposit or obligation of any bank and is not insured or guaranteed by any bank, the Federal Deposit Insurance Corporation or any other government agency. As the owner of this Contract, you may elect a purchase payment credit rider with an additional charge and an associated 9-year surrender charge period. The purchase payment credit rider is only available when the Contract is issued. The portions of this prospectus that specifically pertain to election of the purchase payment credit rider are shown by gray boxes. The charges used to recoup our expense of paying the purchase payment credit include the surrender charge and the purchase payment credit rider charge. The Contract is available with or without the purchase payment credit rider. There may be circumstances where electing the purchase payment credit rider is not to your advantage. In certain circumstances, the amount of the credit may be more than offset by the charges associated with it. The Contract without the purchase payment credit rider has surrender charges and total Separate Account annual expenses that may be lower than the charges for the Contract with the purchase payment credit rider. You should consult with your sales representative to decide if the purchase payment credit rider is suitable. In making this determination, you and your sales representative should consider the following factors: . the length of time you plan to own the Contract; . the frequency, amount and timing of any partial surrenders; and . the amount and timing of your purchase payment(s). Additionally, if you decide to return the Contract during the examination period, we will recover the original purchase payment credit amount. If the value of the purchase payment credit has declined during the examination period, we still recover the full amount of the purchase payment credit. The Contract provides an exchange credit that is available to eligible purchasers (see Replacement Contracts - Exchange Credit). The exchange credit is paid for by a reduction in sales commissions for Contracts sold with the exchange credit. Sales commissions are paid by Contract charges and deductions. The charges and deductions are neither proportionally reduced nor increased for Contracts sold with the exchange credit. These securities have not been approved or disapproved by the 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. This prospectus is valid only when accompanied by the current prospectuses for the underlying mutual funds. These prospectuses should be kept for future reference. TABLE OF CONTENTS GLOSSARY................................................................5 SYNOPSIS................................................................7 SUMMARY.................................................................11 Investment Limitations................................................. 12 Separate Account Investment Options.................................... 12 Transfers.............................................................. 13 Surrenders............................................................. 13 Charges and Deductions................................................. 13 Annuity Payments....................................................... 14 Death Benefit.......................................................... 14 Examination Period (Free-Look)......................................... 14 THE PRINCIPAL FLEXIBLE VARIABLE ANNUITY.................................14 THE COMPANY.............................................................14 THE SEPARATE ACCOUNT....................................................14 THE UNDERLYING MUTUAL FUNDS.............................................15 SURPLUS DISTRIBUTIONS...................................................23 THE CONTRACT............................................................23 To Buy a Contract...................................................... 23 Purchase Payments...................................................... 23 Right to Examine the Contract (Free-Look).............................. 24 Replacement Contracts.................................................. 24 Purchase Payment Credit Rider.......................................... 25 The Accumulation Period................................................ 26 Automatic Portfolio Rebalancing (APR).................................. 28 Telephone and Internet Services........................................ 29 Surrenders............................................................. 29 Death Benefit.......................................................... 30 The Annuity Payment Period............................................. 32 CHARGES AND DEDUCTIONS..................................................33 Annual Fee............................................................. 33 Mortality and Expense Risks Charge..................................... 34 Purchase Payment Credit................................................ 34 Transaction Fee........................................................ 34 Premium Taxes.......................................................... 34 Surrender Charge....................................................... 34 Free Surrender Privilege............................................... 35 Administration Charge.................................................. 36 Special Provisions for Group or Sponsored Arrangements................. 36 FIXED ACCOUNT AND DCA PLUS ACCOUNTS.....................................37 Fixed Account.......................................................... 37 Fixed Account Accumulated Value........................................ 37 Fixed Account Transfers, Total and Partial Surrenders.................. 38 Dollar Cost Averaging Plus Program (DCA Plus Program).................. 38 GENERAL PROVISIONS......................................................39 The Contract........................................................... 39 Delay of Payments...................................................... 39 Misstatement of Age or Gender.......................................... 40 Assignment............................................................. 40 Change of Owner........................................................ 40 Beneficiary............................................................ 40 Contract Termination................................................... 40 Reinstatement.......................................................... 41 Reports................................................................ 41 RIGHTS RESERVED BY THE COMPANY..........................................41 DISTRIBUTION OF THE CONTRACT............................................42 PERFORMANCE CALCULATION.................................................42 VOTING RIGHTS...........................................................43 FEDERAL TAX MATTERS.....................................................43 Non-Qualified Contracts................................................ 43 Required Distributions for Non-Qualified Contracts..................... 44 IRA, SEP and SIMPLE-IRA................................................ 44 Rollover IRAs.......................................................... 45 Withholding............................................................ 45 MUTUAL FUND DIVERSIFICATION.............................................45 STATE REGULATION........................................................45 GENERAL INFORMATION.....................................................46 FINANCIAL STATEMENTS....................................................46 TABLE OF CONTENTS OF THE STATEMENT OF ADDITIONAL INFORMATION............47 APPENDIX A..............................................................48 The Contract offered by this prospectus may not be available in all states. This prospectus is not an offer to sell, or solicitation of an offer to buy, the Contract in states in which the offer or solicitation may not be lawfully made. No person is authorized to give any information or to make any representation in connection with this Contract other than those contained in this prospectus. GLOSSARY ACCUMULATED VALUE - an amount equal to the DCA Plus Account(s) accumulated value plus the Fixed Account accumulated value plus the Separate Account 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 payment is based. This person may or may not be the owner. ANNUITY PAYMENT DATE - the date the owner's accumulated value is applied, under an annuity payment option, to make income payments. (Referred to in the Contract as "Retirement Date.") CONTRACT DATE - the date that the Contract is issued and which is used to determine contract years. CONTRACT YEAR - the one-year period beginning on the contract date and ending one day before the contract anniversary and any subsequent one-year period beginning on a contract anniversary. (e.g. If the contract date is June 5, 2003, the first contract year ends on June 4, 2004, and the first contract anniversary falls on June 5, 2004.) DOLLAR COST AVERAGING PLUS (DCA PLUS) ACCOUNT - an account which earns guaranteed interest for a specific amount of time. (Referred to in the Contract as "Fixed DCA Account.") DOLLAR COST AVERAGING PLUS (DCA PLUS) ACCUMULATED VALUE - the amount of your accumulated value which is in the DCA Plus Account(s). DOLLAR COST AVERAGING PLUS (DCA PLUS) PROGRAM - a program through which purchase payments are transferred from a DCA Plus Account to the divisions and/or the Fixed Account over a specified period of time. (Referred to in the Contract as "Fixed DCA Account.") FIXED ACCOUNT - an account which earns guaranteed interest. FIXED ACCOUNT ACCUMULATED VALUE - the amount of your accumulated value which is in the Fixed Account. INVESTMENT OPTIONS - the DCA Plus Accounts, Fixed Account and Separate Account divisions. JOINT ANNUITANT - additional annuitant. Joint annuitants must be husband and wife and must be named as owner and joint owner. JOINT OWNER - an owner who has an undivided interest with the right of survivorship in this Contract with another owner. Joint owners must be husband and wife and must be named as annuitant and joint annuitant. NON-QUALIFIED CONTRACT - a Contract which does not qualify for favorable tax treatment as a Qualified Plan, Individual Retirement Annuity, Roth IRA, SEP IRA, Simple-IRA or Tax Sheltered Annuity. NOTICE - any form of written communication received by us, at the annuity service office, P.O. Box 9382, Des Moines, Iowa 50306-9382, or in another form approved by us in advance. OWNER - the person, including joint owner, who owns all the rights and privileges of this Contract. PURCHASE PAYMENTS - the gross amount contributed to the Contract. QUALIFIED PLANS - retirement plans which receive favorable tax treatment under Section 401 or 403(a) of the Internal Revenue Code. SEPARATE ACCOUNT DIVISION (DIVISION(S)) - a part of the Separate Account which invests in shares of a mutual fund. (Referred to in the marketing materials as "sub-accounts.") SEPARATE ACCOUNT ACCUMULATED VALUE - the amount of your accumulated value in all divisions. SURRENDER CHARGE - the charge deducted upon certain partial or total surrender of the Contract before the annuity payment date. SURRENDER VALUE - accumulated value less any applicable surrender charge, annual fee, transaction fee and any premium or other taxes. 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 prior to annuity payment date. UNIT VALUE - a measure used to determine the value of an investment in a division. VALUATION DATE - each day the New York Stock Exchange ("NYSE") is open. VALUATION PERIOD - the period of time from one determination of the value of a unit of a division to the next. Each valuation period begins at the close of normal trading on the NYSE, generally 4:00 p.m. E.T. (3:00 p.m. C.T.) on each valuation date and ends at the close of normal trading of the NYSE on the next valuation date. YOU, YOUR - the owner of this Contract, including any joint owner. SYNOPSIS 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. State premium taxes may also be deducted.
CONTRACT OWNER TRANSACTION EXPENSES ------------------------------------------------------------------------------ Sales charge imposed on purchase payments (as a .none percentage of purchase payments) ------------------------------------------------------------------------------ Maximum deferred surrender charge (as a .6% percentage of amount surrendered)/(1)/ ------------------------------------------------------------------------------ Maximum deferred surrender charge (as a .8% percentage of amount surrendered)/(2)/ ------------------------------------------------------------------------------ Transaction Fees (as a percentage of amount surrendered) .$30 for each unscheduled . guaranteed maximum partial surrender after the 12th in a contract year .zero .current ------------------------------------------------------------------------------ Transfer Fee .$30 for each unscheduled . guaranteed maximum transfer after the 12th in a contract year .current .zero ------------------------------------------------------------------------------
(1) Surrender charge without the purchase payment credit rider (as a percentage of amounts surrendered):
TABLE OF SURRENDER CHARGES WITHOUT THE PURCHASE PAYMENT CREDIT RIDER --------------------------------------------------------------------- NUMBER OF COMPLETED CONTRACT YEARS SURRENDER CHARGE APPLIED TO ALL SINCE EACH PURCHASE PAYMENT PURCHASE PAYMENTS RECEIVED IN WAS MADE THAT CONTRACT YEAR ---------------------------------- ------------------------------- 0 (year of purchase payment) 6% 1 6% 2 6% 3 5% 4 4% 5 3% 6 2% 7 and later 0%
(2) Surrender charge with the purchase payment credit rider (as a percentage of amounts surrendered):
TABLE OF SURRENDER CHARGES WITH THE PURCHASE PAYMENT CREDIT RIDER ------------------------------------------------------------------- NUMBER OF COMPLETED CONTRACT YEARS SURRENDER CHARGE APPLIED TO ALL SINCE EACH PURCHASE PAYMENT PURCHASE PAYMENTS RECEIVED IN WAS MADE THAT CONTRACT YEAR ---------------------------------- ------------------------------- 0 (year of purchase payment) 8% 1 8% 2 8% 3 8% 4 7% 5 6% 6 5% 7 4% 8 3% 9 and later 0%
The next table describes the fees and expenses that you will pay periodically during the time that you own the Contract, not including underlying mutual fund fees and expenses.
Annual Contract Fee (waived for Contracts with the lesser of $30 accumulated value of $30,000 or more) or 2% of the -------------------------------------------------accumulated value ----------------------------- Separate Account Annual Expenses (as a percentage of 1.25% average account value) 0.00 . Mortality and Expense Risk Fees 1.25% . Other Account Fees and Expenses ------------------------------------------------------------------------------ Separate Account Annual Expenses ((with optional purchase payment credit rider) as a percentage of 1.25% average account value) 0.60 . Mortality and Expense Risk Fees 0.00 . Purchase Payment Credit Rider 1.85% . Other Account Fees and Expenses ------------------------------------------------------------------------------ Administrative Charge 0.15 % of separate account . guaranteed maximum accumulated value none .current ------------------------------------------------------------------------------
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 its prospectus. Annual Underlying Mutual Fund Operating Expenses as of December 31, 2002.
MINIMUM MAXIMUM --------------------------------------------------------------------------------------------------------- Total annual underlying mutual fund operating expenses (expenses that are deducted from underlying mutual fund assets, including management fees, 0.39% 2.26% distribution and/or service (12b-1) fees and other expenses) ---------------------------------------------------------------------------------------------------------
Annual expenses of the mutual funds (as a percentage of average net assets) as of December 31, 2002:
MANAGEMENT 12B-1 OTHER TOTAL EXPENSES UNDERLYING MUTUAL FUNDS FEES FEES EXPENSES BEFORE REIMBURSEMENT/ //(1)/ ----------------------- ---------- ----- -------- ------------------------------ AIM V.I. Core Equity Fund - Series I 0.61% N/A 0.17% 0.78% AIM V.I. Growth Fund - Series I 0.63 N/A 0.28 0.91 AIM V.I. Premier Equity Fund - Series I 0.61 N/A 0.24 0.85 American Century Variable Portfolios, Inc. VP Income & Growth Fund - Class I 0.70 N/A 0.00 0.70 VP Ultra Fund - Class I 1.00 N/A 0.00 1.00 VP Value Fund - Class II 0.85 0.25 0.00 1.10 Dreyfus Investment Portfolios Founders Discovery Portfolio - Initial Class 0.90 N/A 0.60 1.50/(2)/ Fidelity Variable Insurance Products Contrafund Portfolio - Service Class 0.58 0.10 0.10 0.78 Equity-Income Portfolio - Service Class 2 0.48 0.25 0.10 0.83 Growth Portfolio - Service Class 0.58 0.10 0.09 0.77 INVESCO Variable Investment Funds, Inc. Dynamics Fund 0.75 N/A 0.37 1.12/(3)/ Health Sciences Fund 0.75 N/A 0.32 1.07/(3)/ Small Company Growth Fund 0.75 N/A 0.56 1.31/(4)/ Technology Fund 0.75 N/A 0.36 1.11/(3)/ Janus Aspen Series . Mid Cap Growth Portfolio - Service Shares 0.65 0.25 0.02 0.92 Principal Variable Contracts Fund Asset Allocation Account 0.80 N/A 0.04 0.84 Balanced Account 0.59 N/A 0.03 0.62/(3)/ Bond Account 0.47 N/A 0.02 0.49 Capital Value Account 0.60 N/A 0.01 0.61/(3)/ Equity Growth Account 0.75 N/A 0.02 0.77 Government Securities Account 0.46 N/A 0.01 0.47 Growth Account 0.60 N/A 0.01 0.61/(3)/ International Account 0.85 N/A 0.08 0.93/(3)/ International Emerging Markets Account 1.25 N/A 1.01 2.26/(//5//)(//6//)(//7//)/ International SmallCap Account 1.20 N/A 0.12 1.32/(3)/ LargeCap Blend Account 0.75 N/A 0.35 1.10/(//6//)(//7//)(//8//)/ LargeCap Growth Account/(//9//)/ 1.10 N/A 0.04 1.14/(10)/ LargeCap Growth Equity Account 1.00 N/A 0.09 1.09/(//10//)/ LargeCap Stock Index Account 0.35 N/A 0.04 0.39/(//6//)(//7//)//(8)/ LargeCap Value Account 0.75 N/A 0.35 1.00/(//6//)(//7//)(//8//)/ Limited Term Bond Account/(1//1//)/ 0.50 N/A 0.08 0.58/(//7//)(1//2//)/ MicroCap Account/(//9//)/ 1.00 N/A 0.25 1.25 MidCap Account 0.61 N/A 0.01 0.62/(3)/ MidCap Growth Account 0.90 N/A 0.02 0.92/(3)/ MidCap Growth Equity Account/(9)/ 1.00 N/A 0.13 1.13/(//10//)/ MidCap Value Account 1.05 N/A 0.05 1.10/(3)/ Money Market Account 0.48 N/A 0.01 0.49 Real Estate Account 0.90 N/A 0.02 0.92 SmallCap Account 0.85 N/A 0.12 0.97/(3)/ SmallCap Growth Account 1.00 N/A 0.06 1.06/(3)/ SmallCap Value Account 1.10 N/A 0.19 1.29/(3)/ Utilities Account 0.60 N/A 0.02 0.62
/ //(1)/ The Company and Princor Financial Services Corporation may receive a portion of the underlying fund expenses for record keeping, marketing and distribution services. / //(2) /The Dreyfus Corporation has agreed, until December 31, 2003, to waive receipt of its fees and/or assume the expenses of the portfolio so that the expenses do not exceed 1.50%. For the fiscal year ended December 31, 2002, Dreyfus further reimbursed the portfolio for other expenses so that total annual portfolio operating expenses were 1.34% instead of 1.50%. This additional expense reimbursement was voluntary. / //(//3)/ Expenses shown without the effect of any expense offset arrangement. / //(//4//)/ Certain expenses of the Fund were absorbed voluntarily by INVESCO. After absorption, but excluding any expense offset arrangements, the Fund's Total Annual Fund Operating Expenses for the fiscal year ended December 31, 2002 were 1.25%. / //(//5//)/ Expenses shown without the effect of any expense offset arrangement or expense cap (which increased May 1, 2002). / //(//6//)/ Principal Management Corporation voluntarily agreed to reimburse the total annual expenses through April 30, 2003. With the expense limit, the total annual expenses through April 30, 2003 were: 1.75% for International Emerging Markets Account; 1.00% for LargeCap Blend Account; 1.00% for LargeCap Value Account and 0.40% for LargeCap Stock Index Account. / //(//7//)/ Principal Management Corporation has voluntarily agreed to reimburse the total annual expenses through April 30, 2004 so that they will not exceed 2.00% for International Emerging Markets Account; 1.00% for LargeCap Blend Account; 1.00% for LargeCap Value Account; 0.40% for LargeCap Stock Index Account and 0.75% for Limited Term Bond Account. / //(//8//)/ Expenses shown without the effect of any expense offset arrangement or expense cap. / //(//9//)/ Not available after May 19, 2003. / //(//10//)/ Expenses shown without the effect of any expense offset arrangement or expense cap (which ceased May 1, 2002). / //(1//1//)/ Available May 19, 2003. / //(1//2//) /Expenses for this Account are estimated. EXAMPLE This Example is 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 Example assumes that you invest $10,000 in the contract for the time periods indicated. The Example also assumes that your investment has a 5% return each year and assumes the maximum fees and expenses of any of the underlying mutual funds. Although your actual costs may be higher or lower, based on these assumptions, your costs would be: (1) If you surrender your contract at the end of the applicable time period:
SEPARATE ACCOUNT DIVISION 1 YEAR 1 YEAR 3 YEARS 3 YEARS 5 YEARS 5 YEARS 10 YEARS 10 YEARS ------------------------- ------ ------ ------- ------- ------- ------- -------- -------- AIM V.I. Growth $823 $1,083 $1,188 $1,668 $1,480 $2,079 $2,535 $3,129 AIM V.I. Core Equity 810 1,070 1,149 1,630 1,414 2,015 2,401 3,003 AIM V.I. Premier Equity 817 1,077 1,170 1,650 1,449 2,050 2,473 3,071 American Century VP Income & Growth 802 1,002 1,125 1,425 1,373 1,673 2,317 2,317 American Century VP Ultra 832 1,032 1,216 1,516 1,525 1,825 2,626 2,626 American Century VP Value 827 1,087 1,200 1,680 1,500 2,099 2,575 3,167 Dreyfus Investment Portfolios - Founders Discovery 871 1,131 1,333 1,810 1,720 2,312 3,013 3,577 Fidelity VIP Contrafund 810 1,070 1,149 1,630 1,414 2,015 2,401 3,003 Fidelity VIP Equity-Income 815 1,075 1,164 1,644 1,439 2,040 2,452 3,052 Fidelity VIP Growth 809 1,069 1,146 1,627 1,409 2,010 2,390 2,994 INVESCO VIF-Dynamics 844 1,104 1,252 1,730 1,586 2,182 2,747 3,328 INVESCO VIF-Health Sciences 834 1,094 1,222 1,701 1,536 2,133 2,646 3,234 INVESCO VIF-Small Company Growth 863 1,123 1,309 1,786 1,681 2,274 2,935 3,504 INVESCO VIF-Technology 843 1,103 1,249 1,727 1,581 2,177 2,737 3,318 Janus Aspen Mid Cap Growth 824 1,084 1,191 1,671 1,485 2,084 2,545 3,138 Principal Variable Contracts Fund, Inc. Asset Allocation 816 1,076 1,167 1,647 1,444 2,045 2,463 3,061 Balanced 794 1,054 1,100 1,582 1,332 1,936 2,233 2,846 Bond 781 1,041 1,060 1,543 1,265 1,871 2,095 2,717 Capital Value 793 1,053 1,097 1,579 1,327 1,931 2,223 2,836 Equity Growth 809 1,069 1,146 1,627 1,409 2,010 2,390 2,994 Government Securities 779 1,039 1,054 1,537 1,254 1,861 2,074 2,697 Growth 793 1,053 1,097 1,579 1,327 1,931 2,223 2,836 International 825 1,085 1,194 1,674 1,490 2,089 2,555 3,148 International Emerging Markets* 958 1,217 1,589 2,061 2,141 2,720 3,819 4,331 International SmallCap 864 1,124 1,312 1,789 1,686 2,279 2,945 3,513 LargeCap Blend 842 1,102 1,246 1,725 1,576 2,172 2,727 3,309 LargeCap Growth 846 1,106 1,258 1,736 1,596 2,192 2,767 3,346 LargeCap Growth Equity* 841 1,101 1,243 1,722 1,571 2,167 2,717 3,300 LargeCap Stock Index* 825 1,085 1,197 1,678 1,501 2,104 2,614 3,224 LargeCap Value 832 1,092 1,216 1,695 1,525 2,123 2,626 3,215 Limited Term Bond 790 1,050 1,088 1,570 1,311 1,916 2,191 2,807 MicroCap 857 1,117 1,291 1,769 1,651 2,245 2,876 3,449 MidCap 794 1,054 1,100 1,582 1,332 1,936 2,233 2,846 MidCap Growth 824 1,084 1,191 1,671 1,485 2,084 2,545 3,138 MidCap Growth Equity* 845 1,105 1,255 1,733 1,591 2,187 2,757 3,337 MidCap Value 842 1,102 1,246 1,725 1,576 2,172 2,727 3,309 Money Market 781 1,041 1,060 1,543 1,265 1,871 2,095 2,717 Real Estate 824 1,084 1,191 1,671 1,485 2,084 2,545 3,138 SmallCap 829 1,089 1,206 1,686 1,510 2,109 2,596 3,186 SmallCap Growth* 838 1,098 1,234 1,713 1,556 2,153 2,687 3,271 SmallCap Value* 861 1,121 1,303 1,780 1,671 2,264 2,915 3,485 Utilities 794 1,054 1,100 1,582 1,332 1,936 2,233 2,846
* After expense reimbursement (2) If you do not surrender your contract or if you elect to receive payments under an annuity payment option:
SEPARATE ACCOUNT DIVISION 1 YEAR 1 YEAR 3 YEARS 3 YEARS 5 YEARS 5 YEARS 10 YEARS 10 YEARS ------------------------- ------ ------ ------- ------- ------- ------- -------- -------- AIM V.I. Growth $223 $283 $ 688 $ 868 $1,180 $1,479 $2,535 $3,129 AIM V.I. Core Equity 210 270 649 830 1,114 1,415 2,401 3,003 AIM V.I. Premier Equity 217 277 670 850 1,149 1,450 2,473 3,071 American Century VP Income & Growth 202 262 625 806 1,073 1,376 2,317 2,925 American Century VP Ultra 232 292 716 895 1,225 1,523 2,626 3,215 American Century VP Value 227 287 700 880 1,200 1,499 2,575 3,167 Dreyfus Investment Portfolios - Founders Discovery 271 331 833 1,010 1,420 1,712 3,013 3,577 Fidelity VIP Contrafund 210 270 649 830 1,114 1,415 2,401 3,003 Fidelity VIP Equity-Income 215 275 664 844 1,139 1,440 2,452 3,052 Fidelity VIP Growth 209 269 646 827 1,109 1,410 2,390 2,994 INVESCO VIF-Dynamics 244 304 752 930 1,286 1,582 2,747 3,328 INVESCO VIF-Health Sciences 234 294 722 901 1,236 1,533 2,646 3,234 INVESCO VIF-Small Company Growth 263 323 809 986 1,381 1,674 2,935 3,504 INVESCO VIF-Technology 243 303 749 927 1,281 1,577 2,737 3,318 Janus Aspen Mid Cap Growth 224 284 691 871 1,185 1,484 2,545 3,138 Principal Variable Contracts Fund, Inc. Asset Allocation 216 276 667 847 1,144 1,445 2,463 3,061 Balanced 194 254 600 782 1,032 1,336 2,233 2,846 Bond 181 241 560 743 965 1,271 2,095 2,717 Capital Value 193 253 597 779 1,027 1,331 2,233 2,836 Equity Growth 209 269 646 827 1,109 1,410 2,390 2,994 Government Securities 179 239 554 737 954 1,261 2,074 2,697 Growth 193 253 597 779 1,027 1,331 2,233 2,836 International 225 285 694 874 1,190 1,489 2,555 3,148 International Emerging Markets* 358 417 1,089 1,261 1,841 2,120 3,819 4,331 International SmallCap 264 324 812 989 1,386 1,679 2,945 3,513 LargeCap Blend 242 302 746 925 1,276 1,572 2,727 3,309 LargeCap Growth 246 306 758 936 1,296 1,592 2,767 3,346 LargeCap Growth Equity* 241 301 743 922 1,271 1,567 2,717 3,300 LargeCap Stock Index* 224 284 691 871 1,185 1,484 2,545 3,138 LargeCap Value 232 292 716 895 1,225 1,523 2,626 3,215 Limited Term Bond 190 250 588 770 1,011 1,316 2,191 2,807 MicroCap 257 317 791 969 1,351 1,645 2,876 3,449 MidCap 194 254 600 782 1,032 1,336 2,233 2,846 MidCap Growth 224 284 691 871 1,185 1,484 2,545 3,138 MidCap Growth Equity* 245 305 755 933 1,291 1,587 2,757 3,337 MidCap Value 242 302 746 925 1,276 1,572 2,727 3,309 Money Market 181 241 560 743 965 1,271 2,095 2,717 Real Estate 224 284 691 871 1,185 1,484 2,545 3,138 SmallCap 229 289 706 886 1,210 1,509 2,596 3,186 SmallCap Growth 238 298 734 913 1,256 1,553 2,687 3,271 SmallCap Value 261 321 803 980 1,371 1,664 2,915 3,485 Utilities 194 254 600 782 1,032 1,336 2,233 2,846
* After expense reimbursement SUMMARY This prospectus describes a flexible variable annuity offered by the Company. The Contract is designed to provide individuals with retirement benefits, including (1) Individual Retirement Annuity plans ("IRA Plans"), Simplified Employee Pension plans ("SEPs") and Savings Incentive Match Plan for Employees ("SIMPLE") IRAs adopted according to Section 408 of the Internal Revenue Code and (2) non-qualified retirement programs. This is a brief summary of the Contract's features. More detailed information follows later in this prospectus. INVESTMENT LIMITATIONS . Initial purchase payment must be $2,500 or more for non-qualified retirement programs. . Initial purchase payment must be $1,000 for all other contracts. . Each subsequent payment must be at least $100. . If you are a member of a retirement plan covering three or more persons and payments are made through an automatic investment program, then the initial and subsequent purchase payments for the Contract must average at least $100 and not be less than $50. If purchase payments are not paid during two consecutive calendar years and the accumulated value or total purchase payments less partial surrenders and applicable surrender charges is less than $2,000, then we reserve the right to terminate a Contract and distribute the accumulated value, less any applicable charges. SEPARATE ACCOUNT INVESTMENT OPTIONS (see THE UNDERLYING MUTUAL FUNDS):
DIVISION: THE DIVISION INVESTS IN: --------- ------------------------ AIM V.I. Core Equity Fund - AIM V.I. Core Equity Series I AIM V.I. Growth AIM V.I. Growth Fund - Series I AIM V.I. Premier Equity Fund - AIM V.I. Premier Equity Series I American Century VP Income & American Century VP Income & Growth Growth Fund - Class I American Century VP Ultra Fund - American Century VP Ultra Class I American Century VP Value Fund - American Century VP Value Class II Dreyfus Investment Portfolios Dreyfus Investment Portfolios - Founders Founders Discovery Portfolio - Discovery Portfolio Service Class Fidelity Variable Insurance Products Fund Contrafund Portfolio - Service Fidelity VIP Contrafund Class Equity-Income Portfolio - Fidelity VIP Equity-Income Service Class 2 Fidelity VIP Growth Growth Portfolio - Service Class INVESCO Variable Investment Funds, Inc. INVESCO VIF - Dynamics Fund Dynamics Fund INVESCO VIF - Health Sciences Fund Health Sciences Fund INVESCO VIF - Small Company Growth Small Company Growth INVESCO VIF - Technology Fund Technology Fund Janus Aspen Series Mid Cap Growth Portfolio - Janus Aspen Mid Cap Growth Service Shares Principal Variable Contracts Fund, Inc. Asset Allocation Asset Allocation Account Balanced Balanced Account Bond Bond Account Capital Value Capital Value Account Equity Growth Equity Growth Account Government Securities Government Securities Account Growth Growth Account International International Account International Emerging Markets International Emerging Markets Account International SmallCap International SmallCap Account LargeCap Blend LargeCap Blend Account LargeCap Growth LargeCap Growth Account LargeCap Growth Equity LargeCap Growth Equity Account LargeCap Stock Index LargeCap Stock Index Account LargeCap Value LargeCap Value Account Limited Term Bond Limited Term Bond Account MicroCap MicroCap Account MidCap MidCap Account MidCap Growth MidCap Growth Account MidCap Growth Equity MidCap Growth Equity Account MidCap Value MidCap Value Account Money Market Money Market Account Real Estate Real Estate Account SmallCap SmallCap Account SmallCap Growth SmallCap Growth Account SmallCap Value SmallCap Value Account Utilities Utilities Account
You may allocate your net premium payments to divisions, the DCA Plus Accounts and/or the Fixed Account. Not all of the divisions or the DCA Plus Accounts are available in all states. A current list of divisions available in your state may be obtained from a sales representative or our annuity service office. Each division invests in shares of an underlying mutual fund. More detailed information about the underlying mutual funds may be found in the current prospectus for each underlying mutual fund. The underlying mutual funds are NOT available to the general public directly. The underlying mutual funds are available only as investment options in variable life insurance policies or variable annuity contracts issued by life insurance companies 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. 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 month; and . transfers into DCA Plus Accounts are not permitted. During the annuity payment period, transfers are not permitted (no transfers once payments have begun). SURRENDERS (See Surrenders and Fixed Account Transfers, Total and Partial Surrenders and DCA Plus Surrenders) During the accumulation period: . a dollar amount must be specified; . surrendered amounts may be subject to surrender charge; . 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 purchase payments are not subject to a surrender charge; and . withdrawals before age 591/2 may involve an income tax penalty (see FEDERAL TAX MATTERS). CHARGES AND DEDUCTIONS . No sales charge on purchase payments. . A contingent deferred surrender charge is imposed on certain total or partial surrenders . A mortality and expense risks daily charge equal to 1.25% per year applies to amounts in the Separate Account .If elected, a purchase payment credit rider daily charge equal to 0.60% per year applies to amounts in the Separate Account. The purchase payment credit rider charge terminates upon completion of your 8th contract year. . Daily Separate Account administration charge is currently zero but we reserve the right to assess a charge not to exceed 0.15% annually. .Contracts with an accumulated value of less than $30,000 are subject to an annual Contract fee of the lesser of $30 or 2% of the accumulated value. Currently we do not charge the annual fee if your accumulated value is $30,000 or more. If you own more than one Contract, then all the Contracts you own or jointly own are aggregated, on each Contract's anniversary, to determine if the $30,000 minimum has been met. .Certain states and local governments impose a premium tax. The Company reserves the right to deduct the amount of the tax from purchase payments or accumulated values. ANNUITY PAYMENTS . You may choose from several fixed annuity payment options which start on your selected annuity payment date. . Payments are made to the owner (or beneficiary depending on the annuity payment option selected). You should carefully consider the tax implications of each annuity payment option (see Annuity Payment Options and FEDERAL TAX MATTERS). . Your Contract refers to annuity payments as "retirement benefit" payments. DEATH BENEFIT . If the annuitant or owner dies before the annuity payment date, then a death benefit is payable to the beneficiary of the Contract. . The death benefit may be paid as either a single sum cash benefit or under an annuity payment option (see Death Benefit). . If the annuitant dies on or after the annuity payment date, then the beneficiary will receive only any continuing payments which may be provided by the annuity payment option in effect. EXAMINATION PERIOD (FREE-LOOK) .You may return the Contract during the examination period which is generally 10 days from the date you receive the Contract. The examination period may be longer in certain states. . We return all purchase payments if required by state law. Otherwise we return accumulated value. . We retain the full amount of any purchase payment credit. THE PRINCIPAL FLEXIBLE VARIABLE ANNUITY The Principal Flexible Variable Annuity is significantly different from a fixed annuity. As the owner of a variable annuity, you assume the risk of investment gain or loss (as to amounts in the divisions) rather than the insurance company. The Separate Account 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 purchase payments and accumulated values. There can be no assurance that your investment objectives will be achieved. THE COMPANY The Company is a stock life insurance company with its home office at: Principal Financial Group, Des Moines, Iowa 50392. It 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. It was registered as a unit investment trust with the SEC on July 17, 1970. This registration does not involve SEC supervision of the investments or investment policies of the Separate Account. The income, gains, and losses, whether or not realized, of the Separate Account are credited to or charged against the Separate Account without regard to other income, gains, or losses of the Company. Obligations arising from the Contract, including the promise to make annuity payments, are general corporate obligations of the Company. However, the Contract provides that the portion of the Separate Account's assets equal to the reserves and other liabilities under the Contract are not charged with any liabilities arising out of any other business of the Company. The assets of each division invest in a corresponding underlying mutual fund. New divisions may be added and made available. Divisions may also be eliminated from the Separate Account following SEC approval. On April 18, 2003, we filed a request with the SEC for an order to permit us to substitute shares of the underlying mutual funds in which two of the divisions invest. In each case, the substitution was requested to eliminate an investment option that has not been able to attract significant interest and to invest in an investment option that has a virtually identical investment objective and policies and a lower expense ratio. If we obtain the SEC order, we intend to complete each of the following substitutions:
BEFORE SUBSTITUTION AFTER SUBSTITUTION -------------------------------------------------------------------- ----------------------------------------------------- DIVISION UNDERLYING FUND DIVISION UNDERLYING FUND -------- --------------- -------- --------------- LargeCap Growth Principal Variable Contracts LargeCap Growth Equity* Principal Variable Contracts Fund - LargeCap Growth Fund - LargeCap Growth Account Equity Account MidCap Growth Equity Principal Variable Contracts MidCap Growth Principal Variable Contracts Fund - MidCap Growth Equity Fund - MidCap Growth Account Account * Division will change its name immediately after the substitution
You will not be able to allocate net premiums or transfer to these divisions on or after May 19, 2003. However, you may transfer the values from any of these divisions to other divisions and/or the Fixed Account prior to the substitution, or for 60 days after the substitution, without a transfer charge or any limitation or counting without counting the transfer(s) as one of the twelve free unscheduled transfers (per each Contract year). You may transfer division values by calling us if telephone privileges apply (1-888-852-4450), sending the notice to our service office or by faxing the notice to us (1-515-248-9800). 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). Principal Management Corporation (the "Manager") serves as the manager for the Principal Variable Contracts Fund. The Manager is a subsidiary of Princor Financial Services Corporation. It has managed mutual funds since 1969. As of December 31, 2002, the funds it managed had assets of approximately $6.0 billion. The Manager's address is Principal Financial Group, Des Moines, Iowa 50392-0200. The Company purchases and sells mutual fund shares for the Separate Account at their net asset value. Shares represent interests in the mutual fund available for investment by the Separate Account. Each mutual fund corresponds to one of the divisions. The assets of each division are separate from the others. A division's performance has no effect on the investment performance of any other division. The following is a brief summary of the investment objective of each division. THERE IS NO GUARANTEE THAT THE OBJECTIVES WILL BE MET. AIM V.I. CORE EQUITY DIVISION INVESTS IN: AIM V.I. Core Equity Fund - Series I INVESTMENT ADVISOR: A I M Advisors, Inc. INVESTMENT OBJECTIVE: seeks growth of capital with a secondary objective of current income. The Fund invests primarily in equity securities. AIM V.I. GROWTH DIVISION INVESTS IN: AIM V.I. Growth Fund - Series I INVESTMENT ADVISOR: A I M Advisors, Inc. INVESTMENT OBJECTIVE: seeks growth of capital while investing principally in seasoned and better capitalized companies. AIM V.I. PREMIER EQUITY DIVISION INVESTS IN: AIM V.I. Premier Equity Fund - Series I INVESTMENT ADVISOR: A I M Advisors, Inc. INVESTMENT OBJECTIVE: seeks long-term growth of capital. Income is a secondary objective. The Fund invests primarily in equity securities. AMERICAN CENTURY VP INCOME & GROWTH DIVISION INVESTS IN: American Century Variable Portfolios, Inc. VP Income & Growth - Class I INVESTMENT ADVISOR: American Century Investment Management, Inc. INVESTMENT OBJECTIVE: seeks dividend growth, current income and appreciation. The account will seek to achieve its investment objective by investing in common stocks. AMERICAN CENTURY VP ULTRA DIVISION INVESTS IN: American Century Variable Portfolios, Inc. VP Ultra - Class I INVESTMENT ADVISOR: American Century Investment Management, Inc. INVESTMENT OBJECTIVE: seeks long-term capital growth by investing primarily in common stocks of large U.S. companies. AMERICAN CENTURY VP VALUE DIVISION INVESTS IN: American Century Variable Portfolios, Inc. VP Value - Class II INVESTMENT ADVISOR: American Century Investment Management, Inc. INVESTMENT OBJECTIVE: seeks long-term capital growth. Income is a secondary objective. DREYFUS INVESTMENT PORTFOLIOS - FOUNDERS DISCOVERY DIVISION INVESTS IN: Dreyfus Investment Portfolios Founders Discovery Portfolio - Initial Class INVESTMENT ADVISOR: Founders Asset Management LLC through a sub-advisory agreement INVESTMENT OBJECTIVE: seeks capital appreciation. To pursue this goal, the portfolio invests primarily in equity securities of small, U.S. based companies which are characterized as "growth" companies. FIDELITY VIP CONTRAFUND DIVISION INVESTS IN: Fidelity VIP Contra Portfolio - Service Class INVESTMENT ADVISOR: Fidelity Management & Research Company INVESTMENT OBJECTIVE: seeks long-term capital appreciation. The Fund invests primarily in common stocks. 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 S&P 500 index. FIDELITY VIP GROWTH DIVISION INVESTS IN: Fidelity VIP Growth Portfolio - Service Class INVESTMENT ADVISOR: Fidelity Management & Research Company INVESTMENT OBJECTIVE: seeks long-term capital appreciation. The Fund invests primarily in common stocks. INVESCO VARIABLE INVESTMENTS FUND - DYNAMICS DIVISION INVESTS IN: INVESCO VIF - Dynamics Fund INVESTMENT ADVISOR: INVESCO Funds Group INVESTMENT OBJECTIVE: seeks long-term capital growth by investing primarily in equity securities. INVESCO VARIABLE INVESTMENTS FUND - HEALTH SCIENCES DIVISION INVESTS IN: INVESCO VIF - Health Sciences Fund INVESTMENT ADVISOR: INVESCO Funds Group INVESTMENT OBJECTIVE: seeks long-term capital growth. The Fund invests primarily in equity securities. INVESCO VARIABLE INVESTMENTS FUND - SMALL COMPANY GROWTH DIVISION INVESTS IN: INVESCO VIF - Small Company Growth Fund INVESTMENT ADVISOR: INVESCO Funds Group INVESTMENT OBJECTIVE: seeks long-term capital growth by investing primarily in small-capitalization companies. INVESCO VARIABLE INVESTMENTS FUND - TECHNOLOGY DIVISION INVESTS IN: INVESCO VIF - Technology Fund INVESTMENT ADVISOR: INVESCO Funds Group INVESTMENT OBJECTIVE: seeks long-term capital growth by investing primarily in equity securities and equity related instruments of companies engaged in technology related industries. JANUS ASPEN MID CAP GROWTH DIVISION (FORMERLY JANUS ASPEN AGGRESSIVE GROWTH DIVISION) INVESTS IN: Janus Aspen Mid Cap Growth Portfolio - Service Shares INVESTMENT ADVISOR: Janus Capital Management LLC INVESTMENT OBJECTIVE: seeks long-term growth of capital. It pursues its objective by investing primarily in common stocks selected for their growth potential, and normally invests at least 50% of its equity assets in medium-sized companies. ASSET ALLOCATION DIVISION INVESTS IN: Principal Variable Contracts Fund - Asset Allocation Account INVESTMENT ADVISOR: Morgan Stanley Asset Management through a sub-advisory agreement 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. BALANCED DIVISION INVESTS IN: Principal Variable Contracts Fund - Balanced Account INVESTMENT ADVISOR: Principal Global Investors LLC through a sub-advisory agreement INVESTMENT OBJECTIVE: to generate a total return consisting of current income and capital appreciation while assuming reasonable risks in furtherance of this objective by investing primarily in equity and fixed-income securities. BOND DIVISION INVESTS IN: Principal Variable Contracts Fund - Bond Account INVESTMENT ADVISOR: 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 INVESTMENT ADVISOR: Principal Global Investors LLC through a sub-advisory agreement 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. EQUITY GROWTH DIVISION INVESTS IN: Principal Variable Contracts Fund - Equity Growth Account INVESTMENT ADVISOR: Morgan Stanley Asset Management through a sub-advisory agreement 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. GOVERNMENT SECURITIES DIVISION INVESTS IN: Principal Variable Contracts Fund - Government Securities Account INVESTMENT ADVISOR: Principal Global Investors LLC through a sub-advisory agreement 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 INVESTMENT ADVISOR: Principal Global Investors LLC through a sub-advisory agreement 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 DIVISION INVESTS IN: Principal Variable Contracts Fund - International Account INVESTMENT ADVISOR: Principal Global Investors LLC through a sub-advisory agreement 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. INTERNATIONAL EMERGING MARKETS DIVISION INVESTS IN: Principal Variable Contracts Fund - International Emerging Markets Account INVESTMENT ADVISOR: Principal Global Investors LLC through a sub-advisory agreement INVESTMENT OBJECTIVE: to seek 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 INVESTMENT ADVISOR: Principal Global Investors LLC through a sub-advisory agreement 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 INVESTMENT ADVISOR: Federated Investment Management Company through a sub-advisory agreement INVESTMENT OBJECTIVE: to seek long-term growth of capital. LARGECAP GROWTH DIVISION (NOT AVAILABLE AFTER MAY 19, 2003) INVESTS IN: Principal Variable Contracts Fund - LargeCap Growth Account INVESTMENT ADVISOR: Janus Capital Management, LLC through a sub-advisory agreement INVESTMENT OBJECTIVE: to seek long-term growth of capital by investing primarily in equity securities of growth companies. LARGECAP GROWTH EQUITY DIVISION INVESTS IN: Principal Variable Contracts Fund - LargeCap Growth Equity Account INVESTMENT ADVISOR: Putnam Investment Management, LLC through a sub-advisory agreement INVESTMENT OBJECTIVE: seeks to achieve long-term growth of capital investing primarily in common stocks of larger capitalization domestic companies. LARGECAP STOCK INDEX DIVISION INVESTS IN: Principal Variable Contracts Fund - LargeCap Stock Index Account INVESTMENT ADVISOR: Principal Global Investors LLC through a sub-advisory agreement 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 INVESTMENT ADVISOR: Alliance Capital Management L.P. through its Bernstein Investment Research and Management Unit through a sub-advisory agreement INVESTMENT OBJECTIVE: to seek long-term growth of capital. LIMITED TERM BOND DIVISION (AVAILABLE MAY 19, 2003) INVESTS IN: Principal Variable Contracts Fund - Limited Term Bond Account INVESTMENT ADVISOR: Principal Global Investors, LLC through a sub-advisory agreement INVESTMENT OBJECTIVE: to provide current income. MICROCAP DIVISION (NOT AVAILABLE AFTER MAY 19, 2003) INVESTS IN: Principal Variable Contract Fund - MicroCap Account INVESTMENT ADVISOR: Goldman Sachs Asset Management L.P. through a sub-advisory agreement INVESTMENT OBJECTIVE: to seek long-term growth of capital. The Account will attempt to achieve its objective by investing primarily in value and growth oriented companies with small market capitalizations. MIDCAP DIVISION INVESTS IN: Principal Variable Contracts Fund - MidCap Account INVESTMENT ADVISOR: Principal Global Investors LLC through a sub-advisory agreement 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 INVESTMENT ADVISOR: The Dreyfus Corporation through a sub-advisory agreement 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 GROWTH EQUITY DIVISION (NOT AVAILABLE AFTER MAY 19, 2003) INVESTS IN: Principal Variable Contracts Fund - MidCap Growth Equity Account INVESTMENT ADVISOR: Turner Investment Partners, Inc. through a sub-advisory agreement INVESTMENT OBJECTIVE: seeks to achieve long-term growth of capital by investing primarily in medium capitalization U.S. companies with strong earnings growth potential. MIDCAP VALUE DIVISION INVESTS IN: Principal Variable Contracts Fund - MidCap Value Account INVESTMENT ADVISOR: Neuberger Berman Management, Inc. through a sub-advisory agreement 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 INVESTMENT ADVISOR: 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. REAL ESTATE DIVISION INVESTS IN: Principal Variable Contracts Fund - Real Estate Account INVESTMENT ADVISOR: 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. SMALLCAP DIVISION INVESTS IN: Principal Variable Contracts Fund - SmallCap Account INVESTMENT ADVISOR: Principal Global Investors LLC through a sub-advisory agreement INVESTMENT OBJECTIVE: to seek long-term growth of capital. The Account will attempt to achieve its objective by investing primarily in equity securities of both growth and value oriented companies with comparatively smaller market capitalizations. SMALLCAP GROWTH DIVISION INVESTS IN: Principal Variable Contracts Fund - SmallCap Growth Account INVESTMENT ADVISOR: UBS Global Asset Management (New York) Inc. through a sub-advisory agreement 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 INVESTMENT ADVISOR: J.P. Morgan Investment Management, Inc. through a sub-advisory agreement 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. UTILITIES DIVISION INVESTS IN: Principal Variable Contracts Fund - Utilities Account INVESTMENT ADVISOR: Principal Global Investors LLC through a sub-advisory agreement INVESTMENT OBJECTIVE: to seek to provide current income and long-term growth of income and capital by investing primarily in equity and fixed-income securities of companies in the public utilities industry. SURPLUS DISTRIBUTIONS Divisible surplus distributions are not anticipated because the Contracts are not expected to result in a contribution to the divisible surplus of the Company. However, if any divisible surplus distribution is made, then it will be made to the owners in the form of cash. THE CONTRACT The following descriptions are based on provisions of the Contract offered by this prospectus. You should refer to the actual Contract and the terms and limitations of any qualified plan which is to be funded by the Contract. Qualified plans are subject to several requirements and limitations which may affect the terms of any particular Contract or the advisability of taking certain action permitted by the Contract. TO BUY A CONTRACT If you want to buy a Contract, you must submit an application and make an initial purchase payment. If you are buying the Contract to fund a SIMPLE-IRA or SEP, an initial purchase payment is not required at the time you send in the application. If the application is complete and the Contract applied for is suitable, the Contract is issued subject to underwriting. If the completed application is received in proper order, the initial purchase payment is credited within two valuation days after the later of receipt of the application or receipt of the initial purchase payment at the annuity service office. If the initial purchase payment is not credited within five valuation days, it is refunded unless we have received your permission to retain the purchase payment until we receive the information necessary to issue the Contract. The date the Contract is issued is the contract date. The contract date is the date used to determine contract years, regardless of when the Contract is delivered. PURCHASE PAYMENTS .The initial purchase payment must be at least $2,500 for non-qualified retirement programs. . All other initial purchase payments must be at least $1,000. .If you are making purchase payments through a payroll deduction plan or through a bank account (or similar financial institution) under an automated investment program, then your initial and subsequent purchase payments must be at least $100. .You may elect a purchase payment credit rider with an additional charge and an associated 9-year surrender charge period. . All purchase payments are subject to a surrender charge period that begins in the contract year each payment is received. .If you do not elect the purchase payment credit rider, each purchase payment is subject to a 7 year surrender charge period. .If you elect the purchase payment credit rider, each purchase payment is subject to a 9 year surrender charge period. . Subsequent payments must be at least $100 and can be made until the annuity payment date. . If you are a member of a retirement plan covering three or more persons, then the initial and subsequent purchase payments for the Contract must average at least $100 and cannot be less than $50. . The total of all purchase payments may not be greater than $2,000,000 without our prior approval. . In New Jersey after the first contract year, purchase payments cannot exceed $100,000 per contract year. The Company reserves the right to: . increase the minimum amount for each purchase 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 purchase payments less partial surrenders and applicable surrender charges) is less than $2,000. * The Company will first notify you of its intent to exercise this right and give you 60 days to increase the accumulated value to at least $2,000. RIGHT TO EXAMINE THE CONTRACT (FREE-LOOK) Under state law, you have the right to return the Contract for any reason during the examination period. The examination period is 10 days after the Contract is delivered to you in all states, unless your Contract is issued in: . California and you are age 60 and over (30 day examination period), . Colorado (15 day examination period), . Idaho (20 day examination period), or . North Dakota (20 day examination period). Some states require us to return the initial purchase payment while other states require us to return the accumulated value. If your Contract is issued in a state requiring return of initial purchase payment, your initial purchase payment will be allocated to the Money Market Division. After the examination period, the current value of the Money Market Division will be reallocated according to your allocation instructions. In addition, if you decide to return the Contract during the examination period, the amount returned is reduced by any credits. If the value of the purchase payment credit declines during the examination period, we recover the full amount of the purchase payment credit. If you are purchasing this Contract to fund an IRA, 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 purchase 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 period. If you send the request (properly addressed and postage prepaid) to the annuity service office, the date of the postmark is used to determine if the examination period has expired. Specific information is available from your sales representative or the annuity service office (1-800-852-4450). REPLACEMENT CONTRACTS If the purchase of this Contract is a replacement for another annuity contract or a life insurance policy, different examination periods may apply. The Company reserves the right to keep the initial purchase payment in the Money Market Division longer than 15 days to correspond to the examination periods of a particular state's replacement requirements. Exchange Credit --------------- If you own a Single Premium Deferred Annuity ("SPDA") or a Single Premium Deferred Annuity Plus ("SPDA+") issued by us and are within at least 8 months of the 8th contract year, then you may transfer the accumulated value, without charge, to the Contract described in this prospectus. Additionally, we will add 1% of the current SPDA/SPDA+ surrender value to the purchase payment. We reserve the right to change or terminate this program. Any changes or termination will follow at least 1 year notice. Both SPDA and SPDA+ are annuities which provide a fixed rate of accumulation. This Contract varies with the investment experience and objectives of the various divisions. Thus, the value of your Contract may increase or decrease with the investment holdings of the divisions. When making an exchange decision, the owner should carefully review the SPDA or SPDA+ contract and this prospectus because the charges and provisions of the contracts differ. An existing SPDA or SPDA+ contract may be currently eligible for waiver of surrender charge due to critical need, while similar riders may not be available under this Contract. Electing the exchange credit does not result in additional charges or deductions. The charges and deductions associated with your Contract and any riders still apply. To complete a transfer to this Contract, send: . 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" is not available in New York and may not be available in other states as well. Specific information is available from your registered representative or the annuity service office (1-800-852-4450)). The Exchange Credit is allocated among the Separate Account Divisions, the DCA Plus Account(s) or the Fixed Account in the same ratio as the allocation of the purchase payment. The credit is treated as earnings. The 1% credit is subject to a vesting period. Therefore, the 1% credit is not credited to your Contract until the examination period has expired. If you exercise your right to return the Contract during the examination period, the amount returned is the original amount invested (see Right to Examine the Contract). PURCHASE PAYMENT CREDIT RIDER You may elect a purchase payment credit rider at the time the Contract is issued (may not be available in all states; consult your sales representative or the annuity service office for availability). If the purchase payment credit rider is elected, then the following provisions apply to the Contract: .A credit of 5% will be applied to purchase payments received during your first contract year. For example, if you make purchase payments totaling $10,000 in your first contract year, a credit amount of $500 will be added to your Contract (5% x $10,000). If an additional purchase payment of $5,000 is made in your second contract year, then a credit is not added as a result of the $5,000 purchase payment. .The credit is allocated among the Fixed Account and the divisions according to your then current purchase payment allocations. .If you exercise your right to return the Contract during the examination period, the amount returned to you is reduced by any credits. . Credits are considered earnings under the Contract. .All purchase payments are subject to the 9-year surrender charge table (see Surrender Charge). .The purchase 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 0.60% purchase payment credit rider charge is assessed against the entire Separate Account accumulated value for the first eight contract years. If you anticipate making additional purchase payments after the first contract year you should carefully examine the purchase payment credit rider and consult your sales representative regarding its desirability. (The Fixed Account is not available if the Purchase Payment Credit Rider is selected in Oregon. Specific information is available from your registered representative or the annuity service office (1-800-852-4450)). The following tables demonstrate hypothetical values. The first table shows accumulated values. The second table shows surrender values. The tables are based on: . a $100,000 initial purchase payment and no additional purchase payments; .the deduction of total Separate Account annual expenses of 1.85% (for the first eight contract years) annually for Contracts with the purchase payment credit rider and 1.25% annually for Contracts without the rider; .the deduction of mutual fund expenses equal to those calculated as of December 31, 2000; .purchase payment allocation among the divisions proportionally equal to the allocation of the Company's total Separate Account assets as of April 30, 2000; and . 5% and 10% annual rates of return before charges.
5% ANNUAL RETURN 10% ANNUAL RETURN ------------------------------------ ------------------------------------ CONTRACT CONTRACT CONTRACT CONTRACT ACCUMULATED VALUE ACCUMULATED VALUE ACCUMULATED VALUE ACCUMULATED VALUE WITHOUT WITH WITHOUT WITH PURCHASE PAYMENT PURCHASE PAYMENT PURCHASE PAYMENT PURCHASE PAYMENT CONTRACT YEAR RIDER CREDIT RIDER CREDIT RIDER CREDIT RIDER ------------- ----------------- ----------------- ----------------- ----------------- 1 $103,086 $107,595 $108,356 $113,095 2 $106,277 $110,261 $117,436 $121,838 3 $109,567 $112,994 $127,277 $131,259 4 $112,959 $115,796 $137,943 $141,408 5 $116,456 $118,667 $149,504 $152,342 6 $120,062 $121,609 $162,035 $164,123 7 $123,780 $124,625 $175,616 $176,815 8 $127,614 $127,716 $190,335 $190,489 9 $131,566 $131,670 $206,290 $206,452 10 $135,642 $135,749 $223,582 $223,758 15 $158,001 $158,126 $334,391 $334,654 20 $184,060 $184,205 $500,155 $500,549
5% ANNUAL RETURN 10% ANNUAL RETURN ---------------------------------- ---------------------------------- SURRENDER VALUE SURRENDER VALUE SURRENDER VALUE SURRENDER VALUE WITHOUT WITH WITHOUT WITH PURCHASE PAYMENT PURCHASE PAYMENT PURCHASE PAYMENT PURCHASE PAYMENT CONTRACT YEAR CREDIT RIDER CREDIT RIDER CREDIT RIDER CREDIT RIDER ------------- ---------------- ---------------- ---------------- ---------------- 1 $ 97,501 $ 99,787 $102,454 $105,095 2 $100,500 $102,261 $111,436 $113,838 3 $103,593 $104,994 $121,277 $123,259 4 $107,959 $107,796 $132,943 $133,408 5 $112,456 $111,667 $145,504 $145,342 6 $117,062 $115,609 $159,035 $158,123 7 $121,780 $119,625 $173,616 $171,815 8 $127,614 $123,716 $190,335 $186,489 9 $131,566 $128,670 $206,290 $203,452 10 $135,642 $135,749 $223,582 $223,758 15 $158,001 $158,126 $334,391 $334,654 20 $184,060 $184,205 $500,155 $500,549
Based on the assumptions stated above, accumulated value will generally be higher for Contracts with the purchase payment credit rider than without, regardless of the rate of return. In addition, the higher the rate of return, the more advantageous the purchase payment credit rider becomes. However, Contracts with the purchase payment credit rider are subject to both a greater surrender charge and a longer surrender charge period than Contracts issued without the purchase payment credit rider. If you surrender your Contract with the purchase payment credit rider while subject to a surrender charge, your surrender value may be less than a Contract without the purchase payment credit rider. THE ACCUMULATION PERIOD The Value of Your Contract -------------------------- The value of your Contract is the total of the Separate Account 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 accumulated value. Its value reflects the investment experience of the divisions that you choose. It also reflects your purchase payments, partial surrenders, surrender charges and the Contract expenses deducted from the Separate Account. The Separate Account 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 purchase payment; . an exchange credit (if applicable); . subsequent investments; . purchase payment credits; and . transfers from another division, a DCA Plus Account or the Fixed Account. minus units sold: . for partial surrenders 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 (generally 3:00 p.m. Central Time). To calculate the unit value of a division, the unit value from the previous valuation date is multiplied by the division's net investment factor for the current valuation period. The number of units does not change due to a change in unit value. The net investment factor measures the performance of each division. The net investment factor for a valuation period is calculated as follows: [{share price (net asset value) of the underlying mutual fund at the end of the valuation period plus per share amount of any dividend* (or other distribution) made by the mutual fund during the valuation period} divided by share price (net asset value) of the underlying mutual fund at the end of the previous valuation period] minus {total Separate Account annual expenses} * When an investment owned by a mutual fund pays a dividend, the dividend increases the net asset value of a share of the mutual fund as of the date the dividend is recorded. As the net asset value of a share of a mutual fund increases, the unit value of the corresponding division also reflects an increase. Payment of a dividend under these circumstances does not increase the number of units you own in the division. The Separate Account charges are calculated by dividing the annual amount of the charge by 365 and multiplying by the number of days in the valuation period. The Separate Account charges and any taxes (currently none) are accrued daily and are transferred from the Separate Account at the Company's discretion. Purchase Payments ----------------- . On your application, you direct your purchase payments to be allocated to the Investment Options. . Allocations may be in percentages. . Percentages must be in whole numbers and total 100%. . Subsequent purchase payments are allocated according to your current allocation instructions. . Changes to the allocation instructions may be made without charge. . A change is effective on the next valuation period after we receive your new instructions. . You can change the allocations and 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 1-515-248-9800; or . visiting www.principal.com. . Changes to purchase payment allocations do not transfer any existing Investment Option accumulated values. . Purchase payments are credited on the basis of unit value next determined after we receive a purchase payment. 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 (1-515-248-9800). . You must specify the dollar amount or percentage to transfer from each division. . The minimum amount is $100 or if the division's value is less than $100, then 100% of the division from which the transfer is being made. . 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 (without our prior approval). 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 1-515-248-9800; 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. Scheduled Transfers (Dollar Cost Averaging) ------------------------------------------- . You may elect to have transfers made on a scheduled basis. . 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, then 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 them. . We reserve the right to limit the number of divisions from which simultaneous transfers are made. In no event will it ever be less than two. AUTOMATIC PORTFOLIO REBALANCING (APR) . APR allows you to maintain a specific percentage of your Separate Account accumulated value in specified divisions over time. . You may elect APR at any time. . 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. . APR will not begin until the examination period has expired. . There is no charge for APR transfers. . APR can be selected for quarterly, semi-annual or annual rebalancing. . You may rebalance by completing and submitting a form to us, by telephoning if you have telephone privileges (1-800-852-4450) or faxing your instructions to us (1-515-248-9800). (Divisions are rebalanced at the end of the next valuation period following your request.) Example: You elect APR to maintain your Separate Account accumulated value with 50% in the A Division and 50% in the B Division. At the end of the specified period, 60% of the values are in the A Division, with the remaining 40% in the B Division. By rebalancing, units from the A Division are sold and applied to the B Division so that 50% of the Separate Account accumulated value is once again in each Division. TELEPHONE AND INTERNET SERVICES These services permit you to make: . purchase payment allocation changes; . transfers; and . 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, then we may be liable for loss caused by unauthorized or fraudulent transactions. The procedures may include recording telephone service transactions, requesting personal identification (name, 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 PIN) 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 by us before the close of normal trading of the NYSE (generally 3 p.m. Central Time). Requests received when we are not open for business or after the NYSE closes its normal trading will be effective on the next valuation date. 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 Surrenders result in the cancellation of units and your receipt of the value of the canceled unit minus any applicable fee and surrender charge. Surrenders from the Separate Account are generally paid within seven days of the effective date of the request for surrender (or earlier if required by law). However, certain delays in payment are permitted (see Delay of Payments). Surrenders before age 591/2 may involve an income tax penalty (see FEDERAL TAX MATTERS). You must send us a written request for any surrender. You may specify surrender allocation percentages with each partial surrender request. If you don't provide us with specific percentages, we will use your purchase payment allocation percentages for the partial surrender. Surrenders may be subject to a surrender charge (see Surrender Charge). Total Surrender --------------- . You may surrender the Contract at any time before the annuity payment 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 fee and charge. . 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 annuity payment date and during the lifetime of the Annuitant, you may surrender a part of the accumulated value by sending us a written request. . 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 the surrender allocation percentages you specify. . If surrender allocation percentages are not specified, we use your purchase 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 fee. . 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 by sending us written notice. . 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. . The surrenders continue until your value in the division is zero or we receive written notice to stop them. DEATH BENEFIT If you or the annuitant die before the annuity payment date, then we will pay a death benefit. In the case of joint annuitants, the death benefit is paid upon death of the first annuitant. If the owner is not a natural person, death benefits are paid to the beneficiary(ies) upon the death of the annuitant. Before the annuity payment date, you may give us written instructions for payment under a death benefit option. If we do not receive your instructions, the death benefit is paid according to instructions from the beneficiary(ies). You name the beneficiary or beneficiaries in your application. The beneficiary(ies) receives benefits upon your death. Generally, unless the beneficiary(ies) elects otherwise we pay the death benefit in a single sum, subject to proof of your death. Unless you have named an irrevocable beneficiary(ies), you may change your beneficiary by providing us with written notice. If a beneficiary dies before you, on your death we will make equal payments to the surviving beneficiaries unless you had provided us with other written instructions. If none of your beneficiaries survive you, we will pay the death benefit to your estate in a lump sum. Upon death of the annuitant, your beneficiary may elect to: . apply the death benefit under an annuity payment option; or . receive the death benefit as a single payment. No surrender charge applies when a death benefit is paid. If you die before the annuitant and your beneficiary is your spouse, we will continue the Contract with your spouse as the new owner unless your spouse elects to receive the death benefit. NOTE: for Contracts not issued as an IRA, Roth IRA, SEP IRA or Simple-IRA: If the owner (or in the case of joint annuitants one of the annuitants), dies before the annuitant and before the annuity payment date, written notice of the death must be sent to us promptly so distribution arrangements can be made to avoid adverse tax consequences. Standard Death Benefit ---------------------- The amount of the standard death benefit is the greatest of: . your accumulated value on the date we receive proof of death and all required documents; . the total of purchase payments minus any partial surrenders, fees and charges as of the date we receive all required documents and notice (including proof) of death; or . the highest accumulated value on any prior contract anniversary that is divisible equally by seven, plus any purchase payments and less any partial surrenders (and surrender charges incurred) made after that contract anniversary. Annual Enhanced Death Benefit ----------------------------- This is an optional death benefit rider. Under this rider, if the original annuitant or owner dies before the annuity payment date, then the death benefit payable to the beneficiary is the greatest of: . the standard death benefit; . the annual increasing death benefit, based on purchase payments (accumulated at 5% annually) minus any surrenders and surrender charges (accumulated at 5% annually) until the later of the contract anniversary after the original owner's or original annuitant's 75th birthday or five years from the effective date of the rider; or . the highest accumulated value on a contract anniversary, plus any subsequent purchase payments minus any surrenders and surrender charges, until the contract anniversary following the original owner's or original annuitant's 75th birthday or five years from the effective date of the rider, whichever comes last. For Contracts issued in New York - under this rider, if the original annuitant or owner dies before the annuity payment date, then the death benefit payable to the beneficiary is the greater of: . the standard death benefit; or . the highest accumulated value on a contract anniversary until the contract anniversary following the original owner's or original annuitant's 75th birthday or five years from the effective date of the rider, whichever comes last. LOCK-IN FEATURE . At the later of the contract anniversary following the original owner's or original annuitant's 75th birthday ("lock-in date"), the death benefit amount is locked-in. After the lock-in date, the death benefit increases by purchase payments (subject to applicable restrictions) made after the lock-in date, minus any surrenders and surrender charges. However, because the death benefit is locked-in, it will only decrease by surrenders and surrender charges. Once the standard death benefit equals the annual enhanced death benefit, then the annual enhanced death benefit and any associated charge terminate. The standard death benefit then applies. TERMINATION . You may terminate the annual enhanced death benefit at anytime. Once the annual enhanced death benefit is terminated, it cannot be reinstated (except in Florida). The annual cost of the rider is 0.20% of the annual accumulated value (0.15% in New York). The charge is equal to 0.05% (0.0375% in New York) of the average accumulated value during the calendar quarter. The cost will be deducted through the redemption of units from your Contract's accumulated value in the same proportion as the surrender allocation percentages among the DCA Plus Accounts, Fixed Account and divisions. If the rider is purchased after the beginning of a quarter, then the charge is prorated according to the number of days it is in effect during the quarter. Upon termination of the rider or upon death, you will be charged based on the number of days it is in effect during the quarter. The enhanced death benefit rider is only available at the time the Contract is issued. Thus, once a Contract has been purchased without the rider, it may not be added at a later date. Payment of Death Benefit ------------------------ The death benefit is usually paid within seven days of our receiving all documents (including proof of death) that we require to process the claim. Payment is made according to benefit instructions provided by you. Some states require this payment to be made in less than seven days. Under certain circumstances, this payment may be delayed (see Delay of Payments). We pay interest (at least 3% or as required by state law) on the death benefit from the date we receive all required documents until payment is made or until the death benefit is applied under an annuity payment option. NOTE: Proof of death includes: a certified copy of a death certificate; a certified copy of a court order; a written statement by a medical doctor; or other proof satisfactory to us. THE ANNUITY PAYMENT PERIOD Annuity Payment Date -------------------- You may specify an annuity payment date in your application. You may elect to receive payments under an annuity payment option at any time. If you do not specify an annuity payment date, then the annuity payment date is the later of the older annuitant's 85th birthday or 10 years after issuance. If the annuitant is living and the Contract is in force on that date, we will notify you to begin taking payments under the Contract. You may not select an annuity payment date which is on or after the older annuitant's 85th birthday or 10 years after the contract date, whichever is the later. (No later than age 88 in Pennsylvania or age 90 in New York.) Depending on the type of annuity payment option selected, payments that are initiated either before or after the annuity payment date may be subject to penalty taxes (see FEDERAL TAX MATTERS). You should consider this carefully when you select or change the annuity payment date. You may change the annuity payment date with our prior approval. The request must be in writing and approved before we issue a supplementary contract which provides an annuity payment option. Annuity Payment Options ----------------------- We offer fixed annuity payments. If, however, the accumulated value on the annuity payment date is less than $5,000 or if the amount applied under an annuity payment option is less than the minimum requirement, we may pay out the entire amount. No surrender charge would be imposed. The Contract would then be canceled. You may choose from several fixed annuity payment options. Payments will be made on the frequency you choose. You may elect to have your annuity payments made on a monthly, quarterly, semiannual or annual basis. The dollar amount of the payments is specified for the entire payment period according to the option selected. There is no right to make any total or partial surrender after the annuity payments start. The amount of the annuity payment depends on: . amount of accumulated value; . annuity payment option selected; and . age and gender of annuitant (unless fixed income option is selected). Annuity payments generally are higher for male annuitants than for female annuitants with an otherwise identical Contract. This is because statistically females have longer life expectancies than males. In certain states, this difference may not be taken into consideration in fixing the payment amount. Additionally, Contracts with no gender distinctions are made available for certain employer-sponsored plans because under most such plans, such Contract provisions are prohibited by law. You may select an annuity payment option or change a previous selection by written request. We must receive the request on or before the annuity payment date. If an annuity payment option is not selected, then we will automatically apply the Life Income with Payments Guaranteed for a Period of 10 Years (see below). If you designate joint annuitants, then payment will be made pursuant to a Joint and Full Survivor Life Income for a Period of 10 Years (see below). Tax laws and regulations may impose further restrictions on annuity payment options. Payments under the annuity payment options are made as of the first day of each payment period beginning with the annuity payment date. The available annuity payment options are: FIXED INCOME . Payments of a fixed amount or payments for a fixed period of at least five years but not more than 30 years. Payments stop after all guaranteed payments are made. LIFE INCOME . Payments are made as of the first day of each payment period during the annuitant's life, starting with the annuity payment date. No payments are made after the annuitant dies. It is possible that you would only receive one payment under this option if the annuitant dies before the second payment is due. LIFE INCOME WITH PAYMENTS GUARANTEED FOR A PERIOD OF 5 TO 20 YEARS . Payments are made on the first day of each payment period beginning on the annuity payment date. Payments will continue until the annuitant dies. If the annuitant dies before all of the guaranteed payments have been made, then we will continue the guaranteed payments to the beneficiary. JOINT AND FULL SURVIVOR LIFE INCOME WITH PAYMENTS GUARANTEED FOR A PERIOD OF 10 YEARS . Payments continue as long as either the annuitant or the joint annuitant is alive. If both die before all guaranteed payments have been made, the guaranteed remaining payments are made to the beneficiary. JOINT AND TWO-THIRDS SURVIVOR LIFE INCOME . Payments continue as long as either the annuitant or the joint annuitant is alive. If either the annuitant or joint annuitant dies, payments continue to the survivor at two-thirds the original amount. Payments stop when both the annuitant and joint annuitant have died. It is possible that only one payment is made under this option if both annuitants die before the second payment is due. Other annuity payment options may be available with our approval. Death of Annuitant ------------------ If the owner or annuitant dies during the annuity payment period, remaining payments are made to the beneficiary throughout the guarantee period, if any, or for the life of any joint annuitant, if any. In all cases the person entitled to receive payments also receives any rights and privileges under the annuity payment option. The mortality risk assumed by the Company is to make annuity payments for the full life of all annuitants regardless of how long they, or any individual annuitant, might live. Mortality risk does not apply to the Fixed Income option. Annuity payments are determined in accordance with annuity tables and other provisions contained in the Contract. This assures neither an annuitant's own longevity, nor an improvement in life expectancy, will have an adverse effect on the annuity payments received under this Contract. The annuity payment tables contained in this Contract are based on the Annuity Mortality 1983 Table a. These tables are guaranteed for the life of the Contract. If you own one or more qualified annuity contracts, in order to avoid tax penalties, payments from at least one of your qualified contracts must start no later than April 1 following the calendar year in which you turn age 701/2. The required minimum payment is a distribution in equal (or substantially equal) amounts over your life or over the joint lives of you and your designated beneficiary. In addition, payments must be made at least once a year. Tax penalties may also apply at your death on certain excess accumulations. You should consider potential tax penalties with your tax advisor when selecting an annuity payment option or taking other distributions from the Contract. Additional rules apply to distributions under non-qualified contracts (see Required Distributions for Non-Qualified Contracts). However, the rules do not apply to contracts issued in connection with IRAs, SEPs or SIMPLE-IRAs. CHARGES AND DEDUCTIONS An annual fee, a mortality and expense risks charge and in some circumstances a purchase credit rider charge are deducted under the Contract. A surrender charge may also be deducted from certain surrenders made before the annuity payment date. We reserve the right to assess a transaction fee, state premium taxes and a daily administration charge. There are also deductions from and expenses paid out of the assets of the underlying mutual funds which are described in the underlying mutual funds' prospectuses. ANNUAL FEE An annual fee exists which is the lesser of $30 or 2% of your accumulated value (subject to any applicable state law limitations). The fee is deducted from the DCA Plus Accounts, Fixed Account or your interest in a division, whichever has the greatest value. The fee is deducted on each contract anniversary and upon total surrender of the Contract. This fee is currently waived for Contracts having an accumulated value on the last day of the contract year of $30,000 or more. The aggregate value of multiple Contracts owned, or jointly owned, by you is used to attain the $30,000 accumulated value. Aggregation occurs on each Contract's anniversary. The fee assists in covering administrative costs. The Company does not anticipate any profit from this fee. The administrative costs include costs associated with: . 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. We agree not to increase this charge for the duration of the Contract. This charge is assessed only prior to the annuity payment date. This charge is assessed daily when the value of a unit is calculated. We have a mortality risk in that we guarantee payment of a death benefit in a single sum or under an annuity payment option. No surrender charge is imposed on a death benefit payment which gives us an additional mortality risk. The expense risk that we assume is that the actual expenses incurred in issuing and administering the Contract exceed the Contract limits on administrative charges. If the mortality and expense risks charge is not enough to cover the costs, we bear the loss. If the amount of mortality and expense risks charge deducted is more than our costs, the excess is profit to the Company. We expect a profit from the mortality and expense risks charge. PURCHASE PAYMENT CREDIT If you elect the purchase payment credit rider we assess each division with an additional daily charge. The annual rate of the charge is 0.60% of the average daily net assets of the Separate Account. We agree not to increase this charge for the duration of the Contract. This charge is assessed until completion of your 8th contract year and only prior to the annuity payment date. This charge is assessed daily when the value of a unit is calculated. If the purchase payment credit rider charge is not enough to cover the cost of the credit, we bear the loss. If the amount of the purchase payment credit rider charge deducted is more than our costs, the excess is profit to the Company. We expect a profit from the purchase payment credit rider charge. TRANSACTION FEE We reserve the right to charge a transaction fee of $30 that applies to each unscheduled partial surrender after the 12th unscheduled partial surrender in a contract year. We also reserve the right to charge a $30 transaction fee on each unscheduled transfer after the 12th such transfer in a contract year. The transaction fee would be deducted from the DCA Plus Accounts, Fixed Account and/or your interest in a division from which the amount is surrendered or transferred, on a pro rata basis. PREMIUM TAXES We reserve the right to deduct an amount to cover any premium taxes imposed by states or other jurisdictions. Any deduction is made from either a purchase payment when we receive it, or the accumulated value when you request a surrender (total or partial) or it is applied under an annuity payment option. Premium taxes range from 0% in most states to as high as 3.50%. SURRENDER CHARGE No sales charge is collected or deducted when purchase payments are applied under the Contract. A surrender charge is assessed on certain total or partial surrenders. The amounts we receive from the surrender charge are used to cover some of the expenses of the sale of the Contract (commissions and other promotional or distribution expenses). If the surrender charge collected is not enough to cover the actual costs of distribution, the costs are paid from the Company's General Account assets which includes profit, if any, from the mortality and expense risks charge. The surrender charge for any total or partial surrender is a percentage of the purchase payments surrendered which were received by us during the contract years prior to the surrender. The applicable percentage which is applied to the sum of the purchase payments paid during each contract year is determined by the following tables. Surrender Charge without the purchase payment credit rider (as a percentage of amounts surrendered)
NUMBER OF COMPLETED CONTRACT YEARS SURRENDER CHARGE APPLIED TO ALL SINCE EACH PURCHASE PAYMENT PURCHASE PAYMENTS RECEIVED IN WAS MADE THAT CONTRACT YEAR ------------------------------------ ------------------------------- 0 (year of purchase payment)* 6% 1 6% 2 6% 3 5% 4 4% 5 3% 6 2% 7 and later 0%
Surrender Charge with the purchase payment credit rider (as a percentage of amounts surrendered)
NUMBER OF COMPLETED CONTRACT YEARS SURRENDER CHARGE APPLIED TO ALL SINCE EACH PURCHASE PAYMENT PURCHASE PAYMENTS RECEIVED IN WAS MADE THAT CONTRACT YEAR ---------------------------------- ------------------------------- 0 (year of purchase payment)* 8% 1 8% 2 8% 3 8% 4 7% 5 6% 6 5% 8 3% 9 and later 0%
* Each purchase payment begins in year 0 for purposes of calculating the percentage applied to that payment. However, purchase payments are added together by contract year for purposes of determining the applicable surrender charge percentage. If your contract year begins April 1 and ends March 31 the following year, then all purchase payments received during that period are considered to have been made in that contract year. For purpose of calculating surrender charges, we assume that surrenders and transfers are made in the following order: . first from purchase payments no longer subject to a surrender charge; . then from the free surrender privilege (first from the earnings, then from the oldest purchase payments (first-in, first-out)) described below; and . then from purchase payments subject to a surrender charge on a first-in, first-out basis. A surrender charge is not imposed in states where it is prohibited, including: . New Jersey - no surrender charge for total surrender on or after the later of the annuitant's 64th birthday or 4 years after the contract date. . Washington - no surrender charge for total surrender on or after the later of the annuitant's 70th birthday or 10 years after the contract date. FREE SURRENDER PRIVILEGE The free surrender privilege is an amount normally subject to a surrender charge that may be surrendered without a charge. The free surrender privilege is the greater of: . earnings in the Contract (earnings = accumulated value less unsurrendered purchase payments as of the surrender date); or . 10% of the purchase payments still subject to the surrender charge, decreased by any partial surrenders since the last contract anniversary. The free surrender privilege not used in a contract year is not added to the free surrender privilege for any following contract year(s). Unscheduled partial surrenders of the free surrender privilege may be subject to the transaction fee described above. Waiver of Surrender Charge -------------------------- The surrender charge does not apply to: . amounts applied under an annuity payment option; or . payment of any death benefit, however, the surrender charge does apply to purchase payments made by a surviving spouse after an owner's death; or . 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 the Contract to a single premium immediate annuity issued by the Company after the surrender charge period has expired; 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; or . if permitted by state law, withdrawals made after the first contract anniversary if the original owner or original annuitant has a critical need. Waiver of the surrender charge is available for critical need if the following conditions are met: . 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. . total and permanent disability - a disability that occurs after the contract date but before the original owner or annuitant reaches age 65 and qualifies to receive social security disability benefits. In New York and West Virginia, different definitions of total and permanent disability apply. Contact us at 1-800-852-4450 for additional information. This waiver of surrender charge rider is not available in Massachusetts, New Jersey or Pennsylvania. Specific information is available from your sales representative or the annuity service office (1-800-852-4450). ADMINISTRATION CHARGE We reserve the right to assess each division with a daily charge at the annual rate of 0.15% of the average daily net assets of the division. This charge would only be imposed before the annuity payment date. This charge would be assessed to help cover administrative expenses. Administrative expenses include the cost of issuing the Contract, clerical, record keeping and bookkeeping services, keeping the required financial and accounting records, communicating with Contract owners and making regulatory filings. SPECIAL PROVISIONS FOR GROUP OR SPONSORED ARRANGEMENTS 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. Availability of the reduction and the size of the reduction (if any) is based on certain criteria. Eligibility for and the amount of these reductions are determined by a number of factors, including the number of individuals in the group, the amount of expected purchase payments, total assets under management for the Contract owner, the relationship among the group's members, the purpose for which the Contract is being purchased, the expected persistency of the Contract, and any other circumstances which, in our opinion are rationally related to the expected reduction in expenses. Reductions reflect the reduced sales efforts and administrative costs resulting from these arrangements. We may modify the criteria for and the amount of the reduction in the future. Modifications will not unfairly discriminate against any person, including affected Contract owners and other contract owners with contracts funded by the Separate Account. FIXED ACCOUNT AND DCA PLUS ACCOUNTS This prospectus is intended to serve as a disclosure document only for the Contract as it relates to the Separate Account. It only contains selected information regarding the Fixed Account and DCA Plus Accounts. Assets in the Fixed Account and DCA Plus Accounts are held in the General Account of the Company. The General Account is the assets of the Company other than those allocated to any of the Company's Separate Accounts. Subject to applicable law, the Company has sole discretion over the assets in the General Account. Because of exemptive and exclusionary provisions, interests in the Fixed Account and DCA Plus Accounts are not registered under the Securities Act of 1933 and the General Account is not registered as an investment company under the Investment Company Act of 1940. The Fixed Account and DCA Plus Accounts are not subject to these Acts. The staff of the SEC does not review the prospectus disclosures relating to the Fixed Account or DCA Plus Accounts. However, these disclosures are subject to certain generally applicable provisions of the federal securities laws relating to the accuracy and completeness of statements made in the prospectus. Separate Account expenses are not assessed against any Fixed Account or DCA Plus Account values. More information concerning the Fixed Account and DCA Plus Accounts is available from our annuity service office or from a sales representative. FIXED ACCOUNT The Company guarantees that purchase payments allocated to the Fixed Account earn interest at a guaranteed interest rate. In no event will the guaranteed interest rate be less than 3% compounded annually. Each purchase payment allocated or amount transferred to the Fixed Account earns interest at the guaranteed rate in effect on the date it is received or transferred. This rate applies to each purchase payment or amount transferred through the end of the contract year. Each contract anniversary, we declare a renewal interest rate that is guaranteed and applies to the Fixed Account value in existence at that time. This rate applies until the end of the contract year. Interest is earned daily and compounded annually at the end of each contract year. Once credited, the interest is guaranteed and becomes part of the Fixed Account accumulated value from which deductions for fees and charges may be made. FIXED ACCOUNT ACCUMULATED VALUE Your Fixed Account accumulated value on any valuation date is equal to: . purchase payments allocated to the Fixed Account; . plus any transfers to the Fixed Account from the Separate Account and DCA Plus Accounts; . plus interest credited to the Fixed Account; . minus any surrenders or applicable surrender charges 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 annuity payment date and as provided below. The transfer is effective on the valuation date following our receiving your instructions. You may transfer amounts on either a scheduled or unscheduled basis. You may not make both scheduled and unscheduled Fixed Account transfers in the same contract year. Unscheduled Fixed Account Transfers ----------------------------------- The minimum transfer amount is $100 (or entire Fixed Account accumulated value if less than $100). Once per contract year, within the 30 days following the contract anniversary date, you can: . 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 the renewal interest rate for your Fixed Account accumulated value for the current contract year is more than one percentage point lower than the weighted average of your Fixed Account interest rates for the preceding contract year. We will inform you if the renewal interest rate falls to that level. Scheduled Fixed Account Transfers ------------------------------------- Fixed Account Dollar Cost Averaging You may make scheduled transfers on a monthly basis from the Fixed Account to the Separate Account as follows: . 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 them. . The minimum transfer amount is $100. . If the Fixed Account accumulated value is less than $100 at the time of transfer, then the entire Fixed Account accumulated value will be transferred. . If you stop the transfers, you may not start them again without our prior approval. DOLLAR COST AVERAGING PLUS PROGRAM (DCA PLUS PROGRAM) Purchase payments allocated to the DCA Plus Accounts earn a guaranteed interest rate. A portion of your DCA Plus Account accumulated value is periodically transferred (on the 28th of each month) to divisions or to the Fixed Account. If the 28th is not a valuation date, then the transfer occurs on the next valuation date. The transfers are allocated according to your DCA Plus allocation instructions. Transfers into a DCA Plus Account are not permitted. If you elect the purchase payment credit rider, you may not participate in the DCA Plus Program. DCA Plus Purchase Payments -------------------------- You may enroll in the DCA Plus program by allocating a minimum purchase payment of $1,000 into a DCA Plus Account and selecting divisions and/or the Fixed Account into which transfers will be made. Subsequent purchase payments of at least $1,000 are permitted. You can change your DCA Plus allocation instructions during the transfer period. Automatic portfolio rebalancing does not apply to DCA Plus Accounts. DCA Plus purchase payments receive the fixed rate of return in effect on the date each purchase payment is received by us. The rate of return remains in effect for the remainder of the 6-month or 12-month DCA Plus transfer program. Selecting A DCA Plus Account ---------------------------- DCA Plus Accounts are available in either a 6-month transfer program or a 12-month transfer program. The 6-month transfer program and the 12-month transfer program generally will have different credited interest rates. You may enroll in both a 6-month and 12-month DCA Plus program. However, you may only participate in one 6-month and one 12-month DCA Plus program at a time. Under the 6-month transfer program, all payments and accrued interest must be transferred from the DCA Plus Account to the selected divisions and/or Fixed Account in no more than 6 months. Under the 12-month transfer program, all payments and accrued interest must be transferred to the selected divisions and/or Fixed Account in no more than 12 months. We will transfer an amount each month which is equal to your DCA Plus Account value divided by the number of months remaining in your transfer program. For example, if 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 divisions and the Fixed Account according to your allocation instructions. The transfers begin after we receive your purchase payment and completed enrollment instructions. Transfers occur on the 28th of the month and continue until your entire DCA Plus Account accumulated value is transferred. Unscheduled DCA Plus Transfers ------------------------------ You may make unscheduled transfers from DCA Plus Accounts to divisions and/or the Fixed Account. A transfer is made, and values determined, as of the end of the valuation period in which we receive your request. DCA Plus Surrenders ------------------- You may make scheduled or unscheduled surrenders from DCA Plus Accounts. Purchase payments earn interest according to the corresponding rate until the surrender date. Surrenders are subject to any applicable surrender charge. GENERAL PROVISIONS THE CONTRACT The entire Contract is made up of: the Contract, copies of any applications, amendments, riders and endorsements attached to the Contract; current data pages; copies of any supplemental applications, amendments, endorsements and revised Contract pages or data pages which are mailed to you. Only our corporate officers can agree to change or waive any provisions of a Contract. Any change or waiver must be in writing and signed by an officer of the Company. DELAY OF PAYMENTS Surrenders are generally made within seven days after we receive your instruction for a surrender in a form acceptable to us. This period may be shorter where required by law. However, payment of any amount upon total or partial surrender, death or the transfer to or from a division may be deferred during any period when the right to sell mutual fund shares is suspended as permitted under provisions of the Investment Company Act of 1940 (as amended). The right to sell shares may be suspended during any period when: . 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 or transfer is not canceled by your written instruction, the amount to be surrendered or transferred will be determined the first valuation date following the expiration of the permitted delay. The surrender or transfer will be made within seven days thereafter. In addition, payments on surrenders attributable to a purchase payment made by check may be delayed up to 15 days. This permits payment to be collected on the check. We may also defer payment of surrender proceeds payable out of the Fixed Account for a period of up to six months. MISSTATEMENT OF AGE OR GENDER If the age or, where applicable, gender of the annuitant has been misstated, we adjust the annuity payment under your Contract to reflect the amount that would have been payable at the correct age and gender. If we make any overpayment because of incorrect information about age or gender, or any error or miscalculation, we deduct the overpayment from the next payment or payments due. Underpayments are added to the next payment. ASSIGNMENT You may assign ownership of your non-qualified Contract. Each assignment is subject to any payments made or action taken by the Company prior to our notification of the assignment. We assume no responsibility for the validity of any assignment. An assignment or pledge of a Contract may have adverse tax consequences. An assignment must be made in writing and filed with us at the annuity service office. The irrevocable beneficiary(ies), if any, must authorize any assignment in writing. Your rights, as well as those of the annuitant and beneficiary, are subject to any assignment on file with us. Any amount paid to an assignee is treated as a partial surrender and is paid in a single lump sum. CHANGE OF OWNER You may change your non-qualified Contract ownership designation at any time. Your request must be in writing and approved by us. After approval, the change is effective as of the date you signed the request for change. If ownership is changed, then the waiver of the surrender charge for surrenders made because of critical need of the owner is not available. We reserve the right to require that you send us the Contract so that we can record the change. BENEFICIARY Before the annuity payment date and while the annuitant is alive, you have the right to name or change a beneficiary. This may be done as part of the application process or by sending us a written request. Under certain retirement programs, however, spousal consent may be required to name or change a beneficiary. Unless you have named an irrevocable beneficiary, you may change your beneficiary designation by sending us a written request. If a beneficiary has not been named at the time of the annuitant's death, then the benefit will be paid to the owner, if living, otherwise, to the owner's estate. If the beneficiary dies during the annuity payment period, and no other beneficiary is alive, then any remaining benefits will be paid to the beneficiary's estate. If there are joint annuitants on the Contract, the benefit is paid on the first annuitant's death. CONTRACT TERMINATION We reserve the right to terminate the Contract and make a single sum payment (without imposing any charges) to you if your accumulated value at the end of the accumulation period is less than $2,000. Before the Contract is terminated, we will send you a notice to increase the accumulated value to $2,000 within 60 days. REINSTATEMENT If you have replaced this Contract with an annuity contract from another company and want to reinstate this Contract, then the following apply: . we reinstate the Contract effective on the original surrender date; . if you elect the purchase payment credit rider on the reinstatement Contract, then the 9-year surrender charge period will commence from the date of reinstatement we calculate the purchase payment credit based on the amount of the reinstatement; .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 day 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 annuity payment date. After the annuity payment date, any reports will be mailed to the person receiving the annuity payments. Quarterly statements reflect purchases and surrenders occurring during the quarter as well as the balance of units owned and accumulated values. RIGHTS RESERVED BY THE COMPANY We reserve the right to make certain changes if, in our judgment, they best serve the interests of you and the annuitant or are appropriate in carrying out the purpose of the Contract. Any changes will be made only to the extent and in the manner permitted by applicable laws. Also, when required by law, we will obtain your approval of the changes and approval from any appropriate regulatory authority. Approvals may not be required in all cases. Examples of the changes the Company may make include: . 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. The Contract does not permit excessive trading or market timing. Market timing activity can disrupt management strategy of the underlying mutual funds and increase expenses, which are borne by all Contract owners. We reserve the right to reject excessive exchanges or purchases by market timers 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 at any time to prevent market timing efforts that could disadvantage other Contract owners. These modifications could include, but not be limited to: . requiring a minimum time period between each transfer; . not accepting transfer requests from someone providing them for multiple Contracts for which he or she is not the owner; or . limiting the dollar amount that a Contract owner may transfer at any one time. DISTRIBUTION OF THE CONTRACT The individuals who sell the Contract are authorized to sell life and other forms of personal insurance and variable annuities. These people will usually be representatives of Princor Financial Services Corporation ("Princor"), Principal Financial Group, Des Moines, Iowa 50392-0200 which is a broker-dealer registered under the Securities Exchange Act of 1934 and a member of the National Association of Securities Dealers, Inc. As the principal underwriter, Princor is paid 6.5% of purchase payments by the Company for the distribution of the Contract. The Company and Princor may receive a portion of the Fidelity Variable Insurance Products and Janus Aspen Series Funds' expenses for record keeping, marketing and distribution services. The Contract may also be sold through other selected broker-dealers registered under the Securities and Exchange Act of 1933 or firms that are exempt from such registration. Princor is also the principal underwriter for various registered investment companies organized by the Company. Princor is a subsidiary of Principal Financial Services, Inc. From time to time, Princor may enter into special arrangements with certain broker-dealers and may enter into special arrangements with registered representatives of Princor. These special arrangements may provide for the payment of higher compensation to such broker-dealers and registered representatives for selling the Contract. 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 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 mutual fund within the requirements of the laws of the state which govern the various mutual funds. The number of mutual fund shares held in the Separate Account attributable to your interest in each division is determined by dividing the value of your interest in that division by the net asset value of one share of the mutual fund. Shares for which owners are entitled to give voting instructions, but for which none are received, and shares of the mutual fund owned by the Company are voted in the same proportion as the total shares for which voting instructions have been received. Voting materials are provided to you along with an appropriate form that may be used to give voting instructions to the Company. If the Company determines pursuant to applicable law, that mutual fund shares held in Separate Account B need not be voted pursuant to instructions received from owners, then the Company may vote mutual fund shares held in the Separate Account in its own right. FEDERAL TAX MATTERS The following description is a general summary of the tax rules, primarily related to federal income taxes, which in our opinion are currently in effect. These rules are based on laws, regulations and interpretations which are subject to change at any time. This summary is not comprehensive and is not intended as tax advice. Federal estate and gift tax considerations, as well as state and local taxes, may also be material. You should consult a qualified tax adviser about the tax implications of taking action under a Contract or related retirement plan. NON-QUALIFIED CONTRACTS Section 72 of the Internal Revenue Code governs the income taxation of annuities in general. . Purchase 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 payments: . The investment in the Contract is generally the total of the purchase payments made. . The portion of the annuity payment that represents the amount by which the accumulated value exceeds purchase payments is taxed as ordinary income. The remainder of each annuity payment is not taxed. . After the purchase payment(s) in the Contract is paid out, the full amount of any annuity payment is taxable. For purposes of determining the amount of taxable income resulting from distributions, all Contracts and other annuity contracts issued by us or our affiliates to the same owner within the same calendar year are treated as if they are a single contract. A transfer of ownership of a Contract, or designation of an annuitant or other payee who is not also the owner, may result in a certain income or gift tax consequences to the owner. If you are contemplating any transfer or assignment of a Contract, you should contact a competent tax advisor with respect to the potential tax effects of such transactions. REQUIRED DISTRIBUTIONS FOR NON-QUALIFIED CONTRACTS In order for a non-qualified Contract to be treated as an annuity contract for federal income tax purposes, the Internal Revenue Code requires: . If the person receiving payments dies on or after the annuity payment date but prior to the time the entire interest in the Contract has been distributed, the remaining portion of the interest is distributed at least as rapidly as under the method of distribution being used as of the date of that person's death. . If you die prior to the annuity payment date, the entire interest in the Contract will be distributed: . within five years after the date of your death; or . as annuity payments which begin within one year of your death and which are made over the life of your designated beneficiary or over a period not extending beyond the life expectancy of that beneficiary. . 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 annuity payment date by paying the death benefit in a single sum, subject to proof of your death. The beneficiary may elect by written request to receive an annuity payment option instead of a lump sum payment. If your designated beneficiary is your surviving spouse, the Contract may be continued with your spouse deemed to be the new owner for purposes of the 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, purchase 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 payment date (subject to applicable state law). The portion, if any, of any purchase payment made that is not excluded from their gross income is their investment in the Contract. Aggregate deferrals under all plans at the employee's option may be subject to limitations. If you are purchasing this Contract to fund a tax-qualified retirement plan (IRA, SEP, SIMPLE IRA), you should be aware that this tax deferral feature is available with any qualified investment vehicle and is not unique to an annuity. This Contract provides additional benefits such as lifetime income options, death benefit protection and guaranteed expense levels. Carefully consider the features and benefits of the Contract in making the decision to purchase it. 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 medical expenses; . for certain unemployment expenses; . for first home purchases (up to $10,000); or . for higher education expenses. ROLLOVER IRAS If you receive a lump-sum distribution from a pension or profit sharing plan or tax-sheltered annuity, you may maintain the tax-deferred status of the money by rolling it into a "Rollover Individual Retirement Annuity." Generally, distributions from a qualified plan are subject to mandatory income tax withholding at a rate of 20%, unless the participant elects a direct rollover. You have 60 days from receipt of the money to complete this transaction. If you choose not to reinvest or go beyond the 60 day limit and are under age 591/2, you will incur a 10% IRS penalty as well as income tax expenses. WITHHOLDING Annuity payments and other amounts received under the Contract are subject to income tax withholding unless the recipient elects not to have taxes withheld. The amounts withheld vary among recipients depending on the tax status of the individual and the type of payments from which taxes are withheld. Notwithstanding the recipient's election, withholding may be required on payments delivered outside the United States. Moreover, special "backup withholding" rules may require us to disregard the recipient's election if the recipient fails to supply us with a "TIN" or taxpayer identification number (social security number for individuals), or if the Internal Revenue Service notifies us that the TIN provided by the recipient is incorrect. MUTUAL FUND DIVERSIFICATION The United States Treasury Department has adopted regulations under Section 817(h) of the 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 LEGAL OPINIONS Legal matters applicable to the issue and sale of the Contracts, including our right to issue Contracts under Iowa Insurance Law, have been passed upon by Karen Shaff, General Counsel and Senior Vice President. LEGAL PROCEEDINGS There are no legal proceedings pending to which Separate Account B is a party or which would materially affect Separate Account B. REGISTRATION STATEMENT This prospectus omits some information contained in the SAI (Part B of the registration statement) and Part C of the registration statement which the Company has filed with the SEC. The SAI is hereby incorporated by reference into this prospectus. You may request a free copy of the SAI by writing or telephoning the annuity service office. You may obtain a copy of Part C of the registration statement from the SEC, Washington, D.C. by paying the prescribed fees. OTHER VARIABLE ANNUITY CONTRACTS The Company currently offers other variable annuity contracts that participate in Separate Account B. In the future, we may designate additional group or individual variable annuity contracts as participating in Separate Account B. CUSTOMER INQUIRIES Your questions should be directed to: Principal Flexible Variable Annuity, Principal Financial Group, P.O. Box 9382, Des Moines, Iowa 50306-9382, 1-800-852-4450. INDEPENDENT AUDITORS The financial statements of Principal Life Insurance Company Separate Account B and the consolidated financial statements of Principal Life Insurance Company are included in the SAI. Those statements have been audited by Ernst & Young LLP, independent auditors, for the periods indicated in their reports which also appear in the SAI. FINANCIAL STATEMENTS The consolidated financial statements of Principal Life Insurance Company which are included in the SAI should be considered only as they relate to our ability to meet our obligations under the Contract. They do not relate to investment performance of the assets held in the Separate Account. TABLE OF CONTENTS OF THE STATEMENT OF ADDITIONAL INFORMATION TABLE OF CONTENTS Independent Auditors....................................................3 Principal Underwriter...................................................3 Calculation of Yield and Total Return...................................3 Taxation Under Certain Retirement Plans.................................7 Principal Life Insurance Company Separate Account B Report of Independent Auditors......................................... 11 Financial Statements................................................... 12 Principal Life Insurance Company Report of Independent Auditors......................................... 70 Consolidated Financial Statements...................................... 71 To obtain a free copy of the SAI write or telephone: Principal Flexible Variable Annuity Principal Financial Group P.O. Box 9382 Des Moines, Iowa 50306-9382 Telephone: 1-800-852-4450 APPENDIX A 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) ------------ AIM V.I. Growth 2002 $ 6.284 $ 4.283 -31.84% 3,594 2001 9.624 6.284 -34.70 4,437 2000 12.256 9.624 -21.48 4,277 Period Ended December 31, 1999/(1)/ 10.000 12.256 22.56 968 AIM V.I. Core Equity 2002 7.781 6.487 -16.63 4,400 2001 10.211 7.781 -23.80 5,152 2000 12.101 10.211 -15.62 4,586 Period Ended December 31, 1999/(1) / 10.000 12.101 21.01 1,494 AIM V.I. Premier Equity 2002 8.408 5.791 -31.12 4,035 2001 9.738 8.408 -13.66 4,011 2000 11.553 9.738 -15.71 3,486 Period Ended December 31, 1999/(1)/ 10.000 11.553 15.53 1,149 American Century Income & Growth 2002 8.965 7.138 -20.37 1,122 Period Ended December 31, 2001/(2)/ 10.000 8.965 -10.35 368 American Century Ultra 2002 9.119 6.960 -23.67 436 Period Ended December 31, 2001/(2)/ 10.000 9.119 -8.81 120 American Century Value Period Ended December 31, 2002/(3)/ 10.000 8.408 -15.92 192 Dreyfus Investments Portfolios - Founders Discovery 2002 8.825 5.819 -34.06 134 Period Ended December 31, 2001/(2)/ 10.000 8.825 -11.75 22 Fidelity VIP Contrafund 2002 9.005 8.055 -10.55 4,524 2001 10.405 9.005 -13.46 4,272 2000 11.294 10.405 -7.87 3,917 Period Ended December 31, 1999/(1)/ 10.000 11.294 12.94 1,436 Fidelity VIP Equity-Income Period Ended December 31, 2002/(3)/ 10.000 8.009 -19.91 374 Fidelity VIP Growth 2002 8.640 5.956 -31.07 4,674 2001 10.635 8.640 -18.76 5,285 2000 12.108 10.635 -12.17 4,837 Period Ended December 31, 1999/(1)/ 10.000 12.108 21.08 1,441 INVESCO VIF - Dynamics 2002 7.986 5.371 -32.74 45 Period Ended December 31, 2001/(2)/ 10.000 7.986 -20.14 31 INVESCO VIF - Health Sciences 2002 9.852 7.375 -25.14 568 Period Ended December 31, 2001/(2)/ 10.000 9.852 -1.48 252 INVESCO VIF - Small Company Growth 2002 8.443 5.743 -31.98 141 Period Ended December 31, 2001/(2)/ 10.000 8.443 -15.57 45 INVESCO VIF - Technology 2002 7.070 3.711 -47.51 229 Period Ended December 31, 2001/(2)/ 10.000 7.070 -29.30 100 Janus Aspen Mid Cap Growth 2002 5.565 3.951 -29.01 1,636 2001 9.329 5.565 -40.35 1,448 Period Ended December 31, 2000/(//4//)/ 10.000 9.329 -6.71 70 Asset Allocation 2002 18.753 16.123 -14.03 4,235 2001 19.766 18.753 -5.12 4,644 2000 19.696 19.766 0.36 4,505 1999 16.690 19.696 18.01 3,913 1998 15.478 16.690 7.83 3,762 1997 13.260 15.478 16.73 3,134 1996 11.891 13.260 11.51 2,264 1995 9.978 11.891 19.17 912 Period Ended December 31, 1994/(//5//)/ 10.075 9.978 -0.96 303 Balanced 2002 16.213 13.901 -14.26 5,862 2001 17.647 16.213 -8.13 6,926 2000 17.846 17.647 -1.12 7,235 1999 17.647 17.846 1.13 9,103 1998 15.966 17.647 10.53 8,903 1997 13.708 15.966 16.47 6,717 1996 12.270 13.708 11.72 4,661 1995 9.972 12.270 23.04 1,373 Period Ended December 31, 1994/(//5//)/ 10.266 9.972 -2.86 370 Bond 2002 15.648 16.885 7.91 9,735 2001 14.655 15.648 6.78 8,059 2000 13.718 14.655 6.83 6,415 1999 14.260 13.718 -3.80 7,677 1998 13.408 14.260 6.35 7,499 1997 12.275 13.408 9.23 5,017 1996 12.143 12.275 1.09 3,872 1995 10.064 12.143 20.66 1,401 Period Ended December 31, 1994/(//5//)/ 10.050 10.064 0.14 301 Capital Value 2002 20.053 17.098 -14.74 7,883 2001 22.084 20.053 -9.20 8,725 2000 21.888 22.084 0.90 8,705 1999 23.156 21.888 -5.48 11,634 1998 20.642 23.156 12.18 11,720 1997 16.261 20.642 26.94 9,320 1996 13.333 16.261 21.96 6,267 1995 10.234 13.333 30.28 2,232 Period Ended December 31, 1994/(//5//)/ 10.328 10.234 -0.91 699 Equity Growth 2002 28.124 20.076 -28.62 8,433 2001 33.450 28.124 -15.92 9,806 2000 38.363 33.450 -12.81 10,065 1999 27.815 38.363 37.92 9,018 1998 23.689 27.815 17.42 7,486 1997 18.340 23.689 29.17 6,077 1996 14.503 18.340 26.46 3,971 1995 10.184 14.503 42.41 1,324 Government Securities 2002 16.066 17.262 7.45 14,056 2001 15.118 16.066 6.27 9,403 2000 13.741 15.118 10.02 7,195 1999 13.954 13.741 -1.53 8,554 1998 13.049 13.954 6.94 8,554 1997 11.969 13.049 9.02 5,946 1996 11.728 11.969 2.06 5,443 1995 9.973 11.728 17.60 2,023 Period Ended December 31, 1994/(//5//)/ 10.133 9.973 -1.93 572 Growth 2002 16.257 11.387 -29.95 8,040 2001 22.098 16.257 -26.43 9,977 2000 24.904 22.098 -11.27 10,270 1999 21.657 24.904 14.99 10,999 1998 18.070 21.657 19.85 9,863 1997 14.411 18.070 25.39 7,898 1996 12.970 14.411 11.11 6,089 1995 10.454 12.970 24.07 2,619 Period Ended December 31, 1994/(//5//)/ 10.336 10.454 1.14 764 International 2002 13.529 11.214 -17.11 7,391 2001 18.092 13.529 -25.22 8,130 2000 19.987 18.092 -9.48 8,208 1999 16.071 19.987 24.37 7,799 1998 14.795 16.071 8.62 7,866 1997 13.347 14.795 10.85 7,316 1996 10.804 13.347 23.54 4,797 1995 9.582 10.804 12.75 2,146 Period Ended December 31, 1994/(//5//)/ 9.624 9.582 -0.43 936 International Emerging Markets 2002 9.371 8.549 -8.78 506 2001 9.910 9.371 -5.44 153 Period Ended December 31, 2000/(//4//)/ 10.000 9.910 -0.90 9 International SmallCap 2002 11.592 9.593 -17.25 2,774 2001 15.020 11.592 -22.82 2,848 2000 17.184 15.020 -12.59 2,822 1999 8.978 17.184 91.40 1,246 Period Ended December 31, 1998/(//6//)/ 10.000 8.978 -10.22 419 LargeCap Blend Period Ended December 31, 2002/(//7//)/ 10.000 8.255 -17.45 1,047 LargeCap Growth 2002 7.179 4.973 -30.74 677 2001 9.593 7.179 -25.16 445 Period Ended December 31, 2000/(//4//)/ 10.000 9.593 -4.07 34 LargeCap Growth Equity 2002 6.707 4.420 -34.10 565 2001 9.713 6.707 -30.95 218 Period Ended December 31, 2000/(//4//)/ 10.000 9.713 -2.87 18 LargeCap Stock Index 2002 8.484 6.498 -23.40 6,302 2001 9.774 8.484 -13.20 5,484 2000 10.956 9.774 -10.79 4,136 Period Ended December 31, 1999/(1)/ 10.000 10.956 9.56 2,314 LargeCap Value Period Ended December 31, 2002/(//7//)/ 10.000 8.326 -16.74 1,018 MicroCap 2002 8.825 7.243 -17.93 666 2001 8.771 8.825 0.62 639 2000 7.920 8.771 10.74 523 1999 8.106 7.920 -2.30 244 Period Ended December 31, 1998/(//6//)/ 10.000 8.106 -18.94 141 MidCap 2002 22.975 20.704 -9.88 8,520 2001 24.162 22.975 -4.91 8,963 2000 21.351 24.162 13.17 8,777 1999 19.125 21.351 11.64 9,229 1998 18.676 19.125 2.40 10,738 1997 15.405 18.676 21.23 9,820 1996 12.880 15.405 19.60 7,285 1995 10.108 12.880 27.42 3,059 Period Ended December 31, 1994/(//5//)/ 10.157 10.108 -0.48 973 MidCap Growth 2002 9.217 6.711 -27.19 1,754 2001 11.234 9.217 -17.95 1,867 2000 10.522 11.234 6.77 1,539 1999 9.607 10.522 9.52 746 Period Ended December 31, 1998/(//6//)/ 10.000 9.607 -3.93 352 MidCap Growth Equity 2002 6.961 4.649 -33.22 724 2001 9.713 6.961 -28.33 332 Period Ended December 31, 2000/(//4//)/ 10.000 9.713 -2.87 86 MidCap Value 2002 9.575 8.514 -11.08 1,282 Period Ended December 31, 2001/(//4//)/ 10.000 9.575 -4.25 261 Money Market 2002 13.252 13.272 0.15 7,629 2001 12.912 13.252 2.63 7.538 2000 12.306 12.912 4.92 5,465 1999 11.913 12.306 3.30 7,145 1998 11.463 11.913 3.93 4,905 1997 11.027 11.463 3.95 2,752 1996 10.628 11.027 3.75 2,929 1995 10.194 10.628 4.26 1,370 Period Ended December 31, 1994/(//5//)/ 10.027 10.194 1.67 702 Real Estate 2002 12.155 12.931 6.38 2,087 2001 11.318 12.155 7.40 893 2000 8.750 11.318 29.35 643 1999 9.275 8.750 -5.66 261 Period Ended December 31, 1998/(//6//)/ 10.000 9.275 -7.25 195 SmallCap 2002 9.926 7.123 -28.24 2,980 2001 9.801 9.926 1.28 2,697 2000 11.242 9.801 -12.82 2,250 1999 7.928 11.242 41.80 1,208 Period Ended December 31, 1998/(//6//)/ 10.000 7.928 -20.72 459 SmallCap Growth 2002 11.229 6.005 -46.53 3,622 2001 16.724 11.229 -32.86 3,766 2000 19.672 16.724 -14.99 3,535 1999 10.179 19.672 93.26 1,388 Period Ended December 31, 1998/(//6//)/ 10.000 10.179 1.79 314 SmallCap Value 2002 12.993 11.694 -10.00 2,064 2001 12.384 12.993 4.92 1,213 2000 10.123 12.384 22.34 756 1999 8.440 10.123 19.94 536 Period Ended December 31, 1998/(//6//)/ 10.000 8.440 -15.60 306 Utilities 2002 9.732 8.399 -13.70 2,332 2001 13.631 9.732 -28.60 2,694 2000 11.581 13.631 17.70 2,253 1999 11.464 11.581 1.02 1,670 Period Ended December 31, 1998/(//6//)/ 10.000 11.464 14.64 639
/ //(1)/ Commenced operations on July 30, 1999. / //(2)/ Commenced operations on May 19, 2001. / //(//3//)/ Commenced operations on May 18, 2002. / //(//4//)/ Commenced operations on November 24, 2000. / //(//5//)/ Commenced operations on June 16, 1994. / //(//6//)/ Commenced operations on May 1, 1998. / //(//7//)/ Commenced operations on May 1, 2002.
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) -------- --------- ------ -------------------- -------------------- AIM V.I. Core Equity 2002 $ 7.730 $ 6.405 -17.14% 722 2001 10.205 $ 7.730 -24.25% 577 Period Ended December 31, 2000/(1)/ 10.446 10.205 -2.31 46 AIM V.I. Growth 2002 6.242 4.230 -32.24 368 2001 9.619 6.242 -35.11 314 Period Ended December 31, 2000/(1)/ 9.819 9.619 -2.04 25 AIM V.I. Premier Equity 2002 8.353 5.718 -31.55 689 2001 9.733 8.353 -14.18 439 Period Ended December 31, 2000/(1)/ 9.810 9.733 -0.78 21 American Century Income & Growth 2002 8.931 7.069 -20.85 531 Period Ended December 31, 2001/(2)/ 10.000 8.931 -10.69 181 American Century Ultra 2002 9.085 6.893 -24.14 262 Period Ended December 31, 2001/(2)/ 10.000 9.085 -9.15 107 American Century Value Period Ended December 31, 2002/(3)/ 10.000 8.376 -16.24 90 Dreyfus Investment Portfolios - Founders Discovery 2002 8.792 5.762 -34.46 101 Period Ended December 31, 2001/(2)/ 10.000 8.792 -12.08 12 Fidelity VIP Contrafund 2002 8.946 7.954 -11.09 823 2001 10.399 8.946 -13.97 418 Period Ended December 31, 2000/(1)/ 10.228 10.399 1.67 14 Fidelity VIP Equity Income Period Ended December 31, 2002/(3)/ 10.000 7.979 -20.21 143 Fidelity VIP Growth 2002 8.583 5.881 -31.48 651 2001 10.629 8.583 -19.25 454 Period Ended December 31, 2000/(1)/ 11.022 10.629 -3.57 27 INVESCO VIF - Dynamics 2002 7.956 5.319 -33.15 22 Period Ended December 31, 2001/(2)/ 10.000 7.956 -20.44 5 INVESCO VIF - Health Sciences 2002 9.815 7.304 -25.59 299 Period Ended December 31, 2001/(2)/ 10.000 9.815 -1.85 121 INVESCO VIF - Small Company Growth 2002 8.411 5.688 -32.38 73 Period Ended December 31, 2001/(2)/ 10.000 8.411 -15.89 20 INVESCO VIF - Technology 2002 7.044 3.675 -47.82 138 Period Ended December 31, 2001/(2)/ 10.000 7.044 -29.56 45 Janus Aspen Mid Cap Growth 2002 5.528 3.901 -29.43 913 2001 9.324 5.528 -40.71 607 Period Ended December 31, 2000/(1)/ 10.000 9.324 -6.76 21 Asset Allocation 2002 18.630 15.921 -14.54 384 2001 19.754 18.630 -5.69 278 Period Ended December 31, 2000 /(1)/ 19.631 19.754 0.63 16 Balanced 2002 16.107 13.727 -14.78 358 2001 17.637 16.107 -8.67 150 Period Ended December 31, 2000/(1)/ 17.485 17.637 0.87 6 Bond 2002 15.545 16.674 7.26 1,758 2001 14.647 15.545 6.13 805 Period Ended December 31, 2000/(1)/ 14.225 14.647 2.97 12 Capital Value 2002 19.921 16.883 -15.25 547 2001 22.072 19.921 -9.75 259 Period Ended December 31, 2000/(1)/ 20.967 22.072 5.27 10 Equity Growth 2002 27.939 19.824 -29.04 463 2001 33.431 27.939 -16.43 284 Period Ended December 31, 2000/(1)/ 35.430 33.431 -5.64 14 Government Securities 2002 15.960 17.046 6.80 3,410 2001 15.109 15.960 5.63 1,094 Period Ended December 31, 2000/(1)/ 14.739 15.109 2.51 23 Growth 2002 16.149 11.244 -30.37 358 2001 22.086 16.149 -26.88 271 Period Ended December 31, 2000/(1)/ 23.356 22.086 -5.44 16 International 2002 13.440 11.074 -17.61 769 2001 18.082 13.440 -25.67 412 Period Ended December 31, 2000/(1)/ 17.028 18.082 6.19 22 International Emerging Markets 2002 9.309 8.441 -9.32 261 2001 9.904 9.309 -6.01 112 Period Ended December 31, 2000/(1)/ 10.000 9.904 -0.96 10 International SmallCap 2002 11.515 9.473 -17.74 450 2001 15.011 11.515 -23.29 265 Period Ended December 31, 2000/(1)/ 14.559 15.011 3.10 25 LargeCap Blend Period Ended December 31, 2002/(//4//)/ 10.000 8.224 -17.76 366 LargeCap Growth 2002 7.132 4.910 -31.16 446 2001 9.588 7.132 -25.62 267 Period Ended December 31, 2000/(1)/ 10.000 9.588 -4.12 25 LargeCap Growth Equity 2002 6.663 4.364 -34.50 290 2001 9.708 6.663 -31.37 148 Period Ended December 31, 2000/(1)/ 10.000 9.708 -2.92 17 LargeCap Stock Index 2002 8.428 6.417 -23.86 1,531 2001 9.769 8.428 -13.73 710 Period Ended December 31, 2000/(1)/ 9.939 9.769 -1.71 16 LargeCap Value Period Ended December 31, 2002/(//4//)/ 10.000 8.295 -17.05 299 MicroCap 2002 8.767 7.152 -18.42 122 2001 8.766 8.767 0.01 46 Period Ended December 31, 2000/(1)/ 8.539 8.766 2.66 1 MidCap 2002 22.824 20.445 -10.42 697 2001 24.148 22.824 -5.48 335 Period Ended December 31, 2000/(1)/ 22.631 24.148 6.70 8 MidCap Growth 2002 9.156 6.627 -27.62 406 2001 11.228 9.156 -18.45 195 Period Ended December 31, 2000/(1)/ 10.932 11.228 2.71 10 MidCap Growth Equity 2002 6.915 4.590 -33.62 369 2001 9.708 6.915 -28.77 242 Period Ended December 31, 2000/(1)/ 10.000 9.708 -2.92 13 MidCap Value 2002 9.539 8.431 -11.61 433 Period Ended December 31, 2001/(2)/ 10.00 9.539 -4.61 99 Money Market 2002 13.164 13.106 -.0.44 2,833 2001 12.905 13.164 2.01 2,457 Period Ended December 31, 2000/(1)/ 12.851 12.905 0.42 534 Real Estate 2002 12.075 12.769 5.75 612 2001 11.312 12.075 6.75 158 Period Ended December 31, 2000/(1)/ 10.520 11.312 7.53 10 SmallCap 2002 9.860 7.034 -28.66 505 2001 9.795 9.860 0.66 218 Period Ended December 31, 2000/(1)/ 9.961 9.795 -1.67 8 SmallCap Growth 2002 11.154 5.929 -46.84 517 2001 16.715 11.154 -33.27 291 Period Ended December 31, 2000/(1)/ 16.727 16.715 -0.07 22 SmallCap Value 2002 12.908 11.548 -10.54 571 2001 12.377 12.908 4.29 229 Period Ended December 31, 2000/(1)/ 11.303 12.377 9.50 3 Utilities 2002 9.667 8.294 -14.20 407 2001 13.624 9.667 -29.04 347 Period Ended December 31, 2000/(1)/ 12.984 13.624 4.93 16 ///(1)/ Commenced operations on November 24, 2000. ///(2)/ Commenced operations on May 19, 2001. ///(3//)/ Commenced operations on May 18, 2002. ///(4//)/ Commenced operations on May 1, 2002.
PART B PRINCIPAL LIFE INSURANCE COMPANY SEPARATE ACCOUNT B FLEXIBLE VARIABLE ANNUITY ("FVA") CONTRACT STATEMENT OF ADDITIONAL INFORMATION DATED MAY 1, 2003 This Statement of Additional Information provides information about Principal Life Insurance Company Separate Account B Flexible Variable Annuity (the "Contract") in addition to the information that is contained in the Contract's Prospectus, dated May 1, 2003. This Statement of Additional Information is not a prospectus. It should be read in conjunction with the Prospectus, a copy of which can be obtained free of charge by writing or telephoning: Variable Annuity The Principal Financial Group P.O. Box 9382 Des Moines Iowa 50306-9382 Telephone: 1-800-852-4450 TABLE OF CONTENTS Page Independent Auditors ....................................................3 Principal Underwriter...................................................3 Calculation of Yield and Total Return...................................3 Taxation Under Certain Retirement Plans.................................7 Principal Life Insurance Company Separate Account B Report of Independent Auditors.........................................11 Financial Statements...................................................12 Principal Life Insurance Company Report of Independent Auditors.........................................76 Consolidated Financial Statements......................................77 INDEPENDENT AUDITORS Ernst & Young LLP, 801 Grand, Des Moines, Iowa, serves as independent auditors 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 subsidiary of Principal Financial Services, Inc. The Contract's offering to the public is continuous. As the principal underwriter, Princor is paid for the distribution of the Contract. For the last three fiscal years Princor has received and retained the following commissions:
2002 2001 2000 RECEIVED/RETAINED RECEIVED/RETAINED RECEIVED/RETAINED ----------------- ----------------- ----------------- $18,879,680/$0 $14,886,087/$0 $14,747,326/$0
CALCULATION OF YIELD AND TOTAL RETURN The Separate Account may publish advertisements containing information (including graphs, charts, tables and examples) about the performance of one or more of its Divisions. The Contract was not offered prior to June 16, 1994. However, the Divisions invest in Accounts of the Principal Variable Contracts Fund, Inc., AIM V.I. Growth Fund, AIM V.I. Growth and Income Fund, AIM V.I. Value Fund, Fidelity Variable Insurance Products Fund, and Fidelity Variable Income Products Fund II. Effective June 12, 2000 the Principal Variable Contracts Fund, Inc. Stock Index 500 Account changed its name to the LargeCap Stock Index Account. Effective January 1, 1998 the Mutual Funds which correspond to Accounts of the Principal Variable Contracts Fund, Inc. were reorganized as follows:
OLD MUTUAL FUND NAME NEW CORRESPONDING NAME -------------------- ---------------------- Principal Variable Contracts Fund, Inc. Principal Aggressive Growth Fund, Inc. Aggressive Growth Account Principal Asset Allocation Fund, Inc. Asset Allocation Account Principal Balanced Fund, Inc. Balanced Account Principal Bond Fund, Inc. Bond Account Principal Capital Accumulation Fund, Inc. Capital Value Account Principal Emerging Growth Fund, Inc. MidCap Account Principal Government Securities Fund, Inc. Government Securities Account Principal Growth Fund, Inc. Growth Account Principal Money Market Fund, Inc. Money Market Account Principal World Fund, Inc. International Account
The Aggressive Growth Account changed its name to the Equity Growth Account on May 1, 2001. These Accounts, along with AIM V.I. Growth Fund, AIM V.I. Growth and Income Fund, AIM V.I. Value Fund and Fidelity VIP Growth Portfolio Service Class, were offered prior to the date the Contract was available. Thus, the Separate Account may publish advertisements containing information about the hypothetical performance of one or more of its Divisions for this Contract had the Contract been issued on or after the date the Mutual Fund in which such Division invests was first offered. Because Service Class shares for the Fidelity VIP Growth Division were not offered until November 3, 1997, performance shown for periods prior to that date represent the historical results of Initial Class shares and do not include the effects of the Service Class' higher annual fees and expenses. Service Shares of the Janus Aspen Series were first offered on December 31, 1999. Performance shown for periods prior to December 31, 1999, reflects performance of a different class of shares (the Institutional Shares) restated based on the Service Shares' estimated fees and expenses including the Service Shares' .25% 12b-1 fee and ignoring any fee and expense limitations. The hypothetical performance from the date of inception of the Mutual Fund in which the Division invests is derived by reducing the actual performance of the underlying Mutual Fund by the fees and charges of the Contract as if it had been in existence. The yield and total return figures described below will vary depending upon market conditions, the composition of the underlying Mutual Fund's portfolios and operating expenses. These factors and possible differences in the methods used in calculating yield and total return should be considered when comparing the Separate Account performance figures to performance figures published for other investment vehicles. The Separate Account may also quote rankings, yields or returns as published by independent statistical services or publishers and information regarding performance of certain market indices. Any performance data quoted for the Separate Account represents only historical performance and is not intended to indicate future performance. From time to time the Separate Account advertises its Money Market Division's "yield" and "effective yield" for these Contracts. Both yield figures are based on historical earnings and are not intended to indicate future performance. The "yield" of the Division refers to the income generated by an investment under the Contract in the Division over a seven-day period (which period will be stated in the advertisement). This income is then "annualized." That is, the amount of income generated by the investment during that week is assumed to be generated each week over a 52-week period and is shown as a percentage of the investment. The "effective yield" is calculated similarly but, when annualized, the income earned by an investment in the Division is assumed to be reinvested. The "effective yield" will be slightly higher than the "yield" because of the compounding effect of this assumed reinvestment. Neither yield quotation reflects a sales load deducted from purchase payments which, if included, would reduce the "yield" and "effective yield." For the period ended December 31, 2002, the 7-day annualized and effective yields were -0.26% and -0.26%, respectively, for Contracts without a surrender charge or purchase payment credit, and -6.26% and -6.26%, respectively, for Contracts subject to a surrender charge but without a purchase payment credit. For the period ended December 31, 2002, the 7-day annualized and effective yields were -0.86% and -0.83%, respectively, for Contracts without a surrender but with a purchase payment credit, and -8.86% and -8.83%, respectively, for Contracts subject to a surrender charge but with a purchase payment credit. In addition, from time to time, the Separate Account will advertise the "yield" for certain other Divisions for the Contract. The "yield" of a Division is determined by annualizing the net investment income per unit for a specific, historical 30-day period and dividing the result by the ending maximum offering price of the unit for the same period. This yield quotation does not reflect a surrender charge which, if included, would reduce the "yield." Also, from time to time, the Separate Account will advertise the average annual total return of its various Divisions. The average annual total return for any of the Divisions is computed by calculating the average annual compounded rate of return over the stated period that would equate an initial $1,000 investment to the ending redeemable Contract value. In this calculation the ending value is reduced by a surrender charge that decreases from 6% to 0% over a period of 7 years. The Separate Account may also advertise total return figures for its Divisions for a specified period that does not take into account the surrender charge in order to illustrate the change in the Division's unit value over time. See "Charges and Deductions" in the Prospectus for a discussion of surrender charges. Following are the hypothetical average annual total returns for the period ending December 31, 2002 assuming the Contract had been offered as of the effective dates of the underlying Mutual Funds in which the Divisions invest:
CONTRACT WITHOUT PURCHASE PAYMENT CREDIT RIDER ----------------------------------- WITH SURRENDER CHARGE WITHOUT SURRENDER CHARGE --------------------------------------- --------------------------------------- DIVISION ONE YEAR FIVE YEAR TEN YEAR ONE YEAR FIVE YEAR TEN YEAR -------- -------- --------- -------- -------- --------- -------- Asset Allocation Division -20.10% 0.19% 5.68%/(1)/ -14.10% 0.77% 5.68%/(1)/ Balanced Division -20.33 -3.46 3.94 -14.33 -2.78 3.94 Bond Division 1.83 4.17 5.85 7.83 4.67 5.85 Capital Value Division -20.81 -4.46 5.80 -14.81 -3.75 5.80 Equity Growth Division -34.69 -3.99 8.43/(1)/ -28.69 -3.30 8.43/(1)/ Government Securities Division 1.37 5.23 5.85 7.37 5.71 5.85 Growth Division -36.02 -9.76 1.47/(2)/ -30.02 -8.87 1.47/(2)/ International Division -23.18 -6.20 1.29/(2)/ -17.18 -5.44 1.29/(2)/ International Emerging Markets Division -14.85 -12.02/(3)/ N/A -8.85 -9.41/(3)/ N/A International SmallCap Division -23.31 -1.83/(4)/ N/A -17.31 -1.15/(4)/ N/A LargeCap Blend Division -22.24/(5)/ N/A N/A -16.24/(5)/ N/A N/A LargeCap Growth Division -36.81 -15.06/(//6//)/ N/A -30.81 -13.42/(//6)/ N/A LargeCap Growth Equity Division -40.17 -42.23/(3)/ N/A -34.17 -38.02/(3)/ N/A LargeCap Stock Index Division -29.48 -13.07/(//6//)/ N/A -23.48 -11.52/(//6//)/ N/A LargeCap Value Division -21.02/(5)/ N/A N/A -15.02/(5)/ N/A N/A MicroCap Division -24.00 -7.63/(4)/ N/A -18.00 -6.78/(4)/ N/A MidCap Division -15.96 1.48 9.12 -9.96 2.04 9.12 MidCap Growth Division -33.26 -9.25/(4)/ N/A -27.26 -8.35/(4)/ N/A MidCap Growth Equity Division -39.29 -39.25/(3)/ N/A -33.29 -35.28/(3)/ N/A MidCap Value Division -17.15 4.33/(//6//)/ N/A -11.15 5.29/(5)/ N/A Money Market Division -5.92 2.39 3.03 0.08 2.93 3.03 Real Estate Division 0.31 5.05/(4)/ N/A 6.31 5.58/(4)/ N/A SmallCap Division -34.30 -8.05/(4)/ N/A -28.30 -7.19/(4)/ N/A SmallCap Growth Division -52.60 -11.33/(4)/ N/A -46.60 -10.35/(4)/ N/A SmallCap Value Division -16.07 2.73/(4)/ N/A -10.07 3.31/(4)/ N/A Utilities Division -19.76 -4.52/(4)/ N/A -13.76 -3.77/(4)/ N/A AIM V.I. Core Equity Division -22.70 1.57 6.49/(2)/ -16.70 2.13 6.49/(2)/ AIM V.I. Growth Division -37.90 -5.76 2.48/(//7//)/ -31.90 -5.01 2.48/(//7//)/ AIM V.I. Premier Equity Division -37.20 -4.15 6.47/(//7//)/ -31.20 -3.44 6.47/(//7//)/ American Century VP Income & Growth Division -26.44 -2.15 -0.58/(8)/ -20.44 -1.51 -0.18/(8)/ American Century VP Ultra Division -29.74 -22.04/(9)/ N/A -23.74 -17.87/(9)/ N/A American Century VP Value Division -19.96 1.96 6.99/(10)/ -13.96 2.51 6.99/(10)/ DIP Founders Discovery Division -40.13 -22.26/(//11//)/ N/A -34.13 -20.12/(//11//)/ N/A Fidelity VIP Contrafund Division -16.62 1.74 11.11/(1//2//)/-10.62 2.30 11.11/(1//2//) Fidelity VIP Equity Income Division -23.66 -1.65 8.36 -17.66 -1.02 8.36 Fidelity VIP Growth Division -37.14 -2.38 7.00 -31.14 -1.73 7.00 INVESCO VIF-Dynamics Division -38.82 -5.41 -4.31/(13)/ -32.82 -4.67 -3.87/(13)/ INVESCO VIF-Health Sciences Division -31.21 3.38 4.88/(14)/ -25.21 3.90 5.16/(14)/ INVESCO VIF Small Company Growth Division -38.04 -0.72 -0.75/(13)/ -32.04 -0.11 -0.37/(13)/ INVESCO VIF-Technology Division -53.58 -8.46 -5.08/(15)/ -47.58 -7.62 -4.63/(15)/ Janus Aspen Mid Cap Growth Division -35.08 -4.30 5.62/(1//6//)/ -29.08 -3.60 5.62/(1//6//)/
/ //(1)/ Partial period beginning June 1, 1994. / //(2)/ Partial period beginning May 2, 1994. / //(3)/ Partial period beginning October 24, 2000. / //(4)/ Partial period beginning May 1, 1998. / //(5)/ Partial period beginning May 1, 2002 / //(//6//)/ Partial period beginning May 3, 1999. / //(//7//)/ Partial period beginning May 5, 1993. / //(//8//)/ Partial period beginning October 31, 1997. / //(//9//)/ Partial period beginning May 1, 2001. / //(10)/ Partial period beginning May 1, 1996. / //(11//)/ Partial period beginning December 15, 1999. / //(12//)/ Partial period beginning January 31, 1995. / //(13//)/ Partial period beginning August 25, 1997. / //(14//)/ Partial period beginning May 22, 1997. / //(15//)/ Partial period beginning May 21, 1997. / //(16//)/ Partial period beginning September 13, 1993.
CONTRACT WITH PURCHASE PAYMENT CREDIT RIDER ----------------------------------- WITH SURRENDER CHARGE WITHOUT SURRENDER CHARGE --------------------------------------- --------------------------------------- DIVISION ONE YEAR FIVE YEAR TEN YEAR ONE YEAR FIVE YEAR TEN YEAR -------- -------- --------- -------- -------- --------- -------- Asset Allocation Division -22.61% -1.05% 5.05%/(1)/ -14.61% 0.17% 5.05%/(1)/ Balanced Division -22.85 -4.78 3.32 -14.85 -3.36 3.32 Bond Division -0.81 3.00 5.22 7.19 4.05 5.22 Capital Value Division -23.32 -5.80 5.17 -15.32 -4.33 5.17 Equity Growth Division -37.12 -5.33 7.78/(1)/ -29.12 -3.88 7.78/(1)/ Government Securities Division -1.27 4.07 5.21 6.73 5.08 5.21 Growth Division -38.44 -11.26 0.87/(2)/ -30.44 -9.40 0.87/(2)/ International Division -25.68 -7.60 0.68/(2)/ -17.68 -6.01 0.68/(2)/ International Emerging Markets Division -17.39 -28.48/(3)/ N/A -9.39 -20.48/(3)/ N/A International SmallCap Division -25.81 -3.15/(4)/ N/A -17.81 -1.74/(4)/ N/A LargeCap Blend -24.58/(5)/ N/A N/A -16.58/(5)/ N/A N/A LargeCap Growth Division -39.22 -16.92/(//6//)/ N/A -31.22 -13.94/(//6//)/ N/A LargeCap Growth Equity Division -42.57 -73.33/(3)/ N/A -34.57 -65.33/(3)/ N/A LargeCap Stock Index Division -31.94 -14.86/(//6)/ N/A -23.94 -12.05/(//6//)/ N/A LargeCap Value -23.36/(5)/ N/A N/A -15.36/(5)/ N/A N/A MicroCap Division -26.49 -9.10/(4)/ N/A -18.49 -7.34/(4)/ N/A MidCap Division -18.50 0.27 8.46 -10.50 1.43 8.46 MidCap Growth Division -35.69 -10.78/(4)/ N/A -27.69 -8.90/(4)/ N/A MidCap Growth Equity Division -41.69 -69.88/(3)/ N/A -33.69 -61.88/(3)/ N/A MidCap Value Division -19.68 2.93/(//6//)/ N/A -11.68 4.66/(//6//)/ N/A Money Market Division -8.52 1.19 2.41 -0.52 2.31 2.41 Real Estate Division -2.32 3.85/(4)/ N/A 5.68 4.95/(4)/ N/A SmallCap Division -36.73 -9.54/(4)/ N/A -28.73 -7.75/(4)/ N/A SmallCap Growth Division -54.92 -12.93/(4)/ N/A -46.92 -10.89/(4)/ N/A SmallCap Value Division -18.61 1.50/(4)/ N/A -10.61 2.69/(4)/ N/A Utilities Division -22.28 -5.90/(4)/ N/A -14.28 -4.35/(4)/ N/A AIM V.I. Core Equity Division -25.20 0.36 5.85/(2)/ -17.20 1.52 5.85/(2)/ AIM V.I. Growth Division -40.31 -7.14 1.87/(//7//)/ -32.31 -5.58 1.87/(//7//)/ AIM V.I. Premier Equity Division -39.61 -5.48 5.84/(//7//)/ -31.61 -4.02 5.84/(//7//)/ American Century VP Income & Growth Division -28.92 -3.44 -1.80/(//8//)/ -20.92 -2.10 -0.78/(8)/ American Century VP Ultra Division -32.20 -36.71/(//9//)/ N/A -24.20 -28.71/(9)/ N/A American Century VP Value Division -22.48 0.76 5.92/(10)/ -14.48 1.90 6.35/(10)/ DIP Founders Discovery Division -42.53 -24.47/(//11//)/ N/A -34.53 -20.60/(//11//)/ N/A Fidelity VIP Contrafund Division -19.16 0.54 10.26/(1//2//)/-11.16 1.68 10.45/(1//2//) Fidelity VIP Equity Income Divison -26.15 -2.92 7.71 -18.15 -1.61 7.71 Fidelity VIP Growth Division -39.55 -3.67 6.37 -31.55 -2.32 6.37 INVESCO VIF-Dynamics Division -41.22 -6.78 -5.61/(1//3//)/-33.22 -5.24 -4.44/(13)/ INVESCO VIF-Health Sciences Division -32.66 2.21 3.79/(1//4//)/ -25.66 3.28 4.53/(14)/ INVESCO VIF-Small Company Growth Division -40.45 -1.97 -1.96/(1//3//)/-32.45 -0.71 -0.97/(13)/ INVESCO VIF-Technology Division -55.89 -9.93 -6.38/(1//5//)/-47.89 -8.18 -5.21/(15)/ Janus Aspen Mid Cap Growth Division -37.51 -5.63 4.99/(1//6//)/ -29.51 -4.17 4.99/(1//6//)/ / //(1)/ Partial period beginning June 1, 1994. / //(2)/ Partial period beginning May 2, 1994. / //(3)/ Partial period beginning October 24, 2000. / //(4)/ Partial period beginning May 1, 1998. / //(5)/ Partial period beginning May 1, 2002 / //(//6//)/ Partial period beginning May 3, 1999. / //(//7//)/ Partial period beginning May 5, 1993. / //(//8//)/ Partial period beginning October 31, 1997. / //(//9//)/ Partial period beginning May 1, 2001. / //(10)/ Partial period beginning May 1, 1996. / //(11//)/ Partial period beginning December 15, 1999. / //(12//)/ Partial period beginning January 31, 1995. / //(13//)/ Partial period beginning August 25, 1997. / //(14//)/ Partial period beginning May 22, 1997. / //(15//)/ Partial period beginning May 21, 1997. / //(16//)/ Partial period beginning September 13, 1993.
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 $500 for 2002 through 2005 and $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 ---- -------------- ---------------------------- 2002 $3,000 $ 6,000 2003 $3,000 $ 6,000 2004 $3,000 $ 6,000 2005 $4,000 $ 8,000 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's Adjusted Gross Income is between $150,000 and $160,000; assuming taxes are filed jointly.
DEDUCTIBILITY OF TRADITIONAL IRA CONTRIBUTIONS FOR ACTIVE PARTICIPANTS ----------------------------------------------------------------------------------------------------------------- MARRIED INDIVIDUALS (FILING JOINTLY) SINGLE INDIVIDUAL ----------------------------------------------------------------------- ---------------------------------------- LIMITED NO LIMITED NO YEAR DEDUCTION DEDUCTION YEAR DEDUCTION DEDUCTION ---- --------- --------- ---- --------- --------- 2002 $54,000 $ 64,000 2002 $34,000 $44,000 2003 $60,000 $ 70,000 2003 $40,000 $50,000 2004 $65,000 $ 75,000 2004 $45,000 $55,000 2005 2005 $70,000 $ 80,000 and beyond $50,000 $60,000 2006 $75,000 $ 85,000 2007 and beyond $80,000 $100,000
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% would be imposed on any amount by which the minimum required distribution in any year exceeded the amount actually distributed in that year. In addition, in the event that the owner dies before his or her entire interest in the Contract has been distributed, the owner's entire interest must be distributed in accordance with rules similar to those applicable upon the death of the Contract Owner in the case of a non-qualified Contract, as described in the Prospectus. Tax-Free Rollovers. The Internal Revenue Code (the "Code") permits the taxable portion of funds to be transferred in a tax-free rollover from a qualified employer pension, profit-sharing, annuity, bond purchase or tax-deferred annuity plan to an IRA Contract if certain conditions are met, and if the rollover of assets is completed within 60 days after the distribution from the qualified plan is received. A direct rollover of funds may avoid a 20% federal tax withholding generally applicable to qualified plans or tax-deferred annuity plan distributions. In addition, not more frequently than once every twelve months, amounts may be rolled over tax-free from one IRA to another, subject to the 60-day limitation and other requirements. The once-per-year limitation on rollovers does not apply to direct transfers of funds between IRA custodians or trustees. SIMPLIFIED EMPLOYEE PENSION PLANS AND SALARY REDUCTION SIMPLIFIED EMPLOYEE PENSION PLANS 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 amounts in the chart below.
SIMPLIFIED EMPLOYEE PENSION PLAN (SEP) --------------------------------------------------------------------------- YEAR EMPLOYER ANNUAL CONTRIBUTION ---- ---------------------------- 2002 Lesser of 15% of the employee's compensation or $30,000. 2003 and beyond Indexed for cost-of-living.
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 ---- ----------------- --------------------- 2002 $11,000 $1,000 2003 $12,000 $2,000 2004 $13,000 $3,000 2005 $14,000 $4,000 2006 $15,000 $5,000 2007 and beyond Indexed for cost-of-living. Indexed for cost-of-living.
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 ---- ----------------- --------------------- ----------------------------------- 2002 $7,000 $500 $11,000 2003 $8,000 $1,000 $12,000 2004 $9,000 $1,500 $13,000 2005 $10,000 $2,000 $14,000 2006 Indexed for cost-of-living. $2,500 $15,000 2007 and beyond Indexed for cost-of-living. Indexed for cost-of-living.
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 2002 through 2005 and $1,000 in 2006 and beyond.
ROTH IRA - MAXIMUM ANNUAL CONTRIBUTION ------------------------------------------------ YEAR INDIVIDUAL ROTH IRA CATCH-UP CONTRIBUTION ---- ------------------- --------------------- 2002 $3,000 $ 500 2003 $3,000 $ 500 2004 $3,000 $ 500 2005 $4,000 $ 500 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. If the conversion is made in 1999, IRA income recognized may be spread over four years. Otherwise, all IRA income will need to be recognized in the year of conversion. No IRS 10% tax penalty will apply to the conversion.
MODIFIED ADJUSTED GROSS INCOME ------------------------------------------------------------------------------------------------------------------------ SINGLE MARRIED FILING JOINT ROTH IRA CONTRIBUTION ------ -------------------- --------------------- $95,000 or less $150,000 or less Full Contribution $95,000 - $110,000 $150,000 - $160,0000 Partial Contribution* $110,000 & over $160,000 & over No Contribution *Those entitled to only a partial contribution should check with a tax advisor to determine the allowable contribution.
Married 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. Report of Independent Auditors 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. Growth, AIM V.I. Core Equity (formerly AIM V.I. Growth and Income), AIM V.I. Premier Equity (formerly AIM V.I. Value), American Century VP Income & Growth, American Century VP Ultra, American Century VP Value, Asset Allocation, Balanced, Blue Chip, Bond, Capital Value, Dreyfus DIP Founders Discovery, Equity Growth, Fidelity VIP II Contrafund, Fidelity VIP Equity-Income, Fidelity VIP Growth, Government Securities, Growth, International, International Emerging Markets, International SmallCap, INVESCO VIF-Dynamics, INVESCO VIF-Health Sciences, INVESCO VIF-Small Company Growth, INVESCO VIF-Technology, Janus Aspen Aggressive Growth, LargeCap Blend, LargeCap Growth, LargeCap Growth Equity, LargeCap Stock Index, LargeCap Value, MicroCap, MidCap, MidCap Growth, MidCap Growth Equity, MidCap Value, Money Market, Real Estate, SmallCap, SmallCap Growth, SmallCap Value, Templeton Growth Securities, and Utilities Divisions] as of December 31, 2002, and the related statements of operations for the year then ended, and changes in net assets for each of the two years in the period then ended, except for those divisions operating for portions of such periods as disclosed in the financial statements. These financial statements are the responsibility of the management of Principal Life Insurance Company. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned as of December 31, 2002, by correspondence with the transfer agents. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of each of the respective divisions of Principal Life Insurance Company Separate Account B at December 31, 2002, and the results of their operations and the changes in their net assets for the periods described above, in conformity with accounting principles generally accepted in the United States. /s/ Ernst & Young Des Moines, Iowa February 17, 2003 Principal Life Insurance Company Separate Account B Statements of Assets and Liabilities December 31, 2002 AIM V.I. Growth AIM V.I. Division Core Equity Division ------------------------------------ ------------------------------------ Assets Investments in shares of mutual funds, at market $16,956,156 $33,170,555 Liabilities - - ------------------------------------ ------------------------------------ Net assets $16,956,156 $33,170,555 ==================================== ==================================== Net assets Accumulation units: Bankers Flexible Annuity $ - $ - Pension Builder Plus - - Pension Builder Plus - Rollover IRA - - Personal Variable - - Premier Variable - - Principal Freedom Variable Annuity - - The Principal Variable Annuity 15,397,645 28,545,365 The Principal Variable Annuity With Purchase Credit Rider 1,558,511 4,625,190 Contracts in annuitization period: Bankers Flexible Annuity - - Pension Builder Plus - Rollover IRA - - ------------------------------------ ------------------------------------ Total net assets $16,956,156 $33,170,555 ==================================== ==================================== Investments in shares of mutual funds, at cost $42,733,117 $53,151,211 Shares of mutual fund owned 1,500,545 1,952,358 Accumulation units outstanding: Bankers Flexible Annuity - - Pension Builder Plus - - Pension Builder Plus - Rollover IRA - - Personal Variable - - Premier Variable - - Principal Freedom Variable Annuity - - The Principal Variable Annuity 3,594,651 4,400,460 The Principal Variable Annuity With Purchase Payment Credit Rider 368,471 722,072 Accumulation unit value: Bankers Flexible Annuity $ - $ - Pension Builder Plus - - Pension Builder Plus - Rollover IRA - - Personal Variable - - Premier Variable - - Principal Freedom Variable Annuity - - The Principal Variable Annuity 4.28 6.49 The Principal Variable Annuity With Purchase Payment Credit Rider 4.23 6.41 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 AIM V.I. Century VP American American Premier Equity Income & Century VP Century VP Asset Division Growth Division Ultra Value Division Allocation Balanced Blue Chip Division Division Division Division ----------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------- $27,310,271 $13,564,804 $4,849,454 $2,364,304 $74,398,715 $ 98,581,776 $ 770,244 - - - - - - - ----------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------- $27,310,271 $13,564,804 $4,849,454 $2,364,304 $74,398,715 $ 98,581,776 $ 770,244 =========================================================================================================== =========================================================================================================== $ $ $ $ $ $ $ - - - - - - - - - - - - - - - - - - - - - - - - - - 2,266,647 - - - - - 581 9,912,784 - - 1,802,742 - - - - 770,244 23,370,844 8,008,867 3,039,874 1,613,405 68,285,391 81,489,535 - 3,939,427 3,753,195 1,809,580 750,899 6,112,743 4,912,810 - - - - - - - - - - - - - - - ----------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------- $27,310,271 $13,564,804 $4,849,454 $2,364,304 $74,398,715 $ 98,581,776 $ 770,244 =========================================================================================================== =========================================================================================================== $46,671,140 $16,132,165 $5,751,588 $2,433,822 $90,450,436 $127,351,980 $1,156,934 1,683,740 2,268,838 659,790 386,956 7,576,244 8,527,835 136,086 - - - - - - - - - - - - - - - - - - - - - - - - - - 1,585,936 - - - - - 673 6,811,392 - - 252,029 - - - - 138,511 4,035,578 1,121,940 435,980 191,883 4,235,312 5,862,164 - 688,893 530,926 262,073 89,641 383,949 357,904 - $ $ $ $ $ $ $ - - - - - - - - - - - - - - - - - - - - - - - - - - 1.43 - - - - - .86 1.46 - - 7.15 - - - - 5.56 5.79 7.14 6.96 8.41 16.12 13.90 - 5.72 7.07 6.89 8.38 15.92 13.73 - - - - - - - - - - - - - - - $ $ $ $ $ $ $ - - - - - - - - - - - - - -
Principal Life Insurance Company Separate Account B Statements of Assets and Liabilities (continued) December 31, 2002
Bond Capital Value Division Division ------------------------------------ ------------------------------------ Assets Investments in shares of mutual funds, at market $210,776,908 $175,699,810 Liabilities - - ------------------------------------ ------------------------------------ Net assets $210,776,908 $175,699,810 ==================================== ==================================== Net assets Accumulation units: Bankers Flexible Annuity $ $ 2,584,048 - Pension Builder Plus - 3,139,203 Pension Builder Plus - Rollover IRA - 504,875 Personal Variable 1,472,840 3,639,707 Premier Variable 9,171,510 20,164,227 Principal Freedom Variable Annuity 6,451,892 1,407,021 The Principal Variable Annuity 164,367,917 134,782,742 The Principal Variable Annuity With Purchase Credit Rider 29,312,749 9,238,399 Contracts in annuitization period: Bankers Flexible Annuity - 46,339 Pension Builder Plus - Rollover IRA - 193,249 ------------------------------------ ------------------------------------ Total net assets $210,776,908 $175,699,810 ==================================== ==================================== Investments in shares of mutual funds, at cost $200,281,537 $228,900,362 Shares of mutual fund owned 17,108,515 7,444,907 Accumulation units outstanding: Bankers Flexible Annuity - 107,951 Pension Builder Plus - 730,525 Pension Builder Plus - Rollover IRA - 103,916 Personal Variable 825,389 1,814,123 Premier Variable 5,047,540 9,822,923 Principal Freedom Variable Annuity 533,519 200,596 The Principal Variable Annuity 9,734,507 7,882,997 The Principal Variable Annuity With Purchase Payment Credit Rider 1,758,032 547,186 Accumulation unit value: Bankers Flexible Annuity $ - $ 23.94 Pension Builder Plus - 4.30 Pension Builder Plus - Rollover IRA - 4.86 Personal Variable 1.78 2.01 Premier Variable 1.82 2.05 Principal Freedom Variable Annuity 12.09 7.01 The Principal Variable Annuity 16.89 17.10 The Principal Variable Annuity With Purchase Payment Credit Rider 16.67 16.88 Annuitized units outstanding: Bankers Flexible Annuity - 1,932 Pension Builder Plus - Rollover IRA - 39,775 Annuitized unit value: Bankers Flexible Annuity $ - $ 23.99 Pension Builder Plus - Rollover IRA - 4.86
See accompanying notes.
Dreyfus DIP Fidelity VIP Founders Equity Fidelity VIP II Equity- Income Fidelity VIP Government Discovery Growth Contrafund Division Growth Securities Growth Division Division Division Division Division Division ----------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------- $1,360,985 $178,520,612 $42,985,779 $4,138,073 $31,669,521 $318,208,187 $111,598,998 - - - - - - - ----------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------- $1,360,985 $178,520,612 $42,985,779 $4,138,073 $31,669,521 $318,208,187 $111,598,998 =========================================================================================================== =========================================================================================================== $ $ $ $ -$ $ $ - - - - - - - - - - - 507,604 - - - - - - 70,460 - - - - - - 3,081,548 2,519,261 - 28,053 - - - 13,790,459 13,502,417 - - - - - - - 778,025 169,312,088 36,440,877 2,996,236 27,842,082 242,631,913 91,552,096 582,960 9,180,471 6,544,902 1,141,837 3,827,439 58,126,203 4,025,224 - - - - - - - - - - - - - - ----------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------- $1,360,985 $178,520,612 $42,985,779 $4,138,073 $31,669,521 $318,208,187 $111,598,998 =========================================================================================================== =========================================================================================================== $1,561,414 $271,299,028 $55,990,406 $4,211,628 $61,046,784 $297,283,929 $204,666,382 207,784 15,206,185 2,382,804 229,893 1,356,877 26,517,349 12,857,027 - - - - - - - - - - - - 190,560 - - - - - - 24,458 - - - - - - 1,597,568 2,199,666 - 40,975 - - - 6,986,917 11,578,279 - - - - - - - 133,708 8,433,436 4,524,029 374,117 4,674,642 14,055,612 8,039,848 101,167 463,094 822,852 143,109 650,793 3,409,940 357,981 $ $ $ $ -$ $ $ - - - - - - - - - - - 2.66 - - - - - - 2.88 - - - - - - 1.93 1.15 - .68 - - - 1.97 1.17 - - - - - - - 5.82 20.08 8.05 8.01 5.96 17.26 11.39 5.76 19.82 7.95 7.98 5.88 17.05 11.24 - - - - - - - - - - - - - - $ $ $ $ -$ $ $ - - - - - - - - - - - - -
Principal Life Insurance Company Separate Account B Statements of Assets and Liabilities (continued) December 31, 2002
International Emerging Markets International Division Division ------------------------------------ ------------------------------------ Assets Investments in shares of mutual funds, at market $100,045,178 $6,531,258 Liabilities - - ------------------------------------ ------------------------------------ Net assets $100,045,178 $6,531,258 ==================================== ==================================== Net assets Accumulation units: Bankers Flexible Annuity $ $ - - Pension Builder Plus - - Pension Builder Plus - Rollover IRA - - Personal Variable 1,506,187 - Premier Variable 6,470,617 481 Principal Freedom Variable Annuity 676,080 - The Principal Variable Annuity 82,879,908 4,327,248 The Principal Variable Annuity With Purchase Credit Rider 8,512,386 2,203,529 Contracts in annuitization period: Bankers Flexible Annuity - - Pension Builder Plus - Rollover IRA - - ------------------------------------ ------------------------------------ Total net assets $100,045,178 $6,531,258 ==================================== ==================================== Investments in shares of mutual funds, at cost $145,033,085 $6,999,967 Shares of mutual fund owned 11,394,667 792,628 Accumulation units outstanding: Bankers Flexible Annuity - - Pension Builder Plus - - Pension Builder Plus - Rollover IRA - - Personal Variable 1,278,621 - Premier Variable 5,394,567 543 Principal Freedom Variable Annuity 101,924 - The Principal Variable Annuity 7,390,518 506,192 The Principal Variable Annuity With Purchase Payment Credit Rider 768,709 261,040 Accumulation unit value: Bankers Flexible Annuity $ $ - - Pension Builder Plus - - Pension Builder Plus - Rollover IRA - - Personal Variable 1.18 - Premier Variable 1.20 .88 Principal Freedom Variable Annuity 6.63 - The Principal Variable Annuity 11.21 8.55 The Principal Variable Annuity With Purchase Payment Credit Rider 11.07 8.44 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.
INVESCO INVESCO VIF-Small INVESCO Janus Aspen International INVESCO VIF-Health Company Growth VIF-Technology Aggressive LargeCap SmallCap VIF-Dynamics Sciences Division Division Growth Blend Division Division Division Division Division ----------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------- $30,873,079 $357,214 $6,373,510 $1,224,219 $1,356,879 $10,027,948 $11,648,405 - - - - - - - ----------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------- $30,873,079 $357,214 $6,373,510 $1,224,219 $1,356,879 $10,027,948 $11,648,405 =========================================================================================================== =========================================================================================================== $ $ - $ $ $ -$ $ - - - - - - - - - - - - - - - - - - - - - - - - - - 403 - - - - - - - - - - - - - 26,611,032 242,668 4,187,185 809,350 850,455 6,464,930 8,640,094 4,261,644 114,546 2,186,325 414,869 506,424 3,563,018 3,008,311 - - - - - - - - - - - - - - ----------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------- $30,873,079 $357,214 $6,373,510 $1,224,219 $1,356,879 $10,027,948 $11,648,405 =========================================================================================================== =========================================================================================================== $46,436,630 $456,707 $7,729,865 $1,494,115 $1,992,482 $15,474,321 $12,077,701 3,407,625 41,828 463,528 120,732 166,081 641,994 1,381,780 - - - - - - - - - - - - - - - - - - - - - - - - - - - - 540 - - - - - - - - - - - - - 2,774,030 45,181 567,745 140,920 229,151 1,636,453 1,046,662 449,897 21,536 299,349 72,944 137,793 913,381 365,799 $ $ - $ $ $ -$ $ - - - - - - - - - - - - - - - - - - - - - - - - - - .75 - - - - - - - - - - - - - 9.59 5.37 7.38 5.74 3.71 3.95 8.25 9.47 5.32 7.30 5.69 3.68 3.90 8.22 - - - - - - - - - - - - - - $ $ - $ $ $ -$ $ - - - - - - - - - - - -
Principal Life Insurance Company Separate Account B Statements of Assets and Liabilities (continued) December 31, 2002
LargeCap Growth LargeCap Growth Division Equity Division ------------------------------------ ------------------------------------ Assets Investments in shares of mutual funds, at market $6,224,955 $3,760,962 Liabilities - - ------------------------------------ ------------------------------------ Net assets $6,224,955 $3,760,962 ==================================== ==================================== Net assets Accumulation units: Bankers Flexible Annuity $ - $ - Pension Builder Plus - - Pension Builder Plus - Rollover IRA - - Personal Variable - - Premier Variable - - Principal Freedom Variable Annuity 664,480 - The Principal Variable Annuity 3,368,533 2,496,319 The Principal Variable Annuity With Purchase Credit Rider 2,191,942 1,264,643 Contracts in annuitization period: Bankers Flexible Annuity - - Pension Builder Plus - Rollover IRA - - ------------------------------------ ------------------------------------ Total net assets $6,224,955 $3,760,962 ==================================== ==================================== Investments in shares of mutual funds, at cost $8,979,502 $5,221,047 Shares of mutual fund owned 1,004,025 1,036,078 Accumulation units outstanding: Bankers Flexible Annuity - - Pension Builder Plus - - Pension Builder Plus - Rollover IRA - - Personal Variable - - Premier Variable - - Principal Freedom Variable Annuity 109,755 - The Principal Variable Annuity 677,430 564,830 The Principal Variable Annuity With Purchase Payment Credit Rider 446,420 289,785 Accumulation unit value: Bankers Flexible Annuity $ - $ - Pension Builder Plus - - Pension Builder Plus - Rollover IRA - - Personal Variable - - Premier Variable - - Principal Freedom Variable Annuity 6.05 - The Principal Variable Annuity 4.97 4.42 The Principal Variable Annuity With Purchase Payment Credit Rider 4.91 4.36 Annualized units outstanding: Bankers Flexible Annuity - - Pension Builder Plus - Rollover IRA - - Annuitized unit value: Bankers Flexible Annuity $ - $ - Pension Builder Plus - Rollover IRA - -
See accompanying notes.
MidCap Growth LargeCap LargeCap Value MidCap Growth Equity MidCap Stock Index Division MicroCap MidCap Division Division Value Division Division Division Division ----------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------- $55,031,073 $10,957,987 $5,696,890 $209,892,080 $14,937,467 $ 5,058,267 $16,143,714 - - - - - - - ----------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------- $55,031,073 $10,957,987 $5,696,890 $209,892,080 $14,937,467 $ 5,058,267 $16,143,714 =========================================================================================================== =========================================================================================================== $ $ $ $ $ $ $ - - - - - - - - - - - - - - - - - - - - - - - - 3,071,245 - - - 58,086 - 462 15,250,921 390 - 35,656 4,193,232 - - 903,739 478,431 - 1,538,348 40,955,265 8,476,812 4,820,665 176,408,335 11,770,237 3,366,512 10,916,374 9,824,490 2,481,175 875,763 14,257,840 2,688,409 1,691,755 3,653,336 - - - - - - - - - - - - - - ----------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------- $55,031,073 $10,957,987 $5,696,890 $209,892,080 $14,937,467 $ 5,058,267 $16,143,714 =========================================================================================================== =========================================================================================================== $76,944,276 $11,353,288 $6,554,244 $226,328,683 $22,368,465 $ 6,890,141 $17,524,285 8,666,311 1,286,149 748,606 7,354,313 2,386,177 1,267,736 1,540,431 - - - - - - - - - - - - - - - - - - - - - - - - 1,440,299 - - - 79,887 - 580 7,023,992 573 - 40,275 635,844 - - 84,140 65,676 - 122,595 6,302,265 1,018,101 665,564 8,520,301 1,753,815 724,200 1,282,170 1,531,025 299,121 122,449 697,380 405,680 368,562 433,299 $ $ $ $ $ $ $ - - - - - - - - - - - - - - - - - - - - - - - - 2.13 - - - .73 - .80 2.17 .68 - .89 6.59 - - 10.74 7.28 - 12.55 6.50 8.33 7.24 20.70 6.71 4.65 8.51 6.42 8.29 7.15 20.44 6.63 4.59 8.43 - - - - - - - - - - - - - - $ $ $ $ $ $ $ - - - - - - - - - - - - - -
Principal Life Insurance Company Separate Account B Statements of Assets and Liabilities (continued) December 31, 2002
Money Market Real Estate Division Division ------------------------------------ ------------------------------------ Assets Investments in shares of mutual funds, at market $157,262,140 $34,860,548 Liabilities - - ------------------------------------ ------------------------------------ Net assets $157,262,140 $34,860,548 ==================================== ==================================== Net assets Accumulation units: Bankers Flexible Annuity $ $ - - Pension Builder Plus 709,195 - Pension Builder Plus - Rollover IRA 15,948 - Personal Variable 2,319,071 - Premier Variable 12,310,378 69,434 Principal Freedom Variable Annuity 3,545,949 - The Principal Variable Annuity 101,236,558 26,981,373 The Principal Variable Annuity With Purchase Credit Rider 37,125,041 7,809,741 Contracts in annuitization period: Bankers Flexible Annuity - - Pension Builder Plus - Rollover IRA - - ------------------------------------ ------------------------------------ Total net assets $157,262,140 $34,860,548 ==================================== ==================================== Investments in shares of mutual funds, at cost $157,262,140 $34,192,690 Shares of mutual fund owned 157,262,140 3,101,472 Accumulation units outstanding: Bankers Flexible Annuity - - Pension Builder Plus 328,101 - Pension Builder Plus - Rollover IRA 6,915 - Personal Variable 1,590,174 - Premier Variable 8,250,186 63,529 Principal Freedom Variable Annuity 317,084 - The Principal Variable Annuity 7,629,340 2,086,568 The Principal Variable Annuity With Purchase Payment Credit Rider 2,833,299 611,618 Accumulation unit value: Bankers Flexible Annuity $ $ - - Pension Builder Plus 2.16 - Pension Builder Plus - Rollover IRA 2.31 - Personal Variable 1.46 - Premier Variable 1.49 1.09 Principal Freedom Variable Annuity 11.19 - The Principal Variable Annuity 13.27 12.93 The Principal Variable Annuity With Purchase Payment Credit Rider 13.11 12.77 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 Growth SmallCap Growth SmallCap Securities SmallCap Division Division Value Division Utilities Division Division ----------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------- $25,858,266 $25,167,645 $30,765,512 $ 823,910 $22,960,914 - - - - - ----------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------- $25,858,266 $25,167,645 $30,765,512 $ 823,910 $22,960,914 ========================================================================================= ========================================================================================= $ -$ $ -$ - $ - - - - - - - - - - - - - - - - - 605 14,125 31,701 - 3,544 1,077,576 339,220 - 823,910 - 21,224,583 21,746,833 24,138,397 - 19,584,858 3,555,502 3,067,467 6,595,414 - 3,372,512 - - - - - - - - - - ----------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------- $25,858,266 $25,167,645 $30,765,512 $ 823,910 $22,960,914 ========================================================================================= ========================================================================================= $37,414,722 $66,700,538 $33,024,579 $1,106,960 $32,972,851 4,435,380 4,384,607 2,986,943 95,804 3,162,660 - - - - - - - - - - - - - - - - - - - - 895 32,814 36,224 - 5,072 121,861 63,917 - 85,370 - 2,979,611 3,621,678 2,064,132 - 2,331,765 505,484 517,357 571,152 - 406,628 $ -$ $ -$ - $ - - - - - - - - - - - - - - - - - .68 .43 .88 - .70 8.84 5.31 - 9.65 - 7.12 6.00 11.69 - 8.40 7.03 5.93 11.55 - 8.29 - - - - - - - - - - $ - $ $ -$ - $ - - - - - -
Principal Life Insurance Company Separate Account B Statements of Operations For the Year Ended December 31, 2002
American AIM V.I. Century VP AIM V.I. Growth AIM V.I. Core Premier Equity Income & Growth Division Equity Division (2) Division Division (1) --------------------------------------------------------------- --------------------------------------------------------------- Investment income (loss) Income: Dividends $ $ 122,588 $ 109,242 $ 83,895 - Expenses: Mortality and expense risks 282,555 492,227 398,745 130,146 Separate account rider charges 11,096 29,683 23,637 19,202 --------------------------------------------------------------- (293,651) (521,910) (422,382) (149,348) --------------------------------------------------------------- --------------------------------------------------------------- Net investment income (loss) (293,651) (399,322) (313,140) (65,453) Realized gains (losses) on investments Realized gain (losses) on sale of fund (6,562,643) (4,379,890) (3,583,818) (286,509) shares Capital gain distributions - - - - --------------------------------------------------------------- --------------------------------------------------------------- Total realized gain (losses) on investments (6,562,643) (4,379,890) (3,583,818) (286,509) Change in net unrealized appreciation or (2,407,849) depreciation of investments (2,200,917) (2,768,818) (9,453,512) --------------------------------------------------------------- --------------------------------------------------------------- Net increase (decrease) in net assets $(9,057,211) $(7,548,030) $(13,350,470) $(2,759,811) resulting from operations ===============================================================
(1) Represented the operations of the AIM V.I. Growth and Income Division until May 18, 2002 name change. (2) Represented the operations of the AIM V.I. Value Division until May 18, 2002 name change. (3) Commenced operations May 18, 2002. See accompanying notes.
American American Century VP Ultra Century VP Asset Division Value Division Allocation Balanced Blue Chip Bond Capital Value (3) Division Division Division Division Division ----------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------- $ 9,670 $ - $ $ 3,785,162 $ 6,086 $ 7,436,041 $ 2,864,058 - 40,548 9,894 1,047,411 1,315,347 7,088 2,131,043 2,276,810 9,781 1,739 36,427 21,823 - 129,774 47,672 ----------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------- (50,329) (11,633) (1,083,838) 1,337,170 7,088 2,260,817 2,324,482 ----------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------- (40,659) (11,633) (1,083,838) 2,447,992 (1,002) 5,175,224 539,576 (121,058) (28,192) (2,324,940) (4,926,549) (75,454) 84,496 (5,809,837) - - - - - - 2 ----------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------- (121,058) (28,192) (2,324,940) (4,926,549) (75,454) 84,496 (5,809,835) (959,449) (69,518) (9,672,375) (15,452,608) (183,615) 8,617,399 (27,195,743) ----------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------- $(1,121,166) $(13,081,153) $(17,931,165) $(260,071) $13,877,119 $(32,466,002) $(109,343) ===========================================================================================================
Principal Life Insurance Company Separate Account B Statements of Operations (continued) For the Year Ended December 31, 2002
Dreyfus DIP Fidelity Fidelity VIP Founders Equity Growth VIP II Equity- Income Discovery Division Contrafund Division (3) Division Division --------------------------------------------------------------- --------------------------------------------------------------- Investment income (loss) Income: Dividends $ - $ 598,602 $ 300,046 $ - Expenses: Mortality and expense risks 7,829 2,819,533 548,973 13,451 Separate account rider charges 1,589 55,072 32,952 1,650 --------------------------------------------------------------- 9,418 2,874,605 581,925 15,101 --------------------------------------------------------------- --------------------------------------------------------------- Net investment income (loss) (9,418) (2,276,003) (281,879) (15,101) Realized gains (losses) on investments Realized gain (loss) on sale of fund shares (15,326) (14,482,208) (1,140,471) (4,586) Capital gain distributions - - - - --------------------------------------------------------------- --------------------------------------------------------------- Total realized gain (loss) on investments (15,326) (14,482,208) (1,140,471) (4,586) Change in net unrealized appreciation or depreciation of investments (210,949) (62,423,911) (3,739,862) (73,555) --------------------------------------------------------------- --------------------------------------------------------------- Net increase (decrease) in net assets $(235,693) $(79,182,122) $(5,162,212) $(93,242) resulting from operations ===============================================================
(3) Commenced operations May 18, 2002. See accompanying notes.
International Fidelity VIP Government Emerging International INVESCO Growth Division Securities Growth International Markets SmallCap VIF-Dynamics Division Division Division Division Division Division ----------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------- $ 59,812 $ 8,373,188 $ 39,213 $ 555,057 $ 7,254 $ 92,391 $ - 504,345 2,875,696 1,689,901 1,332,818 62,985 431,430 4,516 24,194 213,526 27,583 43,105 10,607 23,363 613 ----------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------- 528,539 3,089,222 1,717,484 1,375,923 73,592 454,793 5,129 ----------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------- (468,727) 5,283,966 (1,678,271) (820,866) (66,338) (362,402) (5,129) (5,339,145) 550,473 (21,124,015) (8,262,501) (305,102) (4,043,181) (32,450) - 545,276 - - - - - ----------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------- (5,339,145) 1,095,749 (21,124,015) (8,262,501) (305,102) (4,043,181) (32,450) (9,894,594) 10,603,309 (31,876,676) (12,240,046) (487,259) (1,967,979) (111,822) ----------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------- $16,983,024 $(54,678,962) $(21,323,413) $(858,699) $(6,373,562) $(149,401) $(15,702,466) ===========================================================================================================
Principal Life Insurance Company Separate Account B Statements of Operations (continued) For the Year Ended December 31, 2002
INVESCO INVESCO VIF-Small INVESCO Janus Aspen VIF-Health Company Growth VIF-Technology Aggressive Sciences Division Division Growth Division Division --------------------------------------------------------------- --------------------------------------------------------------- Investment income (loss) Income: Dividends $ 12,167 $ - $ - $ - Expenses: Mortality and expense risks 70,545 12,233 16,320 136,238 Separate account rider charges 12,000 1,914 2,829 22,025 --------------------------------------------------------------- 82,545 14,147 19,149 158,263 --------------------------------------------------------------- --------------------------------------------------------------- Net investment income (loss) (70,378) (14,147) (19,149) (158,263) Realized gains (losses) on investments Realized gain (loss) on sale of fund shares (209,680) (50,771) (227,517) (996,833) Capital gain distributions - - - - --------------------------------------------------------------- --------------------------------------------------------------- Total realized gain (loss) on investments (209,680) (50,771) (227,517) (996,833) Change in net unrealized appreciation or depreciation of investments (1,415,145) (299,182) (662,859) (2,761,018) --------------------------------------------------------------- --------------------------------------------------------------- Net increase (decrease) in net assets $(1,695,203) $(364,100) $(909,525) $(3,916,114) resulting from operations ===============================================================
(3) Commenced operations May 18, 2002. See accompanying notes.
LargeCap LargeCap Blend LargeCap Growth Equity LargeCap LargeCap Value Division (3) Growth Division Stock Index Division (3) MicroCap MidCap Division Division Division Division ----------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------- $ 30,247 $ - $ - $ 690,074 $ 68,962 $ 8,463 $ 2,199,548 42,703 73,608 43,168 692,635 45,214 77,784 2,669,624 4,503 12,584 7,587 53,046 4,538 4,298 71,776 ----------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------- 47,206 86,192 50,755 745,681 49,752 82,082 2,741,400 ----------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------- (16,959) (86,192) (50,755) (55,607) 19,210 (73,619) (541,852) (12,201) (643,282) (205,054) (2,543,046) (37,589) (131,015) (1,766,139) - - - - - - 3,510,620 ----------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------- (12,201) (643,282) (205,054) (2,543,046) (37,589) (131,015) 1,744,481 (429,296) (1,667,340) (1,229,077) (13,234,086) (395,301) (1,142,902) (25,759,650) ----------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------- $(458,456) $(2,396,814) $(1,484,886) $(15,832,739) $(413,680) $(1,347,536) $(24,557,021) ===========================================================================================================
Principal Life Insurance Company Separate Account B Statements of Operations (continued) For the Year Ended December 31, 2002
MidCap MidCap Growth MidCap Growth Value Money Market Division Equity Division Division Division --------------------------------------------------------------- --------------------------------------------------------------- Investment income (loss) Income: Dividends $ $ $ $2,138,388 - - 5 Expenses: Mortality and expense risks 208,414 55,480 126,227 1,757,649 Separate account rider charges 13,357 10,413 14,241 203,803 --------------------------------------------------------------- 221,771 65,893 140,468 1,961,452 --------------------------------------------------------------- --------------------------------------------------------------- Net investment income (loss) (221,771) (65,893) (140,463) 176,936 Realized gains (losses) on investments Realized gain (loss) on sale of fund shares (1,183,678) (386,339) (101,510) - Capital gain distributions - - 16,965 - --------------------------------------------------------------- --------------------------------------------------------------- Total realized gain (loss) on investments (1,183,678) (386,339) (84,545) Change in net unrealized appreciation or depreciation of investments (4,244,450) (1,390,637) (1,432,854) - --------------------------------------------------------------- --------------------------------------------------------------- Net increase (decrease) in net assets $(5,649,899) $(1,842,869) $(1,657,862) $ 176,936 resulting from operations ===============================================================
See accompanying notes.
Templeton SmallCap Growth Real Estate mallCap Division SmallCap Growth Value Securities Utilities Division S Division Division Division Division ----------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------- $1,032,783 $ 24,174 $ $ 184,610 $ 20,968 $ 1,114,216 - 295,340 342,204 416,895 337,257 7,924 316,166 27,853 19,305 19,915 32,620 - 19,850 ----------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------- 323,193 361,509 436,810 369,877 7,924 336,016 ----------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------- 709,590 (337,335) (436,810) (185,267) 13,044 778,200 32,014 (1,243,067) (6,181,169) (156,414) (35,290) (2,329,517) 21,590 - - - 20,618 - ----------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------- 53,604 (1,243,067) (6,181,169) (156,414) (14,672) (2,329,517) (127,053) (7,851,136) (15,584,689) (3,626,861) (193,807) (2,601,000) ----------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------- $(9,431,538) $(22,202,668) $(3,968,542) $(195,435) $(4,152,317) $ 636,141 ===========================================================================================================
Principal Life Insurance Company Separate Account B Statements of Changes in Net Assets For the Years Ended December 31, 2002 and 2001
AIM V.I. Growth AIM V.I. Core Equity Division Division (1) ------------------------------- -------------------------------- 2002 2001 2002 2001 ------------------------------- -------------------------------- Increase (decrease) in net assets from operations: Net investment income (loss) $ (293,651) $ (348,755) $ (399,322) $ (552,399) Net realized gains (losses) on investments (6,562,643) (3,382,268) (4,379,890) (1,866,754) Change in net unrealized appreciation or depreciation of investments (2,200,917) (11,713,544) (2,768,818) (10,221,553) ------------------------------- -------------------------------- ------------------------------- -------------------------------- Net increase (decrease) in net assets resulting from operations (9,507,211) (15,444,567) (7,548,030) (12,640,706) Changes from principal transactions: Purchase payments, less sales charges, per payment fees and applicable premium taxes 3,141,075 11,767,849 8,378,629 20,395,496 Administration charges (6,463) (9,127) (14,614) (10,528) Contingent sales charges (40,128) (53,920) (72,832) (64,514) Contract terminations (1,528,972) (1,771,526) (2,700,901) (2,142,073) Death benefit payments (162,128) (93,365) (225,707) (388,869) Flexible withdrawal option payments (387,082) (557,242) (798,578) (1,003,066) Transfer payments to other contracts (4,727,076) (5,522,359) (8,400,299) (6,888,909) Annuity payments - - - - ------------------------------- -------------------------------- ------------------------------- -------------------------------- Increase (decrease) in net assets from principal transactions (3,710,774) 3,760,310 (3,834,302) 9,897,537 ------------------------------- -------------------------------- ------------------------------- -------------------------------- Total increase (decrease) (12,767,985) (11,684,257) (11,382,332) (2,743,169) Net assets at beginning of period 29,724,141 41,408,398 44,552,887 47,296,056 ------------------------------- -------------------------------- ------------------------------- -------------------------------- Net assets at end of period $16,956,156 $29,724,141 $33,170,555 $44,552,887 =============================== ================================
(1) Represented the operations of the AIM V.I. Growth and Income Division until May 18, 2002 name change. (2) Represented the operations of the AIM V.I. Value Division until May 18, 2002 name change. (3) Commenced operations May 19, 2001. (4) Commenced operations May 18, 2002. See accompanying notes.
American American Century Century VP AIM V.I. Premier VP Income & American Century Value Equity Division (2) Growth Division VP Ultra Division (3) Division (4) ------------------------------------------------------------ ---------------------------- --------------- 2002 2001 2002 2001 2002 2001 2002 ------------------------------------------------------------ ---------------------------- --------------- ------------------------------------------------------------ --------------- $ (40,659 $ (11,633) $ (313,140) $ (398,830) $ (65,453) $ (19,340) $ (8,085) (1,651) (3,583,818) (281,213) (286,509) (46,515 (121,058) (28,192) 57,315 (9,453,512) (3,812,271 (2,407,849) (50,565) (959,449) (69,518) ------------------------------------------------------------ ---------------------------- --------------- ------------------------------------------------------------ ---------------------------- --------------- (4,492,314) (2,759,811) (116,420) 47,579 (13,350,470) (1,121,166) (109,343) 12,322,649 16,245,527 12,770,864 6,050,169 4,927,420 2,064,039 2,672,246 (8,719) (11,993) (1,758) (104) (939) (101) (140) (56,189) (54,345) (7,556) (1,172) (3,346) (109) (673) (2,095,174) (1,773,368) (417,814) (124,529) (97,881) (4,073) (23,371) (124,382) (195,192) (35,436) (9,802) - - - (493,217) (563,208) (163,510) (78,873) (48,044) (4,519) (15,310) (7,034,946) (5,159,285) (2,268,159) (586,744) (874,218) (35,189) (159,105) - - - - - - - ------------------------------------------------------------ ---------------------------- --------------- ------------------------------------------------------------ ---------------------------- --------------- 8,488,136 9,876,631 5,248,945 2,020,049 2,510,022 3,902,992 2,473,647 ------------------------------------------------------------ ---------------------------- --------------- ------------------------------------------------------------ ---------------------------- --------------- (10,840,448) 3,995,822 7,116,820 5,132,525 2,781,826 2,067,628 2,364,304 38,150,719 34,154,897 6,447,984 1,315,459 2,067,628 - - ------------------------------------------------------------ ---------------------------- --------------- ------------------------------------------------------------ ---------------------------- --------------- $27,310,271 $38,150,719 $13,564,804 $6,447,984 $4,849,454 $2,067,628 $2,364,304 ============================================================ ============================ ===============
Principal Life Insurance Company Separate Account B Statements of Changes in Net Assets (continued) For the Years Ended December 31, 2002 and 2001
Asset Allocation Division Balanced Division ------------------------------- -------------------------------- -------------------------------- 2002 2001 2002 2001 ------------------------------- -------------------------------- ------------------------------- -------------------------------- Increase (decrease) in net assets from operations: Net investment income (loss) $ (1,083,838) $ 804,984 $ 2,447,992 $ 3,011,881 Net realized gains (losses) on (69,201) investments (2,324,940) (531,895) (4,926,549) Change in net unrealized (14,903,012) appreciation or depreciation of investments (9,672,375) (5,140,131) (15,452,608) ------------------------------- -------------------------------- ------------------------------- -------------------------------- Net increase (decrease) in net assets (13,081,153) (4,867,042) (17,931,165) (11,960,332) resulting from operations Changes from principal transactions: Purchase payments, less sales charges, per payment fees and applicable premium taxes 15,341,850 26,359,590 15,422,255 24,854,111 Administration charges (30,872) (31,148) (45,045) (46,239) Contingent sales charges (131,152) (146,841) (196,260) (230,683) Contract terminations (5,022,589) (4,791,949) (11,270,150) (19,451,689) Death benefit payments (463,984) (698,623) (915,403) (1,555,244) Flexible withdrawal option payments (1,801,025) (1,737,453) (2,449,677) (2,808,643) Transfer payments to other contracts (12,685,206) (11,173,163) (15,120,111) (13,354,334) Annuity payments - - - - ------------------------------- -------------------------------- ------------------------------- -------------------------------- Increase (decrease) in net assets from (4,792,978) (14,574,391) (12,592,721) principal transactions 7,780,413 ------------------------------- -------------------------------- ------------------------------- -------------------------------- Total increase (decrease) (17,874,131) 2,913,371 (32,505,556) (24,553,053) Net assets at beginning of period 92,272,845 89,359,474 131,087,332 155,640,385 ------------------------------- -------------------------------- ------------------------------- -------------------------------- Net assets at end of period $74,398,715 $92,272,845 $ 98,581,776 $131,087,332 =============================== ================================
See accompanying notes.
Blue Chip Division Bond Division Capital Value Division ----------------------------------------------------------------------- ----------------------------------- 2002 2001 2002 2001 2002 2001 ---------------------------------------------------------------------- ----------------------------------- ---------------------------------------------------------------------- ----------------------------------- $ (1,002) $ (1,252) $ 5,175,224 $ 6,192,796 $ 539,576 $ 185,210 (75,454) (36,686) 84,496 (37,886) (5,809,835) (584,825) (183,615) (136,007) 8,617,399 1,461,875 (27,195,743) (21,824,046) ---------------------------------------------------------------------- ----------------------------------- ---------------------------------------------------------------------- ----------------------------------- (173,945) 13,877,119 7,616,785 (32,466,002) (22,223,661) (260,071) 324,376 336,924 92,915,609 69,171,733 29,628,338 43,405,293 - - (54,891) (36,204) (95,165) (111,262) (307) (229) (303,357) (176,019) (287,845) (320,255) (49,614) (37,281) (14,209,960) (10,783,192) (20,152,500) (26,400,210) - (13,347) (1,085,450) (1,277,849) (1,075,581) (1,258,963) (11,641) (11,547) (5,185,135) (3,729,388) (2,921,981) (3,063,138) (122,425) (126,544) (26,892,927) (16,217,904) (21,164,987) (19,549,439) - - - - (27,230) (39,201) ---------------------------------------------------------------------- ----------------------------------- ---------------------------------------------------------------------- ----------------------------------- 147,976 45,183,889 36,951,177 (16,096,951) (7,337,175) 140,389 ---------------------------------------------------------------------- ----------------------------------- ---------------------------------------------------------------------- ----------------------------------- (119,682) (25,969) 59,061,008 44,567,962 (48,562,953) (29,560,836) 889,926 915,895 151,715,900 107,147,938 224,262,763 253,823,599 ---------------------------------------------------------------------- ----------------------------------- ---------------------------------------------------------------------- ----------------------------------- $770,244 $889,926 $210,776,908 $151,715,900 $175,699,810 $224,262,763 ====================================================================== ===================================
Principal Life Insurance Company Separate Account B Statements of Changes in Net Assets (continued) For the Years Ended December 31, 2002 and 2001 Dreyfus DIP Founders Equity Growth Discovery Division (3) Division ------------------------------- -------------------------------- ------------------------------- -------------------------------- 2002 2001 2002 2001 ------------------------------- -------------------------------- ------------------------------- -------------------------------- Increase (decrease) in net assets from operations: Net investment income (loss) $ (9,418) $ (1,072) $ (2,276,003) $ (3,350,863) Net realized gains (losses) on 17,646,281 investments (15,326) (8,033) (14,482,208) Change in net unrealized (68,635,438) appreciation or depreciation of investments (210,949) 10,520 (62,423,911) ------------------------------- -------------------------------- ------------------------------- -------------------------------- Net increase (decrease) in net assets (235,693) 1,415 (79,182,122) (54,340,020) resulting from operations Changes from principal transactions: Purchase payments, less sales charges, per payment fees and applicable premium taxes 1,474,948 326,846 29,873,196 54,487,434 Administration charges (210) (32) (143,434) (189,728) Contingent sales charges (413) - (394,218) (480,724) Contract terminations (12,304) - (15,198,811) (15,660,291) Death benefit payments - - (1,583,658) (1,896,707) Flexible withdrawal option payments (3,416) (1,345) (2,707,304) (3,515,069) Transfer payments to other contracts (158,464) (30,347) (35,873,947) (31,806,714) Annuity payments - - - - ------------------------------- -------------------------------- ------------------------------- -------------------------------- Increase (decrease) in net assets from 1,300,141 295,122 (26,028,176) 938,201 principal transactions ------------------------------- -------------------------------- ------------------------------- -------------------------------- Total increase (decrease) 1,064,448 296,537 (105,210,298) (53,401,819) Net assets at beginning of period 296,537 - 283,730,910 337,132,729 ------------------------------- -------------------------------- ------------------------------- -------------------------------- Net assets at end of period $1,360,985 $296,537 $178,520,612 $283,730,910 =============================== ================================
(3) Commenced operations May 19, 2001. (4) Commenced operations May 18, 2002. See accompanying notes.
Fidelity VIP Equity-Income Fidelity VIP II Division (4) Fidelity VIP Growth Government Securities Contrafund Division Division Division ------------------------------ --------------- ------------------------------ ------------------------------ ------------------------------ --------------- ------------------------------ ------------------------------ 2002 2001 2002 2002 2001 2002 2001 ------------------------------ --------------- ------------------------------ ------------------------------ ------------------------------ --------------- ------------------------------ ------------------------------ $ (281,879) $ (242,127) $ (15,101) $ (468,727) $ (625,663) $ 5,283,966 $ 5,657,936 (1,140,471) 161,824 (4,586) (5,339,145) 1,555,476 1,095,749 439,714 (3,739,862) (5,720,862) (73,555) (9,894,594) (11,609,886) 10,603,309 2,548,259 ------------------------------ --------------- ------------------------------ ------------------------------ ------------------------------ --------------- ------------------------------ ------------------------------ (5,801,165) (15,702,466) (10,680,073) 16,983,024 8,645,909 (5,162,212) (93,242) 16,911,048 15,682,197 4,429,431 9,529,932 17,923,960 178,463,010 86,251,814 (32,971) (24,489) (153) (12,411) (18,271) (85,506) (51,231) (71,372) (59,999) (804) (66,297) (54,674) (420,021) (220,688) (2,707,975) (1,970,009) (28,152) (2,502,664) (1,791,025) (18,261,751) (11,798,114) (266,439) (186,448) (17,135) (343,631) (190,773) (1,432,966) (1,278,291) (518,109) (591,189) (11,271) (601,760) (715,908) (6,347,844) (4,079,100) (7,379,607) (5,734,506) (140,601) (8,191,771) (6,637,155) (33,558,128) (18,222,052) - - - - - - - ------------------------------ --------------- ------------------------------ ------------------------------ ------------------------------ --------------- ------------------------------ ------------------------------ 5,934,575 (2,188,602) 8,516,154 118,356,794 50,602,338 7,115,557 4,231,315 ------------------------------ --------------- ------------------------------ ------------------------------ ------------------------------ --------------- ------------------------------ ------------------------------ 772,363 1,314,392 4,138,073 (17,891,068) (2,163,919) 135,339,818 59,248,247 42,213,416 40,899,024 - 49,560,589 51,724,508 182,868,369 123,620,122 ------------------------------ --------------- ------------------------------ ------------------------------ ------------------------------ --------------- ------------------------------ ------------------------------ $42,985,779 $42,213,416 $4,138,073 $31,669,521 $49,560,589 $318,208,187 $182,868,369 ============================== =============== ============================== ==============================
Principal Life Insurance Company Separate Account B Statements of Changes in Net Assets (continued) For the Years Ended December 31, 2002 and 2001
Growth Division International Division ------------------------------- -------------------------------- ------------------------------- -------------------------------- 2002 2001 2002 2001 ------------------------------- -------------------------------- ---------------------------------------------------------------- Increase (decrease) in net assets from operations: Net investment income (loss) $ (2,383,605 $ (1,391,141) $ (1,678,271) ) $ (820,866) Net realized gains (losses) on (10,026,505 (3,996,231) investments (21,124,015) ) (8,262,501) Change in net unrealized (59,163,654 (37,076,812) appreciation or depreciation of investments (31,876,676) ) (12,240,046) ------------------------------- -------------------------------- ------------------------------- -------------------------------- Net increase (decrease) in net assets (54,678,962) (71,573,764) (21,323,413) (42,464,184) resulting from operations Changes from principal transactions: Purchase payments, less sales charges, per payment fees and applicable premium taxes 14,753,416 43,191,089 28,567,567 36,350,370 Administration charges (38,633) (56,231) (23,561) (26,416) Contingent sales charges (259,390) (300,876) (184,054) (197,795) Contract terminations (16,905,205) (28,231,324) (9,916,613) (15,010,912) Death benefit payments (834,250) (906,840) (428,285) (1,096,569) Flexible withdrawal option payments (2,237,307) (2,985,768) (1,402,413) (1,627,280) Transfer payments to other contracts (22,888,160) (24,491,398) (23,343,025) (20,918,542) Annuity payments - - - - ------------------------------- -------------------------------- ------------------------------- -------------------------------- Increase (decrease) in net assets from (28,409,529) (13,781,348) (6,730,384) (2,527,144) principal transactions ------------------------------- -------------------------------- ------------------------------- -------------------------------- Total increase (decrease) (83,088,491) (85,355,112) (28,053,797) (44,991,328) Net assets at beginning of period 194,687,489 280,042,601 128,098,975 173,090,303 ------------------------------- -------------------------------- ------------------------------- -------------------------------- Net assets at end of period $111,598,998 $194,687,489 $100,045,178 $128,098,975 =============================== ================================
(3) Commenced operations May 19, 2001. See accompanying notes.
International Emerging Markets International SmallCap INVESCO VIF-Dynamics Division Division Division (3) ----------------------------------- ----------------------------------- ----------------------------------- ----------------------------------- ----------------------------------- ----------------------------------- 2002 2001 2002 2001 2002 2001 ----------------------------------- ----------------------------------- ----------------------------------- ----------------------------------- ----------------------------------- ----------------------------------- $ (66,338) $ (11,848) $ (362,402) $ (480,484) $ (5,129) $ (914) (305,102) (29,715) (4,043,181) (1,995,665) (32,450) (1,301) (487,259) 21,842 (1,967,979) (7,790,759) (111,822) 12,329 ----------------------------------- ----------------------------------- ----------------------------------- ----------------------------------- ----------------------------------- ----------------------------------- (19,721) (6,373,562) (10,266,908) 10,114 (858,699) (149,401) 10,446,681 2,647,907 15,777,321 15,099,003 426,735 325,791 (2,204) (376) (17,838) (14,339) (56) (15) (4,362) (375) (56,734) (51,725) (1,094) (451) (145,034) (13,262) (2,142,940) (1,699,200) (39,433) (14,649) (1,693) - (124,755) (168,869) - - (67,941) (9,902) (369,452) (527,890) (1,464) (1,563) (5,304,443) (326,301) (11,885,022) (9,054,902) (165,437) (31,863) - - - - - - ----------------------------------- ----------------------------------- ----------------------------------- ----------------------------------- ----------------------------------- ----------------------------------- 2,297,691 1,180,580 3,582,078 277,250 4,921,004 219,251 ----------------------------------- ----------------------------------- ----------------------------------- ----------------------------------- ----------------------------------- ----------------------------------- 4,062,305 2,277,970 (5,192,982) (6,684,830) 69,850 287,364 2,468,953 190,983 36,066,061 42,750,891 287,364 - ----------------------------------- ----------------------------------- ----------------------------------- ----------------------------------- ----------------------------------- ----------------------------------- $ 6,531,258 $2,468,953 $30,873,079 $36,066,061 $357,214 $287,364 =================================== =================================== ===================================
Principal Life Insurance Company Separate Account B Statements of Changes in Net Assets (continued) For the Years Ended December 31, 2002 and 2001
INVESCO VIF-Small INVESCO VIF-Health Company Growth Sciences Division (3) Division (3) ------------------------------- -------------------------------- 2002 2001 2002 2001 ------------------------------- -------------------------------- ------------------------------- -------------------------------- Increase (decrease) in net assets from operations: Net investment income (loss) $ (70,378) $ (15,360) $ (14,147) $ (1,829) Net realized gains (losses) on investments (209,680) (9,662) (50,771) (136) Change in net unrealized appreciation or depreciation of investments (1,415,145) 58,790 (299,182) 29,286 ------------------------------- -------------------------------- ------------------------------- -------------------------------- Net increase (decrease) in net assets (1,695,203) 33,768 (364,100) 27,321 resulting from operations Changes from principal transactions: Purchase payments, less sales charges, per payment fees and applicable premium taxes 6,280,236 3,871,893 1,336,165 550,468 Administration charges (1,510) (195) (99) (6) Contingent sales charges (6,240) (366) (2,368) (68) Contract terminations (212,500) (13,134) (71,841) (2,198) Death benefit payments (39,490) - - - Flexible withdrawal option payments (40,670) (9,779) (6,046) (435) Transfer payments to other contracts (1,580,969) (212,331) (214,401) (28,173) Annuity payments - - - - ------------------------------- -------------------------------- ------------------------------- -------------------------------- Increase (decrease) in net assets from 4,398,857 3,636,088 1,041,410 519,588 principal transactions ------------------------------- -------------------------------- ------------------------------- -------------------------------- Total increase (decrease) 2,703,654 3,669,856 677,310 546,909 Net assets at beginning of period 3,669,856 - 546,909 - ------------------------------- -------------------------------- ------------------------------- -------------------------------- Net assets at end of period $6,373,510 $3,669,856 $1,224,219 $546,909 =============================== ================================
(3) Commenced operations May 19, 2001. (4) Commenced operations May 18, 2002. See accompanying notes.
LargeCap INVESCO VIF-Technology Janus Aspen Aggressive Blend LargeCap Growth Division (3) Growth Division Division (4) Division ------------------------------ ----------------------------- --------------- ------------------------------ ------------------------------ ----------------------------- --------------- ------------------------------ 2002 2001 2002 2001 2002 2002 2001 ------------------------------ ----------------------------- --------------- ------------------------------ ------------------------------ ----------------------------- --------------- ------------------------------ $ (19,149) $ (103,288 $ (3,521) $ (158,263) ) $ (16,959) $ (86,192) $ (55,437) (171,091 (227,517) (61,158) (996,833) ) (12,201) (643,282) (94,651) (2,670,569 (662,859) 27,256 (2,761,018) ) (429,296) (1,667,340) (942,987) ------------------------------ ----------------------------- --------------- ------------------------------ ------------------------------ ----------------------------- --------------- ------------------------------ (37,423) (3,916,114) (2,944,948) (458,456) (2,396,814) (1,093,075) (909,525) 2,296,732 1,534,786 6,030,231 14,893,570 13,010,576 4,826,680 6,182,943 (199) (35) (3,205) (1,327) (487) (1,190) (408) (2,901) (54) (11,199) (3,739) (1,718) (8,195) (3,221) (104,603) (2,555) (364,582) (133,820) (55,448) (363,825) (217,100) (11,949) - (16,316) (42,821) - (371) - (6,380) (2,080) (81,867) (92,547) (48,562) (83,817) (55,452) (926,474) (470,461) (3,024,293) (1,111,056) (797,500) (1,619,479) (503,257) - - - - - - - ------------------------------ ----------------------------- --------------- ------------------------------ ------------------------------ ----------------------------- --------------- ------------------------------ 1,059,601 2,528,769 13,508,260 2,749,803 5,403,505 1,244,226 12,106,861 ------------------------------ ----------------------------- --------------- ------------------------------ ------------------------------ ----------------------------- --------------- ------------------------------ 334,701 1,022,178 (1,387,345) 10,563,312 11,648,405 352,989 4,310,430 1,022,178 - 11,415,293 851,981 - 5,871,966 1,561,536 ------------------------------ ----------------------------- --------------- ------------------------------ ------------------------------ ----------------------------- --------------- ------------------------------ $1,356,879 $1,022,178 $10,027,948 $11,415,293 $11,648,405 $6,224,955 $5,871,966 ============================== ============================= =============== ==============================
Principal Life Insurance Company Separate Account B Statements of Changes in Net Assets (continued) For the Years Ended December 31, 2002 and 2001
LargeCap Growth LargeCap Stock Equity Division Index Division ------------------------------- -------------------------------- ------------------------------- -------------------------------- 2002 2001 2002 2001 ------------------------------- -------------------------------- ------------------------------- -------------------------------- Increase (decrease) in net assets from operations: Net investment income (loss) $ (50,755) $ (18,905) $ (55,607)$ (92,251) Net realized gains (losses) on investments (205,054) (28,337) (2,543,046) (805,483) Change in net unrealized appreciation or depreciation of investments (1,229,077) (226,473) (13,234,086) (5,829,384) ------------------------------- -------------------------------- ------------------------------- -------------------------------- Net increase (decrease) in net assets (1,484,886) (273,715) (15,832,739) (6,727,118) resulting from operations Changes from principal transactions: Purchase payments, less sales charges, per payment fees and applicable premium taxes 3,629,465 2,882,838 31,404,881 29,850,758 Administration charges (681) (215) (20,388) (18,049) Contingent sales charges (3,794) (1,143) (90,317) (61,467) Contract terminations (130,419) (51,905) (3,619,103) (2,340,318) Death benefit payments (5,914) (43,957) (472,685) (158,384) Flexible withdrawal option payments (52,501) (9,876) (816,819) (818,201) Transfer payments to other contracts (642,758) (389,730) (12,159,066) (7,910,889) Annuity payments - - - - ------------------------------- -------------------------------- ------------------------------- -------------------------------- Increase (decrease) in net assets from 2,793,398 2,386,012 14,226,503 18,543,450 principal transactions ------------------------------- -------------------------------- ------------------------------- -------------------------------- Total increase (decrease) 1,308,512 2,112,297 (1,606,236) 11,816,332 Net assets at beginning of period 2,452,450 340,153 56,637,309 44,820,977 ------------------------------- -------------------------------- ------------------------------- -------------------------------- Net assets at end of period $3,760,962 $2,452,450 $55,031,073 $56,637,309 =============================== ================================
(4) Commenced operations May 18, 2002. See accompanying notes.
LargeCap Value Division (4) MicroCap Division MidCap Division MidCap Growth Division --------------------------------------------- ------------------------------------------------------------- --------------------------------------------- ------------------------------------------------------------- 2002 2002 2001 2002 2001 2002 2001 --------------------------------------------- ------------------------------------------------------------- --------------------------------------------- ------------------------------------------------------------- $ 19,210 $ $ (73,619) $ (67,100) $ (541,852) (939,515) $ (221,771) $ (225,953) 6,367,609 (37,589) (131,015) (28,335) (1,744,481) (1,183,678) (64,006) (17,624,409 (395,301) (1,142,902) 130,314 (25,759,650) ) (4,244,450) (3,226,545) --------------------------------------------- ------------------------------------------------------------- --------------------------------------------- ------------------------------------------------------------- (1,347,536) 34,879 (24,557,021) (12,196,315) (5,649,899) (3,516,504) (413,680) 12,749,044 2,805,849 2,287,078 43,208,980 50,962,992 5,350,625 9,766,947 (609) (2,217) (1,955) (152,071) (127,348) (6,951) (8,557) (3,077) (12,711) (4,175) (314,421) (357,019) (25,805) (20,861) (112,881) (494,235) (136,382) (18,862,302) (25,502,328) (1,032,418) (723,020) - (4,491) (3,713) (1,316,002) (1,152,600) (194,120) (19,993) (80,571) (76,976) (46,648) (2,314,016) (2,245,665) (178,143) (189,503) (1,180,239) (1,216,601) (681,551) (25,034,994) (19,490,990) (2,955,675) (3,434,106) - - - - - - - --------------------------------------------- ------------------------------------------------------------- --------------------------------------------- ------------------------------------------------------------- 998,618 1,412,654 (4,784,826) 2,087,042 957,513 5,370,907 11,371,667 --------------------------------------------- ------------------------------------------------------------- --------------------------------------------- ------------------------------------------------------------- 10,957,987 (348,918) 1,447,533 (29,341,847) (10,109,273) (4,692,386) 1,854,403 - 6,045,808 4,598,275 239,233,927 249,343,200 19,629,853 17,775,450 --------------------------------------------- ------------------------------------------------------------- --------------------------------------------- ------------------------------------------------------------- $10,957,987 $5,696,890 $6,045,808 $209,892,080 $239,233,927 $14,937,467 $19,629,853 ============================================= =============================================================
Principal Life Insurance Company Separate Account B Statements of Changes in Net Assets (continued) For the Years Ended December 31, 2002 and 2001
MidCap Growth MidCap Value Equity Division Division ------------------------------- -------------------------------- ------------------------------- -------------------------------- 2002 2001 2002 2001 ------------------------------- -------------------------------- ------------------------------- -------------------------------- Increase (decrease) in net assets from operations: Net investment income (loss) $ (65,893) $ (36,358) $ (140,463) $ (15,762) Net realized gains (losses) on investments (386,339) (70,972) (84,545) 103,033 Change in net unrealized appreciation or depreciation of investments (1,390,637) (427,044) (1,432,854) (6,982) ------------------------------- -------------------------------- ------------------------------- -------------------------------- Net increase (decrease) in net assets (1,842,869) (534,374) (1,657,862) 80,289 resulting from operations Changes from principal transactions: Purchase payments, less sales charges, per payment fees and applicable premium taxes 4,423,572 4,355,817 17,078,556 4,793,207 Administration charges (1,181) (850) (1,842) (113) Contingent sales charges (3,952) (2,015) (12,713) (741) Contract terminations (118,844) (71,407) (544,299) (42,914) Death benefit payments - (41,971) (7,893) - Flexible withdrawal option payments (68,925) (75,912) (125,099) (16,859) Transfer payments to other contracts (1,319,196) (604,508) (2,932,228) (928,428) Annuity payments - - - - ------------------------------- -------------------------------- ------------------------------- -------------------------------- Increase (decrease) in net assets from 2,911,474 3,559,154 13,454,482 3,804,152 principal transactions ------------------------------- -------------------------------- ------------------------------- -------------------------------- Total increase (decrease) 1,068,605 3,024,780 11,796,620 3,884,441 Net assets at beginning of period 3,989,662 964,882 4,347,094 462,653 ------------------------------- -------------------------------- ------------------------------- -------------------------------- Net assets at end of period $5,058,267 $3,989,662 $16,143,714 $4,347,094 =============================== ================================
See accompanying notes.
Money Market Division Real Estate Division SmallCap Division ----------------------------------------------------------------------- ----------------------------------- ----------------------------------------------------------------------- 2002 2001 2002 2001 2002 2001 ----------------------------------------------------------------------- ----------------------------------- ----------------------------------------------------------------------- $ 176,936 $ 3,080,370 $ 709,590 $ 340,425 $ (337,335) $ (317,444) - - 53,604 101,534 (1,243,067) (611,688) - - (127,053) 301,589 (7,851,136) 1,307,607 ----------------------------------------------------------------------- ----------------------------------- ----------------------------------------------------------------------- ----------------------------------- 176,936 636,141 743,548 (9,431,538) 378,475 3,080,370 243,677,082 249,637,459 29,659,384 9,246,165 14,076,016 12,128,310 (41,512) (41,046) (9,677) (3,104) (9,299) (10,428) (631,403) (420,487) (35,049) (12,429) (41,053) (35,047) (28,356,420) (24,562,491) (1,278,438) (430,485) (1,606,783) (1,197,338) (520,141) (704,127) (41,983) (15,174) (35,185) (70,290) (3,795,995) (2,814,256) (598,412) (246,429) (419,394) (366,960 (203,885,485) (169,642,727) (6,246,781) (3,892,906) (6,501,182) (3,912,196) - - - - - - ----------------------------------------------------------------------- ----------------------------------- ----------------------------------------------------------------------- ----------------------------------- 6,446,126 21,449,044 4,645,638 5,463,120 6,536,051 51,452,325 ----------------------------------------------------------------------- ----------------------------------- ----------------------------------------------------------------------- ----------------------------------- 6,623,062 54,532,695 22,085,185 5,389,186 (3,968,418) 6,914,526 150,639,078 96,106,383 12,775,363 7,386,177 29,826,684 22,912,158 ----------------------------------------------------------------------- ----------------------------------- ----------------------------------------------------------------------- ----------------------------------- $157,262,140 $150,639,078 $34,860,548 $12,775,363 $25,858,266 $29,826,684 ======================================================================= ===================================
Principal Life Insurance Company Separate Account B Statements of Changes in Net Assets (continued) For the Years Ended December 31, 2002 and 2001
SmallCap Growth SmallCap Value Division Division ------------------------------- -------------------------------- ------------------------------- -------------------------------- 2002 2001 2002 2001 ------------------------------- -------------------------------- ---------------------------------------------------------------- Increase (decrease) in net assets from operations: Net investment income (loss) $ (436,810) $ (613,756) $ (185,267) $ (38,940) Net realized gains (losses) on investments (6,181,169) (2,781,403) (156,414) 850,652 Change in net unrealized appreciation or depreciation of investments (15,584,689) (17,465,171) (3,626,861) (203,371) ------------------------------- -------------------------------- ------------------------------- -------------------------------- Net increase (decrease) in net assets (22,202,668) (20,860,330) (3,968,542) 608,341 resulting from operations Changes from principal transactions: Purchase payments, less sales charges, per payment fees and applicable premium taxes 10,865,423 18,525,458 24,920,511 12,678,083 Administration charges (7,892) (13,666) (10,392) (6,150) Contingent sales charges (58,629) (70,256) (40,565) (18,639) Contract terminations (2,237,702) (2,351,195) (1,449,663) (610,683) Death benefit payments (189,814) (242,013) (75,303) (16,121) Flexible withdrawal option payments (456,625) (655,839) (281,412) (145,022) Transfer payments to other contracts (6,430,692) (8,439,889) (7,054,164) (3,154,847) Annuity payments - - - - ------------------------------- -------------------------------- ------------------------------- -------------------------------- Increase (decrease) in net assets from 1,484,069 6,752,600 16,009,012 8,726,621 principal transactions ------------------------------- -------------------------------- ------------------------------- -------------------------------- Total increase (decrease) (20,718,599) (14,107,730) 12,040,470 9,334,962 Net assets at beginning of period 45,886,244 59,993,974 18,725,042 9,390,080 ------------------------------- -------------------------------- ------------------------------- -------------------------------- Net assets at end of period $25,167,645 $45,886,244 $30,765,512 $18,725,042 =============================== ================================
See accompanying notes.
Templeton Growth Securities Division Utilities Division ----------------------------------------------------------------------- ----------------------------------------------------------------------- 2002 2001 2002 2001 ----------------------------------------------------------------------- ----------------------------------------------------------------------- $ 13,044 $ 10,314 $ 778,200 $ 402,113 (14,672) 94,232 (2,329,517) (434,489) (193,807) (115,514) (2,601,000) (10,894,238) ----------------------------------------------------------------------- ----------------------------------------------------------------------- (195,435) (4,152,317) (10,926,614) (10,968) 533,068 281,108 6,289,771 19,206,822 - - (8,784) (13,584) (631) (224) (41,772) (51,816) (101,914) (36,522) (1,503,094) (1,701,101) - - (113,986) (120,009) (13,184) (10,686) (541,725) (773,854) (83,290) (47,888) (6,533,759) (6,979,046) - - - - ----------------------------------------------------------------------- ----------------------------------------------------------------------- 334,049 (2,453,349) 9,567,412 185,788 ----------------------------------------------------------------------- ----------------------------------------------------------------------- 138,614 174,820 (6,605,666) (1,359,202) 685,296 510,476 29,566,580 30,925,782 ----------------------------------------------------------------------- ----------------------------------------------------------------------- $823,910 $685,296 $22,960,914 $29,566,580 =======================================================================
Principal Life Insurance Company Separate Account B Notes to Financial Statements (continued) Principal Life Insurance Company Separate Account B Notes to Financial Statements December 31, 2002 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, 2002, contractholder investment options include the following open-end management investment companies: Principal Variable Contracts Fund, Inc.(3) AIM V.I. Growth Fund Asset Allocation Account AIM V.I. Core Equity Fund, formerly the Balanced Account AIM V.I. Growth and Income Fund until Blue Chip Account May 18, 2002 name change Bond Account AIM V.I. Premier Equity Fund, formerly Capital Value Account AIM V.I. Value Fund until May 18, 2002 Equity Growth Account name change Government Securities Account American Century Variable Portfolios Inc.: Growth Account VP Income & Growth International Account VP Ultra (2) International Emerging Markets Account VP Value (1) International SmallCap Account Dreyfus Investment Portfolios - Founders LargeCap Blend Account (1) Discovery Portfolio (2) LargeCap Growth Account Fidelity Variable Insurance Products Fund II: LargeCap Growth Equity Account Fidelity VIP II Contrafund Portfolio LargeCap Stock Index Account Fidelity Variable Insurance Products Fund: LargeCap Value Account (1) Fidelity VIP Equity-Income (1) MicroCap Account Fidelity VIP Growth Portfolio MidCap Account Franklin Templeton Variable Insurance MidCap Growth Account Products Series Trust: MidCap Growth Equity Account Templeton Growth Securities Fund MidCap Value Account INVESCO Variable Investment Funds: Money Market Account VIF-Dynamics (2) Real Estate Account VIF-Health Sciences (2) SmallCap Account VIF-Small Company Growth (2) SmallCap Growth Account VIF-Technology (2) SmallCap Value Account Janus Aspen Aggressive Growth Portfolio Utilities Account Service Shares
(1) Additional investment option available to contractholders as of May 18, 2002. (2) Additional investment option available to contractholders as of May 19, 2001. (3) Organized by Principal Life Insurance Company. Investments are stated at the closing net asset values per share on December 31, 2002. 1. Investment and Accounting Policies (continued) 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 Contracts; Pension Builder Plus Contracts; Pension Builder Plus - Rollover IRA Contracts; Personal Variable Contracts; Premier Variable Contracts; Principal Freedom Variable Annuity; and The Principal Variable Annuity. 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 charge equivalent to an annual rate of 0.48% of the asset value of each contract. An annual administration charge of $7 for each participant's account is deducted as compensation for administrative expenses. 2. Expenses and Related Party Transactions (continued) Pension Builder Plus and Pension Builder Plus - Rollover IRA Contracts - Mortality and expense risks assumed by Principal Life are compensated for by a charge equivalent to an annual rate of 1.4965% (1.0001% for a Rollover Individual Retirement Annuity) of the asset value of each contract. A contingent sales charge of up to 7% may be deducted from withdrawals made during the first 10 years of a contract, except for death or permanent disability. An annual administration charge will be deducted ranging from a minimum of $25 to a maximum of $275 depending upon a participant's investment account values and the number of participants under the retirement plan and their participant investment account value. Personal Variable Contracts - Mortality and expense risks assumed by Principal Life are compensated for by a charge equivalent to an annual rate of 0.64% of the asset value of each contract. A contingent sales charge of up to 5% may be deducted from withdrawals from an investment account during the first seven years from the date the first contribution which relates to such participant is accepted by Principal Life. This charge does not apply to withdrawals made from investment accounts which correlate to a plan participant as a result of the plan participant's death or permanent disability. An annual administration charge of $34 for each participant's account plus 0.35% of the annual average balance of investment account values which correlate to a plan participant will be deducted on a quarterly basis. Premier Variable Contracts - Mortality and expense risks assumed by Principal Life are compensated for by a charge equivalent to an annual rate of 0.42% of the asset value of each contract. The Contractholder must also pay contract administration charges. The annual charge ranges from a minimum charge of $2,150 to $7,725 plus .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. 2. Expenses and Related Party Transactions (continued) Principal Freedom Variable Annuity - Mortality and expenses risk assumed by Principal Life are compensated for by a charge equivalent to an annual rate of 0.85% of the asset value of each contract. A contingent sales charge up to 6% may be deducted from the withdrawals made during the first six years of a contract, except for death, annuitization, permanent disability, confinement in a health facility, or terminal illness. Principal Life reserves the right to charge an additional administrative fee of up to 0.15% of the asset value of each Division. The Principal Variable Annuity - Mortality and expense risks assumed by Principal Life are compensated for by a charge equivalent to an annual rate of 1.25% of the asset value of each contract. A contingent sales charge of up to 6% may be deducted from the withdrawals made during the first six years of a contract, except for death, annuitization, permanent disability, confinement in a health care facility, or terminal illness. An annual administration charge of the lessor of two percent of the accumulated value or $30 is deducted at the end of the contract year. Principal Life reserves the right to charge an additional administrative fee of up to 0.15% of the asset value of each Division. This fee is currently being waived. Effective November 27, 2000, Principal Life added a purchase payment credit rider to the contract, at an annual rate of .6%. For electing participants, the rider is deducted from the daily unit value. In addition, during the year ended December 31, 2002, management fees were paid indirectly to Principal Management Corporation, an affiliate of Principal Life Insurance Company, in its capacity as advisor to Principal Variable Contracts Fund, Inc. Investment advisory and management fees are based on an annual rate of .35% of the average daily net assets of the Large Cap Stock Index Account and 1.00% of the average daily net assets of the MidCap Growth Equity Account and LargeCap Growth Equity Account. 2. Expenses and Related Party Transactions (continued) 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 .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 Securities, Money Market 0.50% - 0.30% Balanced, Utilities 0.60 - 0.40 MidCap 0.65 - 0.45 Asset Allocation, Equity Growth 0.80 - 0.60 SmallCap 0.85 - 0.65 MidCap Growth, Real Estate 0.90 - 0.70 MicroCap, 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 .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: Account Fee Range --------------------------------------------------------------------------- --------------------------------------------------------------------------- Blue Chip, Capital Value, Growth 0.60% - 0.40% Large Cap Blend, Large Cap Value 0.75 - 0.55 International 0.85 - 0.65 MidCap Value 1.05 - 0.85 LargeCap Growth 1.10 - 0.90 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, 2002:
Division Purchases Sales -------------------------------------------------------------------------------------------------------- AIM V.I. Growth: The Principal Variable Annuity $ 2,327,685 $ 6,510,334 The Principal Variable Annuity With Purchase Payment Credit Rider 813,389 520,016 AIM V.I. Core Equity: The Principal Variable Annuity 5,873,640 11,204,025 The Principal Variable Annuity With Purchase Payment Credit Rider 2,627,577 1,530,816 AIM V.I. Premier Equity: The Principal Variable Annuity 9,658,360 9,894,089 The Principal Variable Annuity With Purchase Payment Credit Rider 2,773,530 1,084,058 American Century VP Income and Growth: Principal Freedom Variable Annuity 1,101,533 424,840 The Principal Variable Annuity 8,079,416 1,839,923 The Principal Variable Annuity With Purchase Payment Credit Rider 3,673,809 778,817 American Century VP Ultra: The Principal Variable Annuity 3,192,748 607,362 The Principal Variable Annuity With Purchase Payment Credit Rider 1,744,343 467,396
4. Purchases and Sales of Investments (continued)
Division Purchases Sales -------------------------------------------------------------------------------------------------------- American Century VP Value: The Principal Variable Annuity $ 1,774,186 $ 96,314 The Principal Variable Annuity With Purchase Payment Credit Rider 898,060 113,918 Asset Allocation: Premier Variable 165 528 The Principal Variable Annuity 12,201,040 19,882,235 The Principal Variable Annuity With Purchase Payment Credit Rider 3,140,646 1,335,903 Balanced: Personal Variable 466,708 467,033 Premier Variable 2,859,580 4,593,796 The Principal Variable Annuity 11,230,423 25,661,875 The Principal Variable Annuity With Purchase Payment Credit Rider 4,650,707 611,113 Blue Chip: Principal Freedom Variable Annuity 330,462 191,075 Bond: Personal Variable 549,184 392,999 Premier Variable 3,428,077 3,048,246 Principal Freedom Variable Annuity 3,827,687 1,040,095 The Principal Variable Annuity 69,816,402 39,556,334 The Principal Variable Annuity With Purchase Payment Credit Rider 22,730,304 5,954,867
4. Purchases and Sales of Investments (continued)
Division Purchases Sales -------------------------------------------------------------------------------------------------------- Capital Value: Bankers Flexible Annuity $ 43,135 $ 889,765 Pension Builder Plus 66,065 565,203 Pension Builder - Rollover IRA 28,783 190,888 Personal Variable 533,450 1,471,767 Premier Variable 3,209,082 7,236,506 Principal Freedom Variable Annuity 439,861 266,797 The Principal Variable Annuity 19,854,486 35,106,458 The Principal Variable Annuity With Purchase Payment Credit Rider 8,317,535 2,322,386 Dreyfus DIP Founders Discovery: The Principal Variable Annuity 840,475 122,953 The Principal Variable Annuity With Purchase Payment Credit Rider 634,473 61,272 Equity Growth: Premier Variable 57,983 21,877 The Principal Variable Annuity 23,594,633 56,227,710 The Principal Variable Annuity With Purchase Payment Credit Rider 6,819,180 2,526,388 Fidelity VIP II Contrafund: The Principal Variable Annuity 12,539,839 10,451,500 The Principal Variable Annuity With Purchase Payment Credit Rider 4,671,257 1,106,900 Fidelity Equity-Income: The Principal Variable Annuity 3,202,294 152,593 The Principal Variable Annuity With Purchase Payment Credit Rider 1,227,137 60,624 Fidelity VIP Growth: The Principal Variable Annuity 6,983,682 11,105,804 The Principal Variable Annuity With Purchase Payment Credit Rider 2,606,065 1,141,272
4. Purchases and Sales of Investments (continued)
Division Purchases Sales -------------------------------------------------------------------------------------------------------- Government Securities: Pension Builder Plus $ 33,031 $ 120,464 Pension Builder - Rollover IRA 3,460 8,313 Personal Variable 746,075 596,102 Premier Variable 5,086,188 2,650,432 The Principal Variable Annuity 126,183,692 44,957,613 The Principal Variable Annuity With Purchase Payment Credit Rider 55,329,029 14,862,515 Growth: Personal Variable 572,571 633,484 Premier Variable 3,197,223 8,165,955 The Principal Variable Annuity 8,126,954 34,393,369 The Principal Variable Annuity With Purchase Payment Credit Rider 2,895,882 1,687,622 International: Personal Variable 299,905 410,366 Premier Variable 1,274,509 3,358,781 Principal Freedom Variable Annuity 316,930 151,082 The Principal Variable Annuity 16,266,005 25,960,742 The Principal Variable Annuity With Purchase Payment Credit Rider 10,965,276 6,792,904 International Emerging Markets: Premier Variable 486 - The Principal Variable Annuity 5,266,250 1,935,100 The Principal Variable Annuity With Purchase Payment Credit Rider 5,187,199 3,664,169 International SmallCap: Premier Variable 409 - The Principal Variable Annuity 9,355,661 10,379,221 The Principal Variable Annuity With Purchase Payment Credit Rider 6,513,641 4,672,312
4. Purchases and Sales of Investments (continued)
Division Purchases Sales -------------------------------------------------------------------------------------------------------- INVESCO VIF-Dynamics: The Principal Variable Annuity $ 286,056 $ 181,832 The Principal Variable Annuity With Purchase Payment Credit Rider 140,680 30,782 INVESCO VIF-Health Science: The Principal Variable Annuity 4,378,120 1,603,455 The Principal Variable Annuity With Purchase Payment Credit Rider 1,914,283 360,469 INVESCO VIF-Small Company Growth: The Principal Variable Annuity 883,111 220,236 The Principal Variable Annuity With Purchase Payment Credit Rider 453,055 88,667 INVESCO VIF-Technology: The Principal Variable Annuity 1,672,091 956,055 The Principal Variable Annuity With Purchase Payment Credit Rider 624,641 115,600 Janus Aspen Aggressive Growth: The Principal Variable Annuity 3,606,862 2,676,162 The Principal Variable Annuity With Purchase Payment Credit Rider 2,423,365 983,559 LargeCap Blend: The Principal Variable Annuity 9,800,212 842,247 The Principal Variable Annuity With Purchase Payment Credit Rider 3,240,610 108,673 LargeCap Growth: Principal Freedom Variable Annuity 487,113 321,565 The Principal Variable Annuity 2,771,834 1,346,104 The Principal Variable Annuity With Purchase Payment Credit Rider 1,567,732 495,398
4. Purchases and Sales of Investments (continued)
Division Purchases Sales -------------------------------------------------------------------------------------------------------- LargeCap Growth Equity: The Principal Variable Annuity $ 2,522,832 $ 576,539 The Principal Variable Annuity With Purchase Payment Credit Rider 1,106,633 310,283 LargeCap Stock Index: Premier Variable 34,482 15,129 Principal Freedom Variable Annuity 2,953,388 1,640,973 The Principal Variable Annuity 19,958,777 13,395,805 The Principal Variable Annuity With Purchase Payment Credit Rider 9,148,306 2,872,150 LargeCap Value: The Principal Variable Annuity 9,974,780 1,168,986 The Principal Variable Annuity With Purchase Payment Credit Rider 2,843,226 258,143 MicroCap: Premier Variabale 575 108 The Principal Variable Annuity 2,048,314 1,769,933 The Principal Variable Annuity With Purchase Payment Credit Rider 765,421 119,270 MidCap: Personal Variable 622,561 901,536 Premier Variable 3,592,019 7,366,160 Principal Freedom Variable Annuity 523,139 251,315 The Principal Variable Annuity 32,099,396 39,403,600 The Principal Variable Annuity With Purchase Payment Credit Rider 12,082,032 2,812,594 MidCap Growth: Premier Variabale 476 84 Principal Freedom Variable Annuity 158,390 137,294 The Principal Variable Annuity 3,100,856 4,008,750 The Principal Variable Annuity With Purchase Payment Credit Rider 2,090,901 468,753
4. Purchases and Sales of Investments (continued)
Division Purchases Sales -------------------------------------------------------------------------------------------------------- MidCap Growth Equity: The Principal Variable Annuity $ 3,125,256 $ 975,195 The Principal Variable Annuity With Purchase Payment Credit Rider 1,298,316 602,796 MidCap Value: Premier Variable 41,879 1,828 Principal Freedom Variable Annuity 1,165,787 345,528 The Principal Variable Annuity 12,173,873 2,780,241 The Principal Variable Annuity With Purchase Payment Credit Rider 3,713,990 636,948 Money Market: Pension Builder Plus 11,890 43,371 Pension Builder - Rollover IRA 224 261 Personal Variable 1,075,882 1,024,458 Premier Variable 7,432,928 8,999,331 Principal Freedom Variable Annuity 8,033,557 6,042,654 The Principal Variable Annuity 167,747,974 166,359,108 The Principal Variable Annuity With Purchase Payment Credit Rider 61,513,016 56,723,226 Real Estate: Premier Variable 75,702 10,374 The Principal Variable Annuity 23,551,872 7,511,862 The Principal Variable Annuity With Purchase Payment Credit Rider 7,086,184 1,011,298 SmallCap: Premier Variable 168 529 Principal Freedom Variable Annuity 1,059,249 520,020 The Principal Variable Annuity 9,721,513 7,508,615 The Principal Variable Annuity With Purchase Payment Credit Rider 3,319,260 945,241
4. Purchases and Sales of Investments (continued)
Division Purchases Sales -------------------------------------------------------------------------------------------------------- SmallCap Growth: Premier Variaable $ 23,244 $ 540 Principal Freedom Variable Annuity 356,990 143,480 The Principal Variable Annuity 7,695,625 8,733,402 The Principal Variable Annuity With Purchase Payment Credit Rider 2,789,567 940,745 SmallCap Value: Premier Variable 26,298 2,594 The Principal Variable Annuity 18,691,170 7,404,335 The Principal Variable Annuity With Purchase Payment Credit Rider 6,387,654 1,874,448 Templeton Growth Securities: Principal Freedom Variable Annuity 574,654 206,943 Utilities: Premier Variable 4,327 560 The Principal Variable Annuity 5,649,476 8,099,677 The Principal Variable Annuity With Purchase Payment Credit Rider 1,750,183 978,898
5. Changes in Units Outstanding Transactions in units were as follows for each of the years ended December 31:
2002 2001 --------------------------------- -------------------------------- --------------------------------- -------------------------------- Division Purchased Redeemed Purchased Redeemed ----------------------------------------------------------------------- -------------------------------- AIM V.I. Growth: The Principal Variable Annuity 450,650 1,292,911 1,281,060 1,121,266 The Principal Variable Annuity With Purchase Payment Credit Rider 157,476 103,273 313,946 25,129
5. Changes in Units Outstanding (continued)
2002 2001 --------------------------------- -------------------------------- --------------------------------- -------------------------------- Division Purchased Redeemed Purchased Redeemed ----------------------------------------------------------------------- -------------------------------- AIM V.I. Core Equity: The Principal Variable Annuity 796,051 1,547,782 1,784,211 1,218,183 The Principal Variable Annuity With Purchase Payment Credit Rider 356,115 211,475 592,076 60,433 AIM V.I. Premier Equity: The Principal Variable Annuity 1,391,604 1,367,431 1,389,014 863,742 The Principal Variable Annuity With Purchase Payment Credit Rider 399,618 149,824 446,201 28,370 American Century VP Income and Growth: Principal Freedom Variable Annuity 133,152 52,242 106,622 69,105 The Principal Variable Annuity 986,394 232,719 386,812 18,547 The Principal Variable Annuity With Purchase Payment Credit Rider 448,526 98,507 184,115 3,208 American Century VP Ultra: The Principal Variable Annuity 392,613 76,978 124,742 4,397 The Principal Variable Annuity With Purchase Payment Credit Rider 214,502 59,239 107,322 512 American Century VP Value: The Principal Variable Annuity 202,948 11,065 - - The Principal Variable Annuity With Purchase Payment Credit Rider 102,729 13,088 - -
5. Changes in Units Outstanding (continued)
2002 2001 --------------------------------- -------------------------------- --------------------------------- -------------------------------- Division Purchased Redeemed Purchased Redeemed ----------------------------------------------------------------------- -------------------------------- Asset Allocation: Premier Variable 177 608 1,104 - The Principal Variable Annuity 699,433 1,107,937 1,094,760 955,630 The Principal Variable Annuity With Purchase Payment Credit Rider 180,040 74,444 296,673 34,640 Balanced: Personal Variable 251,621 292,453 431,102 1,252,450 Premier Variable 1,582,260 2,900,370 3,155,517 7,941,241 The Principal Variable Annuity 597,222 1,660,752 975,434 1,284,492 The Principal Variable Annuity With Purchase Payment Credit Rider 247,320 39,549 150,116 6,163 Blue Chip: Principal Freedom Variable Annuity 49,373 30,116 42,576 24,178 Bond: Personal Variable 285,082 227,502 382,030 417,845 Premier Variable 1,751,775 1,768,796 2,405,332 3,562,951 Principal Freedom Variable Annuity 318,311 86,169 200,014 97,995 The Principal Variable Annuity 4,001,168 2,325,586 3,137,765 1,493,385 The Principal Variable Annuity With Purchase Payment Credit Rider 1,302,671 350,097 908,211 115,093
5. Changes in Units Outstanding (continued)
2002 2001 --------------------------------- -------------------------------- --------------------------------- -------------------------------- Division Purchased Redeemed Purchased Redeemed ----------------------------------------------------------------------- -------------------------------- Capital Value: Bankers Flexible Annuity - 34,847 - 18,718 Pension Builder Plus 2,620 108,092 85,230 65,142 Pension Builder - Rollover 3,091 35,839 8,877 5,950 Personal Variable 214,089 647,157 489,635 1,340,185 Premier Variable 1,129,392 3,134,635 2,803,685 6,773,580 Principal Freedom Variable Annuity 53,849 33,599 40,752 38,759 The Principal Variable Annuity 974,682 1,816,212 1,397,442 1,377,529 The Principal Variable Annuity With Purchase Payment Credit Rider 408,318 120,147 285,090 36,546 Dreyfus DIP Founders Discovery: The Principal Variable Annuity 129,255 17,087 24,188 2,648 The Principal Variable Annuity With Purchase Payment Credit Rider 97,573 8,515 13,915 1,806 Equity Growth: Premier Variable 65,036 24,572 511 - The Principal Variable Annuity 984,343 2,356,674 1,572,476 1,831,227 The Principal Variable Annuity With Purchase Payment Credit Rider 284,490 105,889 292,505 21,963 Fidelity VIP II Contrafund: The Principal Variable Annuity 1,417,094 1,165,210 1,229,555 874,464 The Principal Variable Annuity With Purchase Payment Credit Rider 527,886 123,405 473,432 68,792
5. Changes in Units Outstanding (continued)
2002 2001 --------------------------------- -------------------------------- --------------------------------- -------------------------------- Division Purchased Redeemed Purchased Redeemed ----------------------------------------------------------------------- -------------------------------- Fidelity VIP Equity-Income: The Principal Variable Annuity 392,209 18,092 - - The Principal Variable Annuity With Purchase Payment Credit Rider 150,297 7,188 - - Fidelity VIP Growth: The Principal Variable Annuity 960,906 1,571,530 1,485,093 1,036,766 The Principal Variable Annuity With Purchase Payment Credit Rider 358,576 161,496 447,706 20,921 Government Securities: Pension Builder Plus 472 42,001 26,012 53,855 Pension Builder - Rollover IRA - 2,705 2,205 443 Personal Variable 327,960 313,459 425,315 691,305 Premier Variable 2,397,856 1,375,930 2,373,538 2,722,763 The Principal Variable Annuity 7,207,006 2,553,992 3,895,389 1,688,116 The Principal Variable Annuity With Purchase Payment Credit Rider 3,160,128 844,323 1,265,585 194,405 Growth: Personal Variable 422,806 461,139 774,718 1,341,433 Premier Variable 2,282,355 5,523,939 5,327,841 11,428,949 The Principal Variable Annuity 592,034 2,529,680 1,524,382 1,817,279 The Principal Variable Annuity With Purchase Payment Credit Rider 210,960 124,127 275,260 19,987
5. Changes in Units Outstanding (continued)
2002 2001 --------------------------------- -------------------------------- --------------------------------- -------------------------------- Division Purchased Redeemed Purchased Redeemed ----------------------------------------------------------------------- -------------------------------- International: Personal Variable 226,081 304,176 431,016 757,375 Premier Variable 940,361 2,522,426 2,573,847 6,170,149 Principal Freedom Variable Annuity 42,289 19,922 18,950 25,706 The Principal Variable Annuity 1,334,537 2,074,309 1,693,799 1,771,267 The Principal Variable Annuity With Purchase Payment Credit Rider 899,641 542,765 426,690 36,536 International Emerging Markets: Premier Variable 543 - - - The Principal Variable Annuity 572,129 218,641 175,302 31,947 The Principal Variable Annuity With Purchase Payment Credit Rider 563,541 414,003 108,799 7,227 International SmallCap: Premier Variable 540 - - - The Principal Variable Annuity 886,632 960,686 927,850 901,540 The Principal Variable Annuity With Purchase Payment Credit Rider 617,296 432,463 259,950 19,460 INVESCO VIF-Dynamics: The Principal Variable Annuity 42,827 28,373 34,537 3,810 The Principal Variable Annuity With Purchase Payment Credit Rider 21,062 4,803 7,689 2,412 INVESCO VIF-Health Science: The Principal Variable Annuity 505,616 189,872 274,251 22,250 The Principal Variable Annuity With Purchase Payment Credit Rider 221,075 42,685 123,121 2,162
5. Changes in Units Outstanding (continued)
2002 2001 --------------------------------- -------------------------------- --------------------------------- -------------------------------- Division Purchased Redeemed Purchased Redeemed ----------------------------------------------------------------------- -------------------------------- INVESCO VIF-Small Company Growth: The Principal Variable Annuity 131,333 35,436 46,383 1,360 The Principal Variable Annuity With Purchase Payment Credit Rider 67,376 14,266 22,201 2,367 INVESCO VIF-Technology: The Principal Variable Annuity 307,217 178,237 174,986 74,815 The Principal Variable Annuity With Purchase Payment Credit Rider 114,766 21,551 46,219 1,641 Janus Aspen Aggressive Growth: The Principal Variable Annuity 778,524 590,146 1,547,921 170,075 The Principal Variable Annuity With Purchase Payment Credit Rider 523,072 216,894 645,648 59,556 LargeCap Blend: The Principal Variable Annuity 1,144,371 97,709 - - The Principal Variable Annuity With Purchase Payment Credit Rider 378,406 12,607 - - LargeCap Growth: Principal Freedom Variable Annuity 65,047 44,108 27,268 24,770 The Principal Variable Annuity 472,437 239,592 448,279 37,708 The Principal Variable Annuity With Purchase Payment Credit Rider 267,207 88,175 275,491 32,629
5. Changes in Units Outstanding (continued)
2002 2001 --------------------------------- -------------------------------- --------------------------------- -------------------------------- Division Purchased Redeemed Purchased Redeemed ----------------------------------------------------------------------- -------------------------------- LargeCap Growth Equity: The Principal Variable Annuity 452,792 106,255 254,913 54,868 The Principal Variable Annuity With Purchase Payment Credit Rider 198,616 57,185 148,210 16,638 LargeCap Stock Index: Premier Variable 44,264 16,509 83,407 31,275 Principal Freedom Variable Annuity 373,982 213,128 153,854 109,860 The Principal Variable Annuity 2,645,069 1,826,840 2,481,079 1,132,920 The Principal Variable Annuity With Purchase Payment Credit Rider 1,212,394 391,687 753,959 59,601 LargeCap Value: The Principal Variable Annuity 1,157,007 138,906 - - The Principal Variable Annuity With Purchase Payment Credit Rider 329,795 30,674 - - MicroCap: Premier Variable 716 136 - - The Principal Variable Annuity 243,268 216,946 217,421 101,505 The Principal Variable Annuity With Purchase Payment Credit Rider 90,905 14,619 50,253 5,049
5. Changes in Units Outstanding (continued)
2002 2001 --------------------------------- -------------------------------- --------------------------------- -------------------------------- Division Purchased Redeemed Purchased Redeemed ----------------------------------------------------------------------- -------------------------------- MidCap: Personal Variable 235,969 392,570 460,105 841,891 Premier Variable 1,334,981 3,168,504 2,941,307 6,807,846 Principal Freedom Variable Annuity 43,395 22,298 28,379 6,433 The Principal Variable Annuity 1,291,229 1,733,622 1,513,588 1,328,248 The Principal Variable Annuity With Purchase Payment Credit Rider 486,011 123,744 352,115 24,809 MidCap Growth: Premier Variable 732 159 - - Principal Freedom Variable Annuity 18,372 16,139 75,907 43,331 The Principal Variable Annuity 401,230 514,628 719,282 390,942 The Principal Variable Annuity With Purchase Payment Credit Rider 270,549 60,177 224,984 39,907 MidCap Growth Equity: The Principal Variable Annuity 572,517 180,691 336,229 90,181 The Principal Variable Annuity With Purchase Payment Credit Rider 237,839 111,690 248,160 18,769 MidCap Value: Premier Variable 41,236 1,953 992 - Principal Freedom Variable Annuity 83,966 25,456 69,035 36,745 The Principal Variable Annuity 1,326,059 305,387 316,251 54,753 The Principal Variable Annuity With Purchase Payment Credit Rider 404,553 69,964 101,115 2,405
5. Changes in Units Outstanding (continued)
2002 2001 --------------------------------- -------------------------------- --------------------------------- -------------------------------- Division Purchased Redeemed Purchased Redeemed ----------------------------------------------------------------------- -------------------------------- Money Market: Pension Builder Plus - 15,040 23,506 7,883 Pension Builder - Rollover IRA - 44 1,945 34 Personal Variable 718,311 694,825 1,504,088 1,616,962 Premier Variable 4,884,967 6,023,337 11,485,303 12,465,802 Principal Freedom Variable Annuity 716,580 539,327 240,127 187,180 The Principal Variable Annuity 10,035,799 9,944,024 10,249,767 8,177,038 The Principal Variable Annuity With Purchase Payment Credit Rider 7,168,381 6,792,273 7,153,173 5,229,549 Real Estate: Premier Variable 68,767 9,373 4,135 - The Principal Variable Annuity 1,760,670 567,550 630,468 379,539 The Principal Variable Annuity With Purchase Payment Credit Rider 529,742 76,407 177,430 29,256 SmallCap: Premier Variable 353 890 1,432 - Principal Freedom Variable Annuity 95,765 47,255 16,462 7,865 The Principal Variable Annuity 1,167,677 885,447 996,080 548,931 The Principal Variable Annuity With Purchase Payment Credit Rider 398,685 111,467 243,197 32,766
SmallCap Growth: Premier Variable 33,955 1,141 - - Principal Freedom Variable Annuity 47,056 19,660 12,865 11,584 The Principal Variable Annuity 950,879 1,094,881 1,146,337 915,253 The Principal Variable Annuity With Purchase Payment Credit Rider 344,682 117,939 291,458 22,748
5. Changes in Units Outstanding (continued)
2002 2001 --------------------------------- -------------------------------- --------------------------------- -------------------------------- Division Purchased Redeemed Purchased Redeemed ----------------------------------------------------------------------- -------------------------------- SmallCap Value: Premier Variable 25,857 2,828 13,489 294 The Principal Variable Annuity 1,426,853 575,240 761,115 304,328 The Principal Variable Annuity With Purchase Payment Credit Rider 487,623 145,625 246,756 20,122 Templeton Growth Securities: Principal Freedom Variable Annuity 46,311 18,329 23,238 8,033 Utilities: Premier Variable 5,863 791 - - The Principal Variable Annuity 547,952 909,833 1,228,991 788,487 The Principal Variable Annuity With Purchase Payment Credit Rider 169,753 109,959 383,379 52,442
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 2002 and 2001 in accordance with AICPA Audit and Accounting Guide for Investment Companies, which was effective January 1, 2001. Information for years prior to 2001 is not required to be presented. The following table was developed by determining which products offered 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 6. Financial Highlights (continued) 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.
Expenses Total Unit Fair Investment Ratio (2) Return (3) Units Value Lowest et Assets Income Lowest to Lowest to Division (000's) to Highest N (000s) Ratio (1) Highest Highest ----------------------------------------------------------------------------------------------------------------- ------------------------------- -------------------------------------------------------- AIM V.I. Growth: 2002 3,963 $4.23 to $4.28 $ 16,956 -% 1.25% to 1.75% (32.24)% to (31.83)% 2001 4,751 6.24 to 6.28 29,724 0.22 1.25 to 1.75 (34.68) to (35.14) AIM V.I. Core Equity: 2002 5,123 6.41 to 6.49 33,171 0.31 1.25 to 1.75 (17.13) to (16.63) 2001 5,730 7.73 to 7.78 44,553 0.05 1.25 to 1.75 (24.29) to (23.79) AIM V.I. Premier Equity: 2002 4,724 5.72 to 5.79 27,310 0.34 1.25 to 1.75 (31.54) to (31.13) 2001 4,451 8.35 to 8.41 38,150 0.14 1.25 to 1.75 (14.18) to (13.67) American Century VP Income and Growth: 2002 1,905 7.07 to 7.15 13,565 0.72 0.85 to 1.75 (20.85) to (20.05) 2001 720 8.93 to 8.96 6,448 0.29 0.85 to 1.75 (20.46) to (9.17) American Century VP Ultra: 2002 698 6.89 to 6.96 4,849 0.24 1.25 to 1.75 (24.13) to (23.67) 2001 (5) 227 9.08 to 9.12 2,068 - 1.25 to 1.75 (18.22) to (17.57) American Century VP Value: 2002 (4) 282 8.38 to 8.41 2,364 - 1.25 to 1.75 (25.65) to (26.19) Asset Allocation: 2002 4,620 0.86 to 16.12 74,399 - 0.42 to 1.75 (14.54) to (12.78) 2001 4,923 0.99 to 18.75 92,273 2.18 0.42 to 1.75 (5.67) to (2.40) Balanced: 2002 14,617 1.43 to 13.90 98,582 3.17 0.42 to 1.75 (14.78) to (13.55) 2001 16,832 1.66 to 16.21 131,087 3.40 0.42 to 1.75 (8.67) to (7.26)
6. Financial Highlights (continued)
Expenses Total Unit Fair Investment Ratio (2) Return (3) Units Value Lowest et Assets Income Lowest to Lowest to Division (000's) to Highest N (000s) Ratio (1) Highest Highest --------------------------------------------------------------------------------------------------------------- ------------------------------- ------------------------------------------------------ Blue Chip: 2002 139 $5.56 $ 770 0.73% 0.85% (25.48)% 2001 119 7.46 890 0.70 0.85 (17.81) Bond: 2002 17,899 1.78 to 16.89 210,777 4.09 0.42 to 1.75 (7.26) to 8.80 2001 14,998 1.64 to 15.65 151,716 6.02 0.42 to 1.75 6.14 to 7.74 Capital Value: 2002 21,252 2.01 to 23.99 175,700 .78 0.42 to 1.75 (15.25) to (14.02) 2001 24,351 2.34 to 27.92 224,263 1.21 0.42 to 1.75 (9.74) to (8.49) Dreyfus DIP Founders Discovery: 2002 235 5.76 to 5.82 1,361 - 1.25 to 1.75 (34.46) to (34.06) 2001 (5) 34 8.79 to 8.82 297 - 1.25 to 1.75 (24.13) to (23.55) Equity Growth: 2002 8,938 0.68 to 20.08 178,521 0.27 0.42 to 1.75 (29.04) to (28.02) 2001 10,091 0.95 to 28.12 283,731 0.11 0.42 to 1.75 (16.42) to (12.00) Fidelity VIP II Contrafund: 2002 5,347 7.95 to 8.05 42,986 0.68 1.25 to 1.75 (11.09) to (10.55) 2001 4,691 8.95 to 9.01 42,213 0.67 1.25 to 1.75 (13.94) to (13.50) Fidelity VIP Equity-Income: 2002 (4) 517 7.98 to 8.01 4,138 - 1.25 to 1.75 (33.33) to (32.81) Fidelity VIP Growth: 2002 5,325 5.88 to 5.96 31,670 0.15 1.25 to 1.75 (31.48) to (31.07) 2001 5,739 8.58 to 8.64 49,561 - 1.25 to 1.75 (19.29) to (18.72) Government Securities: 2002 26,265 1.93 to 17.26 318,208 3.45 0.42 to 1.75 7.18 to 8.34 2001 18,304 1.78 to 16.07 182,868 4.93 0.42 to 1.75 5.63 to 7.06 Growth: 2002 22,176 1.15 to 11.39 111,599 0.02 0.42 to 1.75 (30.37) to (29.37) 2001 27,307 1.63 to 16.26 194,687 - 0.42 to 1.75 (26.89) to (25.91) International: 2002 14,934 1.18 to 11.21 100,045 0.49 0.42 to 1.75 (17.61) to (16.42) 2001 16,955 1.41 to 13.53 128,099 0.15 0.42 to 1.75 (25.66) to (24.21)
6. Financial Highlights (continued)
Expenses Total Unit Fair Investment Ratio (2) Return (3) Units Value Lowest Net Assets Income Lowest to Lowest to Division (000's) to Highest (000s) Ratio (1) Highest Highest --------------------------------------------------------------------------------------------------------------- ------------------------------- ------------------------------------------------------ International Emerging Markets: 2002 768 $0.88 to $8.55 $ 6,532 0.14% 0.42% to 1.75% (9.32)% to (2.56)% 2001 264 9.31 to 9.37 2,469 0.50 1.25 to 1.75 (5.96) to (5.44) International SmallCap: 2002 3,225 0.75 to 9.59 30,873 0.27% 0.42 to 1.75 (17.74) to (17.17) 2001 3,113 11.52 to 11.59 36,066 - 1.25 to 1.75 (23.25) to (22.83) INVESCO VIF-Dynamics: 2002 67 5.32 to 5.37 357 - 1.25 to 1.75 (33.15) to (32.75) 2001 (5) 36 7.96 to 7.99 287 - 1.25 to 1.75 (40.85) to (40.42) INVESCO VIF-Health Science: 2002 867 7.30 to 7.38 6,374 0.21 1.25 to 1.75 (25.59) to (25.14) 2001 (5) 373 9.82 to 9.85 3,670 - 1.25 to 1.75 (6.55) to (6.01) INVESCO VIF-Small Company Growth: 2002 214 5.69 to 5.74 1,224 - 1.25 to 1.75 (32.38) to (31.97) 2001 (5) 65 8.41 to 8.44 547 - 1.25 to 1.75 (31.46) to (31.05) INVESCO VIF-Technology: 2002 367 3.68 to 3.71 1,357 - 1.25 to 1.75 (47.82) to (47.51) 2001 (5) 145 7.04 to 7.07 1,022 - 1.25 to 1.75 (58.05) to (55.94) Janus Aspen Aggressive Growth: 2002 2,550 3.90 to 3.95 10,028 - 1.25 to 1.75 (29.44) to (29.01) 2001 2,055 5.53 to 5.57 11,415 - 1.25 to 1.75 (40.67) to (40.35) LargeCap Blend: 2002 (4) 1,412 8.22 to 8.25 11,648 0.87 1.25 to 1.75 (28.74) to (28.21) LargeCap Growth: 2002 1,234 4.91 to 6.05 6,225 - 0.85 to 1.75 (31.15) to (30.46) 2001 801 7.13 to 8.71 5,872 - 0.85 to 1.75 (25.65) to (24.88)
6. Financial Highlights (continued)
Expenses Total Unit Fair Investment Ratio (2) Return (3) Units Value Lowest Net Assets Income Lowest to Lowest to Division (000's) to Highest (000s) Ratio (1) Highest Highest ----------------------------------------------------------------------------------------------------------------- ------------------------------- -------------------------------------------------------- LargeCap Growth Equity: 2002 855 $4.36 to $4.42 $ 3,761 - 1.25% to 1.75% (34.50)% to (34.10)% 2001 367 6.66 to 6.71 2,452 - 1.25 to 1.75 (31.41) to (30.93) LargeCap Stock Index: 2002 8,549 0.73 to 6.59 55,031 1.21 0.42 to 1.75 (23.86) to (22.77) 2001 6,721 0.94 to 8.58 56,637 1.06 0.42 to 1.75 (14.40) to (12.85) LargeCap Value 2002 (4) 1,317 8.29 to 8.33 10,958 1.89 1.25 to 1.75 (27.94) to (27.41) MicroCap: 2002 789 0.80 to 7.24 5,697 0.13 0.42 to 1.75 (18.42) to (4.26) 2001 685 8.77 to 8.82 6,046 - 1.25 to 1.75 0.00 to 0.62 MidCap: 2002 17,766 2.13 to 20.70 209,892 0.96 0.42 to 1.75 (10.42) to (9.13) 2001 19,815 2.35 to 22.98 239,234 0.76 0.42 to 1.75 (5.51) to (4.02) MidCap Growth: 2002 2,226 0.68 to 7.28 14,937 - 0.42 to 1.75 (39.86) to (26.89) 2001 2,126 9.16 to 9.96 19,630 - 0.85 to 1.75 (18.43) to (17.65) MidCap Growth Equity: 2002 1,093 4.59 to 4.65 5,058 - 1.25 to 1.75 (33.62) to (33.22) 2001 575 6.91 to 6.96 3,990 - 1.25 to 1.75 (28.84) to (28.32) MidCap Value: 2002 1,878 0.89 to 12.55 16,144 0.73 0.42 to 1.75 (11.61) to (10.72) 2001 425 0.99 to 14.06 4,347 0.21 0.42 to 1.75 (10.14) to (2.40) Money Market: 2002 20,955 1.46 to 13.27 157,262 1.40 0.42 to 1.75 (0.09) to 0.99 2001 21,440 1.45 to 13.25 150,639 3.67 0.42 to 1.75 2.02 to 3.57 Real Estate: 2002 2,762 1.09 to 12.93 34,861 4.15 0.42 to 1.75 5.75 to 7.27 2001 1,056 1.02 to 12.16 12,775 4.80 0.42 to 1.75 4.80 to 7.38 SmallCap: 2002 3,608 0.68 to 8.84 25,858 0.09 0.42 to 1.75 (28.66) to (27.63) 2001 2,990 0.93 to 12.27 29,827 - 0.42 to 1.75 (16.80) to 1.67
6. Financial Highlights (continued)
Expenses Total Unit Fair Investment Ratio (2) Return (3) Units Value Lowest et Assets Income Lowest to Lowest to Division (000's) to Highest N (000s) Ratio (1) Highest Highest ----------------------------------------------------------------------------------------------------------------- ------------------------------- -------------------------------------------------------- SmallCap Growth: 2002 4,236 $0.43 to $6.00 $ 25,168 - 0.42% to 1.75% (46.85)% to (44.13)% 2001 4,093 9.88 to 11.23 45,886 - 0.85 to 1.75 (33.27) to (32.57) SmallCap Value: 2002 2,672 0.88 to 11.69 30,766 0.66 0.42 to 1.75 (10.54) to (9.25) 2001 1,455 0.96 to 12.99 18,725 0.99 0.42 to 1.75 (9.60) to 4.95 Templeton Growth Securities: 2002 85 9.65 824 2.44 0.85 (19.18) 2001 57 11.94 685 1.88 0.85 (1.31) Utilities: 2002 2,743 0.70 to 8.40 22,961 4.42 0.42 to 1.75 (14.21) to (3.82) 2001 3,040 9.67 to 9.73 29,567 2.52 1.25 to 1.75 (29.00) to (28.60)
(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. (5) Commencement of operations, May 19, 2001. Investment income ratio and expense ratio have been annualized. Report of Independent Auditors 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, an indirect wholly owned subsidiary of Principal Financial Group, Inc.), as of December 31, 2002 and 2001, 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, 2002. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Principal Life Insurance Company at December 31, 2002 and 2001, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States. As discussed in Note 1 to the consolidated financial statements, the Company changed its methods of accounting for derivative instruments and hedging activities and goodwill and other intangible assets in response to new accounting standards that became effective January 1, 2001 and 2002, respectively. /s/ Ernst & Young Des Moines, Iowa January 31, 2003 Principal Life Insurance Company Consolidated Statements of Financial Position December 31, 2002 2001 -------------------------------------- (in millions, except per share data) Assets Fixed maturities, available-for-sale... $32,752.6 $29,007.4 Fixed maturities, trading.............. 101.7 17.8 Equity securities, available-for-sale.. 348.1 802.3 Mortgage loans......................... 10,829.4 10,884.6 Real estate............................ 974.1 950.5 Policy loans........................... 818.5 831.9 Other investments...................... 1,067.5 600.8 -------------------------------------- Total investments................... 46,891.9 43,095.3 Cash and cash equivalents.............. 1,168.5 1,077.7 Accrued investment income.............. 632.5 593.5 Premiums due and other receivables..... 431.8 468.3 Deferred policy acquisition costs...... 1,374.4 1,322.3 Property and equipment................. 472.8 480.6 Goodwill............................... 75.7 70.3 Other intangibles...................... 11.1 13.0 Mortgage loan servicing rights......... 1,517.9 1,778.5 Separate account assets................ 33,105.9 34,028.9 Other assets........................... 1,413.1 642.2 -------------------------------------- -------------------------------------- Total assets........................ $87,095.6 $83,570.6 ====================================== ====================================== Liabilities Contractholder funds................... $26,297.3 $24,664.6 Future policy benefits and claims...... 13,634.9 13,011.7 Other policyholder funds............... 635.5 576.6 Short-term debt........................ 1,243.9 1,378.4 Long-term debt......................... 578.7 617.6 Income taxes currently payable......... 197.3 - Deferred income taxes.................. 1,104.7 782.7 Separate account liabilities........... 33,105.9 34,028.9 Other liabilities...................... 4,559.5 3,167.9 -------------------------------------- -------------------------------------- Total liabilities................... 81,357.7 78,228.4 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.................. 5,015.0 5,004.6 Retained-earnings deficit................... (64.7) (26.6) Accumulated other comprehensive income...... 785.1 368.4 Treasury stock, at cost (363.7 thousand shares of Principal Financial Group, Inc. common stock)................ - (6.7) --------------------------------- Total stockholder's equity............... 5,737.9 5,342.2 --------------------------------- --------------------------------- Total liabilities and stockholder's equity $87,095.6 $83,570.6 ================================= See accompanying notes.
Principal Life Insurance Company Consolidated Statements of Operations For the year ended December 31, 2002 2001 2000 ------------------ ------------------ ------------------ (in millions) Revenues Premiums and other considerations............... $ 3,720.0 $ 3,795.7 $ 3,929.3 Fees and other revenues......................... 1,871.6 1,502.3 1,214.5 Net investment income........................... 3,069.8 3,211.4 3,116.6 Net realized/unrealized capital gains (losses).. (395.2) (492.7) 151.8 ------------------ ------------------ ------------------ ------------------ ------------------ ------------------ Total revenues................................ 8,266.2 8,016.7 8,412.2 Expenses Benefits, claims, and settlement expenses....... 4,958.9 5,092.4 5,147.1 Dividends to policyholders...................... 316.6 313.7 312.7 Operating expenses.............................. 2,413.8 2,140.4 2,062.0 ------------------ ------------------ ------------------ ------------------ ------------------ ------------------ Total expenses................................ 7,689.3 7,546.5 7,521.8 ------------------ ------------------ ------------------ ------------------ ------------------ ------------------ Income before income taxes and cumulative effect of accounting changes................. 576.9 470.2 890.4 Income taxes.................................... 20.2 92.4 248.8 ------------------ ------------------ ------------------ ------------------ ------------------ ------------------ Income before cumulative effect of accounting 556.7 377.8 641.6 changes...................................... Cumulative effect of accounting changes, net of related income taxes...................... (4.6) (10.7) - ------------------ ------------------ ------------------ ------------------ ------------------ ------------------ Net income...................................... $ 552.1 $ 367.1 $ 641.6 ================== ================== ==================
Principal Life Insurance Company Consolidated Statements of Stockholder's Equity Accumulated Additional Retained other Total Common paid-in earnings comprehensive Treasury stockholder's stock capital (deficit) income (loss) stock equity -------------------------------- -------------- --------- ------------- (in millions) Balances at January 1, 2000... $2.5 $ - $5,110.6 $(162.1) $ - $4,951.0 Reclassification of retained earnings to additional paid-in capital............ - 21.0 (21.0) - - - Dividends to parent........... - - (542.6) - - (542.6) Comprehensive income: Net income................. - - 641.6 - - 641.6 Net unrealized gains....... - - - 344.6 - 344.6 Provision for deferred income taxes.................... - - - (121.4) - (121.4) Foreign currency translation adjustment... - - - 27.0 - 27.0 ------------- ------------- Comprehensive income.......... 891.8 -------------------------------- -------------- --------- ------------- -------------------------------- -------------- --------- ------------- Balances at December 31, 2000. 2.5 21.0 5,188.6 88.1 - 5,300.2 Contributions and distributions in connection with Principal Mutual Holding Company's demutualization transaction - 4,976.9 (4,937.3) - - 39.6 Principal Financial Group, ) Inc. shares held in rabbi trusts..................... - 6.7 - - (6.7 - Dividends to parent.......... - - (645.0) 9.8 - (635.2) Comprehensive income: Net income before Principal Mutual Holding Company's demutualization - - 393.7 - - 393.7 Net loss after Principal Mutual Holding Company's demutualization.......... - - (26.6) - - (26.6) ----------- ------------- ----------- ------------- Net income for the year.... - - 367.1 - - 367.1 Net unrealized gains....... - - - 405.2 - 405.2 Provision for deferred income taxes............. - - - (144.4) - (144.4) Foreign currency translation adjustment... - - - 23.9 - 23.9 Cumulative effect of accounting change, net of related income taxes.. - - - (14.2) - (14.2) ------------- ------------- Comprehensive income.......... 637.6 -------------------------------- -------------- --------- ------------- Balances at December 31, 2001. 2.5 5,004.6 (26.6) 368.4 (6.7) 5,342.2 Stock-based compensation...... - 9.1 - - - 9.1 Principal Financial Group, Inc. shares sold by rabbi trusts..................... - 1.3 - - 6.7 8.0 Dividends to parent........... - - (590.2) - - (590.2) Comprehensive income: Net income................. - - 552.1 - - 552.1 Net unrealized gains....... - - - 640.8 - 640.8 Provision for deferred income taxes............. - - - (226.1) - (226.1) Foreign currency translation adjustment... - - - 2.0 - 2.0 ------------- ------------- Comprehensive income.......... 968.8 -------------------------------- -------------- --------- ------------- Balances at December 31, 2002. $2.5 $5,015.0 $ (64.7) $ 785.1 $ - $5,737.9 ================================ ============== ========= =============
See accompanying notes.
Principal Life Insurance Company Consolidated Statements of Cash Flows For the year ended December 31, 2002 2001 2000 ----------------- ---------------- ----------------- (in millions) Operating activities Net income............................................ $ 552.1 $ 367.1 $ 641.6 Adjustments to reconcile net income to net cash provided by operating activities: Cumulative effect of accounting changes, net of related income taxes.................... 4.6 10.7 - Amortization of deferred policy acquisition costs.............................. 141.1 157.6 238.6 Additions to deferred policy acquisition costs... (314.8) (249.0) (263.6) Accrued investment income........................ (39.0) (66.8) (59.0) Premiums due and other receivables............... 31.8 (79.7) (51.9) Contractholder and policyholder liabilities and dividends.................................. 2,082.8 1,805.5 1,456.5 Current and deferred income taxes................ 342.1 62.2 127.9 Net realized/unrealized capital (gains) losses... 395.2 492.7 (151.8) Depreciation and amortization expense............ 91.4 96.0 98.1 Amortization of mortgage servicing rights........ 364.9 212.9 157.8 Stock-based compensation......................... 9.1 - - Mortgage servicing rights valuation adjustments.. 926.7 101.8 54.8 Other............................................ 470.6 799.5 468.5 ----------------- ---------------- ----------------- ----------------- ---------------- ----------------- Net adjustments....................................... 4,506.5 3,343.4 2,075.9 ----------------- ---------------- ----------------- ----------------- ---------------- ----------------- Net cash provided by operating activities............. 5,058.6 3,710.5 2,717.5 Investing activities Available-for-sale securities: Purchases.......................................... (15,001.2) (12,078.9) (12,932.5) Sales.............................................. 8,113.0 6,427.7 7,312.8 Maturities......................................... 3,629.2 2,501.2 2,665.3 Net cash flows from trading securities................ (82.4) (17.0) - Mortgage loans acquired or originated................. (50,131.5) (40,430.2) (10,471.3) Mortgage loans sold or repaid......................... 50,028.3 40,895.8 12,026.8 Purchase of mortgage servicing rights................. (931.7) (968.4) (235.9) Proceeds from sale of mortgage servicing rights....... 8.6 31.5 53.0 Real estate acquired.................................. (265.4) (290.0) (324.3) Real estate sold...................................... 255.5 803.8 795.8 Net change in property and equipment.................. (57.8) (86.6) (71.5) Net proceeds (disbursements) from sales of subsidiaries....................................... 1.4 (14.8) - Purchases of interest in subsidiaries, net of cash acquired........................ (6.5) (8.4) - Net change in other investments....................... 439.9 (217.5) (125.4) ----------------- ---------------- ----------------- ----------------- ---------------- ----------------- Net cash used in investing activities................. (4,000.6) (3,451.8) (1,307.2)
Principal Life Insurance Company Consolidated Statements of Cash Flows (continued) For the year ended December 31, 2002 2001 2000 ----------------- ---------------- ----------------- (in millions) Financing activities Payments to eligible policyholders under Principal Mutual Holding Company's plan of conversion....... $ - $ (1,177.5) $ - Sale of treasury stock............................... 8.0 - - Issuance of long-term debt........................... 64.1 149.2 230.4 Principal repayments of long-term debt............... (103.0) (203.9) (119.9) Net proceeds (repayments) of short-term borrowings........................................ (134.5) 38.5 1,026.6 Contribution received from parent.................... - 1,689.7 - Dividends paid to parent............................. (590.2) (498.9) (345.5) Investment contract deposits......................... 7,014.1 5,054.9 3,982.6 Investment contract withdrawals...................... (7,225.7) (6,075.1) (5,011.3) ----------------- ---------------- ----------------- ----------------- ---------------- ----------------- Net cash used in financing activities................ (967.2) (1,023.1) (237.1) ----------------- ---------------- ----------------- Net increase (decrease) in cash and cash equivalents....................................... 90.8 (764.4) 1,173.2 Cash and cash equivalents at beginning of year....... 1,077.7 1,842.1 668.9 ----------------- ---------------- ----------------- ----------------- ---------------- ----------------- Cash and cash equivalents at end of year............. $ 1,168.5 $ 1,077.7 $ 1,842.1 ================= ================ ================= ================= ================ ================= Schedule of noncash transactions Policy credits to eligible policyholders under Principal Mutual Holding Company's plan of conversion..................................... $ 472.6 ================ ================ Reclassification of stockholder's equity in $ 3,287.2 connection with Principal Mutual Holding Company's plan of conversion..................... ================ ================ Dividend of net remaining noncash assets and liabilities of subsidiary - Principal International, Inc. to Principal Financial Services, Inc. on April 1, 2001................ $ (136.3) ================ ================ Net transfer of noncash assets and liabilities to an unconsolidated entity in exchange for a minority interest.......................................... $ (255.0) ================= Dividend of net noncash assets and liabilities of subsidiaries - Principal International de Chile, S.A. and Principal Compania de Seguros de Vida Chile, S.A. to Principal Financial Services, Inc. on September 28, 2000....................... $ (170.6) =================
See accompanying notes. Principal Life Insurance Company Notes to Consolidated Financial Statements December 31, 2002 1. Nature of Operations and Significant Accounting Policies Description of Business Principal Life Insurance Company and 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. In addition, we offer residential mortgage loan origination and servicing in the U.S. Reorganization Under the terms of Principal Mutual Holding Company's Plan of Conversion, effective October 26, 2001 (the "Date of Demutualization"), Principal Mutual Holding Company, our former ultimate parent, converted from a mutual insurance holding company ("MIHC") to a stock company, and Principal Financial Group, Inc. ("PFG"), a new Delaware business corporation, completed its initial public offering ("IPO"). All membership interests in Principal Mutual Holding Company were extinguished on that date and eligible policyholders received, in aggregate, 260.8 million shares of common stock, $1,177.5 million of cash and $472.6 million of policy credits as compensation. After giving effect to the reorganization resulting from the demutualization, we are now a direct wholly owned subsidiary of Principal Financial Services, Inc. ("PFSI"), which in turn is a direct wholly owned subsidiary of PFG. In PFG's IPO, 100.0 million shares of common stock were issued at a price of $18.50 per share, prior to the underwriters' exercise of the overallotment option. Net proceeds from the IPO were $1,753.9 million, of which $64.2 million was retained by PFG and $1,689.7 million was contributed to us to reimburse for cash, policy credits and demutualization expenses, which were $2.0 million, $18.6 million and $7.2 million, net of income taxes, in 2002, 2001 and 2000, respectively. Basis of Presentation The accompanying consolidated financial statements, which include our majority-owned subsidiaries, have been prepared in conformity with accounting principles generally accepted in the U.S. ("U.S. GAAP"). Less than majority-owned entities in which we had at least a 20% interest are reported on the equity basis in the consolidated statements of financial position as other investments. All significant intercompany accounts and transactions have been eliminated. Closed Block At the time the MIHC structure was created in 1998, we formed and began operating a closed block ("Closed Block") for the benefit of individual participating dividend-paying policies in force on that date. See Note 8 for further details regarding the Closed Block. Principal Life Insurance Company Notes to Consolidated Financial Statements (continued) 1. Nature of Operations and Significant Accounting Policies (continued) Use of Estimates in the Preparation of Financial Statements The preparation of 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. Accounting Changes The Financial Accounting Standards Board (the "FASB") issued Interpretation No. 46, Consolidation of Variable Interest Entities ("FIN 46"), in January 2003. FIN 46 provides guidance related to identifying variable interest entities and determining whether such entities should be consolidated. In addition, FIN 46 also provides guidance related to the initial and subsequent measurement of assets, liabilities and noncontrolling interests of newly consolidated variable interest entities and requires disclosures for both the primary beneficiary of a variable interest entity and other beneficiaries of the entity. FIN 46 is effective immediately for variable interest entities created, or interests in variable interest entities obtained, after January 31, 2003. For those variable interest entities created, or interests in variable interest entities obtained, on or before January 31, 2003, the guidance in FIN 46 must be applied in the first fiscal year or interim period beginning after June 15, 2003. We have initiated an assessment and are currently evaluating interests in entities that may be considered variable interest entities. The ultimate impact of adopting FIN 46 on the consolidated financial statements is still being reviewed. Refer to the Residential Mortgage Banking Activities section of Note 5 for further information on variable interest entities and the effects that FIN 46 may have on our financial statements in the future. In December 2002, the FASB issued Statement of Financial Accounting Standards ("SFAS") No. 148, Accounting for Stock-Based Compensation - Transition and Disclosure an amendment of FASB Statement No. 123 ("SFAS 148"), which is effective for fiscal years ending after December 15, 2002. SFAS 148 provides alternative methods of transition for an entity that voluntarily changes to the fair value based method of accounting for stock-based employee compensation and requires disclosure about the effects on reported net income of an entity's accounting policy decisions with respect to stock-based employee compensation. In addition, SFAS 148 amends Accounting Principles Board ("APB") Opinion No. 28, Interim Financial Reporting, to require disclosure about those effects in interim financial information. Our ultimate parent, PFG, is applying the prospective method of transition as prescribed by SFAS No. 123, Accounting for Stock-Based Compensation ("SFAS 123"). SFAS 123 encourages but does not require companies to record compensation cost for stock-based employee compensation plans based on the fair value of options granted. Effective July 1, 2002, PFG adopted the fair value method for stock-based compensation as defined in SFAS 123 in accounting for their stock-based compensation plans. This increased our pro rata share of expenses allocated to us from PFG for these plans SFAS 123, which indicates that the fair value method is the preferable method of accounting, requires that the fair value method for stock-based compensation be applied as of the beginning of the fiscal year in which it is adopted for all stock-based awards granted subsequent to such date. The financial statements for the first two quarters of 2002 were not restated for this change since its effects were not materially different from amounts reported for both financial position and results of operations. Such effects for the first two quarters were charged against income in the third quarter of 2002 and were not material to such results of operations. Prior to January 1, 2002, PFG applied the intrinsic value method (as permitted under SFAS 123) defined in APB Opinion No. 25, Accounting for Stock Issued to Employees and related Interpretations, which excluded employee options and stock purchases from compensation expense. 1. Nature of Operations and Significant Accounting Policies (continued) In November 2002, the FASB issued Interpretation No. 45, Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others ("FIN 45"). FIN 45 requires certain guarantees to be recorded at fair value instead of when a loss is probable and reasonably estimable as defined by SFAS No. 5, Accounting for Contingencies. FIN 45 also requires a guarantor to make significant new disclosures, even when the likelihood of making any payments under the guarantee is remote. The liability recognition requirements of FIN 45 are effective for those guarantees that are issued or amended as of January 1, 2003 or later. The disclosure requirements are effective for financial statements of annual periods ending after December 15, 2002. Refer to Note 14 for further information regarding our guarantees. In June 2001, the FASB issued SFAS No. 141, Business Combinations ("SFAS 141"), and SFAS No. 142, Goodwill and Other Intangible Assets ("SFAS 142"). SFAS 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001, and requires separate recognition of intangible assets apart from goodwill, if such intangible assets meet certain criteria. SFAS 142, effective January 1, 2002, prohibits the amortization of goodwill and intangible assets with indefinite useful lives. Intangible assets with finite lives will continue to be amortized over their estimated useful lives. Additionally, SFAS 142 requires that goodwill and indefinite-lived intangible assets be reviewed for impairment at least annually, which we plan to do in the fourth quarter each year. Our initial adoption of SFAS 142 on January 1, 2002, required us to perform a two-step fair-value based goodwill impairment test. The first step of the test compared the estimated fair value of the reporting unit to its carrying value, including goodwill. If the carrying value exceeded fair value, a second step was performed, which compared the implied fair value of the applicable reporting unit's goodwill with the carrying amount of that goodwill, to measure the goodwill impairment, if any. Our measurements of fair value were based on evaluations of future discounted cash flows, product level analysis, market performance assumptions and cash flow assumptions. These evaluations utilized the best information available in the circumstances, including reasonable and supportable assumptions and projections. The discounted cash flow evaluations considered earnings scenarios and the likelihood of possible outcomes. Collectively, these evaluations were management's best estimate of projected future cash flows. As a result of performing the two-step impairment test, we recorded an after-tax goodwill impairment of $4.6 million related to our Life and Health Insurance operations. This impairment was recognized on January 1, 2002, as a cumulative effect of a change in accounting principle. 1. Nature of Operations and Significant Accounting Policies (continued) Net income for the years ended December 31, 2002, 2001 and 2000, adjusted for the effects of SFAS 142 related to non-amortization of goodwill and indefinite-lived intangibles, are as follows (in millions): For the year ended December 31, 2002 2001 2000 ------------------------------- Reported net income.............................. $552.1 $367.1 $641.6 Adjustment for amortization expense for goodwill and indefinite-lived intangibles (1) - 7.8 10.4 Tax impacts of amortization expense ........... - (2.4) (3.1) ---------------------------- ---------------------------- Adjusted net income............................ 552.1 372.5 648.9 Adjustment for cumulative effect of accounting changes, net of related income taxes......... 4.6 10.7 - ---------------------------- ---------------------------- Adjusted income before cumulative effect of $556.7 $383.2 $648.9 accounting changes........................... ============================ (1) Includes amortization expenses related to our equity investment subsidiaries. Effective January 1, 2001, we adopted SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities ("SFAS 133"), as amended by SFAS No. 138, Accounting for Certain Derivative Instruments and Certain Hedging Activities - an amendment of FASB Statement No. 133. As amended, SFAS 133 requires, among other things, that all derivatives be recognized in the consolidated statement of financial position as either assets or liabilities that are measured at fair value. SFAS 133 also establishes special accounting for qualifying hedges, which allows for matching the timing of gain or loss recognition on the hedging instrument with the recognition of the corresponding changes in value of the hedged item. Changes in the fair value of a derivative qualifying as a hedge are recognized in earnings or directly in stockholder's equity depending on the instrument's intended use. For derivatives that are not designated as hedges or that do not meet the hedge accounting criteria in SFAS 133, changes in fair value are required to be recognized in earnings in the period of change. At January 1, 2001, our consolidated financial statements were adjusted to record a cumulative effect of adopting SFAS 133, as follows (in millions): Net loss Accumulated other comprehensive loss ----------- --------------------- Adjustment to fair value of derivative contracts (1) $(16.4) $(15.8) Income tax impact.............. 5.7 1.6 -------------------------------- -------------------------------- Total.......................... $(10.7) $(14.2) ================================ (1) Amount presented is net of adjustment to hedged item. 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 investments into one of three categories: held-to-maturity, 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 16 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 deferred policy acquisition costs and applicable taxes. Unrealized gains and losses related to trading securities are reflected in net income as net realized/unrealized capital gains (losses). 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 as determined by broker-dealer surveys or internal estimates and the estimated lives of the securities. 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 and, accordingly, are carried at fair value. (See Note 16 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 deferred policy acquisition costs and applicable taxes. 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 as net realized/unrealized capital gains (losses). 1. Nature of Operations and Significant Accounting Policies (continued) Commercial and residential mortgage loans are generally reported at cost adjusted for amortization of premiums and accrual of discounts, computed using the interest method, and net of valuation allowances. Any changes in the valuation allowances are reported 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 residential mortgage loans held-for-sale in the amount of $386.4 million and $294.9 million and commercial mortgage loans held-for-sale in the amount of $444.2 million and $493.5 million at December 31, 2002 and 2001, 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. 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, market value changes in 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). Unrealized gains and losses on derivatives within our mortgage banking segment are reported as either operating expenses or fees and other revenues depending on the nature of the hedge and are excluded from 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 also 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 sell commercial mortgage loans to an unconsolidated qualified special purpose entity which then issues mortgage-backed securities. We may retain immaterial interests in the loans by purchasing portions of the securities from the issuance. Gain or loss on the sales of the mortgages is reported as fees and other revenues and depends in part on the previous carrying amounts of the financial assets involved in the transfer, which is allocated between the assets sold and the retained interests based on their relative fair value at the date of transfer. Fair values are determined by quoted market prices of external buyers of each class of security purchased. The retained interests are thereafter carried at fair value with other fixed maturity investments and classified as available-for-sale. We also sell residential mortgage loans and retain servicing rights which are retained interests in the sold loans. Gain or loss on the sales of the loans is reported as fees and other revenues and depends in part on the previous carrying amounts of the loans sold and the interests retained based on their relative fair values at the date of the transfer. To obtain fair values, quoted market prices are used if available. However, quotes are generally not available for retained interests, so we estimate fair value based on the present value of the future expected cash flows using management's best estimates of assumptions we believe market participants would use to value such interests. 1. Nature of Operations and Significant Accounting Policies (continued) Mortgage Loan Servicing Rights Mortgage loan servicing rights represent the cost of purchasing or originating the right to receive cash flows from servicing mortgage loans. Servicing rights are recorded at the time of sale of the underlying mortgage loans where the servicing is retained. The total cost of the mortgage loans, which includes the cost to acquire the servicing rights, is allocated to the mortgage loans and the servicing rights based on their relative fair values at the date of sale. Cost basis also includes adjustments resulting from the application of hedge accounting. Capitalized servicing rights are carried at the lower of cost or market value. The capitalized value is amortized in proportion to, and over the period of, estimated net servicing income. Capitalized mortgage loan servicing rights are periodically assessed for impairment based on the estimated fair value of those rights. Fair values are estimated using estimates of discounted future net cash flows over the expected life using loan prepayment, discount rate, ancillary fee income and other economic factors we believe market participants would use to value such assets. For purposes of performing our impairment evaluation, we stratify the servicing portfolio on the basis of certain predominant risk characteristics, including loan type and note rate. To the extent that the carrying value of the servicing rights exceeds fair value for any stratum, a valuation allowance is established, which may be adjusted in the future as the value of the servicing rights increase or decrease. This valuation allowance is recognized in the consolidated statements of operations during the period in which impairment occurs. Activity in the valuation allowance for mortgage loan servicing rights is summarized as follows (in millions): For the year ended December 31, 2002 2001 2000 --------------- --------------- --------------- --------------- --------------- --------------- Balance at beginning of year.. $198.1 $ 2.3 $2.9 Impairments................... 318.3 196.0 1.1 Recoveries.................... (22.7) (0.2) (1.7) --------------- --------------- --------------- --------------- --------------- --------------- Balance at end of year........ $493.7 $198.1 $2.3 =============== =============== =============== During 2002, impairments reflect the results of increased mortgage loan prepayments due to the continued reduction in market interest rates during the year. Derivatives Effective January 1, 2001, all derivatives are recognized as either assets or liabilities in the statement of financial position and measured at fair value. If certain conditions are met, a derivative may be specifically designated as one of the following: (a) a hedge of the exposure to changes in the fair value of a recognized asset or liability or an unrecognized firm commitment; (b) a hedge of the exposure to variable cash flows of a forecasted transaction; (c) a hedge of the foreign currency exposure of an unrecognized firm commitment, an available-for-sale security or a foreign-currency-denominated forecasted transaction. 1. Nature of Operations and Significant Accounting Policies (continued) 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. For derivatives hedging the exposure to changes in fair value of a recognized asset or liability, the change in fair value of the derivative is recognized in earnings in the period of change together with the offsetting change in fair value on the hedged item attributable to the risk being hedged. The effect of such accounting is to reflect in earnings the extent to which the hedge is not effective in achieving offsetting changes in fair value. For derivatives hedging the exposure to variable cash flows, the effective portion of the derivative's change in fair value is initially deferred and reported as a component of other comprehensive income and subsequently reclassified into earnings when each variable cash flow occurs and is recognized in earnings. The ineffective portion of the change in fair value is reported in earnings in the period of change. For derivatives that are terminated prior to maturity, any accumulated gain or loss is recognized in earnings immediately if the hedged item is also terminated. If the hedged item is not terminated, then the accumulated gain or loss is amortized into earnings over the remaining life of the hedged item. For derivatives hedging the foreign currency exposure of an unrecognized firm commitment or an available-for-sale security, the change in fair value of the derivative is recognized in earnings in the period of change together with the offsetting change in fair value on the hedged item attributable to the risk being hedged. The effect of such accounting is to reflect in earnings the extent to which the hedge is not effective in achieving offsetting changes in fair value. For derivatives hedging the foreign currency exposure of a foreign-currency-denominated forecasted transaction, the change in fair value is initially deferred and reported as a component of other comprehensive income and subsequently reclassified into earnings when the forecasted transaction occurs and is recognized in earnings. The ineffective portion of the change in fair value is reported in earnings in the period of change. For derivatives not designated as a hedging instrument, the change in fair value is recognized in earnings in the period of change. A minimum variance technique is used to test the effectiveness of cashflow and fair value relationships whereby the profitability distribution of net fair value or cashflows for the hedging and hedged items are combined. If the coefficient of variation (standard deviation divided by mean) of the probability distribution is 1% or less, then the hedging relationship is deemed to be effective. Prior to the January 1, 2001 adoption of SFAS 133, we used future contracts, mortgage-backed securities forwards, interest rate and principal only swap and floor agreements, options on futures contracts and currency rate swap agreements to hedge and manage our exposure to changes in interest rate levels and foreign exchange rate fluctuations, and to manage duration mismatch of assets and liabilities. Futures contracts were marked to market and settled daily with the net gain or loss at expiration or termination of 1. Nature of Operations and Significant Accounting Policies (continued) the contracts recorded in net realized/unrealized capital gains (losses) on our consolidated statements of operations. Outstanding mortgage-backed forwards were reported as commitments, and upon settlement, the net gain or loss was reported in net realized/unrealized capital gains (losses). For interest rate and currency swaps held by Principal Life, the net amounts paid or received and net amounts accrued through the end of the accounting period were included in net investment income. Any discounts or premiums related to these instruments were amortized to net investment income over the life of the contract. Gains or losses on contracts terminated early were recognized immediately in net realized/unrealized capital gains (losses). Unrealized gains or losses on interest rate swap contracts and currency swaps were not recognized in income. We primarily utilized interest rate floors, futures and options on futures contracts and interest rate and principal only swaps in hedging our portfolio of mortgage servicing rights. The realized and unrealized gains and losses on servicing derivatives accounted for as effective hedges were considered in the periodic assessment of mortgage servicing rights impairment. The realized and unrealized gains and losses on servicing derivatives not considered effective hedges were recorded in our results of operations. We managed interest rate risk on our mortgage loan pipeline by buying and selling mortgage-backed securities in the forward markets, over-the-counter options on mortgage-backed securities, futures contracts and options on treasury futures contracts. The unrealized gains and losses on these derivatives were included in the lower of cost or market calculation of mortgage loans held-for-sale. Contractholder and Policyholder Liabilities Contractholder and policyholder liabilities (contractholder funds, future policy benefits and claims and other policyholder funds) include reserves for investment contracts and reserves for universal life, limited payment, participating and traditional life insurance policies. Investment contracts are contractholders' funds on deposit with us and generally include reserves for pension and annuity contracts. Reserves on investment contracts are equal to the cumulative deposits less any applicable charges plus credited interest. Reserves for universal life insurance contracts are equal to cumulative premiums less charges plus credited interest which represents the account balances that accrue to the benefit of the policyholders. Reserves for nonparticipating term life insurance contracts are computed on a basis of assumed investment yield, mortality, morbidity and expenses, including a provision for adverse deviation, which generally 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 rate and mortality rates guaranteed in calculating the cash surrender values described in the contract. Participating business represented approximately 34%, 36% and 34% of our life insurance in force and 77%, 80% and 80% of the number of life insurance policies in force at December 31, 2002, 2001 and 2000, respectively. Participating business represented approximately 80%, 76% and 64% of life insurance premiums for the years ended December 31, 2002, 2001 and 2000, 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 we need to retain. 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. 1. Nature of Operations and Significant Accounting Policies (continued) 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 and health insurance products include those products with fixed and guaranteed premiums and benefits and consist principally of whole life and term life insurance policies. Premiums from these products are recognized as premium revenue when due. 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 when due. Group life and health insurance premiums are generally recorded as premium revenue over the term of the coverage. Some group contracts allow for premiums to be adjusted to reflect emerging experience. Such adjusted premiums are recognized in the period that the related experience emerges. Fees for contracts providing claim processing or other administrative services are recorded over the period the service is provided. Related policy benefits and expenses for individual and group life, annuity and health insurance products are associated with earned premiums and result in the recognition of profits over the expected lives of the policies and contracts. Universal life-type policies are insurance contracts with terms that are not fixed and guaranteed. Amounts received as payments for such contracts are not reported as premium revenues. Revenues for universal life-type insurance contracts consist of policy charges for the cost of insurance, policy initiation and administration, surrender charges and other fees that have been assessed against policy account values. Policy benefits and claims that are charged to expense include interest credited to contracts and benefit claims incurred in the period in excess of related policy account balances. Investment contracts do not subject us to 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. 1. Nature of Operations and Significant Accounting Policies (continued) 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. Fees and other revenues arising from the residential mortgage banking operations consist of revenues earned for servicing and originating residential mortgage loans as well as marketing other products to servicing portfolio customers. Net revenues are also recognized upon the sale of residential mortgage loans and residential mortgage loan servicing rights and are recorded in fees and other revenues and determined using the specific identification basis. Servicing revenues are recognized as the mortgage loan is serviced over the life of the mortgage loan. Mortgage loans originated are sold in the secondary mortgage markets, shortly after origination. As a result, mortgage loan origination fee revenues are recognized when the mortgage loans are sold. Fee revenues received for marketing other products to servicing portfolio customers are recognized when the service is performed. Deferred Policy Acquisition Costs Commissions and other costs (underwriting, issuance and agency expenses and first-year bonus interest) 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. Deferred policy acquisition costs for universal life-type insurance contracts and participating life insurance policies and investment contracts are being amortized over the lives of the policies and contracts in relation to the emergence of estimated gross profit margins. This amortization is adjusted retrospectively when estimates of current or future gross profits and margins to be realized from a group of products and contracts are revised. The deferred policy acquisition costs of 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. Deferred policy acquisition costs are subject to recoverability testing at the time of policy issue and loss recognition testing at the end of each accounting period. Deferred policy acquisition costs would be written off to the extent that it is determined that future policy premiums and investment income or gross profit margins would not be adequate to cover related losses and expenses. Reinsurance 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, 2002, 2001 and 2000, respectively, we had reinsured $17.8 billion, $15.6 billion and $13.2 billion of life insurance in force, representing 14%, 12% and 9% of total net life insurance in force through a single third-party reinsurer. To minimize the possibility of losses, we evaluate the financial condition of our reinsurers and monitor concentrations of credit risk. 1. Nature of Operations and Significant Accounting Policies (continued) The effects of reinsurance on premiums and other considerations and policy and contract benefits and changes in reserves were as follows (in millions): For the year ended December 31, 2002 2001 2000 ---------- ----------- ------------ ---------- ----------- ------------ Premiums and other considerations: Direct..................................... $3,916.3 $3,999.8 $4,074.8 Assumed.................................... 130.6 56.0 24.6 Ceded...................................... (326.9 (260.1) (170.1) ---------- ----------- ------------ ---------- ----------- ------------ Net premiums and other considerations........ $3,720.0 $3,795.7 $3,929.3 ========== =========== ============ Benefits, claims and settlement expenses: Direct..................................... $5,199.7 $5,308.2 $5,302.6 Assumed.................................... 10.5 7.4 1.9 Ceded...................................... (251.3 (223.2) (157.4) ---------- ----------- ------------ Net benefits, claims and settlement expenses. $4,958.9 $5,092.4 $5,147.1 ========== =========== ============ 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. Generally, 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 other business of ours. We receive a fee for administrative, maintenance and investment advisory services that is 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, 2002 and 2001, the separate accounts include a separate account valued at $1.0 billion and $1.3 billion, respectively, which primarily includes shares of PFG 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 Principal Mutual Holding Company's demutualization. These shares are included in both PFG's basic and diluted earnings per share calculations. 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. Activity of the separate account shares is reflected in both the separate account assets and separate account liabilities and does not impact our results of operations. Income Taxes PFG files a U.S. consolidated income tax return that includes us and all of our qualifying subsidiaries and has a policy of allocating 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 tax assets and deferred tax liabilities of a change in tax rates is recognized in operations in the period in which the change is enacted. 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. Due to the adoption of SFAS 142, goodwill and indefinite-lived intangible assets were no longer amortized after January 1, 2002. Intangible assets with a finite useful life continue to be amortized on a straight-line basis generally over a period of 15 to 30 years. Goodwill and indefinite-lived intangible assets not subject to amortization will be tested for impairment 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. Goodwill impairment testing involves a two-step process described further in the accounting changes section within Note 1. Impairment testing for indefinite-lived intangible assets consists of a comparison of the fair value of the intangible asset with its carrying value. Other intangible assets with finite useful lives continue to be 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. Prior to January 1, 2002, this impairment method was used for all intangible assets and goodwill. Stock-Based Compensation Our parent, PFG, accounts for their stock-based compensation plans using the fair value method and the intrinsic value method in 2002 and 2001, respectively, which are described more fully in Note 19. We are allocated our pro rata share of the expenses for these plans. Awards under these plans vest over periods ranging from three months to three years. Therefore, the cost related to stock-based compensation included in the determination of net income for 2002 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 the stock-based compensation plans. Had compensation expense for 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, 2002 2001 ------------------- ------------------- (in millions) Net income, as reported........................................ $552.1 $367.1 Add: Stock-based compensation expense included in reported net income, net of related tax effects. 9.7 5.1 Deduct: Total stock-based compensation expense determined under fair value based method for all awards, net of related tax effects.................................. 12.5 6.4 ------------------- ------------------- ------------------- ------------------- Pro forma net income........................................... $549.3 $365.8 =================== =================== =================== ===================
1. Nature of Operations and Significant Accounting Policies (continued) Reclassifications Reclassifications have been made to the 2000 and 2001 consolidated financial statements to conform to the 2002 presentation. 2. Related Party Transactions We have entered into various related party transactions with our parent and our parent's other affiliates. During the years ended December 31, 2002, 2001 and 2000, we received $92.2 million, $72.8 million and $57.7 million, respectively, of expense reimbursements from affiliated entities. During 2001, we received a capital contribution of $1,689.7 million from our parent to reimburse us for the payments and costs related to Principal Mutual Holding Company's demutualization. During 2001, we were also reimbursed $16.0 million for expenses paid related to PFG's initial public offering. Our direct parent, PFSI, and us 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 PFSI in aggregate principal amounts not to exceed $1.0 billion, with such advanced amounts earning interest at the daily 30-day "AA" Financial Commercial Paper Discount Rate published by the Federal Reserve (the "Internal Crediting Rate"); and (ii) PFSI to advance cash to us in aggregate principal amounts not to exceed $250.0 million, with such advance amounts earning interest at the Internal Crediting Rate plus 5 basis points to reimburse PFSI for the costs incurred in maintaining short-term investing and borrowing programs. Under this cash advance agreement, we had a receivable from PFSI of $366.0 million and $584.5 million at December 31, 2002 and 2001, respectively, and earned interest of $8.5 million and $30.7 million during 2002 and 2001, 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 results of operations. 3. Goodwill and Other Intangible Assets Amortized intangible assets were as follows (in millions):
As of December 31, 2002 As of December 31, 2001 ---------------------------------------------------------------------------------- ---------------------------------------------------------------------------------- Gross Net Gross Net carrying Accumulated carrying carrying Accumulated carrying amount amortization amount amount amortization amount ---------------------------------------------------------------------------------- Other intangibles with finite useful lives.. $1.6 $0.4 $1.2 $2.1 $0.2 $1.9 ==================================================================================
3. Goodwill and Other Intangible Assets (continued) Unamortized intangible assets were as follows (in millions): As of December 31, 2002 2001 ------------- ------------------- ------------- ------------------- Net carrying Net carrying amount amount ------------- ------------------- ------------- ------------------- Other indefinite-lived intangible assets .. $9.9 $11.1 ============= =================== The amortization expense for intangible assets with finite useful lives was $0.3 million, $0.8 million and $2.3 million for 2002, 2001 and 2000, respectively. At December 31, 2002, the estimated amortization expense for the next five years is as follows (in millions): Estimated amortization expense -------------------- -------------------- 2003.......................... $0.2 2004........................... 0.2 2005........................... 0.2 2006........................... 0.2 2007........................... 0.2 The changes in the carrying amount of goodwill reported in our operating segments were as follows (in millions):
U.S. Asset Life and Management and Health Mortgage Accumulation Insurance Banking Consolidated ----------------- -------------- -------------- --------------- ----------------- -------------- -------------- --------------- Balance at January 1, 2001 ............... $11.8 $50.2 $9.2 $ 71.2 Goodwill from acquisitions................ 3.7 4.2 - 7.9 Reclassification to other intangibles..... - (0.8) - (0.8) Amortization expense..................... (3.0) (4.2) (0.8) (8.0) ----------------- -------------- -------------- --------------- ----------------- -------------- -------------- --------------- Balance at December 31, 2001............. 12.5 49.4 8.4 70.3 Goodwill from acquisitions................ 10.7 - - 10.7 Goodwill disposed of during the period.... - (0.7) - (0.7) Cumulative effect of accounting change - (4.6) - (4.6) ----------------- -------------- -------------- --------------- ----------------- -------------- -------------- --------------- Balance at December 31, 2002.............. $23.2 $44.1 $8.4 $ 75.7 ================= ============== ============== ===============
4. Other Divestitures In September 2000, we sold a portion of our equity ownership position in Coventry Health Care, Inc., which reduced our ownership to approximately 25% and resulted in a realized capital gain of $13.9 million, net of income tax. The investment in Coventry Health Care, Inc. was $146.0 million at December 31, 2001. On February 1, 2002, we sold our remaining stake of 15.1 million shares in Coventry Health Care, Inc. common stock and a warrant, exercisable for 3.1 million shares of Coventry Health Care, Inc. common stock. Total proceeds from the completion of this transaction were $325.4 million, which resulted in a realized capital gain of $114.5 million, net of income tax. On April 1, 2001, we paid a dividend of $176.2 million to our parent, PFSI, consisting of the outstanding capital stock of Principal International, Inc. and Principal International, Inc.'s subsidiaries. On August 24, 2000, we paid a dividend of $171.3 million to our parent, PFSI, consisting of the outstanding capital stock of Principal International de Chile, S.A. and Principal Compania de Seguros de Vida Chile, S.A. 5. 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, 2002 and 2001, are summarized as follows (in millions):
Gross Gross unrealized unrealized Cost gains losses Fair value ------------ -------------- ---------------- ---------------- December 31, 2002 Fixed maturities: U.S. government and agencies..... $ 478.1 $ 19.0 $ - $ 497.1 Foreign governments.............. 329.9 53.7 3.1 380.5 States and political subdivisions 384.2 32.9 5.9 411.2 Corporate - public............... 15,986.6 1,081.3 281.6 16,786.3 Corporate - private.............. 8,439.9 521.0 186.0 8,774.9 Mortgage-backed and other asset-backed securities........ 5,497.7 419.4 14.5 5,902.6 ------------ -------------- ---------------- -------------- ------------ -------------- ---------------- -------------- Total fixed maturities............. $ 31,116.4 $ 2,127.3 $ 491.1 $32,752.6 ============ ============== ================ ============== ============ ============== ================ ============== Total equity securities............ $ 349.8 $ 2.5 $ 4.2 $ 348.1 ============ ============== ================ ============== ============ ============== ================ ============== December 31, 2001 Fixed maturities: U.S. government and agencies..... $ 15.1 $ 0.1 $ 0.1 $ 15.1 Foreign governments.............. 555.5 49.3 1.3 603.5 States and political subdivisions 302.1 20.2 4.7 317.6 Corporate - public............... 12,695.2 504.0 160.5 13,038.7 Corporate - private.............. 8,967.0 325.0 123.5 9,168.5 Mortgage-backed and other asset-backed securities........ 5,642.5 247.6 26.1 5,864.0 ------------ -------------- ---------------- -------------- Total fixed maturities............. $ 28,177.4 $ 1,146.2 $ 316.2 $29,007.4 ============ ============== ================ ============== Total equity securities............ $ 864.2 $ 15.2 $ 77.1 $ 802.3 ============ ============== ================ ==============
5. Investments (continued) The cost and fair value of fixed maturities available-for-sale at December 31, 2002, by expected maturity, were as follows (in millions): Cost Fair value ------------ -------------- ------------ -------------- Due in one year or less............................ $ 1,778.4 $ 1,796.5 Due after one year through five years.............. 9,394.9 9,866.1 Due after five years through ten years............. 7,516.5 8,016.0 Due after ten years................................ 6,928.9 7,171.4 ------------ -------------- ------------ -------------- 25,618.7 26,850.0 Mortgage-backed and other asset-backed securities.. 5,497.7 5,902.6 ------------ -------------- ------------ -------------- Total.............................................. $31,116.4 $32,752.6 ============ ============== 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 (in millions): For the year ended December 31, 2002 2001 2000 -------------------------------------- -------------------------------------- Fixed maturities, available-for-sale... $2,115.5 $2,120.8 $1,856.6 Fixed maturities, trading.............. 5.2 - - Equity securities, available-for-sale.. 27.4 27.6 72.5 Mortgage loans......................... 787.0 855.7 1,005.0 Real estate............................ 78.6 177.5 171.0 Policy loans........................... 57.6 57.5 55.1 Cash and cash equivalents.............. 23.3 58.3 69.9 Other.................................. 82.2 44.9 39.3 -------------------------------------- -------------------------------------- 3,176.8 3,342.3 3,269.4 Less investment expenses............... (107.0) (130.9) (152.8) -------------------------------------- -------------------------------------- Net investment income.................. $3,069.8 $3,211.4 $3,116.6 ====================================== 5. 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 (in millions): For the year ended December 31, 2002 2001 2000 ----------- ----------- --------- ----------- ----------- --------- Fixed maturities, available-for-sale: Gross gains................................. $ 141.1 $ 69.6 $ 28.9 Gross losses................................ (535.7) (380.4) (155.0) Fixed maturities, trading: Gross gains................................. 4.0 0.9 - Gross losses................................ (0.1) (0.1) - Equity securities, available-for-sale: Gross gains................................. 2.6 5.7 84.2 Gross losses................................ (32.5) (76.1) (3.9) Mortgage loans................................ (10.3) 10.6 8.6 Real estate................................... 9.3 (19.0) 82.3 Other, including unrealized derivative gains (losses)............................ 26.4 (103.9) 106.7 ----------- ----------- --------- ----------- ----------- --------- Net realized/unrealized capital gains (losses) $(395.2) $(492.7) $ 151.8 =========== =========== ========= Proceeds from sales of investments (excluding call and maturity proceeds) in fixed maturities were $7.9 billion, $5.4 billion and $5.5 billion in 2002, 2001 and 2000, respectively. Of the 2002, 2001 and 2000 proceeds, $4.3 billion, $1.6 billion and $2.6 billion, respectively, relate to sales of mortgage-backed securities. Our mortgage-backed portfolio is actively managed to reduce the risk of prepayment by purchasing securities that are trading close to par. Gross gains of $88.2 million, $22.5 million and $2.0 million and gross losses of $11.6 million, $5.0 million and $40.1 million in 2002, 2001 and 2000, respectively, were realized on sales of mortgage-backed securities. We recognize impairment losses for fixed maturities and equity securities when declines in value are other than temporary. Realized losses related to other than temporary impairments were $357.0 million, $227.4 million and $6.1 million in 2002, 2001 and 2000, respectively. 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 equity, reduced by adjustments to deferred policy acquisition costs and unearned revenue reserves that would have been required as a charge or credit to operations had such amounts been realized and a provision for deferred income taxes. 5. Investments (continued) The cumulative amount of net unrealized gains and losses on available-for-sale securities was as follows (in million):
As of December 31, 2002 2001 ---------------- ----------------- ---------------- ----------------- Net unrealized gains on fixed maturities, available-for-sale (1).... $1,633.4 $827.4 Net unrealized gains (losses) on equity securities, available-for-sale................................................ 0.2 (60.9) Adjustments for assumed changes in amortization patterns: Deferred policy acquisition costs................................. (226.1) (104.6) Unearned revenue reserves......................................... 13.5 7.2 Net unrealized losses on derivative instruments..................... (167.1) (89.5) Net unrealized loss on policyholder dividend obligation............. (33.6) - Provision for deferred income taxes................................. (428.1) (202.0) ---------------- ----------------- ---------------- ----------------- Net unrealized gains on available-for-sale securities............... $ 792.2 $377.4 ================ =================
(1) Excludes net unrealized gains (losses) on fixed maturities, available-for-sale included in fair value hedging relationships. Commercial Mortgage Loans Commercial mortgage loans represent a primary area of credit risk exposure. At December 31, 2002 and 2001, the commercial mortgage portfolio is diversified by geographic region and specific collateral property type as follows (dollars in millions): As of December 31, 2002 2001 ------------------------------------------------ Carrying Percent Carrying Percent amount of total amount of total ------------------------------------------------ ------------------------------------------------ Geographic distribution New England................. $ 387.6 4.1% $ 327.4 3.4% Middle Atlantic............. 1,617.0 17.3 1,606.3 16.5 East North Central.......... 913.7 9.8 930.1 9.5 West North Central.......... 311.5 3.3 397.8 4.1 South Atlantic.............. 2,180.8 23.3 2,403.0 24.7 East South Central.......... 345.5 3.7 338.5 3.5 West South Central.......... 641.8 6.9 769.0 7.9 Mountain.................... 711.8 7.6 637.7 6.5 Pacific..................... 2,339.7 24.9 2,421.3 24.8 Valuation allowance......... (83.6) (0.9) (90.7) (0.9) ------------------------------------------------ ------------------------------------------------ Total....................... $9,365.8 100.0% $9,740.4 100.0% ================================================ ------------------------------------------------ Property type distribution Office...................... $3,166.2 33.8% $3,252.5 33.4% Retail...................... 2,836.0 30.3 3,106.5 31.9 Industrial.................. 2,802.6 29.9 2,948.9 30.3 Apartments.................. 475.4 5.1 349.8 3.6 Hotel....................... 57.4 0.6 61.6 0.6 Mixed use/other............. 111.8 1.2 111.8 1.1 Valuation allowance......... (83.6) (0.9) (90.7) (0.9) ------------------------------------------------ ------------------------------------------------ Total....................... $9,365.8 100.0% $9,740.4 100.0% ================================================ 5. Investments (continued) Commercial and Residential 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 provision for loss 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 provision for losses is included in net realized/unrealized capital gains (losses) on our consolidated statements of operations. Mortgage loans deemed to be uncollectible are charged against the allowance for losses, and subsequent recoveries are credited to the allowance for losses. The allowance for losses is maintained at a level believed adequate by management to absorb estimated probable credit losses. Management's periodic evaluation of the adequacy of the allowance for losses is based on our past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower's ability to repay, the estimated value of the underlying collateral, composition of the loan portfolio, current economic conditions and other relevant factors. The evaluation is inherently subjective as it requires estimating the amounts and timing of future cash flows expected to be received on impaired loans that may be susceptible to significant change. Impaired mortgage loans along with the related allowance for losses were as follows (in millions): As of December 31, 2002 2001 ------------------ --------------- ------------------ Impaired loans with allowance for losses.. $123.0 $97.6 Allowance for losses...................... (26.9) (17.0) ------------------ --------------- ------------------ --------------- Net impaired loans........................ $ 96.1 $80.6 ================== =============== The average recorded investment in impaired mortgage loans and the interest income recognized on impaired mortgage loans were as follows (in millions): For the year ended December 31, 2002 2001 2000 ----------- -------- -------- Average recorded investment in impaired loans............................. $88.4 $74.4 $72.8 Interest income recognized on impaired loans... 8.6 12.5 12.6 5. Investments (continued) All interest income on impaired commercial mortgage loans was recognized on the cash basis of income recognition, whereas, interest income on impaired residential mortgage loans was recognized on the accrual basis. A summary of the changes in the commercial and residential mortgage loan allowance for losses is as follows (in millions): For the year ended December 31, 2002 2001 2000 --------------- -------------- -------- --------------- -------------- -------- Balance at beginning of year... $92.3 $110.4 $117.8 Provision for losses........... 35.1 11.2 5.4 Releases due to write-downs, sales and foreclosures....... (40.4) (29.3) (12.8) --------------- -------------- -------- --------------- -------------- -------- Balance at end of year......... $87.0 $ 92.3 $110.4 =============== ============== ======== Residential Mortgage Banking Activities We were servicing approximately 920,000 and 741,000 residential mortgage loans with aggregate principal balances of approximately $107,745.3 million and $80,530.5 million at December 31, 2002 and 2001, respectively. In connection with these mortgage servicing activities, we held funds in trust for others totaling approximately $646.7 million and $508.9 million at December 31, 2002 and 2001, respectively. As of December 31, 2002 and 2001, $273.9 million and $252.4 million, respectively, of the funds held in trust were held in our banking subsidiary. In connection with our loan administration activities, we advance payments of property taxes and insurance premiums and also advance principal and interest payments to investors in advance of collecting funds from specific mortgagors. In addition, we make certain payments of attorney fees and other costs related to loans in foreclosure. These amounts receivable are recorded, at cost, as other assets in our consolidated statements of financial position. Amounts advanced are considered in management's evaluation of the adequacy of the mortgage loan allowance for losses. In June 2000, our mortgage banking segment created a special purpose bankruptcy remote entity, Principal Residential Mortgage Capital Resources, LLC ("PRMCR"), to provide an off-balance sheet source of funding for our residential mortgage loan production. We sell eligible residential mortgage loans to PRMCR, where they are warehoused until sold to the final investor. We sold $47.1 billion and $38.0 billion in mortgage loans to PRMCR in 2002 and 2001, respectively. The maximum amount of mortgage loans, which can be warehoused in PRMCR, has increased from $1.0 billion at inception to $4.0 billion as of December 31, 2002. PRMCR held $4.0 billion and $3.0 billion in mortgage loans held-for-sale as of December 31, 2002 and 2001, respectively. The portfolio of loans held-for-sale by PRMCR must meet portfolio criteria, eligibility representations and portfolio aging limitations. Based on these eligibility representations, we are required to repurchase ineligible loans from PRMCR. During 2002, we repurchased $51.9 million of ineligible loans from PRMCR. 5. Investments (continued) PRMCR is capitalized by equity certificates owned by third party investors not affiliated with us or our affiliates, directors or officers and, thus, is not consolidated. The equity holders bear the risk of loss on defaulted mortgages. At December 31, 2002 and 2001, PRMCR had outstanding equity certificates of $193.0 million. PRMCR also issues short-term secured liquidity notes as well as medium term notes to provide funds to purchase mortgage loans from us. At December 31, 2002, PRMCR had outstanding secured liquidity notes of $2.2 billion, three-year fixed term notes of $800.0 million and five-year variable term notes of $800.0 million. At December 31, 2001, PRMCR had outstanding secured liquidity notes of $1.3 billion, three-year fixed term notes of $800.0 million and five-year variable term notes of $800.0 million. All borrowings are collateralized by the assets of PRMCR. We paid a commitment fee to PRMCR based on the overall warehouse limit. PRMCR used a portion of the fee to fund a cash collateral account maintained at PRMCR. These funds are available as additional collateral to cover credit related losses on defaulted mortgage loans. The balance in the account was $24.0 million at December 31, 2002 and 2001, and is reflected in other assets on our consolidated statements of financial position. We maintain a right to the servicing of the mortgage loans held by PRMCR and retain servicing upon the sale of the majority of the mortgage loans to the final investors. As the servicer, we receive a monthly servicing fee and may earn additional incentive servicing fees upon successful completion of our servicing responsibilities. We received $23.3 million and $12.6 million in servicing and incentive servicing fees from PRMCR in 2002 and 2001, respectively. Any unpaid and earned incentive servicing fees as well as any remaining amounts in the cash collateral account will be returned to us upon the termination of PRMCR. Additionally, as the servicer, we are required to advance to PRMCR those payments due from borrowers, but not received, as of specified cutoff dates. In addition, we perform certain secondary marketing, accounting and various administrative functions on behalf of PRMCR. In order to hedge interest rate risk and non-credit-related market value risk associated with its inventory of mortgage loans held-for-sale, PRMCR entered into swaps with counterparties not affiliated with us or PRMCR. The swap counterparties are required to maintain certain minimum ratings as approved by the rating agencies. Through separate swap agreements with the swap counterparties that mirror the original swaps with PRMCR, the interest rate risk and non-credit-related market value components are swapped back to us. Upon the effective date of FIN 46, as described in Note 1, we will be required to consolidate PRMCR unless its current structure is modified. If FIN 46 was effective as of December 31, 2002, the impact would be the consolidation of $4.1 billion in assets and liabilities. In October 2000, our mortgage banking segment created a wholly owned, unconsolidated qualifying special purpose entity, Principal Residential Mortgage Funding, LLC ("PRMF"), to provide an off-balance-sheet source of funding for up to $250.0 million of qualifying delinquent mortgage loans. The limit was increased to $550.0 million in December 2002. We sell qualifying delinquent FHA and VA mortgage loans to PRMF which then transfers the loans to Principal Residential Mortgage EBO Trust ("Trust"), an unaffiliated Delaware business trust. The Trust funds its acquisitions of the mortgage loans by selling participation certificates, representing an undivided interest in the Trust, to commercial paper conduit purchasers, who are not affiliated with us or any of our affiliates, directors or officers. At December 31, 2002 and 2001, the Trust held $405.1 million and $273.5 million in mortgage loans, respectively, and had outstanding participation certificates of $382.8 million and $256.9 million, respectively. 5. Investments (continued) Mortgage loans typically remain in the Trust until they are processed through the foreclosure claim process, are paid off or reinstated. Mortgage loans that reinstate are no longer eligible to remain in the Trust and are required to be removed at fair market value by us at the monthly settlement date following reinstatement. We are retained as the servicer of the mortgage loans and also perform accounting and various administrative functions on behalf of PRMF, in our capacity as the managing member of PRMF. As the servicer, we receive a servicing fee pursuant to the pooling and servicing agreement. We may also receive a successful servicing fee only after all other conditions in the monthly cash flow distribution are met. We received $23.4 million and $8.5 million in servicing and successful servicing fees from PRMF in 2002 and 2001, respectively. At December 31, 2002 and 2001, our residual interest in such cash flows was $32.7 million and $21.5 million, respectively, and was recorded in other assets on our consolidated statements of financial position. The value of the residual interest was based on the net present value of expected cash flows from PRMF, reduced by estimates of foreclosure losses associated with the related loans. We are required to advance funds for payment of interest on the participation certificates and other carrying costs, if sufficient cash is not available in the trust collection account to meet this obligation. Both the Trust and us are parties to a cost of funds hedge agreement. We pay the weighted-average cost of funds on the participation certificates plus fees and expenses and receive the weighted-average coupon of mortgage loans in the Trust less a spread. Based on PRMF's classification as a qualifying special purpose entity pursuant to the guidance of SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities - a Replacement of FASB Statement No. 125, PRMF will not be required to be consolidated under the provisions of FIN 46. Real Estate Depreciation expense on invested real estate was $25.5 million, $20.0 million and $29.5 million in 2002, 2001 and 2000, respectively. Accumulated depreciation was $151.1 million and $142.4 million as of December 31, 2002 and 2001, respectively. Other Investments Other investments include minority interests in unconsolidated entities and properties owned jointly with venture partners and operated by the partners. Total assets of the unconsolidated entities amounted to $2,615.1 million and $3,769.1 million at December 31, 2002 and 2001, respectively. Total revenues of the unconsolidated entities were $324.3 million, $2,650.2 million and $2,127.9 million in 2002, 2001 and 2000, respectively. During 2002, 2001 and 2000, we included $13.9 million, $46.1 million and $31.4 million, respectively, in net investment income representing our share of current year net income of the unconsolidated entities. At December 31, 2002, our net investment in unconsolidated entities was $(52.1) million, which primarily included our minority interests in domestic joint ventures and partnerships. At December 31, 2001, our net investment in unconsolidated entities was $114.6 million, which primarily included our ownership interest in Coventry Health Care, Inc. in addition to our minority interests in joint ventures and partnerships. On February 1, 2002, we sold our minority interest in Coventry Health Care, Inc. (See Note 4). 5. Investments (continued) 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 loans aggregating $525.1 million and $432.9 million at December 31, 2002 and 2001, respectively. With the adoption of SFAS 133 on January 1, 2001, derivatives are reflected on our consolidated statements of financial position and reported as a component of other investments. Certain seed money investments, which were reclassified from equity securities to other invested assets as of September 30, 2002, are carried at fair value with changes in fair value included in net income as net realized/unrealized capital gains (losses). 6. Securitization Transactions Commercial Mortgage Loans We sell commercial mortgage loans in securitization transactions and retain primary servicing responsibilities and other immaterial interests. We receive annual servicing fees approximating 0.01%, which approximates cost. 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 2002 and 2001, we recognized gains of $17.2 million and $18.3 million, respectively, on the securitization of commercial mortgage loans. Key economic assumptions used in measuring the retained interests at the date of securitization resulting from transactions completed included a cumulative default rate between 6% and 11% during 2002 and 4% and 8% during 2001. The assumed range of the loss severity, as a percentage of defaulted loans, was between 12% and 32% during 2002 and 12% and 25% during 2001. 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, 2002, the fair values of retained interests related to the securitizations of commercial mortgage loans were $229.6 million. 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, 2002, as a result of these assumptions were not significant. Residential Mortgage Loans We sell residential mortgage loans and retain servicing responsibilities pursuant to the terms of the applicable servicing agreements. These sales are generally transacted on a non-recourse basis. We receive annual servicing fees approximating 0.4% of the outstanding principal balances on the underlying loans. The value of the servicing rights is subject to prepayment and interest rate risks on the transferred mortgage loans. In 2002, 2001 and 2000, we recognized gains of $373.9 million, $237.2 million and $9.4 million, respectively, on the sales of residential mortgage loans. 6. Securitization Transactions (continued) The key economic assumptions used in determining the fair value of mortgage servicing rights at the date of loan sale for sales completed in 2002, 2001 and 2000 were as follows: 2002 2001 2000 --------------------------------------- --------------------------------------- Weighted-average life (years)...... 6.42 7.84 6.87 Weighted-average prepayment speed.. 11.91% 9.48% 11.81% Yield to maturity discount rate.... 6.75% 7.45% 10.74% Prepayment speed is the constant prepayment rate that results in the weighted-average life disclosed above. At December 31, 2002, key economic assumptions and the sensitivity of the current fair value of the mortgage servicing rights to immediate 10% and 20% adverse changes in those assumptions were as follows (dollars in millions): Fair value of mortgage servicing rights.................. $1,527.6 Expected weighted-average life (in years)................ 4.2 Prepayment speed *....................................... 19.80% Decrease in fair value of 10% adverse change............. $96.4 Decrease in fair value of 20% adverse change............. $182.0 Yield to maturity discount rate *........................ 5.53% Decrease in fair value of 10% adverse change............. $63.9 Decrease in fair value of 20% adverse change............. $127.7 * Represents the weighted-average prepayment speed and discount rate for the life of the mortgage servicing rights asset using our Option Adjusted Spread/Monte Carlo simulation of 160 interest rate paths. These sensitivities are hypothetical and should be used with caution. As the figures indicate, changes in fair value based on a 10% variation in assumptions generally cannot be extrapolated because the relationship of the change in the assumption to the change in fair value may not be linear. Also, in the above table, the effect of a variation in a particular assumption on the fair value of the servicing rights is calculated independently without changing any other assumption. In reality, changes in one factor may result in changes in another, which might magnify or counteract the sensitivities. For example, changes in prepayment speed estimates could result in changes in the discount rate. Securitization Transactions Cash Flows The table below summarizes cash flows for securitization transactions (in millions): For the year ended December 31, 2002 2001 2000 -------------- ------------- ------------ Proceeds from new securitizations... $48,749.4 $39,200.6 $9,927.6 Servicing fees received............. 443.1 307.8 237.5 Other cash flows received on retained interests................ 74.9 51.6 29.4 7. Derivatives Held or Issued for Purposes Other Than Trading Derivatives are generally held for purposes other than trading and are primarily used to hedge or reduce exposure to interest rate and foreign currency risks associated with assets held or expected to be purchased or sold and liabilities incurred or expected to be incurred. Additionally, derivatives are used to change the characteristics of our asset/liability mix consistent with our risk management activities. 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 $424.4 million at December 31, 2002, and $307.4 million at December 31, 2001. Subsequent to the application of such credit enhancements, the net exposure to credit risk was $285.8 million at December 31, 2002, and $307.4 million at December 31, 2001. 7. Derivatives Held or Issued for Purposes Other Than Trading (continued) The notional amounts and credit exposure of our derivative financial instruments by type were as follows (in millions): As of December 31, 2002 2001 -------------- ------------- Notional amounts of derivative instruments with regard to U.S. operations Foreign currency swaps........................ $ 3,217.0 $ 3,426.9 Interest rate floors.......................... 1,650.0 3,400.0 Interest rate swaps........................... 5,930.1 2,857.5 Mortgage-backed forwards and options.......... 17,494.9 9,250.7 Swaptions..................................... 9,772.5 3,570.0 Bond forwards................................. 363.7 357.4 Interest rate lock commitments................ 8,198.0 2,565.9 Call options.................................. 30.0 30.0 U.S. Treasury futures......................... 271.1 186.6 Treasury rate guarantees...................... 63.0 88.0 Warehouse SRP................................. 3,912.7 - Credit default swap long...................... 705.3 - U.S. LIBOR.................................... 2,225.0 - Other......................................... - 25.0 -------------- ------------- Total notional amounts at end of year......... $53,833.3 $25,758.0 ================ ============ ================ ============ Credit exposure of derivative instruments with regard to U.S. operations Foreign currency swaps........................ $ 195.0 $ 41.4 Interest rate floors.......................... 1.7 13.2 Interest rate swaps........................... 48.4 28.1 Mortgage-backed forwards and options.......... - 41.7 Swaptions..................................... 31.4 8.7 Call options.................................. 0.4 8.9 Credit default swap long...................... 8.9 - Other......................................... - 0.1 ---------------- ------------- ---------------- ------------- Total credit exposure at end of year.......... $ 285.8 $ 142.1 ================ ============= 7. Derivatives Held or Issued for Purposes Other Than Trading (continued) The net interest effect of interest rate and currency swap transactions is recorded as an adjustment to net investment income or interest expense, as appropriate, over the periods covered by the agreements. The cost of derivative instruments related to residential mortgage loan servicing rights is included in the basis of the derivatives. These derivatives are marked to market with the changes in market value reported in operating expenses on the consolidated statements of operations. The fair value of our derivative instruments classified as assets at December 31 2002 and 2001, was $1,129.9 million and $298.8 million, respectively. Of this amount, the fair value of derivatives related to investment hedges at December 31, 2002 and 2001, was $348.8 million and $116.5 million, respectively, and was reported with other invested assets on the consolidated statements of financial position. The fair value of derivatives related to residential mortgage loan servicing rights and residential mortgage loans at December 31, 2002 and 2001, was $781.1 million and $182.3 million, respectively, and was reported with other assets on the consolidated statements of financial position. The fair value of derivative instruments classified as liabilities at December 31, 2002 and 2001, was $454.4 million and $449.7 million, respectively, and was reported with other liabilities on the consolidated statements of financial position. 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 also 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. In 2002 and 2001, we recognized a pretax net gain of $50.5 million and $95.5 million, respectively, relating to our fair value hedges. These net gains consisted of the following components: For the year ended December 31, 2002 2001 ------------------ ============================================================== ============================================================== Net gain (loss) related to the ineffective portion of our fair $ (6.6) $151.7 value hedges of residential mortgage loan servicing rights.. ============================================================== Net gain (loss) related to the change in the value of the servicing hedges that were excluded from the assessment of hedge effectiveness......................................... 77.1 (43.6) Net loss related to the ineffective portion of our (20.0) (12.6) investment hedge............................................ ==============================================================------------------ ------------------ Net gain relating to fair value hedges........................ $ 50.5 $ 95.5 ================================================================================ The net gain (loss) on servicing hedges was reported with operating expenses and the net loss on our investment hedges was reported with net realized/unrealized capital gains (losses) on our consolidated statements of operations. Cash Flow Hedges We also utilize floating-to-fixed rate interest rate swaps to match cash flows. 7. Derivatives Held or Issued for Purposes Other Than Trading (continued) 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 2002 and 2001, we recognized a $74.5 million and $5.8 million, respectively, after-tax decrease in value 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 have reclassified $17.8 million net losses from accumulated comprehensive income into earnings during 2002 (none was transferred during 2001), and we expect to reclassify $54.3 million net losses in the next 12 months. In most cases, zero hedge ineffectiveness for cash flow hedges is assumed because the derivative instrument was constructed such that all terms of the derivative match the hedged risk in the hedged item. As a result, we have recognized an immaterial amount in earnings due to cash flow hedge ineffectiveness. Derivatives Not Designated as Hedging Instruments We attempt to match the timing of when interest rates are committed on insurance products, residential mortgage loans and other new investments. However, timing differences may occur and can expose us to fluctuating interest rates. To offset this risk, we use mortgage-backed forwards, over-the-counter options on mortgage-backed securities, U.S. Treasury futures contracts, options on Treasury futures, Treasury rate guarantees and interest rate floors to economically hedge anticipated transactions and to manage interest rate risk. Futures contracts are marked to market and settled daily, which minimizes the counterparty risk. Forward contracts are marked to market no less than quarterly. Our interest rate lock commitments on residential mortgage loans are also accounted for as derivatives. Occasionally, we will sell a callable investment-type contract and may use interest rate swaptions or similar instruments to transform the callable liability into a fixed term liability. In addition, we may sell an investment-type contract with attributes tied to market indices, 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. We have also entered into credit default swaps to exchange the credit default swap risk of one bond for that of another. Although the above-mentioned derivatives are effective hedges from an economic standpoint, they do not meet the requirements for hedge accounting treatment under SFAS 133. As such, periodic changes in the market value of these instruments flow directly into net income. In 2002 and 2001, gains of $19.1 million and $68.3 million, respectively, were recognized in income from market value changes of derivatives not receiving hedge accounting treatment. In 2002, we entered into an interest rate swap as part of a structuring process of an investment grade collateralized debt obligation ("CDO") issuance. Due to market conditions, the CDO was never issued. The pretax loss realized on the termination of the interest rate swap was $17.3 million. 8. 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. 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 our 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 Principal Mutual Holding Company's demutualization. A policyholder dividend obligation is required to be established for earnings in the Closed Block that are not available to shareholders. 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). 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 policyholder dividend obligation. This policyholder dividend obligation 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, 2002, cumulative actual earnings have been less than cumulative expected earnings. However, cumulative net unrealized gains were greater than expected resulting in the recognition of a policyholder dividend obligation of $33.6 million as of December 31, 2002. 8. Closed Block (continued) Closed Block liabilities and assets designated to the Closed Block were as follows: As of December 31, 2002 2001 -------- ----------- (in millions) Closed Block liabilities Future policy benefits and claims............. $5,320.0 $5,248.7 Other policyholder funds...................... 33.0 20.3 Policyholder dividends payable................ 374.3 376.6 Policyholder dividend obligation.............. 33.6 - Other liabilities............................. 20.1 11.8 ------------ ------------- ------------ ------------- Total Closed Block liabilities.............. 5,781.0 5,657.4 Assets designated to the Closed Block Fixed maturities, available-for-sale.......... 2,707.0 2,466.3 Equity securities, available-for-sale......... 23.4 23.4 Mortgage loans................................ 862.9 880.0 Real estate................................... 0.5 - Policy loans.................................. 776.1 792.5 Other investments............................. 19.8 6.9 ------------ ------------- ------------ ------------- Total investments........................... 4,389.7 4,169.1 Cash and cash equivalents (deficit)........... (5.4) (8.0) Accrued investment income..................... 77.5 77.2 Deferred tax asset............................ 68.5 80.8 Premiums due and other receivables............ 29.5 33.3 ------------ ------------- ------------ ------------- Total assets designated to the Closed Block. 4,559.8 4,352.4 ------------ ------------- ------------ ------------- Excess of Closed Block liabilities over assets designated to the Closed Block.............. 1,221.2 1,305.0 Amounts included in other comprehensive income........................ 77.8 43.6 ------------ ------------- ------------ ------------- Maximum future earnings to be recognized from Closed Block assets and liabilities......... $1,299.0 $1,348.6 ============ ============= 8. Closed Block (continued) Closed Block revenues and expenses were as follows: For the year ended December 31, 2002 2001 2000 ----------- ------------ ------------- (in millions) Revenues Premiums and other considerations....... $710.0 $ 742.1 $ 752.4 Net investment income................... 309.9 311.8 289.9 Net realized/unrealized capital losses.. (40.8) (19.7) (4.9) ----------- ------------ ------------- ----------- ------------ ------------- Total revenues........................ 979.1 1,034.2 1,037.4 Expenses Benefits, claims and settlement expenses.............................. 583.3 614.4 601.2 Dividends to policyholders.............. 305.2 305.8 307.7 Operating expenses...................... 12.3 12.7 13.6 ----------- ------------ ------------- ----------- ------------ ------------- Total expenses........................ 900.8 932.9 922.5 ----------- ------------ ------------- ----------- ------------ ------------- Closed Block revenue, net of Closed Block expenses, before income taxes... 78.3 101.3 114.9 Income taxes............................ 25.2 33.5 38.4 ----------- ------------ ------------- ----------- ------------ ------------- Closed Block revenue, net of Closed 53.1 67.8 76.5 Block expenses and income taxes....... Funding adjustment charges.............. (3.5) (7.6) (12.0) ----------- ------------ ------------- ----------- ------------ ------------- Closed Block revenue, net of Closed $ 49.6 $ 60.2 $ 64.5 Block expenses, income tax and funding adjustment charges.................... =========== ============ ========== The change in maximum future earnings of the Closed Block was as follows: As of December 31, 2002 2001 ----------------------- ------------------ (in millions) Beginning of year................. $1,348.6 $1,408.8 End of year....................... 1,299.0 1,348.6 ----------------------- ------------------ ----------------------- ------------------ Change in maximum future earnings. $ (49.6) $ (60.2) ======================= ================== 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. 9. Deferred Policy Acquisition Costs Policy acquisition costs deferred and amortized in 2002, 2001 and 2000 were as follows (in millions): As of December 31, 2002 2001 2000 ---------- ----------- ------------ ---------- ----------- ------------ Balance at beginning of year........... $1,322.3 $1,333.3 $1,430.9 Cost deferred during the year.......... 314.8 249.0 263.9 Amortized to expense during the year... (141.1) (198.5) (239.2) Effect of unrealized gains............. (121.6) (61.5) (122.3) ---------- ----------- ------------ ---------- ----------- ------------ Balance at end of year................. $1,374.4 $1,322.3 $1,333.3 ========== =========== ============ 10. Insurance Liabilities Contractholder Funds Major components of contractholder funds in the consolidated statements of financial position are summarized as follows (in millions): As of December 31, 2002 2001 ------------------------ ------------------------ Liabilities for investment-type contracts: Guaranteed investment contracts....................... $13,894.4 $14,123.5 U.S. funding agreements............................... 107.8 307.1 International funding agreements backing medium-term notes............................................... 3,583.5 3,298.4 International funding agreements...................... 2,555.0 723.9 Other investment-type contracts....................... 1,775.3 2,272.1 ------------------------ Total liabilities for investment-type contracts......... 21,916.0 20,725.0 Liabilities for individual annuities.................... 2,900.4 2,557.6 Universal life and other reserves....................... 1,480.9 1,382.0 ------------------------ Total contractholder funds.............................. $26,297.3 $24,664.6 ======================== Our guaranteed investment contracts and funding agreements contain provisions limiting early surrenders, including penalties for early surrenders and minimum notice requirements. Put provisions give customers the option to terminate a contract prior to maturity, provided they give a minimum notice period. Funding agreements are issued to nonqualified institutional investors both in domestic and international markets. We have a $4.0 billion international program, under which a consolidated offshore special purpose entity was created to issue nonrecourse medium-term notes. Under the program, the proceeds of each note series issuance are used to purchase a funding agreement from us, which is used to secure that particular series of notes. The payment terms of any particular series of notes match the payment terms of the funding agreement that secures that series. Claims for principal and interest under those international funding agreements are afforded equal priority to claims of life insurance and annuity policyholders under insolvency provisions of Iowa Insurance Laws and, accordingly, are reported as contractholder funds 10. Insurance Liabilities (continued) liabilities in our consolidated statements of financial position. In general, the medium-term note funding agreements do not give the contractholder the right to terminate prior to contractually stated maturity dates, absent the existence of certain circumstances which are largely within our control. As of December 31, 2002, the contractual maturities were 2003 - $573.3 million; 2004 - $562.8 million; 2005 - $795.1 million; 2006 - $107.7 million; 2007 - $25.3 million and thereafter - $1,519.3 million. In February 2001, we agreed to issue up to $3.0 billion of funding agreements under another program to support the prospective issuance by an unaffiliated entity of medium-term notes in both domestic and international markets. Subsequently in April 2002, we agreed to an additional issuance of up to $1.0 billion to the same program bringing the total program authorized amount to $4.0 billion. The unaffiliated entity is an unconsolidated qualifying special purpose entity. The funding agreements issued to the unaffiliated entity are reported as contractholder funds liabilities in our consolidated statements of financial position. As of December 31, 2002, $2,555.0 million have been issued under this program. 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 (in millions): For the year ended December 31, 2002 2001 2000 --------------- --------------- ------------ --------------- --------------- ------------ Balance at beginning of year... $ 714.8 $ 705.0 $ 721.7 Incurred: Current year................. 1,588.3 1,597.1 1,788.1 Prior years.................. 0.6 (17.5) (17.8) --------------- --------------- ------------ --------------- --------------- ------------ Total incurred................. 1,588.9 1,579.6 1,770.3 Payments: Current year................. 1,333.2 1,283.2 1,447.3 Prior years.................. 271.2 286.6 339.7 --------------- --------------- ------------ --------------- --------------- ------------ Total payments................. 1,604.4 1,569.8 1,787.0 Balance at end of year: Current year................. 255.1 313.9 340.8 Prior years.................. 444.2 400.9 364.2 --------------- --------------- ------------ --------------- --------------- ------------ Total balance at end of year... $ 699.3 $ 714.8 $ 705.0 =============== =============== ============ The activity summary in the liability for unpaid accident and health claims shows an increase (decrease) of $0.6 million, $(17.5) million and $(17.8) million for the year ended December 31, 2002, 2001 and 2000, respectively, relating to prior years. Such liability adjustments, which affected current operations during 2002, 2001 and 2000, respectively, resulted from developed claims for prior years being different than were anticipated when the liabilities for unpaid accident and health claims were originally estimated. These trends have been considered in establishing the current year liability for unpaid accident and health claims. 11. Debt Short-Term Debt Short-term debt consists primarily of a payable to PFSI of $875.3 million and $1,087.8 million as of December 31, 2002 and 2001, respectively. Interest paid on intercompany debt was $19.9 million and $39.7 million during 2002 and 2001, respectively. Short-term debt also consists of outstanding balances on revolving credit facilities with various financial institutions. At December 31, 2002, we, including certain subsidiaries, had credit facilities with various financial institutions in an aggregate amount of $800.0 million. These credit facilities include $700.0 million to finance a commercial mortgage-backed securities ("CMBS") pipeline, of which $284.2 million was outstanding at December 31, 2002, and $100.0 million in credit facilities to purchase certain CMBS securities for investment purposes, of which $84.4 million was outstanding at December 31, 2002. The weighted-average interest rates on short-term borrowings as of December 31, 2002 and 2001, were 1.8% and 2.3%, respectively. Long-Term Debt The components of long-term debt as of December 31, 2002 and 2001, were as follows (in millions): As of December 31, 2002 2001 ------------ --------------- ------------ --------------- 7.875% surplus notes payable, due 2024.... 199.0 199.0 8% surplus notes payable, due 2044........ 99.1 99.1 Nonrecourse mortgages and notes payable... 158.0 150.3 Other mortgages and notes payable......... 122.6 169.2 ------------ --------------- ------------ --------------- Total long-term debt...................... $578.7 $617.6 ============ =============== The amounts included above are net of the discount and direct costs associated with issuing these notes, which are being amortized to expense over their respective terms using the interest method. On March 10, 1994, we issued $300.0 million of surplus notes, including $200.0 million due March 1, 2024, at a 7.875% annual interest rate and the remaining $100.0 million 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. For each of the years ended December 31, 2002, 2001 and 2000, interest of $23.8 million was approved by the Commissioner, paid and charged to expense. Subject to Commissioner approval, the surplus notes due March 1, 2024, may be redeemed at our election on or after March 1, 2004, in whole or in part at a redemption price of approximately 103.6% of par. The approximate 3.6% premium is scheduled to gradually diminish over the following ten years. These surplus notes may then be redeemed on or after March 1, 2014, at a redemption price of 100% of the principal amount plus interest accrued to the date of redemption. 11. Debt (continued) In addition, 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 mortgages and other notes payable are financings for real estate developments. We, including certain subsidiaries, had $378.0 million in credit facilities with various financial institutions, in addition to obtaining loans with various lenders to finance these developments. Outstanding principal balances as of December 31, 2002, range from $0.2 million to $100.9 million per development with interest rates generally ranging from 6.0% to 8.6%. Outstanding principal balances as of December 31, 2001, range from $0.1 million to $101.9 million per development with interest rates generally ranging from 7.2% to 8.6%. At December 31, 2002, future annual maturities of the long-term debt were as follows (in millions): 2003............................................... $116.9 2004............................................... 7.5 2005............................................... 29.7 2006............................................... 20.9 2007............................................... 96.8 Thereafter......................................... 306.9 ------------------- ------------------- Total future maturities of the long-term debt...... $578.7 =================== Cash paid for interest for 2002, 2001 and 2000 was $42.1 million, $43.9 million and $42.0 million, respectively. These amounts include interest paid on taxes during these years. 12. Income Taxes Our income tax expense was as follows (in millions): For the year ended December 31, 2002 2001 2000 ---------- ---------- -------- ---------- ---------- -------- Current income taxes (benefit): Federal........................................ $ (52.8) $ 30.0 $195.2 State and foreign.............................. 49.4 30.0 12.2 Net realized/unrealized capital gains (losses). (78.1) (210.1) 29.6 ---------- ---------- -------- ---------- ---------- -------- Total current income taxes (benefit)............. (81.5) (150.1) 237.0 Deferred income taxes............................ 101.7 242.5 11.8 ---------- ---------- -------- ---------- ---------- -------- Total income taxes............................... $ 20.2 $ 92.4 $248.8 ========== ========== ======== 12. Income Taxes (continued) Our provision for income taxes may not have the customary relationship of taxes to income. Differences between the prevailing corporate income tax rate of 35% times the pretax income and our effective tax rate on pretax income are generally due to inherent differences between income for financial reporting purposes and income for tax purposes and the establishment of adequate provisions for any challenges of the tax filings and tax payments to the various taxing jurisdictions. A reconciliation between the corporate income tax rate and the effective tax rate is as follows: For the year ended December 31, 2002 2001 2000 ------------ ---------- --------- ------------ ---------- --------- Statutory corporate tax rate............ 35% 35% 35% Dividends received deduction............ (12) (13) (5) Interest exclusion from taxable income.. (2) (3) (1) Federal tax settlement for prior years.. (20) - - Other................................... 3 1 (1) ------------ ---------- --------- Effective tax rate...................... 4% 20% 28% ============ ========== ========= Significant components of our net deferred income taxes were as follows (in millions): As of December 31, 2002 2001 ----------- --------- ----------- --------- Deferred income tax assets (liabilities): Insurance liabilities................................. $ 263.1 $ 229.3 Deferred policy acquisition costs..................... (432.0) (373.1) Net unrealized gains on available-for-sale securities. (422.7) (202.0) Mortgage loan servicing rights........................ (429.6) (355.2) Other................................................. (83.5) (81.7) ----------- --------- ----------- --------- Total net deferred income tax liabilities............... $(1,104.7) $ =========== ========= The Internal Revenue Service (the "Service") has completed examination of the U.S. consolidated federal income tax returns for 1998 and prior years. The Service has also begun to examine returns for 1999 and 2000. We believe that there are adequate defenses against or sufficient provisions for any challenges. Undistributed earnings of certain foreign subsidiaries are considered indefinitely reinvested. A tax liability will be recognized when we expect distribution of earnings in the form of dividends, sale of the investment or otherwise. Net cash received for income taxes in 2002 was $306.8 million primarily due to refunds for 2001 capital losses and the favorable settlement of an Internal Revenue Service audit issue. Cash paid for income taxes in 2001 and 2000 was $69.3 million and $131.9 million, respectively. 13. Employee and Agent Benefits We have defined benefit pension plans covering substantially all of 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 all plans is to deposit the U.S. GAAP-related net periodic pension cost using long-term assumptions, unless the U.S. GAAP funded status is positive, in which case no deposit is made. For 2002, the plan assets include $79.4 million in PFG stock held under a separate account under an annuity contract. These assets were received in the qualified defined benefit plan as a result of Principal Mutual Holding Company's demutualization. For 2001, the value of the demutualization funds was $56.7 million, which was amortized over the remaining service period of plan participants. We also provide certain health care, life insurance and long-term care benefits for retired employees. Retiree health benefits are provided for employees hired prior to January 1, 2002, while retiree long-term care benefits are provided for employees whose retirement was effective prior to July 1, 2000. Covered employees are first eligible for these postretirement benefits when they reach age 57 and have completed ten years of service with us. 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. Our funding policy for all plans is to deposit the U.S. GAAP-related net periodic postretirement benefit cost using long-term assumptions unless the U.S. GAAP funded status is positive, in which case no deposit is made. For 2001, as a result of Principal Mutual Holding Company's demutualization, the postretirement benefit plans received $11.3 million in compensation, which was used to pay benefit claims and participant contributions, with the remainder to be amortized over the remaining service period of plan participants. 13. Employee and Agent Benefits (continued) The plans' combined funded status, reconciled to amounts recognized in the consolidated statements of financial position and consolidated statements of operations, was as follows (dollars in millions):
Pension benefits Other postretirement benefits -------------------------------------------------------------- -------------------------------------------------------------- As of December 31, As of December 31, 2002 2001 2002 2001 --------------- ---------------------------------------------- Change in benefit obligation Benefit obligation at beginning of year.. $ (856.0) $ (797.3) $ (231.1) $ (221.8) Service cost............................. (36.5) (31.2) (9.4) (8.3) Interest cost............................ (63.0) (59.3) (17.8) (15.6) Actuarial loss........................... (124.4) (42.0) (36.6) (25.7) Participant contributions................ - - (1.5) (1.3) Benefits paid............................ 33.5 31.7 9.0 10.9 Other.................................... - 42.1 7.2 30.7 --------------- ---------------------------------------------- Benefit obligation at end of year........ $(1,046.4) $ (856.0) $ (280.2) $ (231.1) =============== ============================================== Change in plan assets Fair value of plan assets at beginning of year................................ $ 952.5 $1,115.4 $ 362.3 $ 359.8 Actual return (loss) on plan assets...... (32.2) (15.7) (2.2) 5.6 Employer contribution.................... 6.5 9.0 1.3 1.4 Participant contributions................ - - 1.5 1.3 Benefits paid............................ (33.5) (31.7) (8.9) (5.7) Other.................................... - (124.5) - - --------------- ---------------------------------------------- Fair value of plan assets at end of year. $ 893.3 $ 952.5 $ 354.0 $ 362.4 =============== ============================================== Funded (underfunded) status.............. $ (153.1) $ 96.5 $ 73.8 $ 131.3 Unrecognized net actuarial (gain) loss... 183.7 (65.3) 70.7 (0.6) Unrecognized prior service cost (benefit) 5.9 7.6 (32.6) (28.2) Unamortized transition asset............. (0.5) (2.7) - - --------------- ---------------------------------------------- --------------- ---------------------------------------------- Other assets - prepaid benefit cost...... $ 36.0 $ 36.1 $ 111.9 $ 102.5 =============== ============================================== =============== ============================================== Weighted-average assumptions as of December 31 Discount rate............................ 6.50% 7.50% 6.50% 7.50%
13. Employee and Agent Benefits (continued)
Pension benefits Other postretirement benefits ------------------------------------------------------------------------------- ------------------------------------------------------------------------------- For the year ended December 31, For the year ended December 31, 2002 2001 2000 2002 2001 2000 ----------------------------------------- ------------------------------------ Components of net periodic benefit cost Service cost............. $ 36.5 $ 31.2 $ 35.0 $ 9.4 $ 8.3 $ 10.4 Interest cost............ 63.0 59.3 57.5 17.8 15.6 19.0 Expected return on plan assets................. (84.6) (99.2) (81.3) (32.8) (32.3) (25.1) Amortization of prior service cost (benefit).............. 1.7 1.7 1.7 (2.7) (2.6) - Amortization of transition (asset) obligation............. (2.2) (11.5) (11.5) - 0.3 2.3 Recognized net actuarial (gain) loss............ (7.9) (14.1) (12.5) 0.2 (1.3) (1.1) ----------------------------------------- ------------------------------------ ----------------------------------------- ------------------------------------ Net periodic benefit $ 6.5 $(32.6) $(11.1) $ (8.1) $(12.0) $ 5.5 cost (income).......... ========================================= ====================================
For 2002, the higher benefits and compensation limits of the Economic Growth and Tax Relief Reconciliation Act of 2001 were recognized in the defined benefit plans. In 2001, we reclassified assets supporting nonqualified pension plan liabilities through a reduction in contractholder funds and an increase in invested assets. The pension plans' 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 No. 87, Employers' Accounting for Pensions ("SFAS 87"), is used. The projected benefit obligation for the pension plans with projected benefit obligations in excess of plan assets was $180.6 million and $147.8 million as of December 31, 2002 and 2001, respectively. The accumulated benefit obligation for the pension plans with accumulated benefit obligations in excess of plan assets was $125.1 million and $115.9 million as of December 31, 2002 and 2001, respectively. These obligations relate to the nonqualified pension plan liabilities. The nonqualified plans have assets that are housed in trusts that fail to meet the requirements to be included in plan assets under SFAS 87. The prepaid benefit costs and accrued benefit costs are $175.1 million and $(139.1) million, respectively, as of December 31, 2002, and $165.0 million and $(128.9) million, respectively, as of December 31, 2001. Effective for 2003, we amended the method for determining postretirement retiree health plan contributions. As a result of this change, the accumulated postretirement obligation decreased by $7.2 million. As part of the substantive plan, the retiree health contributions are assumed to be adjusted in the future as claim levels change. The accumulated postretirement benefit obligation and fair value of plan assets for the postretirement plans with accumulated postretirement benefit obligations in excess of plan assets were $90.2 million and $80.0 million, respectively, as of December 31, 2002, and $2.3 million and $1.1 million, respectively, as of December 31, 2001. The prepaid benefit costs and accrued benefit costs are $112.5 million and $(0.7) million, respectively, as of December 31, 2002, and $103.2 million and $(0.7) million, respectively, as of December 31, 2001. 13. Employee and Agent Benefits (continued) For 2002 and 2001, the expected long-term rates of return on plan assets for pension benefits were 8.5% and 9.0%, respectively, on a pretax basis. The assumed rate of increase in future compensation levels was 5.0% for both 2002 and 2001. For 2002 and 2001, the expected long-term rates of return on plan assets for other postretirement benefits varied by benefit type, employee group and tax status of the trust. For 2002, the rates ranged from 7.25% to 8.25%. For 2001, the rates ranged from 7.8% to 9.3% on a pretax basis. The assumed health care cost trend rate used in measuring the accumulated postretirement benefit obligations starts at 15% in 2002 and declines to an ultimate rate of 5% in 2009. Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans. A one-percentage-point change in assumed health care cost trend rates would have the following effects (in millions): 1-percentage-point 1-percentage-point increase decrease ------------------- ------------------ Effect on total of service and interest cost components....... $ 8.4 $ (6.6) Effect on accumulated postretirement benefit obligation....... 61.8 (49.4) In addition, we have defined contribution plans that are generally available to all employees and agents who are age 21 or older. Eligible participants may contribute up to 20% of their compensation. We match the participant's contribution at a 50% contribution rate up to a maximum contribution of 3% of the participant's compensation. The defined contribution plan allows employees to choose among various investment options, including PFG common stock. Effective September 1, 2002, the employer stock fund was converted to an employee stock ownership plan. We contributed $18.9 million in 2002, $17.9 million in 2001 and $16.0 million in 2000 to these defined contribution plans. As a result of Principal Mutual Holding Company's demutualization, the defined contribution plans received $19.7 million in compensation, which was allocated to participant accounts. 14. Commitments and Contingencies Litigation We are a plaintiff or defendant in actions arising out of our operations. We are, from time to time, also involved in various governmental and administrative proceedings. While the outcome of any pending or future litigation cannot be predicted, management does not believe that any pending litigation will have a material adverse effect on our business, financial condition or results of operations. However, no assurances can be given that such litigation would not materially and adversely affect our business, financial condition or results of operations. 14. Commitments and Contingencies (continued) 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 medical insurance, life insurance, annuities and residential mortgages. In addition, regulatory bodies, such as state insurance departments, the Securities and Exchange Commission, 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. Other companies in the life insurance industry have historically been subject to substantial litigation resulting from claims disputes and other matters. Most recently, such companies have faced extensive claims, including class-action lawsuits, alleging improper life insurance sales practices. Negotiated settlements of such class-action lawsuits have had a material adverse effect on the business, financial condition and results of operations of certain of these companies. We were a defendant in two class-action lawsuits which alleged improper sales practices. We have settled these two class-action lawsuits and have accrued a loss reserve for our best estimate based on information available. We believe this reserve is sufficient to cover our obligation under the settlements. A number of persons and entities who were eligible to be class members have excluded themselves from the class (or "opted out"), as the law permits them to do. We have been notified that some of those who opted out from the class filed lawsuits and made claims similar to those addressed by the settlement. Most of those lawsuits and claims have been resolved. We accrued a loss reserve for our best estimate of our potential exposure to the suits and claims. As uncertainties continue to exist in resolving this matter, it is reasonably possible that all the actual costs of the suits and claims could exceed our estimate. The range of any such costs cannot be presently estimated; however, we believe the additional costs will not have a material impact on our business, financial condition or results of operations. A lawsuit was filed on September 27, 2001, in the United States District Court for the Northern District of Illinois, seeking damages and other relief on behalf of a putative class of policyholders based on allegations that the plan of conversion of Principal Mutual Holding Company from a mutual insurance holding company into a stock company violates the United States Constitution. The action is captioned Esther L. Gayman v. Principal Mutual Holding Company, et al. On April 16, 2002, the Court granted our Motion to Dismiss and ordered the lawsuit be dismissed in its entirety. On April 17, 2002, a Judgment was entered to that effect. The Plaintiffs filed an appeal on May 15, 2002, with the 7th Circuit Court of Appeals. On November 22, 2002, the 7th Circuit Court of Appeals affirmed the District Court's decision. While we cannot predict the outcome of any pending or future litigation, examination or investigation, we do not believe any pending matter will have a material adverse effect on our business, financial condition or results of operations. 14. Commitments and Contingencies (continued) 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 from 2003 through 2015. The estimated maximum exposure under these agreements is approximately $165.0 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 statement of financial position. Should we be required to perform under these guarantees, we 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 available to us, minimizing the impact to our results of operations. We are also subject to various indemnification obligations issued in conjunction with certain transactions, primarily divestitures and the sale of residential mortgage loans and servicing rights by our mortgage banking segment, whose terms range in duration and often are not explicitly defined. Generally, a maximum obligation is not explicitly stated; 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, financial position or results of operations. Securities Held for Collateral We held $774.7 million in mortgage-backed securities in trust at December 31, 2002, to satisfy collateral requirements associated with our mortgage banking segment and derivatives credit support agreements. 15. Stockholder's Equity Treasury Stock As a result of the demutualization, our ultimate parent, PFG, issued 363.7 thousand shares of its common stock with a value of $6.7 million to rabbi trusts held by us for certain benefit plans. These shares were reported as treasury stock and additional paid-in capital in the consolidated statements of stockholder's equity at December 31, 2001. In February 2002, these shares were sold, which generated proceeds of $8.0 million, with a cost of $6.7 million. Other Comprehensive Income (Loss) Comprehensive income (loss) includes all changes in stockholder's equity during a period except those resulting from investments by our stockholder and distributions to our stockholder. 15. Stockholder's Equity (continued) The components of accumulated other comprehensive income (loss) were as follows (in millions):
Net unrealized Net unrealized gains (losses) losses on Foreign Accumulated on derivative currency other available-for-sale instruments translation comprehensive securities adjustment income (loss) ------------------------------------------------ ------------------ ------------------------------------------------ ------------------ Balances at January 1, 2000....... $ (98.6) $ (3.5) $ (60.0) $ (162.1) Net change in unrealized gains (losses) on fixed maturities, available-for-sale.............. 722.0 - - 722.0 Net change in unrealized gains (losses) on equity securities, available-for-sale.............. (268.6) - - (268.6) Adjustments for assumed changes in amortization pattern: Deferred policy acquisition costs....................... (122.7) - - (122.7) Unearned revenue reserves..... 15.2 - - 15.2 Net change in unrealized gains (losses) on derivative instruments..................... - (1.3) - (1.3) Provision for deferred income tax benefit (expense)............... (121.9) 0.5 - (121.4) Change in net foreign currency translation adjustment.......... - - 27.0 27.0 ------------------------------------------------ ------------------ ------------------------------------------------ ------------------ Balances at December 31, 2000..... 125.4 (4.3) (33.0) 88.1
15. Stockholder's Equity (continued)
Net unrealized Net gains (losses) unrealized Foreign on losses on currency Accumulated other available-for-sale derivative translation comprehensive securities instruments adjustment income (loss) ----------------- ------------------------------ ------------------- ----------------- ------------------------------ ------------------- Balances at January 1, 2001....... $ 125.4 $ (4.3) $ (33.0) $ 88.1 Net change in unrealized gains (losses) on fixed maturities, available-for-sale.............. 510.7 - - 510.7 Net change in unrealized gains (losses) on equity securities, available-for-sale.............. (2.5) - - (2.5) Adjustments for assumed changes in amortization pattern: Deferred policy acquisition costs....................... (61.3) - - (61.3) Unearned revenue reserves..... 4.3 - - 4.3 Net change in unrealized gains (losses) on derivative instruments..................... - (46.0) - (46.0) Dividends to parent............... (1.3) - 11.1 9.8 Provision for deferred income tax benefit (expense)............... (160.5) 16.1 - (144.4) Change in net foreign currency translation adjustment.......... - - 23.9 23.9 Cumulative effect of accounting change, net of related income taxes........................... 20.9 (24.0) (11.1) (14.2) ----------------- ------------------------------ ------------------- ----------------- ------------------------------ ------------------- Balances at December 31, 2001..... 435.7 (58.2) (9.1) 368.4 Net change in unrealized gains (losses) on fixed maturities, available-for-sale.............. 806.3 - - 806.3 Net change in unrealized gains (losses) on equity securities, available-for-sale.............. 60.9 - - 60.9 Adjustments for assumed changes in amortization pattern: Deferred policy acquisition costs....................... (121.6) - - (121.6) Unearned revenue reserves..... 6.4 - - 6.4 Net change in unrealized gains (losses) on derivative instruments..................... - (77.6) - (77.6) Net change in unrealized gains (losses) on policyholder dividend obligation............. (33.6) - - (33.6) Provision for deferred income tax benefit (expense)............... (253.3) 27.2 - (226.1) Change in net foreign currency translation adjustment.......... - - 2.0 2.0 ----------------- ------------------------------ ------------------- Balances at December 31, 2002..... $ 900.8 $ (108.6) $ (7.1) $ 785.1 ================= ============================== ===================
15. Stockholder's Equity (continued) The following table sets forth the adjustments necessary to avoid duplication of items that are included as part of net income for a year that had been part of other comprehensive income in prior years (in millions):
As of December 31, 2002 2001 2000 --------------- -------------- --------------- --------------- -------------- --------------- Unrealized gains on available-for-sale $674.2 $491.2 securities arising during the year............. $252.6 Adjustment for realized losses on available-for-sale securities included in net income.......................................... (259.5) (234.8) (29.4) --------------- -------------- --------------- --------------- -------------- --------------- Unrealized gains on available-for-sale securities, as adjusted..................................... $414.7 $256.4 $223.2 =============== ============== ===============
The above table is presented net of income tax, related changes in the amortization patterns of deferred policy acquisition costs and unearned revenue reserves. Dividend Limitations Under Iowa law, we may pay stockholder dividends only from the earned surplus arising from our 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 2002 statutory results, we could pay approximately $746.6 million in stockholder dividends in 2003 without exceeding the statutory limitation. 16. 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. 16. Fair Value of Financial Instruments (continued) 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 mortgage loans are determined by discounting the expected total cash flows using market rates that are applicable to the yield, credit quality and maturity of each loan. Fair values of residential mortgage loans are determined by a pricing and servicing model using market rates that are applicable to the yield, rate structure, credit quality, size and maturity of each loan. The fair values for assets classified as policy loans, other investments excluding equity investments in subsidiaries, cash and cash equivalents and accrued investment income in the accompanying consolidated statements of financial position approximate their carrying amounts. Mortgage loan servicing rights represent the present value of estimated future net revenues from contractually specified servicing fees. The fair value was estimated with a valuation model using an internal prepayment model and discounted at a spread to London Interbank Offered Rates. 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. 16. Fair Value of Financial Instruments (continued) The carrying amounts and estimated fair values of our financial instruments were as follows (in millions):
As of December 31, 2002 2001 ---------------------------------- --------------------------------- ---------------- ----------------- ---------------- ---------------- Carrying amount Fair value Carrying amount Fair value ---------------- ----------------- ---------------- ---------------- ---------------- ----------------- ---------------- ---------------- Assets (liabilities) Fixed maturities, available-for- sale ........................... $32,752.6 $32,752.6 $29,007.4 $29,007.4 Fixed maturities, trading ........ 101.7 101.7 17.8 17.8 Equity securities, available-for- sale ........................... 348.1 348.1 802.3 802.3 Mortgage loans.................... 10,829.4 10,987.8 10,884.6 11,164.6 Policy loans...................... 818.5 818.5 831.9 831.9 Other investments................. 1,013.4 1,013.4 402.7 402.7 Cash and cash equivalents......... 1,168.5 1,168.5 1,077.7 1,077.7 Investment-type insurance contracts....................... (24,816.4) (25,660.9) (23,282.6) (23,642.4) Short-term debt................... (1,243.9) (1,243.9) (1,378.4) (1,378.4) Long-term debt.................... (578.7) (594.3) (617.6) (613.7)
17. 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 ("NAIC SAP") has been adopted as a component of prescribed or permitted practices by the State of Iowa. The Commissioner has the right to permit other specific practices that deviate from prescribed practices. In 2002, we received written approval from the State of Iowa to recognize as admitted assets those assets pledged by us on behalf of a wholly owned subsidiary instead of nonadmitting such assets. At December 31, 2002, our statutory surplus was $698.7 million greater than it would have been if NAIC SAP had been followed for this transaction. This permitted practice has no effect on our net income for the year then ended. 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. If the State of Iowa were to rescind its permission for the transaction described above, our regulatory total adjusted capital would not fall below the authorized control level RBC amount. However, if such permission were rescinded, it is likely we would restructure or discontinue our program to pledge assets on behalf of our wholly owned subsidiary. At December 31, 2002, we meet the RBC requirements. 17. Statutory Insurance Financial Information (continued) Statutory net income and statutory capital and surplus were as follows (in millions): As of or for the year ended December 31, 2002 2001 2000 ------------------ ----------------- --------------- ------------------ ----------------- --------------- Statutory net income... $ 402.1 $ 415.0 $ 912.6 Statutory surplus...... 3,339.2 3,483.8 3,356.4 18. Segment Information We provide financial products and services through the following segments: U.S. Asset Management and Accumulation, Life and Health Insurance and Mortgage Banking. In addition, there is a 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 and third-party clients. The Life and Health insurance segment provides individual life and disability insurance to the owners and employees of businesses and other individuals in the U.S. and provides group life and health insurance to businesses in the U.S. The Mortgage Banking segment originates and services residential mortgage loan products for customers primarily in the U.S. 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, income on capital not allocated to other segments, intersegment eliminations and non-recurring or other income or expenses not allocated to the segments based on review of the nature of such items. Prior to 2002, this segment also included international operations that offer retirement products and services, annuities, mutual funds and life insurance through subsidiaries in Argentina, Chile, Mexico and Hong Kong. During 2001 and 2000, we disposed of, distributed or dividended essentially all of our international operations to our parent, PFSI, described further in Note 4. 18. Segment Information (continued) The Corporate and Other segment includes an equity ownership interest in Coventry Health Care, Inc. The ownership interest was sold in February 2002, described further in Note 4. The Corporate and Other segment's equity in earnings of Coventry Health Care, Inc., which was included in net investment income, was $2.1 million, $20.2 million and $20.6 million for the year ended December 31, 2002, 2001 and 2000, respectively. We evaluate segment performance on segment operating earnings, which is determined by adjusting U.S. GAAP net income for net realized/unrealized capital gains and losses, as adjusted, and nonrecurring items 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 deferred policy acquisition costs, recognition of front-end fee revenues for sales charges on pension products and services, net realized capital gains credited to customers 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. 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, recurring operations of the business. However, segment operating earnings are not a substitute for net income determined in accordance with U.S. GAAP. In 2002, non-recurring items of $109.8 million, net of income taxes, included (1) the positive effect of the settlement of an IRS audit issue ($138.0 million) and (2) the negative effects of (a) an increase to a loss contingency reserve established for sales practice litigation ($21.6 million); (b) a cumulative effect of accounting change related to the implementation of SFAS 142 ($4.6 million); and (c) expenses related to the demutualization ($2.0 million). In 2001, non-recurring items of $31.1 million, net of income taxes, included (1) the negative effects of (a) expenses related to the demutualization ($18.6 million); (b) a cumulative effect of change in accounting principle related to the implementation of SFAS 133 ($10.7 million); and (c) an increase to a loss contingency reserve established for sales practices litigation ($5.9 million); and (2) the positive effect of investment income generated from the proceeds of the IPO ($4.1 million). In 2000, non-recurring items of $101.0 million, net of income taxes, included the negative effects of (a) a loss contingency reserve established for sales practices litigation ($93.8 million); and (b) expenses related to the development of a plan of demutualization ($7.2 million). The accounting policies of the segments are similar to those as described in Note 1, with the exception of capital allocation. We allocate capital to our segments based upon an internal capital model that allows management to more effectively manage our capital. 18. Segment Information (continued) The following tables summarize selected financial information by segment as of or for the years ended December 31, 2002, 2001 and 2000, and reconciles segment totals to those reported in the consolidated financial statements (in millions):
U.S. Asset Management Life and and Health Mortgage Corporate Accumulation Insurance Banking and Other Consolidated --------------------------- ----------- ---------------------------- --------------------------- ----------- ---------------------------- 2002 Revenues: Operating revenues............ $ 3,690.2 $ 3,946.8 $1,074.0 $ (3.8) $ 8,707.2 Net realized/unrealized capital gains (losses)...... (357.8) (93.6) - 56.2 (395.2) Recognition of front-end fee revenues.................... (14.0) - - - (14.0) Capital gains distributed as market value adjustment.... (31.8) - - - (31.8) --------------------------- ----------- ---------------------------- Revenues........................ $ 3,286.6 $ 3,853.2 $1,074.0 $ 52.4 $ 8,266.2 =========================== =========== ============================ =========================== =========== ============================ Net income: Operating earnings............ $ 368.5 $ 233.1 $ 93.3 $ 10.1 $ 705.0 Net realized/unrealized capital gains (losses), as adjusted.................... (250.5) (50.0) - 37.8 (262.7) Nonrecurring items............ - (4.6) - 114.4 109.8 --------------------------- ----------- ---------------------------- --------------------------- ----------- ---------------------------- Net income...................... $ 118.0 $ 178.5 $ 93.3 $ 162.3 $ 552.1 =========================== =========== ============================ =========================== =========== ============================ Assets.......................... $70,311.8 $11,356.3 $3,740.1 $1,687.4 $87,095.6 =========================== =========== ============================ =========================== =========== ============================ Other segment data: Revenues from external customers.................. $ 3,253.9 $ 3,858.6 $1,060.8 $ 92.9 $ 8,266.2 Intersegment revenues......... 32.7 (5.4) 13.2 (40.5) - Interest expense.............. 3.5 0.5 - (3.8) 0.2 Income tax expense (benefit).. (40.1) 95.3 72.5 (107.5) 20.2 Amortization of intangibles... 0.2 0.1 - - 0.3
18. Segment Information (continued)
U.S. Asset Management Life and and Health Mortgage Corporate Accumulation Insurance Banking and Other Consolidated --------------------------- ----------- ---------------------------- --------------------------- ----------- ---------------------------- 2001 Revenues: Operating revenues............. $ 3,712.0 $ 3,946.4 $ 714.4 $ 143.7 $ 8,516.5 Net realized/unrealized ) capital losses............... (248.6) (62.2 - (181.9) (492.7) Recognition of front-end fee revenues..................... 1.5 - - - 1.5 Capital gains distributed as market value adjustment (14.9) - - - (14.9) Investment income generated from IPO proceeds......... - - - 6.3 6.3 --------------- ----------- ---------- --------------------------- Revenues......................... $ 3,450.0 $ 3,884.2 $ 714.4 $ (31.9) $ 8,016.7 =============== =========== ========== =========================== =============== =========== ========== =========================== Net income: $ Operating earnings............. $ 349.0 $ 201.2 99.6 $ 56.9 $ 706.7 Net realized/unrealized capital ) losses, as adjusted.......... (164.7) (33.8 - (110.0) (308.5) Nonrecurring items............. (10.8) 0.1 - (20.4) (31.1) --------------- ----------- ---------- --------------------------- --------------- ----------- ---------- --------------------------- Net income (loss)................ $ 173.5 $ 167.5 $ 99.6 $ (73.5) $ 367.1 =============== =========== ========== =========================== =============== =========== ========== =========================== Assets........................... $68,507.0 $10,776.2 $2,718.8 $1,568.6 $83,570.6 =============== =========== ========== =========================== =============== =========== ========== =========================== Other segment data: Revenues from external customers................ $ 3,416.7 $ 3,888.3 $ 703.8 $ 7.9 $ 8,016.7 Intersegment revenues.......... 33.3 (4.1) 10.6 (39.8) - Interest expense............... 3.3 0.8 - 19.9 24.0 Income tax expense (benefit)... (8.9) 86.2 62.5 (47.4) 92.4 Amortization of goodwill and other intangibles........... 3.2 4.1 0.7 0.6 8.6
18. Segment Information (continued)
U.S. Asset Management Life and and Health Mortgage Corporate Accumulation Insurance Banking and Other Consolidated --------------------------- ----------- ---------------------------- --------------------------- ----------- ---------------------------- 2000 Revenues: Operating revenues.......... $ 3,431.6 $ 4,122.6 $ 359.4 $ 345.9 $ 8,259.5 Net realized/unrealized capital gains (losses).... (53.8) 70.8 - 134.8 151.8 Recognition of front-end fee revenues.................. 0.9 - - - 0.9 --------------- ----------- ------------- ------------ -------------- --------------- ----------- ------------- ------------ -------------- Revenues...................... $ 3,378.7 $ 4,193.4 $ 359.4 $ 480.7 $ 8,412.2 =============== =========== ============= ============ ============== =============== =========== ============= ============ ============== Net income: Operating earnings.......... $ 349.0 $ 162.3 $ 49.8 $ 80.6 $ 641.7 Net realized/unrealized capital gains (losses), as adjusted.................. (35.9) 47.3 - 89.5 100.9 Nonrecurring items.......... - - - (101.0) (101.0) --------------- ----------- ------------- ------------ -------------- --------------- ----------- ------------- ------------ -------------- Net income.................... $ $ $ 49.8 $ 69.1 $ 641.6 313.1 209.6 =============== =========== ============= ============ ============== =============== =========== ============= ============ ============== Assets........................ $65,756.3 $10,569.0 $1,556.3 $2,521.3 $80,402.9 =============== =========== ============= ============ ============== =============== =========== ============= ============ ============== Other segment data: Revenues from external customers................. $ 3,349.7 $ 4,196.9 $ 359.4 $ 506.2 $ 8,412.2 Intersegment revenues....... 29.0 (3.5) - (25.5) - Interest expense............ 7.0 2.5 - (12.2) (2.7) Income tax expense.......... 97.5 104.7 26.9 19.7 248.8 Amortization of goodwill and other intangibles......... 1.0 7.7 0.8 3.2 12.7
18. Segment Information (continued) The following table summarizes our operating revenues (in millions):
For the year ended December 31, 2002 2001 2000 ------------------ ---------------------- ------------------- U.S. Asset Management and Accumulation Full-service accumulation............. $1,076.5 $1,116.6 $1,210.4 Full-service payout................... 1,191.8 1,214.8 920.6 Investment only....................... 886.4 918.1 881.7 ------------------ ---------------------- ------------------- Total pension....................... 3,249.5 3,012.7 3,154.7 Individual annuities.................. 303.8 263.3 267.5 Other and eliminations................ 49.7 33.9 9.2 ------------------ ---------------------- ------------------- Total U.S. Asset Accumulation..... 3,546.7 3,289.4 3,508.2 Eliminations.......................... (33.4) (29.6) (32.0) Principal Global Investors............ 215.4 194.9 174.2 ------------------ ---------------------- ------------------- Total U.S. Asset Management and 3,690.2 3,712.0 3,431.6 Accumulation................... Life and Health Insurance Life insurance........................ 1,629.6 1,658.7 1,693.1 Health insurance...................... 2,058.3 2,061.3 2,221.4 Disability insurance.................. 258.9 226.4 208.1 ------------------ ---------------------- ------------------- Total Life and Health Insurance... 3,946.8 3,946.4 4,122.6 Mortgage Banking Mortgage loan production.............. 483.9 311.4 45.6 Mortgage loan servicing............... 590.1 403.0 313.8 ------------------ ---------------------- ------------------- Total Mortgage Banking............ 1,074.0 714.4 359.4 Corporate and Other................... (3.8) 143.7 345.9 ------------------ ---------------------- ------------------- Total operating revenues.............. $8,707.2 $8,516.5 $8,259.5 ================== ====================== =================== Total operating revenues.............. $8,707.2 $8,516.5 $8,259.5 Net realized/unrealized capital gains (losses) including recognition of front- end fees revenues and certain market value adjustments to fee revenues.. (441.0) (506.1) 152.7 Non-recurring......................... - 6.3 - ------------------ ---------------------- ------------------- Total GAAP revenues................... $8,266.2 $8,016.7 $8,412.2 ================== ====================== ===================
18. Segment Information (continued) Prior to 2002, we operated in the U.S. and in selected markets internationally (including Chile, Mexico, Argentina and Hong Kong). The following table summarizes selected financial information by geographic location as of or for the year ended December 31 (in millions): Revenues Long-lived Assets Net income assets (loss) ------------- ----------------------------- -------------- ------------- ----------------------------- -------------- 2002 U.S............ $8,266.2 $559.6 $87,095.6 $552.1 International.. - - - - ------------- ----------------------------- -------------- ------------- ----------------------------- -------------- Total.......... $8,266.2 $559.6 $87,095.6 $552.1 ============= ============================= ============== ============= ============================= ============== 2001 U.S............ $8,021.9 $563.9 $83,570.6 $388.7 International.. (5.2) - - (21.6) ------------- ----------------------------- -------------- ------------- ----------------------------- -------------- Total.......... $8,016.7 $563.9 $83,570.6 $367.1 ============= ============================= ============== ============= ============================= ============== 2000 U.S............ $8,175.3 $533.8 $79,719.1 $658.5 International.. 236.9 47.1 683.8 (16.9) ------------- ----------------------------- -------------- ------------- ----------------------------- -------------- Total.......... $8,412.2 $580.9 $80,402.9 $641.6 ============= ============================= ============== Long-lived assets include property and equipment and goodwill and other intangibles. Our operations are not materially dependent on one or a few customers, brokers or agents, and revenues, assets. Operating earnings were attributed to geographic location based on the country of domicile the sales originated. 19. Stock-Based Compensation Plans As of December 31, 2002, PFG sponsors the Stock Incentive Plan, Stock Purchase Plan and Long Term Performance Plan, which result in an expense for us. Under the terms of the 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 and stock appreciation rights. Options outstanding under the Stock Incentive Plan were granted at a price equal to the market value of PFG common stock on the date of grant, graded or cliff-vested over a three-year period for employees still employed or under contract, and expire ten years after the grant date. 19. Stock-Based Compensation Plans (continued) PFG also maintains the Long Term Performance Plan, which provides the opportunity for eligible executives to share in the success of PFG if specified minimum corporate performance objectives are achieved over a three-year period. This plan was amended in May 2001, to utilize stock as an option for payment starting with payments in 2003. For the years ended December 31, 2002 and 2001, we recorded compensation expense of $3.0 million and $11.1 million, respectively, related to the plan. Under PFG's Stock Purchase Plan, participating employees have the opportunity to purchase shares of PFG common stock on a quarterly basis. The maximum amount an employee may contribute during any plan year is the lesser of $10,000, or such greater or lesser amount as determined by the plan administrator, and 10% of the employee's salary. Employees may purchase shares of PFG common stock at a price equal to 85% of the share's fair market value as of the beginning or end of the quarter, whichever is lower. In 2001, compensation expense was recognized for stock option awards issued to career agents using the fair value method as prescribed in FASB Interpretation No. 44, Accounting for Certain Transactions Involving Stock Compensation - An Interpretation of APB Opinion No. 25. The compensation cost that has been charged against income for the Stock Incentive Plan and Stock Purchase Plan was $9.1 million and $0.01 million for 2002 and 2001, respectively. The weighted-average estimated fair value of stock options granted during 2002 and 2001 using the Black-Scholes option valuation model was $10.18 and $6.07 per share, respectively. The fair value of each option was estimated on the date of grant using the Black-Scholes option pricing model and the following assumptions: 2002 2001 -------------- -------------- Dividend yield............... .91 % 1.12 % ============== ============== Expected volatility.......... 32.5 % 37.5 % ============== ============== Risk-free interest rate...... 4.7 % 3.7 % ============== ============== Expected life (in years)..... 6 3 ============== ============== The fair value of the employees' purchase rights, which represent a price equal to 15% of the share's fair market value under the Stock Purchase Plan, was $1.6 million in 2001. 20. Quarterly Results of Operations (Unaudited) The following is a summary of unaudited quarterly results of operations for 2002 and 2001:
For the three months ended March 31 June 30 September 30 December 31 ----------------------------------- ----------------------------------- ----------------------------------------------------------------------- (in millions) 2002 Total revenues........................ $2,102.3 $2,169.9 $1,880.2 $2,113.8 Total expenses........................ 1,773.6 2,049.8 1,847.9 2,018.0 Income before cumulative effect of accounting change, net of related income taxes....................... 228.2 98.8 32.9 196.8 Net income............................ 223.6 98.8 32.9 196.8 2001 Total revenues........................ $2,115.5 $1,888.8 $2,148.3 $1,864.1 Total expenses........................ 1,953.0 1,742.1 1,999.5 1,851.9 Income before cumulative effect of accounting change, net of related income taxes....................... 131.4 115.7 113.8 16.9 Net income............................ 120.7 115.7 113.8 16.9
PART C OTHER INFORMATION Item 24. Financial Statements and Exhibits (a) Financial Statements included in the Registration Statement (1) Part A: Condensed Financial Information for the eight years ended December 31, 2002 and for the period beginning June 16, 1994 and ended December 31, 1994. (2) Part B: Principal Life Insurance Company Separate Account B: Report of Independent Auditors. Statement of Assets and Liabilities, December 31, 2002. Statement of Operations for the year ended December 31, 2002. Statements of Changes in Net Assets for the years ended December 31, 2002 and 2001. Notes to Financial Statements. Principal Life Insurance Company: Report of Independent Auditors. Consolidated Statements of Financial Position, December 31, 2002 and 2001. Consolidated Statements of Operations for the years ended December 31, 2002, 2001 and 2000. Consolidated Statements of Financial Position, December 31, 2002 and 2001. Consolidated Statements of Stockholder's Equity for the years ended December 31, 2002, 2001 and 2000. Consolidated Statements of Cash Flows for the years ended December 31, 2002, 2001 and 2000. Notes to Consolidated Financial Statements. (3) Part C Principal Life Insurance Company Report of Independent Auditors on Schedules* Schedule I - Summary of Investments - Other Than Investments in Related Parties As December 31, 2002* Schedule III - Supplementary Insurance Information As of December 31, 2002, 2001 and 2000 and for each of the years then ended* Schedule IV - Reinsurance As of December 31, 2002, 2001 and 2000 and for each of the years then ended* All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and therefore have been omitted. (b) Exhibits (1) Board Resolution of Registrant (Filed 5/5/99) (3a) Distribution Agreement (Filed 3/1/96) (3b) Selling Agreement (Filed 4/20/99) (4a) Form of Variable Annuity Contract (Filed 3/1/96) (4b) Form of Variable Annuity Contract (Filed 3/1/96) (5) Form of Variable Annuity Application (Filed 3/1/96) (6a) Articles of Incorporation of the Depositor (Filed 3/1/96) (6b) Bylaws of Depositor (Filed 3/1/96) (9) Opinion of Counsel (Filed 3/1/96) (10a) Consent of Ernst & Young LLP* (10b) Powers of Attorney (Filed 2/28/00) (11) Financial Statement Schedules* (13a) Total Return Calculation (Filed 12/16/97) (13b) Annualized Yield for Separate Account B (Filed 12/16/97) * Filed herein Item 25. Officers and Directors of the Depositor Principal Life Insurance Company is managed by a Board of Directors which is elected by its policyowners. The directors and executive officers of the Company, their positions with the Company, including Board Committee memberships, and their principal business address, are as follows: DIRECTORS: Principal Name, Positions and Offices Business Address BETSY J. BERNARD AT&T Consumer Director 295 North Maple Avenue Chair, Nominating Committee Room 4345L1 Basking Ridge, NJ 07920 JOCELYN CARTER-MILLER Office Depot, Inc. Director 2200 Old Germantown Road Member, Audit Committee Delray Beach, FL 33445 GARY E. COSTLEY Multifoods Director 110 Cheshire Lane, Suite 300 Member, Human Resources Minnetonka, MN 55305 Committee DAVID J. DRURY 4633 156th Street Director Waukee, IA 50263 Member, Executive Committee C. DANIEL GELATT, JR. NMT Corporation Director 2004 Kramer Street Member, Executive Committee La Crosse, WI 54603 Member, Human Resources Committee J. BARRY GRISWELL The Principal Financial Group Director, Des Moines, IA 50392 Chairman of the Board Chair, Executive Committee SANDRA L. HELTON Telephone and Data Systems, Inc. Director 30 North LaSalle Street, Suite 4000 Member, Audit Committee Chicago, IL 60602 CHARLES S. JOHNSON 4935 Mesa Capella Drive Director Las Vegas, NV 89113-1441 Member, Human Resources Committee WILLIAM T. KERR Meredith Corporation Director 1716 Locust St. Member, Executive Committee Des Moines, IA 50309-3023 and Chair, Human Resources Committee RICHARD L. KEYSER W.W. Grainger, Inc. Director 100 Grainger Parkway Member, Audit Committee Lake Forest, IL 60045-5201 VICTOR. H. LOEWENSTEIN Egon Zehnder International Director 10 Cours de Rive Member, Nominating CH-1204 Geneva, Switzerland Committee Federico F. Pena Vestar Capital Partners Member, Nominating 1225 17th Street, Ste 1660 Committee Denver, CO 80202 DONALD M. STEWART The Chicago Community Trust Director 222 North LaSalle Street, Ste 1400 Member, Nominating Chicago, IL 60601-1009 Committee ELIZABETH E. TALLETT Dioscor, Inc. Director 48 Federal Twist Road Chair, Audit Committee Stockton, NJ 08559 Member, Executive Committee EXECUTIVE OFFICERS (OTHER THAN DIRECTORS)
JOHN EDWARD ASCHENBRENNER Executive Vice President PAUL FRANCIS BOGNANNO Senior Vice President GARY MERLYN CAIN Senior Vice President MICHAEL THOMAS DALEY Executive Vice President CHARLES ROBERT DUNCAN Senior Vice President RALPH CRAIG EUCHER Senior Vice President DENNIS PAUL FRANCIS Senior Vice President MICHAEL HARRY GERSIE Executive Vice President and Chief Financial Officer THOMAS JOHN GRAF Senior Vice President ROBB BRYAN HILL Senior Vice President JOYCE NIXSON HOFFMAN Senior Vice President and Corporate Secretary DANIEL JOSEPH HOUSTON Senior Vice President ELLEN ZISLIN LAMALE Senior Vice President and Chief Actuary JULIA MARIE LAWLER Senior Vice President and Chief Investment Officer JAMES PATRICK MCCAUGHAN Executive Vice President MARY AGNES O'KEEFE Senior Vice President KAREN ELIZABETH SHAFF Senior Vice President and General Counsel ROBERT ALLEN SLEPICKA Senior Vice President NORMAN RAUL SORENSEN Senior Vice President CARL CHANSON WILLIAMS Senior Vice President and Chief Information Officer LARRY DONALD ZIMPLEMAN Executive Vice President
Item 26. Persons Controlled by or Under Common Control with Registrant Principal Financial Services, Inc. (an Iowa corporation) an intermediate holding company organized pursuant to Section 512A.14 of the Iowa Code. Subsidiaries wholly-owned by Principal Financial Services, Inc. a. Princor Financial Services Corporation (an Iowa Corporation) a registered broker-dealer. b. PFG DO Brasil LTDA (Brazil) a Brazilian holding company. c. Principal International, Inc. (an Iowa Corporation) a company engaged in international business development. d. Principal Life Insurance Company (an Iowa corporation) a stock life insurance company engaged in the business of insurance and retirement services. e. Principal International Holding Company, LLC f. Principal Financial Group (Mauritius) Ltd. a Mauritius holding company. g. ING/Principal Pensions Co., Ltd. (Japan) a Japan company who engages in the management, investment and administration of financial assets and any services incident thereto. h. Principal Financial Services (Australia), Inc. (an Iowa holding company) formed to facilitate the acquisition of the Australian business of BT Australia. i. Principal Capital Management (Singapore) Limited (a Singapore corporation) a company engaging in funds management. j. Principal Financial Services (NZ), Inc. (an Iowa holding company) formed to facilitate the acquisition of the New Zealand business of BT Australia. k. Principal Capital Management (Europe) Limited a United Kingdom company that engages in European representation and distributor of the Principal Investments Funds. l. Principal Capital Management (Ireland) Limited an Ireland company that engages in fund management. m. Principal International de Chile, S.A. (Chile) a holding company. n. Principal Financial Group Investments (Australia) Pty Limited an Australia holding company. Subsidiary wholly-owned by Princor Financial Services Corporation: a. Principal Management Corporation (an Iowa Corporation) a registered investment advisor. Subsidiary 42% owned by PFG DO Brasil LTDA a. Brasilprev Seguros E Previdencia S.A. (Brazil) a pension fund company. Subsidiaries wholly-owned by Principal International, Inc.: a. Zao Principal International (a Russia Corporation) inactive. b. Principal International Argentina, S.A. (an Argentina corporation) a holding company that owns Argentina corporations offering annuities, group and individual insurance policies. c. Principal Asset Management Company (Asia) Ltd. (Hong Kong) an asset management company. d. Principal International (Asia) Limited (Hong Kong) a corporation operating as a regional headquarters for Asia. e. Principal Trust Company (Asia) Limited (Hong Kong) (an Asia trust company). f. Principal Mexico Compania de Seguros, S.A. de C.V. (Mexico) a life insurance company. g. Principal Pensiones, S.A. de C.V. (Mexico) a pension company. h. Principal Afore, S.A. de C.V. (Mexico), a pension company. i. Principal Consulting (India) Private Limited (an India corporation) an India consulting company. Subsidiaries 88% owned by Principal International, Inc.: a. Principal Insurance Company (Hong Kong) Limited (a Hong Kong Corporation) a company that sells insurance and pension products. Subsidiaries wholly-owned by Principal International Argentina, S.A. (Argentina): a. Principal Retiro Compania de Seguros de Retiro, S.A. (Argentina) an annuity company. b. Principal Life Compania de Seguros, S.A. (Argentina) a life insurance company. Subsidiary wholly-owned by Principal International (Asia) Limited (Hong Kong): a. Principal Capital Management (Asia) Limited (Hong Kong) Asian representative and distributor for the Principal Investment Funds. Subsidiary wholly-owned by Principal Afore, S.A. de C.V. (Mexico): a. Siefore Principal, S.A. de C.V. (Mexico) an investment fund company. Subsidiaries organized and wholly-owned by Principal Life Insurance Company: a. InSource Group,LLC (Delaware) a limited liability company engaged in marketing products for companies of the Principal Financial Group, Inc. b. Principal Capital Management, LLC (a Delaware Corporation) a limited liability company that provides private mortgage, real estate & fixed-income securities services to institutional clients. c. Principal Development Investors, LLC (a Delaware Corporation) a limited liability company engaged in acquiring and improving real property through development and redevelopment. d. Principal Net Lease Investors, LLC (a Delaware Corporation) a limited liability company which operates as a buyer and seller of net leased investments. e. Principal Holding Company (an Iowa Corporation) a downstream holding company for Principal Life Insurance Company. f. Executive Benefit Services, Inc. (North Carolina) marketing, sales and administration of executive employee benefit services. Principal Life Insurance Company sponsored the organization of the following mutual funds, some of which it controls by virtue of owning voting securities Principal Balanced Fund, Inc.(a Maryland Corporation) 0.00% of shares outstanding owned by Principal Life Insurance Company (including subsidiaries and affiliates) on February 7, 2003. Principal Bond Fund, Inc.(a Maryland Corporation) 0.00% of shares outstanding owned by Principal Life Insurance Company (including subsidiaries and affiliates) on February 7, 2003. Principal Capital Value Fund, Inc. (a Maryland Corporation) 31.28% of outstanding shares owned by Principal Life Insurance Company (including subsidiaries and affiliates)on February 7, 2003. Principal Cash Management Fund, Inc. (a Maryland Corporation) 2.90% of outstanding shares owned by Principal Life Insurance Company (including subsidiaries and affiliates) on February 7, 2003. Principal Government Securities Income Fund, Inc. (a Maryland Corporation) 0.00% of shares outstanding owned by Principal Life Insurance Company (including subsidiaries and affiliates) on February 7, 2003. Principal Growth Fund, Inc. (a Maryland Corporation) 0.46% of outstanding shares owned by Principal Life Insurance Company (including subsidiaries and affiliates) on February 7, 2003. Principal International Emerging Markets Fund, Inc. (a Maryland Corporation) 29.25% of shares outstanding owned by Principal Life Insurance Company (including subsidiaries and affiliates) on February 7, 2003. Principal International Fund, Inc. (a Maryland Corporation) 24.55% of shares outstanding owned by Principal Life Insurance Company (including subsidiaries and affiliates) on February 7, 2003. Principal International SmallCap Fund, Inc. (a Maryland Corporation) 4.39% of shares outstanding owned by Principal Life Insurance Company (including subsidiaries and affiliates) on February 7, 2003. Principal Limited Term Bond Fund, Inc. (a Maryland Corporation) 2.93% of shares outstanding owned by Principal Life Insurance Company (including subsidiaries and affiliates) on February 7, 2003. Principal LargeCap Stock Index Fund, Inc. (a Maryland Corporation) 3.21% of shares outstanding owned by Principal Life Insurance Company (including subsidiaries and affiliates) on February 7, 2003. Principal MidCap Fund, Inc. (a Maryland Corporation) 0.00% of shares outstanding owned by Principal Life Insurance Company (including subsidiaries and affiliates) on February 7, 2003 Principal Partners Blue Chip Fund, Inc.(a Maryland Corporation) 0.00% of shares outstanding owned by Principal Life Insurance Company (including subsidiaries and affiliates) on February 7, 2003. Principal Partners Equity Growth Fund, Inc.(a Maryland Corporation) 0.00% of shares outstanding owned by Principal Life Insurance Company (including subsidiaries and affiliates) on February 7, 2003 Principal Partners LargeCap Blend Fund, Inc.(a Maryland Corporation) 13.58% of shares outstanding owned by Principal Life Insurance Company (including subsidiaries and affiliates) on February 7, 2003 Principal Partners LargeCap Value Fund, Inc.(a Maryland Corporation) 14.19% of shares outstanding owned by Principal Life Insurance Company (including subsidiaries and affiliates) on February 7, 2003 Principal Partners MidCap Growth Fund, Inc.(a Maryland Corporation) 8.20% of shares outstanding owned by Principal Life Insurance Company (including subsidiaries and affiliates) on February 7, 2003 Principal Partners SmallCap Growth Fund, Inc.(a Maryland Corporation) 27.61% of shares outstanding owned by Principal Life Insurance Company (including subsidiaries and affiliates) on February 7, 2003 Principal Real Estate Fund, Inc. (a Maryland Corporation) 25.75% of shares outstanding owned by Principal Life Insurance Company (including subsidiaries and affiliates) on February 7, 2003 Principal SmallCap Fund, Inc.(a Maryland Corporation) 0.00% of shares outstanding owned by Principal Life Insurance Company (including subsidiaries and affiliates) on February 7, 2003. Principal Investors Fund, Inc.(a Maryland Corporation), 17.93% of shares outstanding of the Balanced Fund, 0.33% of shares outstanding of the Bond & Mortgage Securitites Fund, 22.06% of shares outstanding of the Capital Preservation Fund, 0.56% of shares outstanding of the Governement Securities Fund, 25.97% of shares outstanding of the High Quality Intermediate-Term Bond Fund, 28.22% of shares outstanding of the High Quality Long-Term Bond Fund, 0.57% of shares outstanding of the High Quality Short-Term Bond Fund, 38.04% of shares outstanding of the International Emerging Markets Fund, 13.22% of shares outstanding of the International Fund I, 0.60% of shares outstanding of the International Fund II, 33.55% of shares outstanding of the International SmallCap Fund, 99.99% of shares outstanding of the LargeCap Blend Fund I, 28.93% of shares outstanding of the LargeCap Growth Fund, 1.76% of shares outstanding of the LargeCap S&P 500 Index Fund, 28.80% of shares outstanding of the LargeCap Value Fund, 0.23% of shares outstanding of the Principal LifeTime 2010 Fund, 0.17% of shares outstanding of the Principal LifeTime 2020 Fund, 0.18% of shares outstanding of the Principal LifeTime 2030 Fund, 0.49% of shares outstanding of the Principal LifeTime 2040 Fund, 1.26% of shares outstanding of the Principal LifeTime 2050 Fund, 0.54% of shares outstanding of the Principal LifeTime Strategic Income Fund, 20.47% of shares outstanding of the MidCap Blend Fund, 10.43% of shares outstanding of the MidCap Growth Fund, 19.57% of shares outstanding of the MidCap S&P 400 Index Fund, 0.55% of shares outstanding of the MidCap Value Fund, 0.20% of shares outstanding of the Money Market Fund, 1.01% of shares outstanding of the Partners LargeCap Blend Fund, 21.53% of shares outstanding of the Partners LargeCap Blend Fund I, 99.42% of shares outstanding of the Partners LargeCap Growth Fund, 0.42% of shares outstanding of the Partners LargeCap Growth Fund I, 26.27% of shares outstanding of the Partners LargeCap Growth Fund II, 0.44% of shares outstanding of the Partners LargeCap Value Fund, 22.90% of shares outstanding of the Partners MidCap Blend Fund, 17.76% of shares outstanding of the Partners MidCap Growth Fund, 8.86% of shares outstanding of the Partners MidCap Value Fund, 99.97% of shares outstanding of the Partners SmallCap Blend Fund, 1.75% of shares outstanding of the Partners SmallCap Growth Fund I, 0.29% of shares outstanding of the Partners SmallCap Growth Fund II, 2.18% of shares outstanding of the Partners SmallCap Value Fund, 99.99% of shares outstanding of the Partners SmallCap Value Fund I, 0.18% of shares outstanding of the Preferred Securities Fund, 7.80% of shares outstanding of the Real Estate Fund, 18.09% of shares outstanding of the SmallCap Blend Fund, 15.81% of shares outstanding of the SmallCap Growth Fund, 0.70% of shares outstanding of the SmallCap S&P 600 Index Fund, 12.24% of shares outstanding of the SmallCap Value Fund, were owned by Principal Life Insurance Company (including subsidiaries and affiliates) on February 7, 2003. Principal Tax-Exempt Bond Fund, Inc. (a Maryland Corporation) 0.00% of shares outstanding owned by Principal Life Insurance Company (including subsidiaries and affiliates) on February 7, 2003. Principal Utilities Fund, Inc. (a Maryland Corporation) 0.00% of shares outstanding owned by Principal Life Insurance Company (including subsidiaries and affiliates) on February 7, 2003. Principal Variable Contracts Fund, Inc. (a Maryland Corporation) 100% of shares outstanding of the following Accounts owned by Principal Life Insurance Company and its Separate Accounts on February 7, 2003: Asset Allocation, Balanced, Blue Chip, Bond, Capital Value, Equity Growth (f/k/a Aggressive Growth), Government Securities, Growth, High Yield, International, International Emerging Markets, International SmallCap, LargeCap Blend, LargeCap Growth, LargeCap Growth Equity, LargeCap Stock Index, LargeCap Value, MicroCap, MidCap, MidCap Growth, MidCap Growth Equity, MidCap Value, Money Market, Real Estate, SmallCap, SmallCap Growth, SmallCap Value, and Utilities. Subsidiaries wholly-owned by Principal Capital Management, LLC: a. Principal Enterprise Capital, LLC (a Delaware Corporation) a company engaged in portfolio management on behalf of institutional clients for structuring, underwriting and management of entity-level investments in real estate operating companies (REOCs). b. Principal Commercial Acceptance, LLC (a Delaware Corporation) a limited liability company that provides private market bridge financing and other secondary market opportunities. c. Principal Capital Real Estate Investors, LLC (a Delaware Corporation) a registered investment advisor. d. Principal Commercial Funding, LLC (a Delaware Corporation) a limited liability company engaged in the structuring, warehousing, securitization and sale of commercial mortgage-backed securities. e. Principal Capital Income Investors, LLC a Delaware limited liability company which provides investment and financial services. f. Principal Capital Futures Trading Advisor, LLC a Delaware funds management limited liability company. g. Invista Capital Management, LLC (an Delaware Corporation) a limited liability company which is a registered investment adviser. h. Spectrum Asset Management, Inc. (Connecticut) A corporation specializing in all aspects of the preferred market including portfolio management, risk management and trading. Subsidiary wholly-owned by Invista Capital Management, LLC: a. Principal Capital Trust. (a Delaware Corporation) a business trust and private investment company offering non-registered units, initially, to tax-exempt entities. Subsidiaries wholly-owned by Principal Holding Company: a. Principal Generation Plant, LLC an inactive Delaware limited liability company. b. Principal Bank (a Federal Corporation) a Federally chartered direct delivery savings bank. c. Patrician Associates, Inc. (a California Corporation) a real estate development company. d. Petula Associates, Ltd. (an Iowa Corporation) a real estate development company. e. Principal Development Associates, Inc. (a California Corporation) a real estate development company. f. Principal Spectrum Associates, Inc. (California) a corporation which engages in real estate joint venture transactions with developers. g. Principal FC, Ltd. (an Iowa Corporation) a limited purpose investment corporation. h. Equity FC, Ltd. (an Iowa Corporation) engaged in investment transactions, including limited partnerships and limited liability companies. i. Principal Delaware Name Holding Company, Inc.(Delaware) a corporation which is currently inactive. j. Principal Asset Markets, Inc. (an Iowa Corporation) a corporation which is currently inactive. k. Principal Residential Mortgage, Inc. (an Iowa Corporation) a full service mortgage banking company that makes and services a wide variety of loan types on a nationwide basis. l. Principal Portfolio Services, Inc. (an Iowa Corporation) a corporation which is currently inactive. m. HealthRisk Resource Group, Inc. (an Iowa Corporation) a general business corporation that engages in investment transactions, including limited partnerships and limited liability companies n. Preferred Product Network, Inc. (a Delaware corporation) an insurance broker. o. Principal Health Care, Inc. (an Iowa Corporation) a managed care company. p. Dental-Net, Inc. (an Arizona Corporation) a managed dental care services organization. HMO and dental group practice. q. Principal Financial Advisors, Inc. (an Iowa Corporation) a registered investment advisor. r. Delaware Charter Guarantee & Trust Company, d/b/a Trustar Retirement Services (a Delaware Corporation) a corporation that administers individual and group retirement plans for stock brokerage firm clients and mutual fund distributors. s. Professional Pensions, Inc. (a Connecticut Corporation) a corporation engaged in sales, marketing and administration of group insurance plans and third-party administrator for defined contribution plans. t. Principal Investors Corporation (a New Jersey Corporation) a corporation which is currently inactive. Subsidiary wholly-owned by Petula Associates, Ltd. a. Petula Prolix Development Company (Iowa) a general business corporation involved in joint real estate ventures. Subsidiary wholly-owned by Principal Residential Mortgage, Inc.: a. Principal Wholesale Mortgage, Inc. (an Iowa Corporation) a brokerage and servicer of residential mortgages. b. Principal Mortgage Reinsurance Company (a Vermont corporation) a mortgage reinsurance company. c. Principal Residential Mortgage Funding, LLC (Iowa) a full service mortgage banking company that makes and services a wide variety of loan types on a nationwide basis. Subsidiaries wholly-owned by Dental-Net, Inc. a. Employers Dental Services, Inc. (an Arizona corporation) a prepaid dental plan organization. Subsidiaries wholly-owned by Professional Pensions, Inc.: a. Benefit Fiduciary Corporation (a Rhode Island corporation) serves as a corporate trustee for retirement trusts. b. PPI Employee Benefits Corporation (a Connecticut corporation) a registered broker-dealer limited to the sale of open-end mutual funds and variable insurance products. c. Boston Insurance Trust, Inc. (a Massachusetts corporation) a corporation which serves as a trustee and administrator of insurance trusts and arrangements. Subsidiary wholly-owned by Executive Benefit Services, Inc.: a. Executive Broker Dealers Services, LLC Subsidiary wholly-owned by Principal Financial Group (Mauritius) Ltd. a. IDBI Principal Asset Management Company (India) a India asset management company. b. IDBI-Principal Trustee Company Limited (India) a trustee for mutual funds. Subsidiary wholly-owned by Principal Financial Services (Australia), Inc.: a. Principal Financial Group (Australia) Holdings Pty Ltd. an Australian holding company organized in connection with the contemplated acquisition of BT Australia Funds Management. Subsidiary wholly-owned by Principal Financial Group (Australia) Holdings Pty Ltd. a. BT Financial Group Pty Ltd. (Australia) a holding company. Subsidiary wholly-owned by BT Financial Group PTY Ltd.: a. BT Investments (Australia) Limited a company engaged in institutional and retail money management. Subsidiary wholly-owned by BT Investments (Australia) Limited: a. BT Australia (Holdings) Pty Ltd (Australia) a commercial and investment banking and asset management company. Subsidiary wholly-owned by BT Australia (Holdings) Pty Ltd: a. BT Australia Pty Ltd. (Australia) a company engaged in asset management and trustee/administrative activities. Subsidiaries wholly-owned by BT Australia PTY Ltd.: a. BT Australia Corporate Services Pty Limited an Australia holding company for internal service companies. b. BT Life Limited an Australia company engaged in commercial and investment linked life insurance policies. c. BT Funds Management Limited an Australia company engaged in institutional and retail money management. d. Principal Capital Global Investors Limited dba BT Fund Management (Australia) a company who manages international funds (New Zealand, Singapore, Asia, North America and and United Kingdom). e. BT Securities Limited an Australia company that engages in loan finance secured against share and managed fund portfolios. f. QV1 Pty Limited an Australia company. g. BT Portfolio Services Limited an Australia company that engages in processing and transaction services for financial planners and financial intermediaries. h. BT Wealth Management Pty Ltd (Australia) A company which is a financial advisory service provider. Subsidiaries organized and wholly-owned by BT Australia Corporate Services Pty Limited: a. BT Finance Pty Limited an Australia provider of finance by loans and leases. b. BT Nominees Pty Limited an Australia company that operates as a trustee of staff superannuation fund (pension plan). c. Chifley Services Pty Limited an Australia company that engages in staff car leasing management. Subsidiaries wholly-owned by BT Funds Management Limited a. BT Tactical Asset Management Pty Limited an Australia company that engages in management of futures positions. b. Oniston Pty Ltd an Australia company that is a financial services investment vehicle. c. BT Finance & Investments Pty Ltd an Australia trustee of wholesale cash management trust. Subsidiary organized and wholly-owned by BT Securities Limited: a. BT (Queensland) Pty Limited an Australia trustee company. Subsidiary organized and wholly-owned by Principal Financial Services (NZ), Inc. a. BT Financial Group (NZ) Limited a New Zealand holding company. Subsidiary organized and wholly-owned by BT Financial Group (NZ) Limited: a. BT Funds Management (NZ) Limited a New Zealand funds manager. Subsidiary wholly-owned by Principal International de Chile, S.A.: a. Principal Tanner Administradora De Fondos Mutuos S.A. (Chile) a corporation organized for the administration of various funds. b. Principal Compania de Seguros de Vida Chile S.A. (Chile) life insurance company. Subsidiary 60% owned by Principal Compania de Seguros de Vida Chile S.A. (Chile): a. Andueza & Principal Creditos Hipotecarios S.A. (Chile) a residential mortgage company. Subsidiary organized and wholly-owned by Principal Financial Group Investments (Australia) Pty Limited: a. Principal Hotels Holdings Pty Ltd. a holding company. Subsidiary organized and wholly-owned by Principal Hotels Holdings Pty Ltd.: a. Principal Hotels Australia Pty Ltd. a holding company. Subsidiary organized and wholly-owned by Principal Hotels Australia Pty Ltd.: a. BT Hotel Limited an Australia corporation, which is the hotel operating/managing company of the BT Hotel Group. company. Item 27. Number of Contractowners - As of: March 31, 2002 (1) (2) (3) Number of Plan Number of Title of Class Participants Contractowners -------------- -------------- -------------- BFA Variable Annuity Contracts 50 6 Pension Builder Contracts 376 219 Personal Variable Contracts 373 16 Premier Variable Contracts 2231 75 Flexible Variable Annuity Contract 52304 52304 Freedom Variable Annuity Contract 925 925 Item 28. Indemnification None Item 29. Principal Underwriters (a) Princor Financial Services Corporation, principal underwriter for Registrant, acts as principal underwriter for, Principal Balanced Fund, Inc., Principal Bond Fund, Inc., Principal Capital Value Fund, Inc., Principal Cash Management Fund, Inc., Principal Government Securities Income Fund, Inc., Principal Growth Fund, Inc., Principal International Emerging Markets Fund, Inc., Principal International Fund, Inc., Principal International SmallCap Fund, Inc., Principal Investors Fund, Inc., Principal LargeCap Stock Index Fund, Inc., Principal Limited Term Bond Fund, Inc., Principal MidCap Fund, Inc., Principal Partners Blue Chip Fund, Inc., Principal Partners Aggressive Growth Fund, Inc., Principal Partners LargeCap Blend Fund, Inc., Principal Partners LargeCap Value Fund, Inc. Principal Partners MidCap Growth Fund, Inc., Principal Partners SmallCap Growth Fund, Inc., Principal Real Estate Fund, Inc., Principal SmallCap Fund, Inc., Principal Tax-Exempt Bond Fund, Inc., Principal Utilities Fund, Inc., Principal Variable Contracts Fund, Inc. and for variable annuity contracts participating in Principal Life Insurance Company Separate Account B, a registered unit investment trust, and for variable life insurance contracts issued by Principal Life Insurance Company Variable Life Separate Account, a registered unit investment trust. (b) (1) (2) Positions and offices Name and principal with principal business address underwriter Lindsay L. Amadeo Assistant Director - The Principal Marketing Services Financial Group Des Moines, IA 50392 John E. Aschenbrenner Director The Principal Financial Group Des Moines, IA 50392 Patricia A. Barry Assistant Corporate Secretary The Principal Financial Group Des Moines, IA 50392 Craig L. Bassett Treasurer The Principal Financial Group Des Moines, IA 50392 Michael J. Beer Executive Vice President The Principal Financial Group Des Moines, IA 50392 David J. Brown Vice President The Principal Financial Group Des Moines, IA 50392 P. Scott Cawley Product Marketing Officer The Principal Financial Group Des Moines, IA 50392 Michael T. Daley Director The Principal Financial Group Des Moines, IA 50392 Ralph C. Eucher Director and The Principal President Financial Group Des Moines, IA 50392 Arthur S. Filean Senior Vice President The Principal Financial Group Des Moines, IA 50392 Dennis P. Francis Director The Principal Financial Group Des Moines, IA 50392 Paul N. Germain Vice President - The Principal Mutual Fund Operations Financial Group Des Moines, IA 50392 Ernest H. Gillum Vice President - The Principal Product Development Financial Group Des Moines, IA 50392 Susan R. Haupts Marketing Officer The Principal Financial Group Des Moines, IA 50392 Joyce N. Hoffman Sr. Vice President and The Principal Corporate Secretary Financial Group Des Moines, IA 50392 Peter R. Kornweiss Vice President The Principal Financial Group Des Moines, IA 50392 Elise M. Pilkington Assistant Director - The Principal Retirement Consulting Financial Group Des Moines, IA 50392 Martin R. Richardson Operations Officer - The Principal Broker/Dealer Services Financial Group Des Moines, IA 50392 Michael D. Roughton Counsel The Principal Financial Group Des Moines, IA 50392 James F. Sager Vice President The Principal Financial Group Des Moines, IA 50392 Jean B. Schustek Assistant Vice President - The Principal Registered Products Financial Group Des Moines, IA 5092 Kyle R. Selberg Vice President-Marketing The Principal Financial Group Des Moines, IA 50392 Karen E. Shaff Director The Principal Financial Group Des Moines, IA 50392 Minoo Spellerberg Assistant Vice President and The Principal Compliance Officer Financial Group Des Moines, IA 50392 Paul D. Steingreaber Director of Investment Products The Principal Financial Group Des Moines, IA 50392 Jamie K. Stenger Assistant Director - Compliance The Principal Financial Group Kirk L. Tibbetts Senior Vice President and The Principal Chief Financial Officer Financial Group Des Moines, IA 50392 Larry D. Zimpleman Chairman of the Board and The Principal Director Financial Group Des Moines, IA 50392 (c) (1) (2) Net Underwriting Name of Principal Discounts and Underwriter Commissions Princor Financial $18,879,680 Services Corporation (3) (4) (5) Compensation on Brokerage Events Occasioning Commissions Compensation the Deduction of a Deferred Sales Load 0 0 0 Item 30. Location of Accounts and Records All accounts, books or other documents of the Registrant are located at the offices of the Depositor, The Principal Financial Group, Des Moines, Iowa 50392. Item 31. Management Services Inapplicable Item 32. Undertakings The Registrant undertakes that in restricting cash withdrawals from Tax Sheltered Annuities to prohibit cash withdrawals before the Participant attains age 59 1/2, separates from service, dies, or becomes disabled or in the case of hardship, Registrant acts in reliance of SEC No Action Letter addressed to American Counsel of Life Insurance (available November 28, 1988). Registrant further undertakes that: 1. Registrant has included appropriate disclosure regarding the redemption restrictions imposed by Section 403(b)(11) in its registration statement, including the prospectus, used in connection with the offer of the contract; 2. Registrant will include appropriate disclosure regarding the redemption restrictions imposed by Section 403(b)(11) in any sales literature used in connection with the offer of the contract; 3. Registrant will instruct sales representatives who solicit Plan Participants to purchase the contract specifically to bring the redemption restrictions imposed by Section 403(b)(11) to the attention of the potential Plan Participants; and 4. Registrant will obtain from each Plan Participant who purchases a Section 403(b) annuity contract, prior to or at the time of such purchase, a signed statement acknowledging the Plan Participant's understanding of (a) the restrictions on redemption imposed by Section 403(b)(11), and (b) the investment alternatives available under the employer's Section 403(b) arrangement, to which the Plan Participant may elect to transfer his contract value. REPRESENTATION PURSUANT TO SECTION 26 OF THE INVESTMENT COMPANY ACT OF 1940 Principal Mutual Life Insurance Company represents the fees and charges deducted under the Policy, in the aggregate, are reasonable in relation to the services rendered, the expenses expected to be incurred, and the risks assumed by the Company. SIGNATURES Pursuant to the requirements of the Securities Act of 1933 and the Investment Company Act of 1940, the Registrant, Principal Life Insurance Company Separate Account B, certifies that it meets the requirements of Securities Act Rule 485(b) for effectiveness of the Registration Statement and has duly caused this Amendment to the Registration Statement to be signed on its behalf by the undersigned thereto duly authorized in the City of Des Moines and State of Iowa, on the 29th day of April, 2003 PRINCIPAL LIFE INSURANCE COMPANY SEPARATE ACCOUNT B (Registrant) (Registrant) /s/ J. Barry Griswell By ______________________________________________ J. Barry Griswell Chairman, President and Chief Executive Officer By PRINCIPAL LIFE INSURANCE COMPANY (Depositor) /s/ J. Barry Griswell By ______________________________________________ J. Barry Griswell Chairman, President and Chief Executive Officer Attest: /s/ Joyce N. Hoffman ----------------------------------- Joyce N. Hoffman Senior Vice President and Corporate Secretary As required by the Securities Act of 1933, this Amendment to the Registration Statement has been signed by the following persons in the capacities and on the date indicated. Signature Title Date /s/ J. B. Griswell President, Chairman and 04/29/2003 -------------------- Chief Executive Officer J. B. Griswell /s/ G. B. Elming Vice President and 04/29/2003 -------------------- Controller (Principal G. B. Elming Accounting Officer) /s/ M. H. Gersie Executive Vice President 04/29/2003 -------------------- and Chief Financial Officers M. H. Gersie (Principal Financial Officer) (B. J. Bernard)* Director 04/29/2003 -------------------- B. J. Bernard (J. Carter-Miller)* Director 04/29/2003 -------------------- J. Carter-Miller (G. E. Costley)* Director 04/29/2003 -------------------- G. E. Costley (D. J. Drury)* Director 04/29/2003 -------------------- D. J. Drury (C. D. Gelatt, Jr.)* Director 04/29/2003 -------------------- C. D. Gelatt, Jr. (S. L. Helton)* Director 04/29/2003 -------------------- S. L. Helton (C. S. Johnson)* Director 04/29/2003 -------------------- C. S. Johnson (W. T. Kerr)* Director 04/29/2003 -------------------- W. T. Kerr (R. L. Keyser)* Director 04/29/2003 -------------------- R. L. Keyser (V. H. Loewenstein)* Director 04/29/2003 -------------------- V. H. Loewenstein (F. F. Pena)* Director 04/29/2003 -------------------- F. F. Pena (D. M. Stewart)* Director 04/29/2003 -------------------- D. M. Stewart (E. E. Tallett)* Director 04/29/2003 -------------------- E. E. Tallett *By /s/ J. Barry Griswell ------------------------------------ J. Barry Griswell Chairman, President and Chief Executive Officer Pursuant to Powers of Attorney Previously Filed or Included