-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, VrCou8GgS9Ey8UwznMDCjxjxZRW2I12sH96uFm9/d8HTMv1vbN4cSRm8cmektzv9 ZMmVSyVkhIDmKEBKQvGEYw== 0000870786-04-000298.txt : 20050103 0000870786-04-000298.hdr.sgml : 20041231 20041230173434 ACCESSION NUMBER: 0000870786-04-000298 CONFORMED SUBMISSION TYPE: 485BPOS PUBLIC DOCUMENT COUNT: 5 FILED AS OF DATE: 20050103 DATE AS OF CHANGE: 20041230 EFFECTIVENESS DATE: 20050103 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PRINCIPAL LIFE INSURANCE CO SEPARATE ACCOUNT B CENTRAL INDEX KEY: 0000009713 IRS NUMBER: 420127290 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 485BPOS SEC ACT: 1933 Act SEC FILE NUMBER: 333-116220 FILM NUMBER: 041235026 BUSINESS ADDRESS: STREET 1: THE PRINCIPAL FINANCIAL GROUP STREET 2: 711 HIGH STREET CITY: DES MOINES STATE: IA ZIP: 50392-2080 BUSINESS PHONE: 515-247-5476 MAIL ADDRESS: STREET 1: THE PRINCIPAL FINANCIAL GROUP STREET 2: 711 HIGH STREET CITY: DES MOINES STATE: IA ZIP: 50392-2080 FORMER COMPANY: FORMER CONFORMED NAME: PRINCIPAL MUTUAL LIFE INSURANCE COMPANY SEPARATE ACCOUNT B DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: BANKERS LIFE CO SEPARATE ACCOUNT B DATE OF NAME CHANGE: 19870317 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PRINCIPAL LIFE INSURANCE CO SEPARATE ACCOUNT B CENTRAL INDEX KEY: 0000009713 IRS NUMBER: 420127290 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 485BPOS SEC ACT: 1940 Act SEC FILE NUMBER: 811-02091 FILM NUMBER: 041235027 BUSINESS ADDRESS: STREET 1: THE PRINCIPAL FINANCIAL GROUP STREET 2: 711 HIGH STREET CITY: DES MOINES STATE: IA ZIP: 50392-2080 BUSINESS PHONE: 515-247-5476 MAIL ADDRESS: STREET 1: THE PRINCIPAL FINANCIAL GROUP STREET 2: 711 HIGH STREET CITY: DES MOINES STATE: IA ZIP: 50392-2080 FORMER COMPANY: FORMER CONFORMED NAME: PRINCIPAL MUTUAL LIFE INSURANCE COMPANY SEPARATE ACCOUNT B DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: BANKERS LIFE CO SEPARATE ACCOUNT B DATE OF NAME CHANGE: 19870317 485BPOS 1 ipva-c1.txt IPVA PROSPECTUS AND SAI Registration No. 333-116220 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. __1__ __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 January 3, 2005 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 INVESTMENT PLUS VARIABLE ANNUITY/SM/ the "Contract" Issued by Principal Life Insurance Company (the "Company"). This prospectus is dated XXXXXX. This prospectus provides information about the Contract and the Principal Life Insurance Company Separate Account B ("Separate Account") that you, as owner, should know before investing. It should be read and retained for future reference. Additional information about the Contract is included in the Statement of Additional Information ("SAI"), dated XXXXXXX, which has been filed with the Securities and Exchange Commission (the "SEC"). The SAI is a part of this prospectus. The table of contents of the SAI is at the end of this prospectus. You may obtain a free copy of the SAI by writing or telephoning: Principal Investment Plus Variable Annuity/sm/, Principal Financial Group, P. O. Box 9382, Des Moines, Iowa 50306-9382, Telephone:1-800-852-4450 An investment in the Contract is not a deposit or obligation of any bank and is not insured or guaranteed by any bank, the Federal Deposit Insurance Corporation or any other government agency. The individual deferred annuity contract ("Contract") described in this prospectus is funded with the Separate Account, dollar cost averaging fixed accounts ("DCA Plus Accounts") and a Fixed Account. The DCA Plus Accounts and the Fixed Account are a part of the General Account of the Company. The assets of the Separate Account Divisions ("divisions") are invested in the following underlying mutual funds:
Neuberger Berman AIM V.I. Basic Value Fund - Advisers Management Principal Variable Series I Trust Contracts Fund AIM V.I. SmallCap Equity Fasciano Portfolio-S Limited Term Bond Fund - Series I Class Account AllianceBernstein Variable High Income Bond MidCap Account Products Series Fund, Inc. Portfolio-S Class AllianceBernstein Small Cap Partners Portfolio-I MidCap Growth Account Growth Portfolio Class American Century Variable Socially Responsive MidCap Value Account Portfolios II, Inc. Portfolio-I Class Inflation Protection Fund - Principal Variable Money Market Account Class II Contracts Fund American Century Variable Asset Allocation Principal LifeTime Portfolios, Inc. Account Strategic Income Account Ultra Fund - Class II Bond Account Principal LifeTime 2010 Account Vista Fund - Class I Capital Value Account Principal LifeTime 2020 Account Dreyfus Investment Equity Growth Account Principal LifeTime 2030 Portfolios Account Technology Growth Equity Income Account Principal LifeTime 2040 Portfolio-Service Shares Account Fidelity Variable Insurance Equity Value Account Principal LifeTime 2050 Products Account Contrafund Portfolio - Government Securities Real Estate Securities Service Class 2 Account Account Equity-Income Portfolio - Growth Account SmallCap Growth Account Service Class 2 Growth Portfolio - Service International Account SmallCap Value Account Class 2 Mid Cap Portfolio - Service International Class 2 Emerging Markets T. Rowe Price Blue Chip Account Growth Portfolio - II Overseas Portfolio - Service International T. Rowe Price Health Class 2 SmallCap Account Sciences Portfolio - II Goldman Sachs Variable LargeCap Blend Insurance Trust Account CORE/sm/ Small Cap Equity LargeCap Stock Index Fund Account Mid Cap Value Fund LargeCap Value Account
The Contract is available with or without the premium payment credit rider. The benefits provided by the rider may be exceeded by its costs (increased surrender charge and surrender charge period and annual expenses). Expenses for a Contract with the rider are higher than expenses for a Contract without the rider. You should review your own circumstances to determine whether the rider is suitable for you. To assist you in making that determination, we have highlighted in gray boxes those portions of this prospectus pertaining to the rider. Please note that on July 16, 2004, we filed a request with the SEC for an order to permit us to recapture the premium payment credit if you request commencement of annuity benefits during the examination offer period or any other time prior to the third contract anniversary. If the order is granted, the credit would be recovered from your investment options. Potentially, the amount we would recover could be more than the then current value of the credit if the investment options have experienced negative investment performance. Until the order is granted, we will not recover the 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. 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. 1 TABLE OF CONTENTS GLOSSARY................................................................ SUMMARY OF EXPENSE INFORMATION.......................................... SUMMARY................................................................. Investment Limitations................................................. Transfers.............................................................. Surrenders............................................................. Charges and Deductions................................................. Annuity Benefit Payments............................................... Death Benefit.......................................................... Examination Offer Period (Free-Look)................................... THE PRINCIPAL INVESTMENT PLUS VARIABLE ANNUITY.......................... THE COMPANY............................................................. THE SEPARATE ACCOUNT.................................................... THE UNDERLYING MUTUAL FUNDS............................................. THE CONTRACT............................................................ To Buy a Contract...................................................... Premium Payments....................................................... Right to Examine the Contract (Free-Look).............................. Replacement Contracts.................................................. Premium Payment Credit Rider........................................... The Accumulation Period................................................ Automatic Portfolio Rebalancing (APR).................................. Telephone and Internet Services........................................ Surrenders............................................................. Investment Protector Plus Rider........................................ Death Benefit.......................................................... Enhanced Death Benefit Rider........................................... The Annuity Benefit Payment Period..................................... CHARGES AND DEDUCTIONS.................................................. Annual Fee............................................................. Mortality and Expense Risks Charge..................................... Charges for Optional Riders ............................................ Transaction Fee........................................................ Transfer Fee........................................................... Premium Taxes.......................................................... Surrender Charge....................................................... Free Surrender Privilege............................................... Administration Charge.................................................. Special Provisions for Group or Sponsored Arrangements................. FIXED ACCOUNT AND DCA PLUS ACCOUNTS..................................... Fixed Account.......................................................... Fixed Account Accumulated Value........................................ Fixed Account Transfers, Total and Partial Surrenders.................. Dollar Cost Averaging Plus Program (DCA Plus Program).................. GENERAL PROVISIONS...................................................... The Contract........................................................... Delay of Payments...................................................... Misstatement of Age or Gender.......................................... Assignment............................................................. Change of Owner or Annuitant ........................................... Beneficiary............................................................ Contract Termination................................................... Reinstatement.......................................................... Reports................................................................ Important Information about Procedures ................................. RIGHTS RESERVED BY THE COMPANY.......................................... Frequent Trading and Market Timing (Abusive Trading Practices) ......... DISTRIBUTION OF THE CONTRACT............................................ PERFORMANCE CALCULATION................................................. VOTING RIGHTS........................................................... FEDERAL TAX MATTERS..................................................... Non-Qualified Contracts................................................ Required Distributions for Non-Qualified Contracts..................... IRA, SEP and SIMPLE-IRA................................................ Rollover IRAs.......................................................... Withholding............................................................ MUTUAL FUND DIVERSIFICATION............................................. STATE REGULATION........................................................ GENERAL INFORMATION..................................................... FINANCIAL STATEMENTS.................................................... TABLE OF CONTENTS OF THE STATEMENT OF ADDITIONAL INFORMATION............ APPENDIX A - Separate Account Divisions ................................. APPENDIX B - Investment Protector Plus Rider Examples ................... GLOSSARY ACCUMULATED VALUE - an amount equal to the DCA Plus Account(s) accumulated value plus the Fixed Account accumulated value plus the Separate Account division accumulated value. ANNIVERSARY - the same date and month of each year following the contract date. ANNUITANT - the person, including any joint annuitant, on whose life the annuity benefit payment is based. This person may or may not be the owner. ANNUITIZATION DATE - the date the owner's accumulated value is applied, under an annuity benefit payment option, to make income payments. 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, 2004, the first contract year ends on June 4, 2005, and the first contract anniversary falls on June 5, 2005.) DATA PAGE - that portion of the Contract which contains the following: owner and annuitant data (names, gender, annuitant age); the contract issue date; maximum annuitization date; contract charges and limits; benefits; and a summary of any optional benefits chosen by the contract owner. DOLLAR COST AVERAGING PLUS (DCA PLUS) ACCOUNT - an account which earns guaranteed interest for a specific amount of time. DOLLAR COST AVERAGING PLUS (DCA PLUS) ACCUMULATED VALUE - the amount of your accumulated value which is in the DCA Plus Account(s). DOLLAR COST AVERAGING PLUS (DCA PLUS) PROGRAM - a program through which premium payments are transferred from a DCA Plus Account to the investment options over a specified period of time. FIXED ACCOUNT - an account which earns guaranteed interest. FIXED ACCOUNT ACCUMULATED VALUE - the amount of your accumulated value which is in the Fixed Account. INVESTMENT OPTIONS - the DCA Plus Accounts, Fixed Account and Separate Account divisions. JOINT ANNUITANT - an annuitant whose life determines the annuity benefit under this Contract. Any reference to the death of the annuitant means the death of the first annuitant to die. JOINT OWNER - an owner who has an undivided interest with the right of survivorship in this Contract with another owner. Any reference to the death of the owner means the death of the first owner to die. NON-QUALIFIED CONTRACT - a Contract which does not qualify for favorable tax treatment as a Qualified Plan, Individual Retirement Annuity, Roth IRA, SEP IRA, Simple-IRA or Tax Sheltered Annuity. NOTICE - any form of communication received by us, at the annuity service office, either in writing or in another form approved by us in advance. Your notices may be mailed to us at: Principal Life Insurance Company P O Box 9382 Des Moines, Iowa 50306-9382 OWNER - the person, including joint owner, who owns all the rights and privileges of this Contract. PREMIUM PAYMENTS - the gross amount contributed to the Contract. QUALIFIED PLANS - retirement plans which receive favorable tax treatment under Section 401 or 403(a) of the Internal Revenue Code. SEPARATE ACCOUNT DIVISION (DIVISION(S)) - a part of the Separate Account which invests in shares of an underlying mutual fund. (Referred to in the marketing materials as "sub-accounts.") SEPARATE ACCOUNT DIVISION ACCUMULATED VALUE - the amount of your accumulated value in all divisions. SURRENDER CHARGE - the charge deducted upon certain partial surrenders or total surrender of the Contract before the annuitization date. SURRENDER VALUE - accumulated value less any applicable surrender charge, rider fee, annual fee, transaction fee and any premium or other taxes. TRANSFER - moving all or a portion of your accumulated value to or among one investment option or another. Simultaneous transfers are considered to be one transfer for purposes of calculating the transfer fee, if any. UNDERLYING MUTUAL FUND - a registered open-end investment company, or a separate division or portfolio thereof, in which a division invests. UNIT - the accounting measure used to calculate the value of a division. UNIT VALUE - a measure used to determine the value of an investment in a division. VALUATION DATE - each day the New York Stock Exchange ("NYSE") is open for trading and trading is not restricted. VALUATION PERIOD - the period of time from one determination of the value of a unit of a division to the next. Each valuation period begins at the close of normal trading on the NYSE, generally 4:00 p.m. E.T., on each valuation date and ends at the close of normal trading of the NYSE on the next valuation date. YOU, YOUR - the owner of this Contract, including any joint owner. SUMMARY OF EXPENSE INFORMATION The following tables describe the fees and expenses that you will pay when buying, owning and surrendering the Contract. The first table describes the fees and expenses that you will pay at the time that you buy the Contract, surrender the Contract or transfer cash value between investment options.The expenses in the shaded box reflect the expenses associated with the premium payment credit rider. These expenses are higher than the expenses for the Contract without the premium payment credit rider.
CONTRACT OWNER TRANSACTION EXPENSES ------------------------------------------------------------------------------ Sales charge imposed on premium payments (as a .none percentage of premium payments) ------------------------------------------------------------------------------ Maximum deferred surrender charge (as a .6% percentage of amount surrendered)/(1)/ ------------------------------------------------------------------------------ Maximum deferred surrender charge for Contracts with the premium payment credit rider (as a .8% percentage of amount surrendered)/(2)/ ------------------------------------------------------------------------------ Transaction Fees .$30 for each unscheduled . guaranteed maximum partial surrender after the first in a contract year .zero .current ------------------------------------------------------------------------------ Transfer Fee/(3)/ .$30 for each unscheduled . guaranteed maximum transfer after the first in a contract year .current .zero ------------------------------------------------------------------------------ State Premium Taxes (vary by state) . 3.5% of premiums paid . guaranteed maximum .zero .current ------------------------------------------------------------------------------
(1) Surrender charge without the premium payment credit rider (as a percentage of amounts surrendered):
TABLE OF SURRENDER CHARGES WITHOUT THE PREMIUM PAYMENT CREDIT RIDER -------------------------------------------------------------------- NUMBER OF COMPLETED CONTRACT YEARS SURRENDER CHARGE APPLIED TO ALL SINCE EACH PREMIUM PAYMENT PREMIUM PAYMENTS RECEIVED IN WAS MADE THAT CONTRACT YEAR ---------------------------------- ------------------------------- 0 (year of premium payment) 6% 1 6% 2 6% 3 5% 4 4% 5 3% 6 2% 7 and later 0%
(2) Surrender charge with the premium payment credit rider (as a percentage of amounts surrendered):
TABLE OF SURRENDER CHARGES WITH THE PREMIUM PAYMENT CREDIT RIDER ------------------------------------------------------------------- NUMBER OF COMPLETED CONTRACT YEARS SURRENDER CHARGE APPLIED TO ALL SINCE EACH PREMIUM PAYMENT PREMIUM PAYMENTS RECEIVED IN WAS MADE THAT CONTRACT YEAR ---------------------------------- ------------------------------- 0 (year of premium payment) 8% 1 8% 2 7% 3 6% 4 5% 5 4% 6 3% 7 2% 8 1% 9 and later 0%
(3) Please note that in addition to the fees shown, the Separate Account and/or sponsors of the underlying mutual funds may adopt requirements pursuant to rules and/or regulations adopted by federal and/or state regulators which require us to collect additional transfer fees and/or impose restrictions on transfers. The next table describes the fees and expenses that are deducted periodically during the time that you own the Contract, not including underlying mutual fund fees and expenses.
PERIODIC EXPENSES ----------------------------------------------------------------------------- Annual Contract Fee (waived for the lesser of $30 Contracts with accumulated value of or 2% of the accumulated value $30,000 or more) ----------------------------------------------------------------------------- Separate Account Annual Expenses (as a percentage of average separate account accumulated value) . guaranteed maximum Mortality and Expense Risks Fee 1.25% Administration Charge 0.15% Total Separate Account Annual ----- Expense 1.40% .current 1.25% Mortality and Expense Risks Fee 0.00% Administration Charge ----- Total Separate Account Annual 1.25% Expense ----------------------------------------------------------------------------- Optional Riders ----------------------------------------------------------------------------- . Enhanced Death Benefit rider . guaranteed maximum .0.075% of average quarterly .current accumulated value .0.0625% of average quarterly accumulated value ----------------------------------------------------------------------------- . Investment Protector Plus rider .0.2125% of the average quarterly . guaranteed maximum Investment Back remaining withdrawal benefit base* .current .0.15% of the average quarterly Investment Back remaining withdrawal benefit base* ----------------------------------------------------------------------------- .an annual charge of 0.60 % of accumulated value in the . Premium Payment Credit rider divisions deducted daily plus a . guaranteed maximum reduction of up to 0.60% of the Fixed Account interest rate . an annual charge of 0.60 .current % of accumulated value in the divisions deducted daily (with no reduction of the Fixed Account interest rate) -----------------------------------------------------------------------------
* The Investment Back remaining withdrawal benefit base is the total amount that is available for future withdrawal benefit payments (see THE CONTRACT - Surrenders - Investment Protector Plus Rider). --------------------------------- The next item shows the minimum and maximum total operating expenses charged by the underlying mutual funds that you may pay periodically during the time that you own the contract. More detail concerning the fees and expenses of each underlying mutual fund is contained in its prospectus. ..
MINIMUM AND MAXIMUM ANNUAL UNDERLYING MUTUAL FUND OPERATING EXPENSES AS OF DECEMBER 31, 2003 ------------------------------------------------------------------------------ MINIMUM MAXIMUM ------------------------------------------------------------------------------ Total annual underlying mutual fund operating expenses (expenses that are deducted from underlying mutual fund assets, including management fees, distribution and/or service 0.39% 4.59% (12b-1) fees and other expenses) ------------------------------------------------------------------------------
Annual expenses of the underlying mutual funds (as a percentage of average net assets) as of December 31, 2003:
ANNUAL UNDERLYING MUTUAL FUND EXPENSES MANAGEMENT 12B-1 OTHER TOTAL UNDERLYING MUTUAL FUNDS FEES FEES EXPENSES EXPENSES/(1)/ ----------------------- ---------- ----- -------- -------------------- AIM V.I. Basic Value Fund - Series I 0.73 N/A 0.31 1.04 AIM V.I. SmallCap Equity Fund - Series I 0.85 N/A 0.70 1.55/(2)/ AllianceBernstein Small Cap Growth Portfolio 1.00 N/A 0.36 1.36/(3)/ American Century VP II Inflation Protection Fund - Class II 0.50 0.25 0.00 0.75 American Century VP Ultra - Class II 0.90 0.25 0.01 1.16 American Century VP Vista Fund - Class I 1.00 N/A 0.00 1.00 Dreyfus IP Technology Growth - Service Shares 0.75 0.25 0.13 1.13 Fidelity VIP Contrafund - Service Class 2 0.58 0.25 0.10 0.93/(4)/ Fidelity VIP Equity-Income - Service Class 2 0.48 0.25 0.09 0.82/(4)/ Fidelity VIP Growth - Service Class 2 0.58 0.25 0.09 0.92/(4)/ Fidelity VIP Mid Cap - Service Class 2 0.58 0.25 0.12 0.95/(//4)/ Fidelity VIP Overseas - Service Class 2 0.73 0.25 0.18 1.16/(4)/ Goldman Sachs VIT CORE Small Cap Equity 0.75 N/A 0.15 0.90/(5)/ Goldman Sachs VIT Mid Cap Value 0.80 N/A 0.11 0.91/(6)/ Neuberger Berman AMT Fasciano Portfolio - S Class 1.15 0.25 3.19 4.59/(7)/ Neuberger Berman AMT High Income Bond Portfolio - S Class 0.78 0.25 0.60 1.63/(8)/ Neuberger Berman AMT Partners Portfolio - I Class 0.83 N/A 0.08 0.91/(//7)/ Neuberger Berman AMT Socially Responsive Portfolio - I Class 0.85 N/A 1.45 2.30/(7)(//9/ Principal VCF Asset Allocation 0.80 N/A 0.05 0.85 Principal VCF Bond 0.46 N/A 0.01 0.47 Principal VCF Capital Value 0.60 N/A 0.01 0.61/(1//0//)/ Principal VCF Equity Growth 0.76 N/A 0.01 0.77/(1//0//)/ Principal VCF Equity Income 0.60 N/A 0.01 0.61 Principal VCF Equity Value 0.85 N/A 0.12 0.97/(//11//)/ Principal VCF Government Securities 0.43 N/A 0.01 0.44 Principal VCF Growth 0.60 N/A 0.01 0.61/(1//0//)/ Principal VCF International 0.85 N/A 0.08 0.93/(1//0//)/ Principal VCF International Emerging Markets 1.25 N/A 0.59 1.84/(1//2//)/ Principal VCF International SmallCap 1.20 N/A 0.13 1.33/(1//0//)/ Principal VCF LargeCap Blend 0.75 N/A 0.08 0.83/(1//0//)/ Principal VCF LargeCap Stock Index 0.35 N/A 0.04 0.39/(1//3//)/ Principal VCF LargeCap Value 0.75 N/A 0.04 0.79/(1//0//)/ Principal VCF Limited Term Bond 0.50 N/A 0.07 0.57 Principal VCF MidCap 0.60 N/A 0.01 0.61/(1//0//)/ Principal VCF MidCap Growth 0.90 N/A 0.04 0.94/(1//0//)/ Principal VCF MidCap Value 1.05 N/A 0.03 1.08/(1//0//)/ Principal VCF Money Market 0.48 N/A 0.01 0.49 Principal VCF Principal LifeTime 2010 0.1225 N/A 0.10 0.2225/(//1//3//)/ Principal VCF Principal LifeTime 2020 0.1225 N/A 0.07 0.1925/(//1//3//)/ Principal VCF Principal LifeTime 2030 0.1225 N/A 0.07 0.1925/(//1//3//)/ Principal VCF Principal LifeTime 2040 0.1225 N/A 0.23 0.3525/(//1//3//)/ Principal VCF Principal LifeTime 2050 0.1225 N/A 0.42 0.5425/(//1//3//)/ Principal VCF Principal LifeTime Strategic Income 0.1225 N/A 0.26 0.3825/(//1//3//)/ Principal VCF Real Estate Securities 0.90 N/A 0.02 0.92/(1//0//)/ Principal VCF SmallCap Growth 1.00 N/A 0.02 1.02/(1//0//)/ Principal VCF SmallCap Value 1.10 N/A 0.08 1.18/(1//0//)/ T. Rowe Price Blue Chip Growth Portfolio - II 0.85 0.25 0.00 1.10 T. Rowe Price Health Sciences Portfolio - II 0.95 0.25 0.00 1.20
/(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 fund's advisor has contractually agreed to waive advisory fees and/or reimburse expenses of Series I shares to the extent necessary to limit Total Annual Fund Operating Expenses (excluding certain items discussed below) to 1.30%. In determining the advisor's obligation to waive advisory fees and/or reimburse expenses, the following expenses are not taken into account, and could cause the Total Annual Fund Operating Expenses to exceed the 1.30% cap: (i) interest; (ii) taxes; (iii) extraordinary items (these are expenses that are not anticipated to arise from the fund's day-to-day operations), as defined in the Financial Accounting Standard's Board's Generally Accepted Accounting Principles or as approved by the fund's board of trustees; (iv) expenses related to a merger or reorganization, as approved by the fund's board of trustees; and (v) expenses that the fund has incurred but did not actually pay because of an expense offset arrangement. Currently, the only expense offset arrangements from which the fund benefits are in the form of credits that the fund receives from banks where the fund or its transfer agent has deposit accounts used to clear shareholder transactions in which it holds uninvested cash. Those credits are used to pay certain expenses incurred by the fund. This expense limitation agreement is in effect through December 31, 2004. / //(3)/ Total portfolio operating expenses do not reflect Alliance's voluntary waiver of a portion of its advisory fee. This waiver is effective as of January 1, 2004 and the fee reduction is expected to continue for a period of at least five years but could be terminated at any time. The advisory fees after waiver for the Portfolio and, after giving effect to the advisory fee waiver, total portfolio operating expenses would be 0.75% and 1.11% respectively. / //(4)/ Fidelity Management & Research Company has voluntarily agreed to reimburse the fund to the extent that total operating expenses, as a percentage of average net assets, exceed the following rates: VIP Contrafund 0.90%; VIP Equity-Income 0.81%; VIP Growth 0.89%; VIP Mid Cap 0.93%; and VIP Overseas 1.12%. These arrangements may be discontinued by FMR at any time. / //(5) /Effective December 22, 2003, the Investment Adviser has contractually agreed to limit "Other Expenses" (excluding interest, taxes, certain securities lending cost, brokerage commissions, and extraordinary expenses) and "Total Fund Operating Expenses" to the extent that such expenses exceed, on an annual basis, 0.11% and 0.90%, respectively of the Fund's average daily net assets. The Investment Adviser has contractually agreed to maintain these expense limitations through June 30, 2005. / //(6) /The Investment Adviser has voluntarily agreed to reduce or limit "Other Expenses" (excluding management fees, transfer agency fees and expenses, taxes, interest, brokerage fees, litigation, indemnification, shareholder meeting and other extraordinary expenses) equal on an annualized basis to 0.25% of the average daily net assets of the Fund. The Investment Adviser may cease or modify the expense limitation at its discretion at any time. If this occurs, "Other Expenses" and "Total Fund Operating Expenses" may increase without shareholder approval. / //(7) /Neuberger Berman Management Inc. ("NBMI") has undertaken through December 31, 2007 to waive fees and/or reimburse certain operating expenses, including the compensation of NBMI and excluding taxes, interest, extraordinary expenses, brokerage commissions and transactions costs, that exceed, in the aggregate, 1.00% of the Partners Portfolio's average daily net asset value; 1.40% of the average daily net asset value of the Fasciano Portfolio; 1.50% of the average daily net asset value of the Socially Responsive Portfolio. The expense limitation arrangements for the Portfolios are contractual and any excess expenses can be repaid to NBMI within three years of the year incurred, provided such recoupment would not cause a Portfolio to exceed its respective limitation. (8) Neuberger Berman Management Inc. (NBMI) has contractually agreed to reimburse certain expenses of the fund through December 31, 2007, so that the total annual operating expenses are limited to 1.10% of the fund`s average daily net asset value. This arrangement does not cover interest, taxes, brokerage commissions, and extraordinary expenses. The fund has agreed to repay NBMI for expenses reimbursed to the fund provided that repayment does not cause the fund`s annual operating expenses to exceed its expense limitation. Any such repayment must be made within three years after the year in which NBMI incurred the expense. Since the fund had not commenced operations as of December 31, 2003, the operating expenses for the fund are based on a net asset size of $25 million. / //(//9//) /NBMI has voluntarily committed to waive fees and/or reimburse expenses for an additional 0.20% of the average daily net asset value of the Socially Responsive Portfolio to maintain the Portfolio's net operating expense ratio at 1.30%. NBMI can, at its sole discretion, on at least 30 days' notice terminate this voluntary waiver and/or reimbursement commitment. / //(1//0//)// /Expense ratio shown without the effect of fees paid indirectly through a commission recapture agreement or a custodial agreement. / //(11)/ As this Account is new, expenses are estimated. The Account's inception date is August 30, 2004. / //(1//2//) /Expense ratio without the effect of fees paid indirectly through a commission recapture agreement or a custodial agreement and the Manager's voluntary expense limit (which increased May 1, 2003 from 1.75% to 2.0%). / //(1//3//)/ Principal Management Corporation has voluntarily agreed to reimburse the total annual expenses through April 30, 2005 so that they will not exceed 1.10% for the Equity Value Account; 0.40% for LargeCap Stock Index Account; 0.16% for Principal LifeTime 2010 Account; 0.13% for Principal LifeTime 2020 Account; 0.16% for Principal LifeTime 2030 Account; 0.14% for Principal LifeTime 2040 Account; 0.13% for Principal LifeTime 2050 Account and 0.14% for Principal LifeTime Strategic Income Account. These agreements may be discontinued by Principal Management Corporation at any time. Each Principal LifeTime Account, as shareholders of underlying funds, indirectly bears its pro rata share of the operating expenses incurred by each underlying fund. As of December 31, 2003, the operating expenses of the underlying funds ranged from 0.39% to 1.84%. 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 shaded areas show charges that apply to Contracts with the premium payment credit rider. The unshaded areas show charges that apply to Contracts without the premium payment credit rider. Example 1 reflects the maximum charges imposed is you were to purchase the Contract without any riders. The Example also reflects the minimum and maximum annual underlying mutual fund operating expenses (as of December 31, 2003). The Example assumes: .. a $10,000 investment in the Contract for the time periods indicated; .. a 5% return each year; and .. a $30 annual contract fee (expressed as a percentage of the average accumulated value) .. 0.15% Administration Charge (fees collected may be less than shown in this table as this charge is not currently imposed) .. the Contract has been purchased without optional riders; and the maximum and minimum fees and expenses of any of the underlying mutual funds. This Example shows the maximum guaranteed fees of the Contract. EXAMPLE 1 . Contract without riders.
IF YOU SURRENDER YOUR CONTRACT IF YOU DO NOT IF YOU ANNUITIZE YOUR CONTRACT AT THE END OF THE APPLICABLE SURRENDER AT THE END OF THE APPLICABLE TIME PERIOD YOUR CONTRACT TIME PERIOD - ----------------------------------------------------------------------------------------------------------------------------------- 1 YR. 3 YRS. 5 YRS. 10 YRS. 1 YR. 3 YRS. 5 YRS. 10 YRS. 1 YR. 3 YRS. 5 YRS. 10 YRS. - ----------------------------------------------------------------------------------------------------------------------------------- Maximum Total Underlying Mutual Fund Operating 1,126 2,280 3,240 5,653 592 1,758 2,900 5,653 592 1,758 2,900 5,653 Expenses (4.59%) - ----------------------------------------------------------------------------------------------------------------------------------- Minimum total Underlying Mutual Fund Operating 739 1,156 1,358 2,078 180 557 958 2,078 180 557 958 2,078 Expenses (0.39%) - -----------------------------------------------------------------------------------------------------------------------------------
Example 2 reflects the maximum charges imposed is you were to purchase the Contract with the premium payment credit and enhanced death benefit riders. The Example also reflects the minimum and maximum annual underlying mutual fund operating expenses (as of December 31, 2003). The Example assumes: .. a $10,000 investment in the Contract for the time periods indicated; .. a 5% return each year; and .. a $30 annual contract fee (expressed as a percentage of the average accumulated value) .. 0.15% Administration Charge (fees collected may be less than shown as this charge is not currently imposed) .. the premium payment credit rider was added to the Contract at issue; . the premium payment credit rider surrender charge schedule is applied . the premium payment credit is a direct offset against expenses (in Contract year 1) .. the enhanced death benefit rider was added to the Contract at issue; and .. the maximum and minimum fees and expenses of any of the underlying mutual funds. EXAMPLE 2 . Contract with premium payment credit and enhanced death benefit riders.
IF YOU SURRENDER YOUR CONTRACT IF YOU DO NOT IF YOU ANNUITIZE YOUR CONTRACT AT THE END OF THE APPLICABLE SURRENDER AT THE END OF THE APPLICABLE TIME PERIOD YOUR CONTRACT TIME PERIOD - ----------------------------------------------------------------------------------------------------------------------------------- 1 YR. 3 YRS. 5 YRS. 10 YRS. 1 YR. 3 YRS. 5 YRS. 10 YRS. 1 YR. 3 YRS. 5 YRS. 10 YRS. - ----------------------------------------------------------------------------------------------------------------------------------- Maximum Total Underlying Mutual Fund Operating 1,453 2,711 3,841 6,417 709 2,086 3,414 6,417 709 2,086 3,414 6,417 Expenses (4.59%) - ----------------------------------------------------------------------------------------------------------------------------------- Minimum total Underlying Mutual Fund Operating 1,056 1,550 1,951 2,929 277 850 1,451 2,929 277 850 1,451 2,929 Expenses (0.39%) - -----------------------------------------------------------------------------------------------------------------------------------
Example 3 reflects the maximum charges imposed is you were to purchase the Contract with the Investment Protection Plus rider. The Example also reflects the minimum and maximum annual underlying mutual fund operating expenses (as of December 31, 2003) for the limited array of underlying mutual funds available when utilizing the Investment Protector Plus rider (see the rider description for more details). The Example assumes: .. a $10,000 investment in the Contract for the time periods indicated; .. a 5% return each year; and .. a $30 annual contract fee (expressed as a percentage of the average accumulated value) .. 0.15% Administration Charge (fees collected may be less than shown as this charge is not currently imposed) .. the Investment Protector Plus rider was added to the Contract at issue; .. the premium payment credit rider was added to the Contract at issue; . the premium payment credit rider surrender charge schedule is applied . the premium payment credit is a direct offset against expenses (in Contract year 1) .. the enhanced death benefit rider was added to the Contract at issue; and .. the maximum and minimum fees and expenses of the underlying mutual funds available when utilizing the Investment Protector Plus rider. EXAMPLE 3 . Contract with Investment Protector Plus, premium payment credit and enhanced death benefit riders.
IF YOU SURRENDER YOUR CONTRACT IF YOU DO NOT IF YOU ANNUITIZE YOUR CONTRACT AT THE END OF THE APPLICABLE SURRENDER AT THE END OF THE APPLICABLE TIME PERIOD YOUR CONTRACT TIME PERIOD - ----------------------------------------------------------------------------------------------------------------------------------- 1 YR. 3 YRS. 5 YRS. 10 YRS. 1 YR. 3 YRS. 5 YRS. 10 YRS. 1 YR. 3 YRS. 5 YRS. 10 YRS. - ----------------------------------------------------------------------------------------------------------------------------------- Maximum Total Underlying Mutual Fund Operating 1,171 1,907 2,549 4,065 402 1,218 2,049 4,065 402 1,218 2,049 4,065 Expenses (1.03%) - ----------------------------------------------------------------------------------------------------------------------------------- Minimum total Underlying Mutual Fund Operating 1,123 1,763 2,297 3,581 350 1,063 1,797 3,581 350 1,063 1,797 3,581 Expenses (0.52%) - -----------------------------------------------------------------------------------------------------------------------------------
SUMMARY This prospectus describes a flexible variable annuity offered by the Company. The Contract is designed to provide individuals with retirement benefits, including: .. non-qualified retirement programs; and .. Individual Retirement Annuity plans ("IRA Plans"), Simplified Employee Pension plans ("SEPs") and Savings Incentive Match Plan for Employees ("SIMPLE") IRAs adopted according to Section 408 of the Internal Revenue Code (see Federal Tax Matters - IRA, SEP and SIMPLE-IRA and Rollover IRAs). The Contract does not provide any additional tax deferral if you purchase it to fund an IRA or other investment vehicle that already provides tax deferral. For information on how to purchase the Contract, please see THE CONTRACT - To Buy a Contract. This is a brief summary of the Contract's features. More detailed information follows later in this prospectus. INVESTMENT LIMITATIONS .. Initial premium payment must be $5,000 or more for non-qualified contracts. .. Initial premium payment must be $2,000 for all other contracts. .. Each subsequent payment must be at least $500. .. If you are a member of a retirement plan covering three or more persons and payments are made through an automatic investment program, the initial and subsequent premium payments for the Contract must average at least $100 and not be less than $50. You may allocate your net premium payments to the investment options. .. A complete list of the divisions may be found in Appendix A. Each division invests in shares of an underlying mutual fund. More detailed information about the underlying mutual funds may be found in the current prospectus for each underlying mutual fund. .. The investment options also include the Fixed Account and the DCA Plus Accounts. TRANSFERS (See Division Transfers and Fixed Account Transfers, Total and Partial Surrenders for additional restrictions.) This section does not apply to transfers under the DCA Plus Program (see Scheduled DCA Plus Transfers and Unscheduled DCA Plus Transfers). During the accumulation period: .. a dollar amount or percentage of transfer must be specified; .. a transfer may occur on a scheduled or unscheduled basis; .. transfers to the Fixed Account are not permitted if a transfer has been made from the Fixed Account to a division within six months; and .. transfers into DCA Plus Accounts are not permitted. During the annuity benefit payment period, transfers are not permitted (no transfers once payments have begun). SURRENDERS (See Surrenders and Fixed Account Transfers, Total and Partial Surrenders and DCA Plus Surrenders) During the accumulation period: .. a dollar amount must be specified; .. surrendered amounts may be subject to surrender charge;
.for Contracts without the premium payment credit rider, the maximum surrender charge is 6% of the amount(s) surrendered. .for Contracts with the premium payment credit rider, the maximum surrender charge is 8% of the amount(s) surrendered.
.. total surrenders may be subject to an annual Contract fee; .. during a contract year, partial surrenders less than the Contract's earnings or 10% of premium payments are not subject to a surrender charge; and .. surrenders before age 591/2 may involve an income tax penalty (see FEDERAL TAX MATTERS). CHARGES AND DEDUCTIONS (see CHARGES AND DEDUCTIONS) .. There is no sales charge on premium payments .. A contingent deferred surrender charge is imposed on certain total or partial surrenders. .. An annual mortality and expense risks charge equal to 1.25% of amounts in the Separate Account divisions is imposed daily. .. The daily Separate Account administration charge currently is zero but we reserve the right to assess a charge not to exceed 0.15% of Separate Account division value(s) annually. .. The optional riders are available at an additional charge (see CHARGES AND DEDUCTIONS). .. Contracts with an accumulated value of less than $30,000 are subject to an annual Contract fee of the lesser of $30 or 2% of the accumulated value. Currently we do not charge the annual fee if your accumulated value is $30,000 or more. If you own more than one Contract, all the Contracts you own or jointly own are aggregated on each Contract's anniversary, to determine if the $30,000 minimum has been met and whether that Contract will be charged. .. Certain states and local governments impose a premium tax. The Company reserves the right to deduct the amount of the tax from premium payments or accumulated values. ANNUITY BENEFIT PAYMENTS .. You may choose from several fixed annuity benefit payment options which start on your selected annuitization date. .. Payments are made to the owner (or beneficiary depending on the annuity benefit payment option selected). You should carefully consider the tax implications of each annuity benefit payment option (see Annuity Benefit Payment Options and FEDERAL TAX MATTERS). DEATH BENEFIT .. If the owner dies before the annuitization date, a death benefit is payable to the beneficiary of the Contract. .. The death benefit may be paid as either a single sum cash benefit or under an annuity benefit payment option (see Death Benefit). .. If the annuitant dies on or after the annuitization date, the beneficiary will receive only any continuing payments which may be provided by the annuity benefit payment option in effect. EXAMINATION OFFER PERIOD (FREE-LOOK) (see Right to Examine the Contract (Free-Look))
..You may return the Contract during the examination offer period which is generally 10 days from the date you receive the Contract. The examination offer period may be longer in certain states. ..We return all premium payments if required by state law. Otherwise we return accumulated value. .. We keep the full amount of any premium payment credit.
THE PRINCIPAL INVESTMENT PLUS VARIABLE ANNUITY The Principal Investment Plus Variable Annuity is significantly different from a fixed annuity. As the owner of a variable annuity, you assume the risk of investment gain or loss (as to amounts in the divisions) rather than the Company. The Separate Account division accumulated value under a variable annuity is not guaranteed and varies with the investment performance of the underlying mutual funds. Based on your investment objectives, you direct the allocation of premium payments and accumulated values. There can be no assurance that your investment objectives will be achieved. THE COMPANY The Company is a stock life insurance company with its home office at: Principal Financial Group, Des Moines, Iowa 50392. 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 benefit payments, are general corporate obligations of the Company. However, the Contract provides that the portion of the Separate Account's assets equal to the reserves and other liabilities under the Contract are not charged with any liabilities arising out of any other business of the Company. The assets of each division invest in a corresponding underlying mutual fund. New divisions may be added and made available. Divisions may also be eliminated from the Separate Account following SEC approval. THE UNDERLYING MUTUAL FUNDS The underlying mutual funds are registered under the Investment Company Act of 1940 as open-end investment management companies. The underlying mutual funds provide the investment vehicles for the Separate Account. A full description of the underlying mutual funds, the investment objectives, policies and restrictions, charges and expenses and other operational information are contained in the accompanying prospectuses (which should be read carefully before investing) and the Statement of Additional Information ("SAI"). ADDITIONAL COPIES OF THESE DOCUMENTS ARE AVAILABLE WITHOUT CHARGE FROM A SALES REPRESENTATIVE OR OUR ANNUITY SERVICE OFFICE (CALL 1-800-852-4450). The Company purchases and sells underlying mutual fund shares for the Separate Account at their net asset value. Shares represent interests in the underlying mutual fund available for investment by the Separate Account. Each underlying mutual fund corresponds to one of the divisions. The assets of each division are separate from the others. A division's performance has no effect on the investment performance of any other division. The underlying mutual funds are NOT available to the general public directly. The underlying mutual funds are available only as investment options in variable life insurance policies or variable annuity contracts issued by life insurance companies and qualified plans. Some of the underlying mutual funds have been established by investment advisers that manage publicly traded mutual funds having similar names and investment objectives. While some of the underlying mutual funds may be similar to, and may in fact be modeled after publicly traded mutual funds, you should understand that the underlying mutual funds are not otherwise directly related to any publicly traded mutual fund. Consequently, the investment performance of publicly traded mutual funds and of any underlying mutual fund may differ substantially. Appendix A contains a brief summary of the investment objectives of, and sub-advisor for, each division. THE CONTRACT The following descriptions are based on provisions of the Contract offered by this prospectus. You should refer to the actual Contract and the terms and limitations of any qualified plan which is to be funded by the Contract. Qualified plans are subject to several requirements and limitations which may affect the terms of any particular Contract or the advisability of taking certain action permitted by the Contract. TO BUY A CONTRACT If you want to buy a Contract, you must submit an application and make an initial premium payment. If you are buying the Contract to fund a SIMPLE-IRA or SEP, an initial premium payment is not required at the time you send in the application. If the application is complete and the Contract applied for is suitable, the Contract is issued. If the completed application is received in proper order, the initial premium payment is credited within two valuation days after the later of receipt of the application or receipt of the initial premium payment at the annuity service office. If the initial premium payment is not credited within five valuation days, it is refunded unless we have received your permission to retain the premium payment until we receive the information necessary to issue the Contract. The date the Contract is issued is the contract date. The contract date is the date used to determine contract years, regardless of when the Contract is delivered. PREMIUM PAYMENTS .. The initial premium payment must be at least $5,000 for non-qualified retirement programs. .. All other initial premium payments must be at least $2,000. .. If you are making premium payments through a payroll deduction plan or through a bank account (or similar financial institution) under an automated investment program, your initial and subsequent premium payments must be at least $100. .. All premium payments are subject to a surrender charge period that begins in the contract year each payment is received. .. Subsequent payments must be at least $500 and can be made until the annuitization date. .. If you are a member of a retirement plan covering three or more persons, the initial and subsequent premium payments for the Contract must average at least $100 and cannot be less than $50. .. The total of all premium payments may not be greater than $2,000,000 without our prior approval. RIGHT TO EXAMINE THE CONTRACT (FREE-LOOK) Under state law, you have the right to return the Contract for any reason during the examination offer period. The examination offer period is 10 days after the Contract is delivered to you in all states, unless your Contract is issued in: .. Arizona and you are age 65 and over (30 day examination offer period), .. California and you are age 60 and over (30 day examination offer period), .. Idaho (20 day examination offer period), or .. North Dakota (20 day examination offer period). Some states require us to return the initial premium payment while other states require us to return the accumulated value. Though we currently allocate your initial premium to the investment options you have selected, we reserve the right to allocate initial premiums to the Money Market Division during the examination offer period. In addition, we are required to allocate initial premium payments to the Money Market Division if the contract is issued in California and the owner is age 65 or older. After the examination offer period, the current value of the Money Market Division will be reallocated according to your allocation instructions. The states in which purchase payments are returned are:
Georgia Louisiana Nebraska Rhode Island Hawaii Maine New Hampshire South Carolina Idaho Maryland North Carolina Utah Iowa Michigan Oklahoma Virginia Kentucky Missouri Pennsylvania West Virginia
Please note that on July 16, 2004, we filed a request with the SEC for an order to permit us to recapture the premium payment credit if you decide to return the Contract during the examination offer period. If the order is granted, we recover the full amount of the premium payment credit and you could receive less than your initial premium payment. Based on your state, you would receive either the initial premium payments less the purchase payment credit or the accumulated value less 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 premium payments; or .. accumulated value. To return a Contract, you must send it and a written request to the annuity service office or to the sales representative who sold it to you before the close of business on the last day of the examination offer period. If you send the request (properly addressed and postage prepaid) to the annuity service office, the date of the postmark is used to determine if the examination offer period has expired. Specific information is available from your sales representative or the annuity service office (1-800-852-4450). REPLACEMENT CONTRACTS If the purchase of this Contract is a replacement for another annuity contract or a life insurance policy, different examination offer periods may apply. The Company reserves the right to keep the initial premium payment in the Money Market Division longer than 10 days to correspond to the examination offer periods of a particular state's replacement requirements. 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 premium payment. We reserve the right to change or terminate this program. Any changes or termination will follow at least one-year notice. Both SPDA and SPDA+ are annuities which provide a fixed rate of accumulation. The values in the Separate Account divisions in this Contract vary with the investment experience and objectives of the various underlying mutual funds. Thus, the value of your Contract may increase or decrease with the investment holdings of the Separate Account divisions. When making an exchange decision, the owner should carefully review the SPDA or SPDA+ contract and this prospectus because the charges and provisions of the contracts differ. An existing SPDA or SPDA+ contract may be currently eligible for waiver of surrender charge due to critical need, while similar riders may not be available under this Contract. Electing the exchange credit does not result in additional charges or deductions. The charges and deductions associated with your Contract and any riders still apply. To complete a transfer to this Contract, send: .. a Contract application, .. a SPDA/SPDA+ surrender form, .. a replacement form (based on state written), and .. an Annuity Exchange Request and Release Form. The exchange is effective when we receive the completed forms and accept the application. The transaction is valued at the end of the valuation period in which we receive the necessary documents. (This "exchange credit" 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 premium payment. The credit is treated as earnings. We recover the 1% credit if you exercise your right to return the Contract during the examination offer period (see Right to Examine the Contract).
PREMIUM PAYMENT CREDIT RIDER You may elect a premium payment credit rider at the time the Contract is issued (the rider may not be available in all states; consult your sales representative or the annuity service office for availability). If the premium payment credit rider is elected, the following provisions apply to the Contract: .. A credit of 5% will be applied to premium payments received during your first contract year. For example, if you make premium payments totaling $10,000 in your first contract year, a credit amount of $500 will be added to your Contract (5% x $10,000). If an additional premium payment of $5,000 is made in your second contract year, a credit is not added as a result of the $5,000 premium payment. ..The credit is allocated among the investment options according to your then current premium payment allocations. ..If you exercise your right to return the Contract during the examination offer period, the amount returned to you is reduced by any credits. You could receive less than your initial premium payment. .. On July 16, 2004 we filed a request with the SEC for an order to permit us to recapture the premium payment credit if you request commencement of annuity benefits prior to the third contract anniversary or if you decide to return the Contract during the examination offer period. If the order is granted, the credit would be recovered from your investment options according to your surrender allocation percentages (if surrender allocation percentages are not specified, we would use your premium allocation percentages). Potentially, the amount we would recover could be more than the current value of the credit if the investment options have experienced negative investment performance. .. Credits are considered earnings under the Contract. ..All premium payments are subject to the 9-year surrender charge table (see Surrender Charge). ..The premium payment credit rider may not be cancelled and the associated 9-year surrender charge period cannot be changed. The current annual charge for the rider is 0.60% of the average daily net assets of the Separate Account divisions. The charge is assessed until completion of your 8th contract year (and only prior to the annuitization date) even if the credit has been recovered. You should carefully examine the premium payment credit rider to decide if the premium payment credit rider is suitable as there are circumstances under which you would be worse off for having received the credit. In making this determination, you should consider the following factors: ..the length of time you plan to own the Contract (the rider increases the amount and duration of the surrender charges); ..the frequency, amount and timing of any partial surrenders (the rider increases the amount and duration of the surrender charges); ..the amount and timing of your premium payment(s). If you elect the rider and anticipate making additional premium payments after the first contract year, please note that premium payments after the first contract year will be assessed higher Separate Account charges though no credit is applied to those premium payments; and ..the higher Separate Account charges have a negative impact on investment performance. The charges used to recoup our expense of payment the premium payment credit include the surrender charge and the premium payment credit rider charge. We expect to make a profit from these charges. The following tables demonstrate hypothetical values but do not show the impact of partial surrenders. The tables are based on: .. a $25,000 initial premium payment and no additional premium payments; ..the deduction of total Separate Account annual expenses of 1.85% (for the first eight contract years) annually for Contracts with the premium payment credit rider and 1.25% annually for Contracts without the rider and after the first eight contract years for Contract with the premium payment credit rider; ..the deduction of the arithmetic average of the underlying mutual fund expenses as of December 31, 2003 (estimated expense ratios are used for the new underlying mutual funds); .. 0%, 5% and 10% annual rates of return before charges; and ..payment of the $30 annual contract fee (while the Contract's value is less than $30,000).
0% ANNUAL RETURN 5% ANNUAL RETURN 10% ANNUAL RETURN -------------------------------- -------------------------------- -------------------------------- SURRENDER VALUE SURRENDER VALUE SURRENDER VALUE SURRENDER VALUE SURRENDER VALUE SURRENDER VALUE WITHOUT WITH WITHOUT WITH WITHOUT WITH CONTRACT PREMIUM PAYMENT PREMIUM PAYMENT PREMIUM PAYMENT PREMIUM PAYMENT PREMIUM PAYMENT PREMIUM PAYMENT YEAR CREDIT RIDER CREDIT RIDER CREDIT RIDER CREDIT RIDER CREDIT RIDER CREDIT RIDER - -------- --------------- --------------- --------------- --------------- --------------- --------------- 1 $23,050 $23,627 $24,261 $24,834 $ 25,436 $ 26,089 2 22,493 22,880 24,844 25,282 27,397 28,036 3 21,949 22,406 25,479 26,051 29,617 30,379 4 21,619 21,938 26,389 26,849 32,222 32,868 5 21,292 21,476 27,350 27,657 35,005 35,513 6 20,966 21,021 28,329 28,477 37,981 38,325 7 20,643 20,572 29,327 29,338 41,162 41,315 8 20,501 20,130 30,624 30,180 44,815 44,497 9 20,002 19,816 31,410 31,219 48,207 48,153 10 19,515 19,504 32,217 32,277 51,856 52,066 15 17,252 17,242 36,573 36,641 74,685 74,988 20 15,251 15,242 41,519 41,596 107,564 108,000
The higher the rate of return, the more advantageous the premium payment credit rider becomes. However, Contracts with the premium payment credit rider are subject to both a greater surrender charge and a longer surrender charge period than Contracts issued without the premium payment credit rider. If you surrender your Contract with the premium payment credit rider while subject to a surrender charge, your surrender value may be less than the surrender value of a Contract without the premium payment credit rider.
THE ACCUMULATION PERIOD The Value of Your Contract - -------------------------- The accumulated value of your Contract is the total of the Separate Account division accumulated value plus the DCA Plus Account(s) accumulated value plus the Fixed Account accumulated value. The DCA Plus Accounts and Fixed Account are described in the section titled FIXED ACCOUNT AND DCA PLUS ACCOUNTS. There is no guaranteed minimum Separate Account division accumulated value. Its value reflects the investment experience of the divisions that you choose. It also reflects your premium payments, partial surrenders, surrender charges and the Contract expenses deducted from the Separate Account. The Separate Account division accumulated value changes from day to day. To the extent the accumulated value is allocated to the Separate Account, you bear the investment risk. At the end of any valuation period, your Contract's value in a division is: .. the number of units you have in a division multiplied by .. the value of a unit in the division.
The number of units is the total of units purchased by allocations to the division from: .. your initial premium payment; .. subsequent investments; .. premium payment credits; and .. transfers from another investment option. minus units sold: .. for partial surrenders from the division; .. as part of a transfer to another division or the Fixed Account; and .. to pay contract charges and fees.
Unit values are calculated each valuation date at the close of normal trading of the NYSE. To calculate the unit value of a division, the unit value from the previous valuation date is multiplied by the division's net investment factor for the current valuation period. The number of units does not change due to a change in unit value. The net investment factor measures the performance of each division. The net investment factor for a valuation period is (((a) plus (b)) divided by (c)) minus (d) where: .. (a) is the share price (net asset value) of the underlying mutual fund at the end of the valuation period; .. (b) is the per share amount of any dividend* (or other distribution) made by the mutual fund during the valuation period; .. (c) is the share price (net asset value) of the underlying mutual fund at the end of the previous valuation period; and .. (d) are the total Separate Account annual expenses. * When an investment owned by an underlying mutual fund pays a dividend, the dividend increases the net asset value of a share of the underlying mutual fund as of the date the dividend is recorded. As the net asset value of a share of an underlying mutual fund increases, the unit value of the corresponding division also reflects an increase. Payment of a dividend under these circumstances does not increase the number of units you own in the division. The Separate Account charges are calculated by dividing the annual amount of the charge by 365 and multiplying by the number of days in the valuation period. Premium Payments - ---------------- .. On your application, you direct your premium payments to be allocated to the investment options. .. Allocations may be in percentages. .. Percentages must be in whole numbers and total 100%. .. Subsequent premium payments are allocated according to your then current allocation instructions. .. Changes to the allocation instructions are made without charge. . A change is effective on the next valuation period after we receive your new instructions. . You can change the current allocations and future allocation instructions by: . mailing your instructions to us; . calling us at 1-800-852-4450 (if telephone privileges apply); . faxing your instructions to us at 1-515-248-9800; or . visiting www.principal.com. .. Changes to premium payment allocations do not automatically result in the transfer any existing investment option accumulated values. You must provide specific instructions to transfer existing accumulated values. .. Premium payments are credited on the basis of unit value next determined after we receive a premium payment. .. If no premiums are paid during two consecutive calendar years and the accumulated value is less than $2,000, we reserve the right to terminate the Contract (see GENERAL INFORMATION - Reservation of Rights). Division Transfers - ------------------ .. You may request an unscheduled transfer or set up a scheduled transfer by sending us a written request, by telephoning if you have telephone privileges (1-800-852-4450) or sending us a fax (1-515-248-9800). .. You must specify the dollar amount or percentage to transfer from each division. .. The minimum transfer amount is the lesser of $100 or the value of your division. You may not make a transfer to the Fixed Account if: .. a transfer has been made from the Fixed Account to a division within six months; or .. following the transfer, the Fixed Account value would be greater than $1,000,000. Unscheduled Transfers - --------------------- .. You may make unscheduled division transfers from a division to another division or to the Fixed Account by: . mailing your instructions to us; . calling us at 1-800-852-4450 (if telephone privileges apply); . faxing your instructions to us at 1-515-248-9800; 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. .. We reserve the right to impose of fee of $ 30 on each unscheduled transfer after the first in a contract year. LIMITATIONS ON UNSCHEDULED TRANSFERS . We reserve the right to reject excessive exchanges or purchases if the trade would disrupt the management of the Separate Account, any division of the Separate Account or any underlying mutual fund. In addition, we may suspend or modify transfer privileges in our sole discretion at any time to prevent market timing efforts that could disadvantage other owners. These modifications could include, but not be limited to: .. requiring a minimum time period between each transfer; .. imposing a transfer fee; .. limiting the dollar amount that an owner may transfer at any one time; or .. not accepting transfer requests from someone providing requests for multiple Contracts for which he or she is not the owner. Scheduled Transfers (Dollar Cost Averaging) - ------------------------------------------- .. You may elect to have transfers made on a scheduled basis. .. There is no charge for scheduled transfers and no charge for participating in the scheduled transfer program. .. You must specify the dollar amount of the transfer. .. You select the transfer date (other than the 29th, 30th or 31st) and the transfer period (monthly, quarterly, semi-annually or annually). .. If the selected date is not a valuation date, the transfer is completed on the next valuation date. .. Transfers are not permitted into DCA Plus Accounts. .. If you want to stop a scheduled transfer, you must provide us notice prior to the date of the scheduled transfer. .. Transfers continue until your value in the division is zero or we receive notice to stop the transfers. .. We reserve the right to limit the number of divisions from which simultaneous transfers are made. In no event will it ever be less than two. Scheduled transfers are designed to reduce the risks that result from market fluctuations. They do this by spreading out the allocation of your money to investment options over a longer period of time. This allows you to reduce the risk of investing most of your money at a time when market prices are high. The success of this strategy depends on market trends and is not guaranteed. Example:
MONTH AMOUNT INVESTED SHARE PRICE SHARES PURCHASED ----- --------------- ----------- ---------------- January $ 100 $ 25.00 4 February $ 100 $ 20.00 5 March $ 100 $ 20.00 5 April $ 100 $ 10.00 10 May $ 100 $ 15.00 6 June $ 100 $ 20.00 5 -------- ------- - Total $ 600 $110.00 35
In the example above, the average share price is $18.33 (total of share prices ($110.00) divided by number of purchases (6)). The average share cost is $17.14 (amount invested ($600.00) divided by number of shares purchased (35)). AUTOMATIC PORTFOLIO REBALANCING (APR) .. APR allows you to maintain a specific percentage of your Separate Account division accumulated value in specified divisions over time. .. You may elect APR at any time after the examination offer period has expired. .. APR is not available for values in the Fixed Account or the DCA Plus Accounts. .. APR is not available if you have arranged scheduled transfers from the same division. .. There is no charge for APR transfers and no charge for participating in the APR program. .. APR may be done on the frequency you specify: . quarterly (on a calendar year or contract year basis); or . semiannually or annually (on a contract year basis). .. You may rebalance by completing and submitting a form to us, by telephoning if you have telephone privileges (1-800-852-4450) or faxing your instructions to us (1-515-248-9800). (Divisions are rebalanced at the end of the next valuation period following your request.) Example: You elect APR to maintain your Separate Account division accumulated value with 50% in the Capital Value Division and 50% in the Bond Division. At the end of the specified period, 60% of the values are in the Capital Value Division, with the remaining 40% in the Bond Division. By rebalancing, units from the Capital Value Division are sold and applied to the Bond Division so that 50% of the Separate Account division accumulated value is once again in each Division. TELEPHONE AND INTERNET SERVICES These services permit you to: .. make premium payment allocation changes; .. make redemptions; .. set up DCA scheduled transfers; .. make transfers; and .. make changes to APR. Instructions received via our telephone services and internet are binding on both owners if the Contract is jointly owned. Neither the Company nor the Separate Account are responsible for the authenticity of telephone service or internet transaction requests. We reserve the right to refuse telephone service or internet transaction requests. You assume the risk of loss caused by fraudulent telephone service or internet transactions we reasonably believe to be genuine. We follow procedures in an attempt to assure genuine telephone service or internet transactions. If these procedures are not followed, we may be liable for loss caused by unauthorized or fraudulent transactions. The procedures may include recording telephone service transactions, requesting personal identification (name, address, security phrase, password, daytime telephone number, social security number and/or birth date) and sending written confirmation to your address of record. If the Contract is owned by a business entity or a trust, an authorized individual (with the proper password) may use these services. Instructions provided by the authorized individual are binding on the owner. We reserve the right to modify or terminate telephone service or internet transaction procedures at any time. Telephone Services - ------------------ Telephone services are available for both you and your sales representative. Telephone services may be declined on the application or at any later date by providing us with written notice. Telephone services are used by calling us at 1-800-852-4450. Telephone instructions must be made while we are open for business. They are effective when received in good order by us before the close of normal trading of the NYSE. Requests received when we are not open for business or after the NYSE closes its normal trading will be effective on the next valuation date. Internet - -------- Internet access is available for both you and your sales representative at www.principal.com. You may elect Internet authorization for your sales representative by providing us written notice. SURRENDERS You may surrender your Contract by providing us notice. Surrenders result in the cancellation of units and your receipt of the value of the canceled unit minus any applicable fee and surrender charge. The values are determined as of the end of the valuation period in which we receive your request. Surrenders from the Separate Account are generally paid within seven days of the effective date of the request for surrender (or earlier if required by law). However, certain delays in payment are permitted (see Delay of Payments). Surrenders before age 591/2 may involve an income tax penalty (see FEDERAL TAX MATTERS). You may specify surrender allocation percentages with each partial surrender request. If you do not provide us with specific percentages, we will use your premium payment allocation percentages for the partial surrender. Surrenders may be subject to a surrender charge (see Surrender Charge). Surrender requests may be sent to us at: Principal Life Insurance Company P O Box 9382 Des Moines, Iowa 50306-9382 Total Surrender - --------------- .. You may surrender the Contract at any time before the annuitization date. .. You receive the cash surrender value at the end of the valuation period during which we receive your surrender request. .. The cash surrender value is your accumulated value minus any applicable surrender charges and fee(s) (contract fee and/or prorated share of the charge(s) for optional rider(s)). .. The written consent of all collateral assignees and irrevocable beneficiaries must be obtained prior to surrender. .. We reserve the right to require you to return the Contract to us prior to making any payment though this does not affect the amount of the cash surrender value. Unscheduled Partial Surrender - ----------------------------- .. Prior to the annuitization date, you may surrender a part of the accumulated value 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 your surrender allocation percentages. .. If surrender allocation percentages are not specified, we use your premium payment allocation percentages. .. We surrender units from your investment options to equal the dollar amount of the surrender request plus any applicable surrender charge and transaction fee, if any. .. The accumulated value after the unscheduled partial surrender must be equal to or greater than $5,000 (we reserve the right to change the minimum remaining accumulated value but it will not be greater than $10,000). Scheduled Partial Surrender - --------------------------- .. You may elect partial surrenders from any of the investment options on a scheduled basis 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. .. We surrender units from your investment options to equal the dollar amount of the surrender request plus any applicable surrender charge. .. The surrenders continue until your value in the investment option is zero or we receive written notice to stop the surrenders. INVESTMENT PROTECTOR PLUS RIDER You may elect to purchase the optional Investment Protector Plus Rider at an additional charge. The Contract is available with or without the rider. The rider provides protection against market risk by allowing you to make certain annual withdrawals, regardless of your accumulated value. Election of this rider may or may not be to your benefit. If you do not intend to make any partial surrenders, the rider is not appropriate for you. Please review the rider terms and consult your sales representative to determine whether the rider is appropriate for you. We guarantee that you may withdraw certain guaranteed minimum withdrawal benefit (GMWB) amounts each contract year, regardless of your accumulated value, subject to the terms and conditions of the rider. The rider: .. Provides the flexibility of two separate measures of withdrawal benefits without requiring you to elect either measure (as long as the accumulated value is greater than zero); .. Limits the investment options available under the Contract; and .. Has a charge which is discussed in the section CHARGES AND DEDUCTIONS -Charges for Optional Riders The rider is available only at the time the Contract is issued and only if the older owner is younger than age 81. You may not terminate the rider during the first five contract years. The rider does not restrict or change your partial surrender rights under the Contract, including your right to elect scheduled partial surrenders. You must notify us if you want to make a withdrawal. The rider provides two alternative withdrawal benefit measures - For Life and Investment Back measures. .. The For Life measure guarantees that, regardless of the accumulated value, you may withdraw 5% of the For Life withdrawal benefit base for the rest of your life or until the For Life withdrawal benefit base is zero. Your right to the 5% annual For Life benefit does not commence until the contract year after the older owner attains age 59 1/2. .. The Investment Back measure guarantees that, regardless of the accumulated value, you may withdraw 7% annually of the Investment Back withdrawal benefit base until the Investment Back remaining withdrawal benefit base is zero. Your right to the 7% annual Investment Back benefit commences immediately. You are not required to elect a withdrawal benefit measure (as long as the accumulated value is greater than zero). We tell you each contract year the amount of the For Life withdrawal benefit and the Investment Back withdrawal benefit. Excess Withdrawals - ------------------ The rider is designed to permit you to recover at least your premium payments by allowing periodic withdrawals of specified amounts for the duration of the rider. Withdrawal amounts that exceed the withdrawal benefit base under a measure will have a negative effect on the benefits of this rider as follows: .. For Life - Any withdrawal that you make prior to the contract year after the older owner attains age 59 1/2 and the portion of any withdrawals that exceed the For Life withdrawal benefit in any year thereafter is an Excess Withdrawal that reduces the For Life withdrawal benefit base. .. Investment Back - The portion of any withdrawals that exceed the Investment Back withdrawal benefit in any year is an Excess Withdrawal that reduces the Investment Back withdrawal benefit base. Excess Withdrawals deplete the withdrawal benefit base and may result in termination of the rider for lack of value in the withdrawal benefit base. Please refer to the examples in Appendix B so that you may better understand how withdrawals affect the benefits available under this rider. Definitions - ----------- Some important terms in understanding this rider are: .. Excess Withdrawal - the portion of a withdrawal that exceeds the withdrawal benefit under either measure. .. GMWB Bonus - an amount equal to 5% of total premium payments (see GMWB Bonus). .. GMWB Step-Up - if the accumulated value of the Contract is greater than the Investment Back remaining withdrawal benefit base, you may increase ("step-up") the remaining withdrawal benefit base for both measures to the accumulated value in certain years (see GMWB Step-Up). .. Remaining withdrawal benefit base - the amount that is available for future withdrawal benefits. .. Withdrawal benefit- the amount that we guarantee you may withdraw each year under the For Life and the Investment Back measures. .. Withdrawal benefit base - the basis for determining the withdrawal benefit available each year under the For Life and Investment Back measures. Calculation of the For Life Withdrawal Benefit - ---------------------------------------------- We determine the For Life withdrawal benefit on the contract date and each contract anniversary as follows: .. The For Life withdrawal benefit is not available until the contract year commencing after the older owner attains age 59 1/2. .. Thereafter, the For Life benefit is 5% of the For Life withdrawal benefit base until the earlier to occur of: (i) the For Life withdrawal benefit base is zero; or (ii) your death. At your death, your beneficiary(ies) elects to receive the Investment Back benefit (a series of benefits) or the death benefit under the Contract (as a lump sum). Calculation of the Investment Back Withdrawal Benefit - ----------------------------------------------------- We determine the Investment Back withdrawal benefit on the contract date and each contract anniversary as follows: .. The Investment Back withdrawal benefit starts on the contract date. .. The benefit is 7% of the Investment Back withdrawal benefit base until the Investment Back remaining withdrawal benefit base is zero. At your death, your beneficiary(ies) elects to receive the Investment Back benefit (a series of benefits) or the death benefit under the Contract (as a lump sum). Calculation of the Withdrawal Benefit Base - ------------------------------------------ We calculate the withdrawal benefit base for the Investment Back and the For Life measures separately on the contract date and each contract anniversary. On the contract date, the withdrawal benefit base for both measures equals your total premium payments. On succeeding contract anniversaries, the withdrawal benefit base equals total premium payments plus total GMWB Bonuses (if any) minus Excess Withdrawals (as computed for the particular measure). Excess Withdrawal is the greater of (a) or (b) where: (a) is the amount of the surrender that exceeds the withdrawal benefit remaining prior to the surrender; and (b) is the result of ((1) divided by (2)) multiplied by (3) where: (1) is the amount of the surrender that exceeds the withdrawal benefit remaining prior to the surrender; and (2) is the accumulated value after the withdrawal benefit is deducted but prior to deducting the surrender amount that exceeds the withdrawal benefit; and (3) is the withdrawal benefit base prior to the adjustment for the excess withdrawal amount. Calculation of the Remaining Withdrawal Benefit Base - ---------------------------------------------------- We calculate the remaining withdrawal benefit base for the Investment Back and For Life measures separately. We adjust the remaining withdrawal benefit base whenever a premium payment or partial surrender occurs. On the contract date, the remaining withdrawal benefit base for both measures equals the withdrawal benefit base; i.e., total premium payments. After the contract date, the remaining withdrawal benefit base is the total of all premium payments plus all GMWB Bonuses (if any) minus an amount that is the result of (a) plus (b) where: (a) is the actual amount surrendered that does not exceed the withdrawal benefit remaining prior to the surrender; and (b) is the greater of (1) and (2) where: (1) is the amount of the partial surrender that exceeds the withdrawal benefit remaining prior to the surrender; and (2) is the result of ((i) divided by (ii)) multiplied by (iii) where: (i) is the amount of the surrender greater than the withdrawal benefit remaining prior to the surrender; (ii) is the accumulated value after the withdrawal benefit amount is deducted but prior to the surrender of the excess amount; and (iii) is the remaining withdrawal benefit base after the withdrawal benefit amount is deducted but prior to the adjustment for the excess amount. EFFECT OF ACCUMULATED VALUE If the accumulated value of your Contract is zero and if you have an Investment Back remaining withdrawal benefit base or a For Life withdrawal benefit base, or both, you must elect either the For Life or the Investment Back withdrawal benefit. We will pay the rider benefits under the measure you have elected. .. The Investment Back measure will provide a series of withdrawal benefits until the Investment Back remaining withdrawal benefit base is zero. .. The For Life measure will provide a series of withdrawal benefits until the later of the For Life remaining withdrawal benefit base is zero or the time of your death. If there is any remaining withdrawal benefit base at the time of your death, we will pay it to your beneficiaries, as described in the Rider Death Provisions section below. .. The Excess Withdrawal amount deducted from the withdrawal benefit base and remaining withdrawal benefit base may be more than dollar-for-dollar if the accumulated value is less than the benefit bases. The calculation of the proportionate deductions to the withdrawal benefit base and remaining withdrawal benefit base are described above. GMWB BONUS If no partial surrenders are made in a given contract year, a GMWB bonus of 5% of the premium payments is credited to the withdrawal benefit base and the remaining withdrawal benefit base on the next contract anniversary. The GMWB bonus ends the earlier of: .. the fifth contract anniversary; or .. the date you make a partial surrender. The GMWB bonus is used only to calculate the benefit bases for this rider. It is not included in the accumulated value of your Contract. GMWB STEP-UP Beginning with the fifth contract anniversary, if the accumulated value is greater than the Investment Back remaining withdrawal benefit base, you may elect the GMWB Step-Up. The Step-Up increases the remaining withdrawal benefit base for both the For Life and Investment Back measures and will reset the withdrawal benefit base for both the For Life and Investment Back measures to the accumulated value on the most recent contract anniversary. You must notify us within 30 days after your fifth contract anniversary if you elect the Step-Up. If you do not elect to step-up at that time, you may make a Step-Up election within the 30-day period following any subsequent contract anniversary. Once you have elected to step-up, you must wait five contract years to make another step-up election. If you elect a Step-Up, you will be subject to any limitations on investment options and to the rider charge then in effect. A person who owns the contract as a result of spousal continuation (described in THE CON-TRACT) may elect a Step-Up at the time of electing to continue the Contract. INVESTMENT OPTION RESTRICTIONS While this rider is in effect, the investment options you may select are restricted. Those investment options are determined at the time the rider is issued. The Company reserves the right to substitute or add new or other investment options at its sole discretion. You may allocate your Separate Account divisions to .. one of the GMWB models shown below, or .. the Principal LifeTime 2010 Account, or .. the Principal LifeTime 2020 Account, or .. the Principal LifeTime Strategic Income Account. The rider does not impose restrictions on allocations to the Fixed or DCA Accounts. For more information about the Principal LifeTime Accounts, please see the attached prospectus for the Principal Variable Contracts Fund, Inc. You may transfer among the investment options within a GMWB Model as long as the percent-ages for each of the five risk categories match the Model. You may transfer from one GMWB Model or Principal LifeTime Account to another by moving 100% of the accumulated value in the separate account divisions to the new GMWB model or to a Principal LifeTime Account available with the rider. You may make a transfer by providing us notice (the change is effective on the next valuation period after we receive your notice). The GMWB models and Principal LifeTime Accounts are designed to support the rider guarantees with balanced investment options. The rider is not suitable if your goal is aggressive growth. GMWB MODELS You may use one of the three GMWB select models shown below. Alternatively, you may use one of the three GMWB self-build models, which afford you limited investment option selections. For example, if you choose self-build model A, you must allocate 30% of your division assets into the "stable divisions". You choose how you will allocate that 30% between the Money Market and the Limited Term Bond divisions (for example: 15% in each of Money Market and Limited Term Bond; or 10% in Money Market and 20% in Limited Term Bond). The select models are rebalanced each calendar quarter to the percentages shown in the Select Models chart below. The self-build models are rebalanced each calendar quarter to the percent-ages you have selected. SELECT MODELS
INVESTMENT ADVISOR GMWB MODEL A GMWB MODEL B GMWB MODEL C - ------------------------------------------------------------------------------------------ STABLE DIVISIONS 30% 20% 10% - ------------------------------------------------------------------------------------------ Limited Term Bond Principal Global 30% 20% 10% Investors, LLC - ------------------------------------------------------------------------------------------ CONSERVATIVE DIVISIONS 40% 30% 20% - ------------------------------------------------------------------------------------------ American Century VP American Century Inflation Protection Investment Management, Inc. 10% 5% 10% Bond Principal Management Corporation 15% 15% 10% Government Securities Principal Global 15% 10% 0% Investors, LLC - ------------------------------------------------------------------------------------------ MODERATE DIVISIONS 20% 30% 45% - ------------------------------------------------------------------------------------------ Large Cap Blend 10% 10% 10% LargeCap Blend T. Rowe Price 10% 10% 10% Associates, Inc. - ------------------------------------------------------------------------------------------ Large Cap Value 0% 5% 10% LargeCap Value Alliance Capital 0% 5% 10% Management L.P. - ------------------------------------------------------------------------------------------ Balanced 10% 15% 20% Equity Income Principal Global 10% 15% 20% Investors, LLC - ------------------------------------------------------------------------------------------ Mid Cap Value 0% 0% 5% MidCap Value Neuberger Berman 0% 0% 5% Management, Inc. - ------------------------------------------------------------------------------------------ AGGRESSIVE DIVISIONS 10% 15% 20% - ------------------------------------------------------------------------------------------ Large Cap Growth 10% 10% 10% American Century VP American Century Ultra Investment Management, 10% 10% 10% Inc. - ------------------------------------------------------------------------------------------ MidCap Blend 0% 5% 5% MidCap Principal Global 0% 5% 5% Investors, LLC - ------------------------------------------------------------------------------------------ Small Cap Value 0% 0% 5% SmallCap Value JP Morgan Investment 0% 0% 5% Management, Inc. - ------------------------------------------------------------------------------------------ DYNAMIC DIVISIONS 0% 5% 5% - ------------------------------------------------------------------------------------------ Fidelity VIP Overseas Fidelity Management & 0% 5% 5% Research Company - ------------------------------------------------------------------------------------------
SELF-BUILD MODELS
INVESTMENT ADVISOR GMWB MODEL A GMWB MODEL B GMWB MODEL C - ------------------------------------------------------------------------------------------ STABLE DIVISIONS 30% 20% 10% - ------------------------------------------------------------------------------------------ Limited Term Bond Principal Global Investors, LLC Money Market Principal Management Corporation - ------------------------------------------------------------------------------------------ CONSERVATIVE DIVISIONS 40% 30% 20% - ------------------------------------------------------------------------------------------ Bond Principal Management Corporation Government Securities Principal Global Investors, LLC American Century VP American Century Inflation Protection Investment Management, Inc. - ------------------------------------------------------------------------------------------ MODERATE DIVISIONS 20% 30% 45% - ----------------------------------------------------------------------------------------------- Large Cap Blend 10% 10% 10% LargeCap Blend T. Rowe Price Associates, Inc. LargeCap Stock Index Principal Global Investors, LLC Neuberger Berman AMT Neuberger Berman Socially Responsive Management, Inc. - ------------------------------------------------------------------------------------------ Large Cap Value 0% 5% 10% Capital Value Principal Global Investors, LLC Equity Value American Century Investment Management, Inc. LargeCap Value Alliance Capital Management L.P. - ------------------------------------------------------------------------------------------ Balanced 10% 15% 20% Asset Allocation Morgan Stanley Asset Management Equity Income Principal Global Investors, LLC Principal LifeTime Principal Global 2010 Investors, LLC Principal LifeTime Principal Global 2020 Investors, LLC Principal LifeTime Principal Global Strategic Income Investors, LLC - ------------------------------------------------------------------------------------------ Mid Cap Value 0% 0% 5% MidCap Value Neuberger Berman Management, Inc. AGGRESSIVE DIVISIONS 10% 15% 20% - ------------------------------------------------------------------------------------------ Large Cap Growth 10% 10% 10% American Century VP American Century Ultra Investment Management, Inc. Fidelity VIP Fidelity Management & Contrafund Research Company T. Rowe Price Health T. Rowe Price Sciences Associates, Inc. - ------------------------------------------------------------------------------------------ Mid Cap Blend 0% 5% 5% MidCap Principal Global Investors, LLC - ------------------------------------------------------------------------------------------ Small Cap Value 0% 0% 5% SmallCap Value JP Morgan Investment Management, Inc. - ----------------------------------------------------------------------------------------------- DYNAMIC DIVISIONS 0% 5% 5% - ------------------------------------------------------------------------------------------ Fidelity VIP Overseas Fidelity Management & Research Company International Principal Global Investors, LLC - ------------------------------------------------------------------------------------------
TERMINATION OF THE RIDER You may not terminate the rider prior to the fifth contract anniversary. However, the rider terminates upon the earliest to occur of .. You send us notice to terminate the rider (after the fifth contract anniversary). This will terminate the rider, not the Contract. .. You terminate the Contract. .. The Investment Back remaining withdrawal benefit base and the For Life withdrawal benefit base are zero. .. The contract owner is changed. (We do not consider it a change of owner if a surviving spouse elects to continue the Contract. The surviving spouse may elect to continue the Con-tract with or without the rider. Only the Investment Back benefit can be continued because the For Life benefit terminates upon the death of the first owner to die.) .. Once terminated, the rider may not be reinstated. EFFECT OF NOT TAKING AVAILABLE BENEFITS If you choose not to take any or all of a withdrawal benefit in a contract year, that benefit amount is not carried over to the next year. There will be no reduction in the For Life and the Investment Back withdrawal benefit bases and remaining withdrawal benefit bases. RIDER DEATH PROVISION .. For Life measure - the For Life measure terminates on the original owner's death. If at the time of the owner's death the accumulated value is greater than zero, your beneficiary(ies) must elect to receive either . the Investment Back withdrawal benefit (a series of benefits (we will pay the benefit in an amount and frequency acceptable to us. If a beneficiary chooses a periodic payment, it must be at least $100 per payment)) until the Investment Back remaining withdrawal benefit base is zero; or . the death benefit under the Contract (as a lump sum) If you elected the For Life measure when the accumulated value was zero, your beneficiary(ies) receive any For Life remaining withdrawal benefit base as a series of benefits. .. Investment Back measure - If you elected the Investment Back measure when the accumulated value was zero, your beneficiary(ies) receive any Investment Back remaining withdrawal benefit base as a series of payments. If at the time of the owner's death the accumulated value is greater than zero, your beneficiary(ies) must elect to receive either . the Investment Back withdrawal benefit (a series of benefits (we will pay the benefit in an amount and frequency acceptable to us. If a beneficiary chooses a periodic payment, it must be at least $100 per payment)) until the Investment Back remaining withdrawal benefit base is zero; or . the death benefit under the Contract (as a lump sum). FOR EXAMPLES ON HOW THE RIDER FEATURES OPERATE AND ARE CALCULATED, PLEASE SEE APPENDIX B. STANDARD DEATH BENEFIT If you die before the annuitization date, we pay a death benefit as follows:
Upon death of the owner if there is one owner .if the spouse is named beneficiary, the death benefit is paid or the surviving spouse may elect to continue the Contract .if someone other than the spouse is named beneficiary, the death benefit is paid to the beneficiary. If no beneficiary survives the owner, the death benefit is paid to the owner's estate. .if there are multiple beneficiaries named (which may or may not include the spouse of the owner), death benefits are paid to the beneficiaries. If no beneficiary survives the owner, the death benefit is paid to the owner's estate if there are joint owners . .the death benefit is paid or the if the joint owners are spouses surviving spouse may elect to continue the Contract .if the joint owners are not .the death benefit is paid to the spouses surviving owner if the owner is a corporation, Upon death of the annuitant the death trust or other entity benefit is paid to the named beneficiary(ies). If no beneficiary(ies) survives the annuitant, the death benefit is paid to the owner.
Before the annuitization date, you may give us written instructions for payment under a death benefit option. If we do not receive your instructions, the death benefit is paid according to instructions from the beneficiary(ies). The beneficiary(ies) may elect to apply the death benefit under an annuity benefit payment option or receive the death benefit as a single payment. Generally, unless the beneficiary(ies) elects otherwise we pay the death benefit in a single sum, subject to proof of your death. If a beneficiary dies before you, on your death we will make equal payments to the surviving beneficiaries unless you had provided us with other written instructions. If none of your beneficiaries survive you, we will pay the death benefit to your estate in a lump sum. No surrender charge applies when a death benefit is paid. If you die before the annuitization date and your beneficiary is your spouse, we will continue the Contract with your spouse as the new owner unless your spouse elects to receive the death benefit. Standard Death Benefit - ---------------------- The amount of the standard death benefit is the greatest of (1), (2) or (3) where: .. (1) is the accumulated value on the date we receive proof of death and all required documents; .. (2) is the total of premium payments minus an adjustment for each partial surrender (and any applicable fees and charges) made prior to the date we receive proof of death and all required documents; and .. (3) is the highest accumulated value (on any prior contract anniversary that is divisible by seven) plus any premium payments and minus an adjustment for each partial surrender (and any applicable fees and charges) made after that contract anniversary. The adjustment for each partial surrender is equal to ((a) divided by (b)) multiplied by the amounts determined in (2) or (3) above immediately prior to the partial surrender where: .. (a) is the amount of the partial surrender (and any applicable fees and charges); and .. (b) is the accumulated value immediately before the partial surrender. Example: Your accumulated value is $10,000 and you take a partial surrender of $2,000 (20% of the accumulated value). For purposes of calculating the death benefit, we adjust the amounts determined in (2) or (3) above by 20%. Enhanced Death Benefit Rider - ---------------------------- This rider provides you with the greater of the enhanced death benefit or the standard death benefit (described above). The enhanced death benefit rider can only be purchased at the time the Contract is issued. You may terminate the rider at any time. Once the rider is terminated, it cannot be reinstated. The rider charge is discussed in the section CHARGES AND DEDUCTIONS - Charges for Optional Riders. Prior to the annuitization date and prior to the lock-in date (the later of the contract anniversary following the oldest owner's 75th birthday or five years after the rider effective date), the enhanced death benefit is the greater of (a) or (b) where: .. (a) is (1) minus (2) where . (1) is the total of premium payments made since the rider effective date increased at a 5% effective annual interest rate; and . (2) is an adjustment for each partial surrender made since the rider effective date increased at a 5% effective annual interest rate. .. (b) is (1) plus (2) minus (3) where . (1) is the highest accumulated value on any contract anniversary since the rider effective date; . (2) are the premium payments received since that contract anniversary; and . (3) is an adjustment for each partial surrender made since that contract anniversary. After the lock-in date, (a) and (b) are only: .. increased by any premium payment since the lock-in date; and .. decreased by an adjustment for each partial surrender since the lock-in date. The adjustment for each partial surrender is ((1) divided by (2)) multiplied by (3) where: . (1) is the partial surrender amount plus surrender charge, if any; . (2) is the accumulated value immediately prior to the partial surrender; and . (3) is the amounts determined in (a) or (b) above immediately prior to the partial surrender. NOTE: For contracts issued in New Jersey, New York and Washington - under this rider, if the original owner dies before the annuitization date, the death benefit payable to the beneficiary is the greater of the standard death benefit or the death benefit calculated in (b) of the enhanced death benefit description above. Payment of Death Benefit - ------------------------ The death benefit is usually paid within seven days of our receiving all documents (including proof of death) that we require to process the claim. Payment is made according to benefit instructions provided by you. Some states require this payment to be made in less than seven days. Under certain circumstances, this payment may be delayed (see Delay of Payments). We pay interest (as required by state law) on the death benefit from the date we receive all required documents until payment is made or until the death benefit is applied under an annuity benefit payment option. NOTE: Proof of death includes: a certified copy of a death certificate; a certified copy of a court order; a written statement by a medical doctor; or other proof satisfactory to us. THE ANNUITY BENEFIT PAYMENT PERIOD Annuitization Date - ------------------ You may specify an annuitization date in your application. If you do not specify an annuitization date, the annuitization 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 so that you may elect to receive payments under the Contract. You may not select an annuitization date which is on or after the older annuitant's 85th birthday or 10 years after the contract date, whichever is the later. You may fully annuitize your Contract at any time after the first contract anniversary by electing to receive payments under an annuity benefit payment option. You may select when you want the payments to begin (within the period that begins the business day following our receipt of your instruction and ends one year after our receipt of your instruction). Depending on the type of annuity benefit payment option selected, payments that are initiated either before or after the annuitization date may be subject to penalty taxes (see FEDERAL TAX MATTERS). You should consider this carefully when you select or change the annuitization date. You may change the annuitization date with our prior approval. The request must be in writing and approved before we issue a supplementary contract which provides an annuity benefit payment option. Annuity Benefit Payment Options - ------------------------------- We only offer fixed annuity payments. If, however, the accumulated value on the annuitization date is less than $5,000 or if the amount applied under an annuity benefit 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 benefit payment options. Payments will be made on the frequency you choose. You may elect to have your annuity benefit payments made on a monthly, quarterly, semiannual or annual basis. The dollar amount of the payments is specified for the entire payment period according to the option selected. There is no right to make any total or partial surrender after the annuity benefit payments start. The amount of the fixed annuity benefit payment depends on: .. amount of accumulated value; .. annuity benefit payment option selected; and .. age and gender of annuitant (unless fixed income option is selected). The mortality risk assumed by the Company is to make annuity benefit payments for the life of annuitants regardless of how long they might live. Annuity benefit payments are determined in accordance with annuity tables and other provisions contained in the Contract. The annuity benefit payment tables contained in this Contract are based on the Annuity 2000 Mortality Table. These tables are guaranteed for the life of the Contract. The amount of the initial payment is determined by applying the accumulated value as of the date of annuitization to the annuity table for the annuitant's annuity option, gender, and age. Annuity benefit payments generally are higher for male annuitants than for female annuitants with an otherwise identical Contract. This is because statistically females have longer life expectancies than males. In certain states, this difference may not be taken into consideration in fixing the payment amount. Additionally, Contracts with no gender distinctions are made available for certain employer-sponsored plans because under most such plans, such Contract provisions are prohibited by law. You may select an annuity benefit payment option or change a previous selection by written request. We must receive the request on or before the annuitization date. If an annuity benefit payment option is not selected. we will automatically apply: .. for Contracts with one annuitant - Life Income with Payments Guaranteed for a Period of 10 Years. .. for Contracts with joint annuitants - Joint and Full Survivor Life Income with Payments Guaranteed for a Period of 10 Years. Tax laws and regulations may impose further restrictions on annuity benefit payment options. The available annuity benefit payment options include: FIXED PERIOD INCOME . Level payments are made for a fixed period. You may select a range from 5 to 30 years. If the annuitant dies before the selected period expires, payments continue to the beneficiary(ies) until the end of the period. Payments stop after all guaranteed payments are made. LIFE INCOME . Level payments begin at the annuitization date and continue for the annuitant's lifetime. It is possible that you would only receive one payment under this option if the annuitant dies before the second payment is due. LIFE INCOME WITH PERIOD CERTAIN . Level payments continue during the annuitant's lifetime. You may add a period certain of 5 to 30 years. If the annuitant dies before all of the guaranteed payments have been made, the guaranteed payments continue to the beneficiary(ies) until the end of the period. JOINT AND SURVIVOR . Payments continue as long as either the annuitant or the joint annuitant is alive. You may add a period certain of 5 to 30 years. You may also choose an option that lowers the amount of income after the death of a joint annuitant. If a period certain has been selected, and both annuitants die before all guaranteed payments have been made, the guaranteed payments continue to the beneficiary(ies) until the end of the period. Other annuity benefit payment options may be available with our approval. 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 benefit 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. DEATH OF ANNUITANT (DURING THE ANNUITY BENEFIT PAYMENT PERIOD) - -------------------------------------------------------------- If the annuitant dies during the annuity benefit payment period, remaining payments are made to the owner throughout the guarantee period, if any, or for the life of any joint annuitant, if any. If the owner is the annuitant, remaining payments are made to the contingent owner. In all cases the person entitled to receive payments also receives any rights and privileges under the annuity benefit payment option. CHARGES AND DEDUCTIONS An annual fee, a mortality and expense risks charge and in some circumstances a rider charge are deducted under the Contract. A surrender charge may also be deducted from certain surrenders made before the annuitization date. We reserve the right to assess a transaction fee, a transfer 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. Other than the Annual Fee (which we do not expect to generate a profit), we expect a profit from the fees and charges listed below. ANNUAL FEE Contracts with an accumulated value of less than $30,000 are subject to an annual Contract fee of the lesser of $30 or 2% of the accumulated value. Currently we do not charge the annual fee if your accumulated value is $30,000 or more. If you own more than one Contract, all the Contracts you own or jointly own are aggregated, on each Contract's anniversary, to determine if the $30,000 minimum has been met and whether that Contract will be charged. The fee is deducted from the investment option that has the greatest value. The fee is deducted on each contract anniversary and upon total surrender of the Contract. The fee assists in covering administration costs. The administration costs include costs associated with: .. issuing Contracts; .. establishing and maintaining the records which relate to Contracts; .. making regulatory filings and furnishing confirmation notices; .. preparing, distributing and tabulating voting materials and other communications; .. providing computer, actuarial and accounting services; and .. processing Contract transactions. MORTALITY AND EXPENSE RISKS CHARGE We assess each division with a daily charge for mortality and expense risks. The annual rate of the charge is 1.25% of the average daily net assets of the Separate Account divisions. We agree not to increase this charge for the duration of the Contract. This charge is assessed only prior to the annuitization date. This charge is assessed daily when the value of a unit is calculated. We have a mortality risk in that we guarantee payment of a death benefit in a single sum or under an annuity benefit payment option. No surrender charge is imposed on a death benefit payment which gives us an additional mortality risk. The expense risk that we assume is that the actual expenses incurred in issuing and administering the Contract exceed the Contract limits on administration charges. If the mortality and expense risks charge is not enough to cover the costs, we bear the loss. If the amount of mortality and expense risks charge deducted is more than our costs, the excess is profit to the Company. CHARGES FOR OPTIONAL RIDERS Subject to certain conditions, you may add one or more of the following optional riders to your Contract. Detailed information concerning the optional riders may be obtained from your sales representative or the annuity service office (1-800-852-4450). ENHANCED DEATH BENEFIT RIDER . The annual charge for the rider is 0.25% of the annual accumulated value (0.15% in New York and Washington). The charge is equal to 0.0625% (0.0375% in New York and Washington) of the average accumulated value during the calendar quarter. The charge is deducted through the redemption of units from the accumulated value in the same proportion as the surrender allocation percentages. If the rider is purchased after the beginning of a quarter, the charge is prorated according to the number of days it is in effect during the quarter. Upon termination of the rider or upon death, you will be charged based on the number of days it is in effect during the quarter. The rider charge is intended to reimburse us for the cost of the potentially greater death benefit provided by the rider. INVESTMENT PROTECTOR PLUS RIDER . The current quarterly charge is equal to 0.15% of the average quarterly Investment Back remaining withdrawal benefit base during the calendar quarter. We reserve the right to increase the charge to 0.2125% of the average quarterly Investment Back remaining withdrawal benefit base. At the end of each calendar quarter, the charge is deducted through the redemption of units from the accumulated value in the same proportion as the surrender allocation percentages. If the rider is purchased after the beginning of a quarter, the charge is prorated according to the number of days it is in effect during the quarter. Upon termination of the rider or upon death, you will be charged based on the number of days it is in effect during the quarter. The rider charge is intended to reimburse us for the cost of the protection provided by the rider.
PREMIUM PAYMENT CREDIT RIDER . The current charge for the rider is 0.60% of the average daily net assets of the Separate Account divisions. In addition, we reserve the right to reduce the Fixed Account interest rate by up to 0.60%. The charge is assessed until completion of your 8th contract year and only prior to the annuitization date. This charge is assessed daily when the value of a unit is calculated. The rider charge is intended to cover the cost of the credit.
TRANSACTION FEE We reserve the right to charge a transaction fee of $30 that applies to each unscheduled partial surrender after the 1st unscheduled partial surrender in a contract year. The transaction fee would be deducted from the accumulated value remaining in the investment option(s) from which the amount is surrendered, on a pro rata basis. TRANSFER FEE We also reserve the right to charge a transfer fee on each unscheduled transfer. The transfer fee would be deducted from the investment option(s) from which the amount is transferred, on a pro rata basis. PREMIUM TAXES We reserve the right to deduct an amount to cover any premium taxes imposed by states or other jurisdictions. Any deduction is made from either a premium payment when we receive it, or the accumulated value when you request a surrender (total or partial) or it is applied under an annuity benefit payment option. Premium taxes range from 0% in most states to as high as 3.50%. SURRENDER CHARGE No sales charge is collected or deducted when premium payments are applied under the Contract. A surrender charge is assessed on certain total or partial surrenders. The amounts we receive from the surrender charge are used to cover some of the expenses of the sale of the Contract (commissions and other promotional or distribution expenses). If the surrender charge collected is not enough to cover the actual costs of distribution, the costs are paid from the Company's General Account assets which includes profit, if any, from the mortality and expense risks charge. The surrender charge for any total or partial surrender is a percentage of the premium payments surrendered which were received by us during the contract years prior to the surrender. The applicable percentage which is applied to the sum of the premium payments paid during each contract year is determined by the following tables. The amount of the purchase payment credit, if any, is not included in the sum of the premium payments paid. Surrender Charge without the premium payment credit rider (as a percentage of amounts surrendered)
NUMBER OF COMPLETED CONTRACT YEARS SURRENDER CHARGE APPLIED TO ALL SINCE EACH PREMIUM PAYMENT PREMIUM PAYMENTS RECEIVED IN WAS MADE THAT CONTRACT YEAR ------------------------------------ ------------------------------- 0 (year of premium payment)* 6% 1 6% 2 6% 3 5% 4 4% 5 3% 6 2% 7 and later 0%
Surrender Charge with the premium payment credit rider (as a percentage of amounts surrendered)
NUMBER OF COMPLETED CONTRACT YEARS SURRENDER CHARGE APPLIED TO ALL SINCE EACH PREMIUM PAYMENT PREMIUM PAYMENTS RECEIVED IN WAS MADE THAT CONTRACT YEAR ---------------------------------- ------------------------------- 0 (year of premium payment)* 8% 1 8% 2 7% 3 6% 4 5% 5 4% 6 3% 7 2% 8 1% 9 and later 0%
* Each premium payment begins in year 0 for purposes of calculating the percentage applied to that payment. However, premium payments are added together by contract year for purposes of determining the applicable surrender charge. If your contract year begins April 1 and ends March 31 the following year, all premium payments received during that period are considered to have been made in that contract year. For purpose of calculating surrender charges, we assume that surrenders and transfers are made in the following order: .. first from premium payments no longer subject to a surrender charge; .. then from the free surrender privilege (first from the earnings, then from the oldest premium payments (first-in, first-out)) described below; and .. then from premium payments subject to a surrender charge on a first-in, first-out basis. FREE SURRENDER PRIVILEGE The free surrender privilege is an amount normally subject to a surrender charge that may be surrendered without a charge. The free surrender privilege is the greater of: .. earnings in the Contract (earnings = accumulated value less unsurrendered premium payments as of the surrender date); or .. 10% of the premium 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 benefit payment option; or .. payment of any death benefit, however, the surrender charge does apply to premium payments made by a surviving spouse after an owner's death; or .. amounts distributed to satisfy the minimum distribution requirement of Section 401(a)9 of the Internal Revenue Code provided that the amount surrendered does not exceed the minimum distribution amount which would have been calculated based on the value of this Contract alone; or .. an amount transferred from 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. Waiver of Surrender Charge Rider - -------------------------------- This rider is automatically made a part of the Contract at issue. There is no charge for the rider. This rider waives the surrender charge on surrenders made after the first contract anniversary if the original owner or original annuitant has a critical need. Waiver of the surrender charge is available for critical need if the following conditions are met: .. original owner or original annuitant has a critical need; and .. the critical need did not exist before the contract date. .. For the purposes of this section, the following definitions apply: . critical need - owner's or annuitant's confinement to a health care facility, terminal illness diagnosis or total and permanent disability. If the critical need is confinement to a health care facility, the confinement must continue for at least 60 consecutive days after the contract date and the surrender must occur within 90 days of the confinement's end. . health care facility - a licensed hospital or inpatient nursing facility providing daily medical treatment and keeping daily medical records for each patient (not primarily providing just residency or retirement care). This does not include a facility primarily providing drug or alcohol treatment, or a facility owned or operated by the owner, annuitant or a member of their immediate families. . terminal illness - sickness or injury that results in the owner's or annuitant's life expectancy being 12 months or less from the date notice to receive a distribution from the Contract is received by the Company. In Texas and Oregon, terminal illness is not included in the criteria for critical need. . total and permanent disability - a disability that occurs after the contract date but before the original owner or annuitant reaches age 65 and qualifies to receive social security disability benefits. In New York, a different definition of total and permanent disability applies. Contact us at 1-800-852-4450 for additional information. NOTE: The waiver of surrender charge rider is not available in Massachusetts, Missouri, 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 value of the divisions. This charge would only be imposed before the annuitization date. This charge would be assessed to help cover administration expenses. Administration expenses include the cost of issuing the Contract, clerical, record keeping and bookkeeping services, keeping the required financial and accounting records, communicating with owners and making regulatory filings. SPECIAL PROVISIONS FOR GROUP OR SPONSORED ARRANGEMENTS Where permitted by state law, Contracts may be purchased under group or sponsored arrangements as well as on an individual basis. GROUP ARRANGEMENT - program under which a trustee, employer or similar entity purchases Contracts covering a group of individuals on a group basis. SPONSORED ARRANGEMENT - program under which an employer permits group solicitation of its employees or an association permits group solicitation of its members for the purchase of Contracts on an individual basis. The charges and deductions described above may be reduced or eliminated for Contracts issued in connection with group or sponsored arrangements. The rules in effect at the time the application is approved will determine if reductions apply. Reductions may include but are not limited to sales of Contracts without, or with reduced, mortality and expense risks charges, annual fees or surrender charges. Eligibility for and the amount of these reductions are determined by a number of factors, including the number of individuals in the group, the amount of expected premium payments, total assets under management for the owner, the relationship among the group's members, the purpose for which the Contract is being purchased, the expected persistency of the Contract, and any other circumstances which, in our opinion are rationally related to the expected reduction in expenses. Reductions reflect the reduced sales efforts and administration costs resulting from these arrangements. We may modify the criteria for and the amount of the reduction in the future. Modifications will not unfairly discriminate against any person, including affected owners and other owners with contracts funded by the Separate Account. FIXED ACCOUNT AND DCA PLUS ACCOUNTS This prospectus is intended to serve as a disclosure document only for the Contract as it relates to the Separate Account. 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. We reserve the right to refuse premium payment allocations and transfers from the other investment options to the Fixed Account and premium payment allocations to the DCA Plus Accounts. We will send you a written notice at least 30 days prior to the date we exercise this right. We will also notify you if we lift such restrictions. FIXED ACCOUNT The Company guarantees that premium payments allocated and amounts transferred to the Fixed Account earn interest at the interest rate in effect on the date it is received or transferred. This rate applies to each premium payment or amount transferred through the end of the contract year. Each contract anniversary, we declare a renewal interest rate that applies to the Fixed Account value in existence at that time. This rate applies until the end of the contract year. Interest is earned daily and compounded annually at the end of each contract year. Once credited, the interest is guaranteed and becomes part of the Fixed Account accumulated value from which deductions for fees and charges may be made.
We reserve the right to reduce the Fixed Account interest rate by up to 0.60% if you elect the premium payment credit rider.
FIXED ACCOUNT ACCUMULATED VALUE Your Fixed Account accumulated value on any valuation date is equal to: .. premium payments or credits allocated to the Fixed Account; .. plus any transfers to the Fixed Account from the other investment options; .. plus interest credited to the Fixed Account; .. minus any surrenders or applicable surrender charges from the Fixed Account; .. minus any transfers to the Separate Account. FIXED ACCOUNT TRANSFERS, TOTAL AND PARTIAL SURRENDERS Transfers and surrenders from the Fixed Account are subject to certain limitations. In addition, surrenders from the Fixed Account may be subject to a charge (see Surrender Charge). You may transfer amounts from the Fixed Account to the divisions before the annuitization date and as provided below. The transfer is effective on the valuation date following our receipt of your instructions. You may transfer amounts on either a scheduled or unscheduled basis. You may not make both scheduled and unscheduled Fixed Account transfers in the same contract year. Unscheduled Fixed Account Transfers - ----------------------------------- The minimum transfer amount is $100 (or entire Fixed Account accumulated value if less than $100). Once per contract year, within the 30 days following the contract anniversary date, you can: .. transfer an amount not to exceed 25% of your Fixed Account accumulated value; or .. transfer up to 100% of your Fixed Account accumulated value if: . your Fixed Account accumulated value is less than $1,000; or . (a) minus (b) is greater than 1% where: . (a) is the weighted average of your Fixed Account interest rates for the preceding contract year; and . (b) is the renewal interest rate for the Fixed Account. We will inform you if the renewal interest rate falls to that level. Scheduled Fixed Account Transfers - --------------------------------- Fixed Account Dollar Cost Averaging You may make scheduled transfers on a monthly basis from the Fixed Account to the Separate Account as follows: .. You may establish scheduled transfers by sending a written request or by telephoning the annuity service office at 1-800-852-4450. .. Transfers occur on a date you specify (other than the 29th, 30th or 31st of any month). .. If the selected date is not a valuation date, the transfer is completed on the next valuation date. .. Scheduled transfers are only available if the Fixed Account accumulated value is $5,000 or more at the time the scheduled transfers begin. .. Scheduled monthly transfers of an amount not to exceed 2% of your Fixed Account accumulated value at the beginning of the contract year or the current Fixed Account accumulated value will continue until the Fixed Account accumulated value is zero or until you notify us to discontinue the transfers. .. The minimum transfer amount is $100. .. If the Fixed Account accumulated value is less than $100 at the time of transfer, the entire Fixed Account accumulated value will be transferred. .. If you stop the transfers, you may not start transfers again without our prior approval.
DOLLAR COST AVERAGING PLUS PROGRAM (DCA PLUS PROGRAM) Premium payments allocated to the DCA Plus Accounts earn the interest rate in effect at the time each premium payment is received. A portion of your DCA Plus Account accumulated value is periodically transferred (on the 28th of each month) to Separate Account divisions or to the Fixed Account. If the 28th is not a valuation date, the transfer occurs on the next valuation date. The transfers are allocated according to your DCA Plus allocation instructions. Transfers into a DCA Plus Account are not permitted. There is no charge for participating in the DCA Plus Program. If you elect the premium payment credit rider, you may not participate in the DCA Plus Program.
DCA Plus Premium Payments - ------------------------- You may enroll in the DCA Plus program by allocating a minimum premium payment of $1,000 into a DCA Plus Account and selecting investment options into which transfers will be made. Subsequent premium payments of at least $1,000 are permitted. You can change your DCA Plus allocation instructions during the transfer period. Automatic portfolio rebalancing does not apply to DCA Plus Accounts. DCA Plus premium payments receive the fixed rate of return in effect on the date each premium payment is received by us. The rate of return remains in effect for the remainder of the 6-month or 12-month DCA Plus 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 investment options in no more than 6 months. Under the 12-month transfer program, all payments and accrued interest must be transferred to the selected investment options in no more than 12 months. We will transfer an amount each month which is equal to your DCA Plus Account value divided by the number of months remaining in your transfer program. For example, if four scheduled transfers remain in the six-month transfer program and the DCA Plus Account accumulated value is $4,000, the transfer amount would be $1,000 ($4,000 / 4). Scheduled DCA Plus Transfers - ---------------------------- Transfers are made from DCA Plus Accounts to the investment options according to your allocation instructions. The transfers begin after we receive your premium payment and completed enrollment instructions. Transfers occur on the 28th of the month and continue until your entire DCA Plus Account accumulated value is transferred. Unscheduled DCA Plus Transfers - ------------------------------ You may make unscheduled transfers from DCA Plus Accounts to the investment options. A transfer is made, and values determined, as of the end of the valuation period in which we receive your request. DCA Plus Surrenders - ------------------- You may make scheduled or unscheduled surrenders from DCA Plus Accounts. Premium payments earn interest according to the corresponding rate until the surrender date. Surrenders are subject to any applicable surrender charge. GENERAL PROVISIONS THE CONTRACT The entire Contract is made up of the Contract, amendments, riders and endorsements and data pages. Only our corporate officers can agree to change or waive any provisions of a Contract. Any change or waiver must be in writing and signed by an officer of the Company. DELAY OF PAYMENTS Surrenders are generally made within seven days after we receive your instruction for a surrender in a form acceptable to us. This period may be shorter where required by law. However, payment of any amount upon total or partial surrender or death, annuitization of the accumulated value or the transfer to or from a division may be deferred during any period when the right to sell mutual fund shares is suspended as permitted under provisions of the Investment Company Act of 1940 (as amended). The right to sell shares may be suspended during any period when: .. trading on the NYSE is restricted as determined by the SEC or when the NYSE is closed for other than weekends and holidays; or .. an emergency exists, as determined by the SEC, as a result of which: . disposal by a mutual fund of securities owned by it is not reasonably practicable; . it is not reasonably practicable for a mutual fund to fairly determine the value of its net assets; or . the SEC permits suspension for the protection of security holders. If payments are delayed and your surrender, annuitization or transfer is not canceled by your written instruction, the amount to be surrendered, annuitized or transferred will be determined the first valuation date following the expiration of the permitted delay. The surrender, annuitization or transfer will be made within seven days thereafter. In addition, payments on surrenders attributable to a premium payment made by check may be delayed up to 15 days. This permits payment to be collected on the check. We may also defer payment of surrender proceeds payable out of the Fixed Account for a period of up to six months. MISSTATEMENT OF AGE OR GENDER If the age or, where applicable, gender of the annuitant has been misstated, we adjust the annuity benefit payment under your Contract to reflect the amount that would have been payable at the correct age and gender. If we make any overpayment because of incorrect information about age or gender, or any error or miscalculation, we deduct the overpayment from the next payment or payments due. Underpayments are added to the next payment. ASSIGNMENT You may assign ownership of your non-qualified Contract. Each assignment is subject to any payments made or action taken by the Company prior to our notification of the assignment. We assume no responsibility for the validity of any assignment. An assignment or pledge of a Contract may have adverse tax consequences. An assignment must be made in writing and filed with us at the annuity service office. The irrevocable beneficiary(ies), if any, must authorize any assignment in writing. Your rights, as well as those of the annuitant and beneficiary, are subject to any assignment on file with us. Any amount paid to an assignee is treated as a partial surrender and is paid in a single lump sum. CHANGE OF OWNER OR ANNUITANT You may change the owner and/or annuitant of your non-qualified Contract at any time. Your request must be in writing and approved by us. After approval, the change is effective as of the date you signed the request for change. If ownership is changed, the waiver of the surrender charge for surrenders made because of critical need of the owner is not available. We reserve the right to require that you send us the Contract so that we can record the change. BENEFICIARY While this Contract is in force, you have the right to name or change a beneficiary. This may be done as part of the application process or by sending us a written request. Unless you have named an irrevocable beneficiary, you may change your beneficiary designation by sending us notice. CONTRACT TERMINATION We reserve the right to terminate the Contract and make a single sum payment (without imposing any charges) to you if your accumulated value at the end of the accumulation period is less than $2,000. Before the Contract is terminated, we will send you a notice to increase the accumulated value to $2,000 within 60 days. Termination of the Contracts will not unfairly discriminate against any owner.
REINSTATEMENT If you have replaced this Contract with an annuity contract from another company and want to reinstate this Contract, the following apply: .. we reinstate the Contract effective on the original surrender date; ..if you had the premium payment credit rider on the original Contract, the 9-year surrender charge period applies to the reinstated Contract. The remaining surrender charge period, if any, is calculated based on the number of years since the original contract date; ..we apply the amount received from the other company and the amount of the surrender charge you paid when you surrendered the Contract; ..these amounts are priced on the valuation date the money from the other company is received by us; .. commissions are not paid on the reinstatement amounts; and .. new data pages are sent to your address of record.
REPORTS We will mail to you a statement, along with any reports required by state law, of your current accumulated value at least once per year prior to the annuitization date. After the annuitization date, any reports will be mailed to the person receiving the annuity benefit payments. Quarterly statements reflect purchases and surrenders occurring during the quarter as well as the balance of units owned and accumulated values. IMPORTANT INFORMATION ABOUT PROCEDURES To help the government fight the funding of terrorism and money laundering activities, Federal law requires financial institutions to obtain, verify, and record information that identifies each person who applies for a Contract. When you apply for a Contract, we will ask for your name, address, date of birth, and other information that will allow us to verify your identity. We may also ask to see your driver's license or other identifying documents. If concerns arise with verification of your identification, no transactions will be permitted while we attempt to reconcile the concerns. If we are unable to verify your identity within 30 days of our receipt of your original premium payment, Contract will be terminated and any value surrendered in accordance with normal redemption procedures. RIGHTS RESERVED BY THE COMPANY We reserve the right to make certain changes if, in our judgment, they best serve the interests of you and the annuitant or are appropriate in carrying out the purpose of the Contract. Any changes will be made only to the extent and in the manner permitted by applicable laws. Also, when required by law, we will obtain your approval of the changes and approval from any appropriate regulatory authority. Approvals may not be required in all cases. Examples of the changes the Company may make include: .. transfer assets in any division to another division or to the Fixed Account; .. add, combine or eliminate a division(s); .. substitute the units of a division for the units of another division; . if units of a division are no longer available for investment; or . if in our judgment, investment in a division becomes inappropriate considering the purposes of the Separate Account. FREQUENT TRADING AND MARKET-TIMING (ABUSIVE TRADING PRACTICES) This Contract is not designed for frequent trading or market timing activity of the investment options. If you intend to trade frequently and/or use market timing investment strategies, you should not purchase this Contract. We consider frequent trading and market timing activities to be abusive trading practices because they: .. Disrupt the management of the underlying mutual funds by; . forcing the fund to hold short-term (liquid) assets rather than investing for long term growth, which results in lost investment opportunities for the fund; and . causing unplanned portfolio turnover; .. Hurt the portfolio performance of the underlying mutual funds; and .. Increase expenses of the underlying mutual fund and separate account due to; . increased broker-dealer commissions; and . increased recordkeeping and related costs. We have adopted policies and procedures to help us identify and prevent abusive trading practices. In addition, the underlying mutual funds monitor trading activity to identify and take action against abuses. While our policies and procedures are designed to identify and protect against abusive trading practices, there can be no certainty that we will identify and prevent abusive trading in all instances. When we do identify abusive trading, we will apply our policies and procedures in a fair and uniform manner. If we, or an underlying mutual fund that is an investment option with the Contract, deem abusive trading practices to be occurring, we will take action that may include, but is not limited to: .. Rejecting transfer instructions from a Contract owner or other person authorized by the owner to direct transfers; .. Restricting submission of transfer requests by, for example, allowing transfer requests to be submitted by 1/st/ class U.S. mail only and disallowing requests made via the internet, by facsimile, by overnight courier or by telephone; .. Limiting the number of unscheduled transfer during a Contract year to no more than 12; .. Requiring a holding period of a minimum of thirty days before permitting transfers among the divisions where there is evidence of at least one round-trip transaction by the owner; and .. Taking such other action as directed by the underlying mutual fund. The underlying mutual funds have reserved the right to accept or reject, without prior written notice, any transfer requests. In some instances, a transfer may be completed prior to a determination of abusive trading. In those instances, we will reverse the transfer and return the Contract to the investment option holdings it had prior to the transfer. We will give you notice in writing in this instance. DISTRIBUTION OF THE CONTRACT The 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 premium payments by the Company for the distribution of the Contract. The Company and Princor may receive a portion of the expenses of certain underlying mutual funds 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 underlying mutual fund shares in which you have a voting interest is determined by your investments in an underlying mutual fund as of a "record date." The record date is set by the underlying mutual fund within the requirements of the laws of the state which govern the various mutual funds. The number of underlying mutual fund shares held in the Separate Account attributable to your interest in each division is determined by dividing the value of your interest in that division by the net asset value of one share of the underlying mutual fund. Shares for which owners are entitled to give voting instructions, but for which none are received, and shares of the underlying mutual fund owned by the Company are voted in the same proportion as the total shares for which voting instructions have been received. Voting materials are provided to you along with an appropriate form that may be used to give voting instructions to the Company. If the Company determines pursuant to applicable law, that underlying mutual fund shares held in Separate Account B need not be voted pursuant to instructions received from owners, the Company may vote underlying mutual fund shares held in the Separate Account in its own right. FEDERAL TAX MATTERS The following description is a general summary of the tax rules, primarily related to federal income taxes, which in our opinion are currently in effect. These rules are based on laws, regulations and interpretations which are subject to change at any time. This summary is not comprehensive and is not intended as tax advice. Federal estate and gift tax considerations, as well as state and local taxes, may also be material. You should consult a qualified tax adviser about the tax implications of taking action under a Contract or related retirement plan. NON-QUALIFIED CONTRACTS Section 72 of the Internal Revenue Code governs the income taxation of annuities in general. .. Premium payments made under non-qualified Contracts are not excludable or deductible from your gross income or any other person's gross income. .. An increase in the accumulated value of a non-qualified Contract owned by a natural person resulting from the investment performance of the Separate Account or interest credited to the DCA Plus Accounts and the Fixed Account is generally not taxable until paid out as surrender proceeds, death benefit proceeds, or otherwise. .. Generally, owners who are not natural persons are immediately taxed on any increase in the accumulated value. The following discussion applies generally to Contracts owned by natural persons. .. Surrenders or partial surrenders are taxed as ordinary income to the extent of the accumulated income or gain under the Contract. .. The value of the Contract pledged or assigned is taxed as ordinary income to the same extent as a partial surrender. .. Annuity benefit payments: . The investment in the Contract is generally the total of the premium payments made. . The portion of the annuity benefit payment that represents the amount by which the accumulated value exceeds premium payments is taxed as ordinary income. The remainder of each annuity benefit payment is not taxed. . After the premium payment(s) in the Contract is paid out, the full amount of any annuity benefit payment is taxable. For purposes of determining the amount of taxable income resulting from distributions, all Contracts and other annuity contracts issued by us or our affiliates to the same owner within the same calendar year are treated as if they are a single contract. 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 qualified 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 annuitization date but prior to the time the entire interest in the Contract has been distributed, the remaining portion of the interest is distributed at least as rapidly as under the method of distribution being used as of the date of that person's death. .. If you die prior to the annuitization date, the entire interest in the Contract will be distributed: . within five years after the date of your death; or . as annuity benefit payments which begin within one year of your death and which are made over the life of your designated beneficiary or over a period not extending beyond the life expectancy of that beneficiary. .. If you take a distribution from the Contract before you are 591/2, you may incur an income tax penalty. Generally, unless the beneficiary elects otherwise, the above requirements are satisfied prior to the annuitization date by paying the death benefit in a single sum, subject to proof of your death. The beneficiary may elect, by written request, to receive an annuity benefit payment option instead of a lump sum payment. If your designated beneficiary is your surviving spouse, the Contract may be continued with your spouse deemed to be the new owner for purposes of the Internal Revenue Code. Where the owner or other person receiving payments is not a natural person, the required distributions provided for in the Internal Revenue Code apply upon the death of the annuitant. IRA, SEP, AND SIMPLE-IRA The Contract may be used to fund IRAs, SEPs, and SIMPLE-IRAs. .. IRA - An Individual Retirement Annuity (IRA) is a retirement savings annuity. Contributions grow tax deferred. .. SEP-IRA - A SEP is a form of IRA. A SEP allows you, as an employer, to provide retirement benefits for your employees by contributing to their IRAs. .. SIMPLE-IRA - SIMPLE stands for Savings Incentive Match Plan for Employers. A SIMPLE-IRA allows employees to save for retirement by deferring salary on a pre-tax basis and receiving predetermined company contributions. The tax rules applicable to owners, annuitants and other payees vary according to the type of plan and the terms and conditions of the plan itself. In general, premium payments made under a retirement program recognized under the Internal Revenue Code are excluded from the participant's gross income for tax purposes prior to the annuity benefit payment date (subject to applicable state law). The portion, if any, of any premium payment made that is not excluded from their gross income is their investment in the Contract. Aggregate deferrals under all plans at the employee's option may be subject to limitations. 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% Internal Revenue Service penalty as well as income tax expenses. WITHHOLDING Annuity benefit payments and other amounts received under the Contract are subject to income tax withholding unless the recipient elects not to have taxes withheld. The amounts withheld vary among recipients depending on the tax status of the individual and the type of payments from which taxes are withheld. Notwithstanding the recipient's election, withholding may be required on payments delivered outside the United States. Moreover, special "backup withholding" rules may require us to disregard the recipient's election if the recipient fails to supply us with a "TIN" or taxpayer identification number (social security number for individuals), or if the Internal Revenue Service notifies us that the TIN provided by the recipient is incorrect. MUTUAL FUND DIVERSIFICATION The United States Treasury Department has adopted regulations under Section 817(h) of the Internal Revenue Code which establishes standards of diversification for the investments underlying the Contracts. Under this Internal Revenue Code Section, Separate Account investments must be adequately diversified in order for the increase in the value of non-qualified Contracts to receive tax-deferred treatment. In order to be adequately diversified, the portfolio of each underlying mutual fund must, as of the end of each calendar quarter or within 30 days thereafter, have no more than 55% of its assets invested in any one investment, 70% in any two investments, 80% in any three investments and 90% in any four investments. Failure of an underlying mutual fund to meet the diversification requirements could result in tax liability to non-qualified Contract holders. The investment opportunities of the underlying mutual funds could conceivably be limited by adhering to the above diversification requirements. This would affect all owners, including owners of Contracts for whom diversification is not a requirement for tax-deferred treatment. STATE REGULATION The Company is subject to the laws of the State of Iowa governing insurance companies and to regulation by the Insurance Department of the State of Iowa. An annual statement in a prescribed form must be filed by March 1 in each year covering our operations for the preceding year and our financial condition on December 31 of the prior year. Our books and assets are subject to examination by the Commissioner of Insurance of the State of Iowa, or the Commissioner's representatives, at all times. A full examination of our operations is conducted periodically by the National Association of Insurance Commissioners. Iowa law and regulations also prescribe permissible investments, but this does not involve supervision of the investment management or policy of the Company. In addition, we are subject to the insurance laws and regulations of other states and jurisdictions where we are licensed to operate. Generally, the insurance departments of these states and jurisdictions apply the laws of the state of domicile in determining the field of permissible investments. GENERAL INFORMATION RESERVATION OF RIGHTS The Company reserves the right to: .. increase the minimum amount for each premium payment to not more than $1,000; and .. terminate a Contract and send you the accumulated value if no premiums are paid during two consecutive calendar years and the accumulated value (or total premium payments less partial surrenders and applicable surrender charges) is less than $2,000. The Company will first notify you of its intent to exercise this right and give you 60 days to increase the accumulated value to at least $2,000. LEGAL OPINIONS Legal matters applicable to the issue and sale of the Contracts, including our right to issue Contracts under Iowa Insurance Law, have been passed upon by Karen Shaff, General Counsel and Executive Vice President. LEGAL PROCEEDINGS There are no legal proceedings pending to which Separate Account B is a party or which would materially affect Separate Account B. REGISTRATION STATEMENT This prospectus omits some information contained in the SAI (Part B of the registration statement) and Part C of the registration statement which the Company has filed with the SEC. The SAI is hereby incorporated by reference into this prospectus. You may request a free copy of the SAI by writing or telephoning the annuity service office. You may obtain a copy of Part C of the registration statement from the SEC, Washington, D.C. by paying the prescribed fees. OTHER VARIABLE ANNUITY CONTRACTS The Company currently offers other variable annuity contracts that participate in Separate Account B. In the future, we may designate additional group or individual variable annuity contracts as participating in Separate Account B. CUSTOMER INQUIRIES Your questions should be directed to: Principal Investment Plus Variable Annuity, Principal Financial Group, P.O. Box 9382, Des Moines, Iowa 50306-9382, 1-800-852-4450. 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 registered public accounting firm, for the periods indicated in their reports which also appear in the SAI. FINANCIAL STATEMENTS The consolidated financial statements of Principal Life Insurance Company which are included in the SAI should be considered only as they relate to our ability to meet our obligations under the Contract. They do not relate to investment performance of the assets held in the Separate Account. TABLE OF CONTENTS OF THE SAI General Information and History......................................... Independent Public Accountant ........................................... Principal Underwriter................................................... Calculation of Yield and Total Return................................... Taxation Under Certain Retirement Plans................................. Financial Statements Principal Life Insurance Company Separate Account B Report of Independent Registered Public Accounting Firm............... Financial Statements.................................................. Principal Life Insurance Company Report of Independent Registered Public Accounting Firm............... Financial Statements.................................................. To obtain a free copy of the SAI write or telephone: Principal Investment Plus Variable Annuity Principal Financial Group P.O. Box 9382 Des Moines, Iowa 50306-9382 Telephone: 1-800-852-4450 APPENDIX A - SEPARATE ACCOUNT DIVISIONS The following is a brief summary of the investment objectives of each division. There is no guarantee that the objectives will be met. AIM V.I. BASIC VALUE DIVISION INVESTS IN: AIM V.I. Basic Value Fund - Series I INVESTMENT ADVISOR: A I M Advisors, Inc. INVESTMENT OBJECTIVE: seeks long-term growth of capital. AIM V.I. SMALL CAP EQUITY DIVISION INVESTS IN: AIM V.I. Small Cap Equity Fund - Series I INVESTMENT ADVISOR: A I M Advisors, Inc. INVESTMENT OBJECTIVE: seeks long-term growth of capital. ALLIANCEBERNSTEIN SMALL CAP GROWTH DIVISION INVESTS IN: AllianceBernstein Variable Products Series Fund, Inc. - AllianceBernstein Small Cap Growth Portfolio - Class A INVESTMENT ADVISOR: Alliance Capital Management, L.P. INVESTMENT OBJECTIVE: seeks growth of capital by pursuing aggressive investment policies. AMERICAN CENTURY VP INFLATION PROTECTION DIVISION INVESTS IN: American Century Variable Portfolios II, Inc. Inflation Protection Fund - Class II INVESTMENT ADVISOR: American Century Investment Management, Inc. INVESTMENT OBJECTIVE: seeks long-term total return using a strategy that seeks to protect against U.S. inflation. AMERICAN CENTURY VP ULTRA DIVISION INVESTS IN: American Century Variable Portfolios, Inc. Ultra Fund - Class II INVESTMENT ADVISOR: American Century Investment Management, Inc. INVESTMENT OBJECTIVE: seeks long-term capital growth by investing primarily in stocks of U.S. companies. AMERICAN CENTURY VP VISTA DIVISION INVESTS IN: American Century Variable Portfolios, Inc. Vista Fund - Class I INVESTMENT ADVISOR: American Century Investment Management, Inc. INVESTMENT OBJECTIVE: seeks long-term capital growth. DREYFUS IP TECHNOLOGY GROWTH DIVISION INVESTS IN: Dreyfus Investment Portfolios Technology Growth Portfolio - Service Class INVESTMENT ADVISOR: The Dreyfus Corporation INVESTMENT OBJECTIVE: seeks capital appreciation. FIDELITY VIP CONTRAFUND DIVISION INVESTS IN: Fidelity VIP Contrafund Portfolio - Service Class 2 INVESTMENT ADVISOR: Fidelity Management & Research Company INVESTMENT OBJECTIVE: seeks long-term capital appreciation. FIDELITY VIP EQUITY-INCOME DIVISION INVESTS IN: Fidelity VIP Equity-Income Portfolio - Service Class 2 INVESTMENT ADVISOR: Fidelity Management & Research Company INVESTMENT OBJECTIVE: seeks reasonable income. The fund will also consider the potential for capital appreciation. The fund's goad 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 2 INVESTMENT ADVISOR: Fidelity Management & Research Company INVESTMENT OBJECTIVE: seeks to achieve capital appreciation. FIDELITY VIP MID CAP DIVISION INVESTS IN: Fidelity VIP Mid Cap Portfolio - Service Class 2 INVESTMENT ADVISOR: Fidelity Management & Research Company INVESTMENT OBJECTIVE: seeks long-term growth of capital. FIDELITY VIP OVERSEAS DIVISION INVESTS IN: Fidelity VIP Overseas Portfolio - Service Class 2 INVESTMENT ADVISOR: Fidelity Management & Research INVESTMENT OBJECTIVE: seeks long-term growth of capital. GOLDMAN SACHS VIT CORE/SM/ SMALL CAP EQUITY DIVISION INVESTS IN: Goldman Sachs VIT CORE/sm/ Small Cap Equity Fund INVESTMENT ADVISOR: Goldman Sachs Asset Management, L.P. INVESTMENT OBJECTIVE: seeks long-term growth of capital. GOLDMAN SACHS VIT MID CAP VALUE DIVISION INVESTS IN: Goldman Sachs VIT Mid Cap Value Fund INVESTMENT ADVISOR: Goldman Sachs Asset Management, L.P. INVESTMENT OBJECTIVE: seeks long-term capital appreciation. NEUBERGER BERMAN AMT FASCIANO DIVISION INVESTS IN: Neuberger Berman AMT Fasciano Portfolio INVESTMENT ADVISOR: Neuberger Berman Management Inc. INVESTMENT OBJECTIVE: seeks long-term capital growth. NEUBERGER BERMAN AMT HIGH INCOME BOND DIVISION INVESTS IN: Neuberger Berman AMT High Income Bond Portfolio - S Class INVESTMENT ADVISOR: Neuberger Berman Management Inc. INVESTMENT OBJECTIVE: The fund seeks high total returns consistent with capital preservation. NEUBERGER BERMAN AMT PARTNERS DIVISION INVESTS IN: Neuberger Berman AMT Partners Portfolio INVESTMENT ADVISOR: Neuberger Berman Management Inc. INVESTMENT OBJECTIVE: seeks growth of capital. NEUBERGER BERMAN AMT SOCIALLY RESPONSIVE DIVISION INVESTS IN: Neuberger Berman AMT Socially Responsive Portfolio INVESTMENT ADVISOR: Neuberger Berman Management Inc. INVESTMENT OBJECTIVE: seeks long-term growth of capital by investing primarily in securities of companies that meet the fund's financial criteria and social policy. ASSET ALLOCATION DIVISION INVESTS IN: Principal Variable Contracts Fund - Asset Allocation Account 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. 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: T. Rowe Price Associates, Inc. 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. EQUITY INCOME DIVISION INVESTS IN: Principal Variable Contracts Fund - Equity Income 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. The Account seeks to achieve its objective by investing primarily in equity securities, preferred securities, real estate investment trusts and convertible securities. EQUITY VALUE DIVISION INVESTS IN: Principal Variable Contracts Fund - Equity Value Account INVESTMENT ADVISOR: American Century Investment Management, Inc. 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. 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: seeks long-term growth of capital by investing in equity securities of issuers in emerging market countries. INTERNATIONAL SMALLCAP DIVISION INVESTS IN: Principal Variable Contracts Fund - International SmallCap Account 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: T. Rowe Price Associates, Inc. through a sub-advisory agreement INVESTMENT OBJECTIVE: seeks long-term growth of capital. 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 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. 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 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. PRINCIPAL LIFETIME 2010 DIVISION INVESTS IN: Principal Variable Contracts Fund - Principal LifeTime 2010 Account INVESTMENT ADVISOR: Principal Global Investors, LLC through a sub-advisory agreement INVESTMENT OBJECTIVE: seeks a total return consisting of long-term growth of capital and current income by investing primarily in shares of other Principal Variable Contracts Fund accounts. PRINCIPAL LIFETIME 2020 DIVISION INVESTS IN: Principal Variable Contracts Fund - Principal LifeTime 2020 Account INVESTMENT ADVISOR: Principal Global Investors, LLC through a sub-advisory agreement INVESTMENT OBJECTIVE: seeks a total return consisting of long-term growth of capital and current income by investing primarily in shares of other Principal Variable Contracts Fund accounts. PRINCIPAL LIFETIME 2030 DIVISION INVESTS IN: Principal Variable Contracts Fund - Principal LifeTime 2030 Account INVESTMENT ADVISOR: Principal Global Investors, LLC through a sub-advisory agreement INVESTMENT OBJECTIVE: seeks a total return consisting of long-term growth of capital and current income by investing primarily in shares of other Principal Variable Contracts Fund accounts. PRINCIPAL LIFETIME 2040 DIVISION INVESTS IN: Principal Variable Contracts Fund - Principal LifeTime 2040 Account INVESTMENT ADVISOR: Principal Global Investors, LLC through a sub-advisory agreement INVESTMENT OBJECTIVE: seeks a total return consisting of long-term growth of capital and current income by investing primarily in shares of other Principal Variable Contracts Fund accounts. PRINCIPAL LIFETIME 2050 DIVISION INVESTS IN: Principal Variable Contracts Fund - Principal LifeTime 2050 Account INVESTMENT ADVISOR: Principal Global Investors, LLC through a sub-advisory agreement INVESTMENT OBJECTIVE: seeks a total return consisting of long-term growth of capital and current income by investing primarily in shares of other Principal Variable Contracts Fund accounts. PRINCIPAL LIFETIME STRATEGIC INCOME DIVISION INVESTS IN: Principal Variable Contracts Fund - Principal LifeTime Strategic Income Account INVESTMENT ADVISOR: Principal Global Investors, LLC through a sub-advisory agreement INVESTMENT OBJECTIVE: seeks high current income by investing primarily in shares of other Principal Variable Contracts Fund accounts. REAL ESTATE SECURITIES DIVISION INVESTS IN: Principal Variable Contracts Fund - Real Estate Securities Account 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 GROWTH DIVISION INVESTS IN: Principal Variable Contracts Fund - SmallCap Growth Account INVESTMENT ADVISOR: Emerald Advisors, Inc and UBS Global Asset Management (Americas) Inc. through sub-advisory agreements 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. T. ROWE PRICE BLUE CHIP GROWTH DIVISION INVESTS IN: T. Rowe Price Blue Chip Growth Portfolio - II INVESTMENT ADVISOR: T. Rowe Price Associates, Inc. INVESTMENT OBJECTIVE: seeks to provide long-term capital growth. T. ROWE PRICE HEALTH SCIENCES DIVISION INVESTS IN: T. Rowe Price Health Sciences Portfolio - II INVESTMENT ADVISOR: T. Rowe Price Associates, Inc. INVESTMENT OBJECTIVE: seeks long-term capital appreciation. APPENDIX B - GMWB EXAMPLES These examples are provided to assist you in understanding the various features of the GMWB rider and the guarantees associated with each GMWB option. EXAMPLES WITHOUT EXCESS WITHDRAWALS The examples without excess withdrawals assume the following: The client is age 62. initial premium payment = $100,000. withdrawal benefit base prior to partial surrender = $100,000. remaining withdrawal benefit base prior to partial surrender = $100,000. Investment Back (7%) withdrawal benefit payment = $7,000. For Life (5%) withdrawal benefit payment = $5,000. EXAMPLE 1 . .. In contract year one, no partial surrenders are made. .. On the first contract anniversary, a 5% GMWB bonus is credited to the withdrawal benefit base. The credit is $100,000 x 0.05% = $5,000 .. The new withdrawal benefit base is $100,000 + $5,000 = $105,000. .. The new withdrawal benefit payment: . Investment Back is $105,000 x 0.07% = $7,350 . For Life is $105,000 x 0.05% = $5,250 EXAMPLE 2 . In contract year one: .. no partial surrenders are made; and .. the client makes a premium payment of $50,000. On the first contract anniversary: .. a 5% GMWB bonus is credited to the withdrawal benefit base. The credit is ($100,000 + $50,000) x 0.05% = $7,500; .. Investment Back: . the new withdrawal benefit base is $100,000 + $50,000 + $7,500 = $157,500; and . the new withdrawal benefit payment is $157,500 x 7% = $11,025. .. For Life: . the new withdrawal benefit base is $100,000 + $50,000 + $7,500 = $157,500; and . the new withdrawal benefit payment is $157,500 x 5% = $7,875. EXAMPLE 3 . In contract year one, the client makes a partial surrender of $5,000. On the first contract anniversary, .. Investment Back: . the new remaining withdrawal benefit base is $100,000 - $5,000 = $95,000. . the withdrawal benefit base remains the same ($100,000). . the withdrawal benefit payment for the next contract year remains the same ($100,000 x 0.07% = $7,000). .. For Life: . the new remaining withdrawal benefit base is $100,000 - $5,000 = $95,000. . the withdrawal benefit base remains the same ($100,000). . the withdrawal benefit payment for the next contract year remains the same ($100,000 x 0.05% = $5,000). EXAMPLE 4 . In contract year one, no partial surrenders are made. On the first contract anniversary: .. a 5% GMWB bonus is credited to withdrawal benefit base. The credit is $100,000 x 0.05% = $5,000; and .. the new withdrawal benefit base is $100,000 + $5,000 = $105,000. In contract year two: .. the client makes a partial surrender of $5,000. .. no GMWB bonus is credited as the client made a partial surrender. In contract year three: .. the client does not make any partial surrenders; .. no GMWB bonus is credited as the client had taken a partial surrender (in contract year two). EXAMPLE 5 . In each of the first five contract years, a partial surrender of $5,000 is made. On the fifth contract anniversary, you may elect a step-up.
THE ACCUMULATED VALUE IS: $90,000 $110,000 INVESTMENT BACK Prior to step-up Withdrawal Benefit Base = $100,000 = $100,000 Withdrawal Benefit $100,000 $100,000 Payment = x 0.07% = $7,000 = x 0.07% = $7,000 Remaining Withdrawal = $75,000 = $75,000 Benefit Base ---------------------------------------------------------------------------------- After step-up Withdrawal Benefit Base = $90,000 = $110,000 Withdrawal Benefit $90,000 $110,000 Payment = x 0.07% = $6,300 = x 0.07% = $7,700 Remaining Withdrawal = $90,000 = $110,000 Benefit Base ---------------------------------------------------------------------------------- FOR LIFE Prior to step-up Withdrawal Benefit Base = $100,000 = $100,000 Withdrawal Benefit $ 100,000 $ 100,000 Payment = x 0.05% = $5,000 = x 0.05% = $5,000 Remaining Withdrawal = $75,000 = $75,000 Benefit Base ---------------------------------------------------------------------------------- After step-up Withdrawal Benefit Base = $90,000 = $110,000 Withdrawal Benefit $90,000 $110,000 Payment = x 0.05% = $4,500 = x 0.05% = $5,500 Remaining Withdrawal = $90,000 = $110,000 Benefit Base ----------------------------------------------------------------------------------
EXCESS WITHDRAWAL EXAMPLES The excess withdrawal examples assume the following: the client is age 62. the initial premium payment is $100,000. withdrawal benefit base prior to partial surrender = $100,000. remaining withdrawal benefit base prior to partial surrender = $100,000. Investment Back (7%) withdrawal benefit payment = $7,000. For Life (5%) withdrawal benefit payment = $5,000. partial surrender amount = $8,000 (excess amount for "Investment Back" is $1,000; excess amount for "For Life" is $3,000). EXAMPLE 1: - ---------- In the first example, the accumulated value prior to partial surrender is $90,000. WITHDRAWAL BENEFIT BASE CALCULATION - ----------------------------------- On the contract anniversary following the partial surrender, the withdrawal benefit base is adjusted for any excess withdrawals. INVESTMENT BACK . The amount of the adjustment* is $1,204.82. The new withdrawal benefit base is $100,000 - $1,204.82 = $98,795.18. * The amount of the adjustment is the greater of (a) or (b) where: .. (a) is $1,000 (the amount of the excess withdrawal); and .. (b) is $1,204.82 (the result of ((1) divided by (2)) multiplied by (3)) where: . (1) is the amount of the surrender greater than the withdrawal benefit payment remaining prior to the partial surrender ($1,000); . (2) is the accumulated value after the withdrawal benefit payment is deducted but prior to the surrender of the excess amount ($90,000 - $7,000); and . (3) is the withdrawal benefit base prior to the adjustment for the excess amount ($100,000). FOR LIFE . The amount of the adjustment* is $3,529.41. The new withdrawal benefit base is $100,000 - $3,529.41 = $96,470.59. * The amount of the adjustment is the greater of (a) or (b) where: .. (a) is $3,000 (the amount of the excess withdrawal); and .. (b) is $3,529.41 (the result of ((1) divided by (2)) multiplied by (3)) where: . (1) is the amount of the surrender greater than the withdrawal benefit payment remaining prior to the partial surrender ($3,000); . (2) is the accumulated value after the withdrawal benefit payment is deducted but prior to the surrender of the excess amount ($90,000 - $5,000); and . (3) is the withdrawal benefit base prior to the adjustment for the excess amount ($100,000). REMAINING WITHDRAWAL BENEFIT BASE CALCULATION - --------------------------------------------- The remaining withdrawal benefit base is adjusted when partial surrenders are made. INVESTMENT BACK . The amount of the adjustment* is $8,120.48 (the amount of the withdrawal benefit payment plus the excess withdrawal). The new remaining withdrawal benefit base is $100,000 - $8,120.48 = $91,879.52. * The amount of the adjustment is (a) plus (b) where: .. (a) is $7,000 (the actual amount surrendered that does not exceed the withdrawal benefit payment); and .. (b) is $1,120.48 (a proportionate reduction for the excess withdrawal). The amount of the proportionate reduction is the greater of (1) or (2) where: . (1) is $1,000 (the amount of the excess withdrawal); and . (2) is $1,120.48 (the result of ((i) divided by (ii)) multiplied by (iii)) where: . (i) is the amount of the surrender greater than the withdrawal benefit payment remaining prior to the partial surrender ($1,000); . (ii) is the accumulated value after the withdrawal benefit payment is deducted but prior to the surrender of the excess amount ($90,000 - $7,000); and . (iii) is the remaining withdrawal benefit base after the withdrawal benefit payment is deducted but prior to the adjustment for the excess amount ($100,000 - $7,000). FOR LIFE . The amount of the adjustment* is $8,352.94 (the amount of the withdrawal benefit payment plus the excess withdrawal). The new remaining withdrawal benefit base is $100,000 - $8,352.94 = $91,647.06. * The amount of the adjustment is (a) plus (b) where .. (a) is $5,000 (the actual amount surrendered that does not exceed the withdrawal benefit payment); and .. (b) is $3,352.94 (a proportionate reduction for the excess withdrawal). The amount of the proportionate reduction is the greater of (1) or (2) where: . (1) is $3,000 (the amount of the excess withdrawal); and . (2) is $3,352.94 (the result of ((i) divided by (ii)) multiplied by (iii)) where: . (i) is the amount of the surrender greater than the withdrawal benefit payment remaining prior to the partial surrender ($3,000); . (ii) is the accumulated value after the withdrawal benefit payment is deducted but prior to the surrender of the excess amount ($90,000 - $5,000); and . (iii) is the remaining withdrawal benefit base after the withdrawal benefit payment is deducted but prior to the adjustment for the excess amount ($100,000 - $5,000). WITHDRAWAL BENEFIT PAYMENT CALCULATION (FOR THE NEXT CONTRACT YEAR) - ------------------------------------------------------------------- The withdrawal benefit payment is the new withdrawal benefit base (calculated on the contract anniversary) multiplied by the associated percentage. INVESTMENT BACK . The new withdrawal benefit payment $98,795.18. x 0.07% = $6,915.66. FOR LIFE . The new withdrawal benefit payment $96,470.59 x 0.05% = $4,823.53. EXAMPLE 2: - ---------- In this example, the accumulated value prior to partial surrender is $110,000. WITHDRAWAL BENEFIT BASE CALCULATION - ----------------------------------- On the contract anniversary following the partial surrender, the withdrawal benefit base is adjusted for any excess withdrawals. INVESTMENT BACK . The amount of the adjustment* is $1,000 (the amount of the excess withdrawal). The new withdrawal benefit base is $100,000 - $1,000 = $99,000. * The amount of the adjustment is the greater of (a) or (b) where: .. (a) is $1, 000 (the amount of the excess withdrawal); and .. (b) is $970.87 (the result of ((1) divided by (2)) multiplied by (3)) where: . (1) is the amount of the surrender greater than the withdrawal benefit payment remaining prior to the partial surrender ($1,000); . (2) is the accumulated value after the withdrawal benefit payment is deducted but prior to the surrender of the excess amount ($110,000 minus $7,000); and . (3) is the withdrawal benefit base prior to the adjustment for the excess amount ($100,000) FOR LIFE . The amount of the adjustment* is $3,000 (the amount of the excess withdrawal). The new withdrawal benefit base is $100,000 - $3,000 = $97,000. * The amount of the adjustment is the greater of (a) or (b) where: .. (a) is $3,000 (the amount of the excess withdrawal); and .. (b) is $2,857.14 (the result of ((1) divided by (2)) multiplied by (3)) where: . (1) is the amount of the surrender greater than the withdrawal benefit payment remaining prior to the partial surrender ($3,000); . (2) is the accumulated value after the withdrawal benefit payment is deducted but prior to the surrender of the excess amount ($110,000 minus $5,000); and . (3) is the withdrawal benefit base prior to the adjustment for the excess amount ($100,000). REMAINING WITHDRAWAL BENEFIT BASE CALCULATION - --------------------------------------------- The remaining withdrawal benefit base is adjusted when partial surrenders are made. INVESTMENT BACK . The amount of the adjustment* is $8,000 (the amount of the withdrawal benefit payment plus the excess withdrawal). The new remaining withdrawal benefit base is $100,000 - $8,000 = $92,000. * The amount of the adjustment is (a) plus (b) where: .. (a) is $7,000 (the actual amount surrendered that does not exceed the withdrawal benefit payment); and .. (b) is $1,000 (a proportionate reduction for the excess withdrawal). The amount of the proportionate reduction is the greater of (1) or (2) where: . (1) is $1,000 (the amount of the excess withdrawal); and . (2) is $902.91 (the result of ((i) divided by (ii)) multiplied by (iii)) where: . (i) is the amount of the surrender greater than the withdrawal benefit payment remaining prior to the partial surrender ($1,000); . (ii) is the accumulated value after the withdrawal benefit payment is deducted but prior to the surrender of the excess amount ($110,000 - $7,000); and . (iii) is the remaining withdrawal benefit base after the withdrawal benefit payment is deducted but prior to the adjustment for the excess amount ($100,000 - $7,000). FOR LIFE . The amount of the adjustment* is $8,000 (the amount of the withdrawal benefit payment plus the excess withdrawal). The new remaining withdrawal benefit base is $100,000 - $8,000 = $92,000. * The amount of the adjustment is (a) plus (b) where .. (a) is $5,000 - the actual amount surrendered that does not exceed the withdrawal benefit payment; and .. (b) is $3,000 - a proportionate reduction for the excess withdrawal. The amount of the proportionate reduction is the greater of (1) or (2) where: . (1) is $3,000 (the amount of the excess withdrawal); and . (2) is $2,714.28 (the result of ((i) divided by (ii)) multiplied by (iii)) where: . (i) is the amount of the surrender greater than the withdrawal benefit payment remaining prior to the partial surrender ($3,000); . (ii) is the accumulated value after the withdrawal benefit payment is deducted but prior to the surrender of the excess amount ($110,000 - $5,000); and . (iii) is the remaining withdrawal benefit base after the withdrawal benefit payment is deducted but prior to the adjustment for the excess amount ($100,000 - $5,000). WITHDRAWAL BENEFIT PAYMENT CALCULATION (FOR THE NEXT CONTRACT YEAR) - ------------------------------------------------------------------- The withdrawal benefit payment is the new withdrawal benefit base (calculated on the contract anniversary) multiplied by the associated percentage. INVESTMENT BACK . The new withdrawal benefit payment is $99,000 x 0.07% = $6,930. FOR LIFE . The new withdrawal benefit payment $97,000 x 0.05% = $4,850. PRINCIPAL LIFE INSURANCE COMPANY SEPARATE ACCOUNT B PRINCIPAL INVESTMENT PLUS VARIABLE ANNUITY/SM// /CONTRACT STATEMENT OF ADDITIONAL INFORMATION DATED XXXXXX This Statement of Additional Information provides information about the Principal Investment Plus Variable Annuity/sm// / (the "Contract") in addition to the information that is contained in the Contract's Prospectus, dated XXXXXX. This Statement of Additional Information is not a prospectus. It should be read in conjunction with the Prospectus, a copy of which can be obtained free of charge by writing or telephoning: Principal Investment Plus Variable Annuity The Principal Financial Group P.O. Box 9382 Des Moines Iowa 50306-9382 Telephone: 1-800-852-4450 1 TABLE OF CONTENTS Page General Information and History......................................... Independent Public Accountant ........................................... Principal Underwriter................................................... Calculation of Yield and Total Return................................... Taxation Under Certain Retirement Plans................................. Financial Statements Principal Life Insurance Company Separate Account B Report of Independent Registered Public Accounting Firm............... Principal Life Insurance Company Report of Independent Registered Public Accounting Firm............... Financial Statements.................................................. GENERAL INFORMATION AND HISTORY Principal Life Insurance Company (the "Company") is the issuer of the Principal Investment Plus Variable Annuity (the "Contract") and serves as custodian of its assets. The Company is a stock life insurance company with its home office at: Principal Financial Group, Des Moines, Iowa 50392 and is authorized to transact life and annuity business in all states of the United States and the District of Columbia. The Company is a wholly owned indirect subsidiary of Principal Financial Group, Inc., a publicly-traded company. In 1879, the Company was incorporated under Iowa law as a mutual assessment life insurance company named Bankers Life Association. It became a legal reserve life insurance company and changed its name to Bankers Life Company in 1911 and then to Principal Mutual Life Insurance Company in 1986. The name change to Principal Life Insurance Company and reorganization into a mutual insurance holding company structure took place in 1998, when the Company became a stock life insurance company. In 2001, the mutual insurance holding company converted to a stock company through a process called demutualization, resulting in the current organizational structure. INDEPENDENT PUBLIC ACCOUNTANT Ernst & Young LLP, 801 Grand, Des Moines, Iowa, serves as the independent registered public accounting firm for Principal Life Insurance Company Separate Account B and the Principal Life Insurance Company. PRINCIPAL UNDERWRITER Princor Financial Services Corporation ("Princor") is the principal underwriter of the Contract. Princor is a 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. As the Contract is new, Princor has not received any commissions. 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. Separate perfomance figures will be shown for the Contract without the premium payment credit rider and for the Contract with the premium payment credit rider. The Contract was not offered prior to XXXXXXX. However, the certain divisions invest in underlying mutual funds which were offered prior to the date the Contract was available. Thus, the Separate Account may publish advertisements containing information about the hypothetical performance of one or more of its divisions for this Contract as the Contract was issued on or after the date the underlying mutual fund was first offered. The hypothetical performance from the date of inception of the underlying mutual fund in which the division invests is derived by reducing the actual performance of the underlying mutual fund by the highest level of fees and charges of the Contract as if it had been in existence. In addition, as certain of the underlying mutual funds have added classes since the inception of the fund, performance may be shown for periods prior to the inception date of the new class which represents the historical results of initial class shares and do not include the effects of the subsequent class' annual fees and expenses. The yield and total return figures described below will vary depending upon market conditions, the composition of the underlying mutual fund's portfolios and operating expenses. These factors and possible differences in the methods used in calculating yield and total return should be considered when comparing the Separate Account performance figures to performance figures published for other investment vehicles. The Separate Account may also quote rankings, yields or returns as published by independent statistical services or publishers and information regarding performance of certain market indices. Any performance data quoted for the Separate Account represents only historical performance and is not intended to indicate future performance. From time to time the Separate Account advertises its Money Market Division's "yield" and "effective yield" for the Contract. Both yield figures are based on historical earnings and are not intended to indicate future performance. The "yield" of the division refers to the income generated by an investment under the Contract in the division over a 7-day period (which period will be stated in the advertisement). This income is then "annualized." That is, the amount of income generated by the investment during that week is assumed to be generated each week over a 52-week period and is shown as a percentage of the investment. The "effective yield" is calculated similarly but, when annualized, the income earned by an investment in the Division is assumed to be reinvested. The "effective yield" will be slightly higher than the "yield" because of the compounding effect of this assumed reinvestment. Neither yield quotation reflects a sales load deducted from purchase payments which, if included, would reduce the "yield" and "effective yield."
YIELD FOR THE PERIOD ENDED AUGUST 31, 2004 FOR CONTRACTS: 7-DAY ANNUALIZED YIELD 7-DAY EFFECTIVE YIELD -------------- ---------------------- --------------------- without a surrender charge or a purchase payment credit rider -1.23% with a surrender charge but without a purchase payment credit rider -7.23 without a surrender charge but with a purchase payment credit rider -2.22 -1.82 with a surrender charge and with a purchase payment credit rider -8.22 -7.82
In addition, from time to time, the Separate Account will advertise the "yield" for certain other divisions for the Contract. The "yield" of a division is determined by annualizing the net investment income per unit for a specific, historical 30-day period and dividing the result by the ending maximum offering price of the unit for the same period. This yield quotation does not reflect a surrender charge which, if included, would reduce the "yield." Also, from time to time, the Separate Account will advertise the average annual total return of its various divisions. The average annual total return for any of the divisions is computed by calculating the average annual compounded rate of return over the stated period that would equate an initial $1,000 investment to the ending redeemable Contract value. In this calculation for the Contract without the premium payment credit rider, the ending value is reduced by a surrender charge that decreases from 6% to 0% over a period of 7 years. For the calculations relating to the Contract with the premium payment credit rider, the ending value is reduced by a surrender charge that decreases from 8% to 0% over a period of 9 years. The Separate Account may also advertise total return figures for its divisions for a specified period that does not take into account the surrender charge in order to illustrate the change in the division's unit value over time. See "Charges and Deductions" in the Prospectus for a discussion of surrender charges. Following are the hypothetical average annual total returns for the period ending December 31, 2003 assuming the Contract had been offered as of the effective dates of the underlying mutual funds in which the divisions invest:
CONTRACT WITHOUT PURCHASE PAYMENT CREDIT RIDER WITH SURRENDER CHARGE -------------------------------------------------------------- EFFECTIVE SINCE DIVISION DATE ONE YEAR FIVE YEARS TEN YEARS INCEPTION -------- --------- -------- ---------- --------- --------- AIM V.I. Basic Value September 10, 2001 25.89% -0.71% AIM V.I. SmallCap Equity August 29, 2003 7.34 AllianceBernstein Small Cap Growth August 15, 1996 40.95 -2.51 0.83 American Century VP Inflation Protection December 31, 2002 -1.80 -1.80 American Century VP Ultra May 1, 2001 17.15 / -6.58 American Century VP Vista October 5, 2001 34.34 / 3.23 Dreyfus IP Technology Growth August 31, 1999 42.98 / -10.33 Fidelity VIP Contrafund January 3, 1995 20.50 1.30 / 12.36 Fidelity VIP Equity-Income November 3, 1986 22.31 1.45 9.37 9.47 Fidelity VIP Growth October 31, 1986 24.80 -3.56 8.05 9.94 Fidelity VIP Mid Cap December 28, 1998 30.49 17.12 17.92 Fidelity VIP Overseas January 28, 1987 35.16 -1.38 3.67 4.78 Goldman Sachs VIT Mid Cap Value May 1, 1998 20.7 10.34 6.17 Goldman Sachs VIT Core Small Cap Equity February 13, 1998 38.07 7.29 4.27 Neuberger Berman AMT Partners March 22, 1994 27.31 -0.48 / 8.59 Neuberger Berman AMT Socially Responsive February 18, 1999 26.62 / 2.81 Neuberger Berman AMT Fasciano July 12, 2002 17.41 10.35 Principal VCF Asset Allocation June 1, 1994 14.00 2.38 / 7.07 Principal VCF Bond December 18, 1987 -2.81 3.50 5.13 6.79 Principal VCF Capital Value May 13, 1970 17.84 -2.53 7.40 10.45 Principal VCF Equity Growth June 1, 1994 18.28 -2.92 / 9.97 Principal VCF Equity Income May 1, 1998 6.31 -4.63 / -1.52 Principal VCF Government Securities April 9, 1987 -5.53 3.86 5.00 6.46 Principal VCF Growth May 2, 1994 18.79 -9.05 3.64 Principal VCF International May 2, 1994 24.59 -2.59 / 3.96 Principal VCF International Emerging Markets October 24, 2000 49.15 / 6.13 Principal VCF International SmallCap May 1, 1998 46.14 9.73 / 6.37 Principal VCF LargeCap Blend May 1, 2002 16.12 / -2.27 Principal VCF LargeCap Stock Index May 3, 1999 20.63 -5.26 Principal VCF LargeCap Value May 1, 2002 20.36 0.80 Principal VCF Limited Term Bond May 1, 2003 -6.16 Principal VCF MidCap December 18, 1987 25.06 6.72 10.27 12.74 Principal VCF MidCap Growth May 1, 1998 32.73 -1.38 -1.82 Principal VCF MidCap Value May 3, 1999 28.70 / 10.54 Principal VCF Money Market March 18, 1983 -6.62 1.42 2.80 Principal VCF Real Estate Securities May 1, 1998 31.09 13.40 10.30 Principal VCF SmallCap Growth May 1, 1998 37.74 -4.02 -3.00 Principal VCF SmallCap Value May 1, 1998 42.64 15.14 9.90 T. Rowe Price Blue Chip Growth December 29, 2000 20.79 -8.45 T. Rowe Price Heath Sciences December 29, 2000 28.09 -6.62
CONTRACT WITHOUT PURCHASE PAYMENT CREDIT RIDER WITHOUT SURRENDER CHARGE -------------------------------------------------------------- EFFECTIVE SINCE DIVISION DATE ONE YEAR FIVE YEARS TEN YEARS INCEPTION -------- --------- -------- ---------- --------- --------- AIM V.I. Basic Value September 10, 2001 31.89% 1.45% AIM V.I. SmallCap Equity August 29, 2003 13.34 AllianceBernstein Small Cap Growth August 15, 1996 46.95 -1.86 0.83 American Century VP Inflation Protection December 31, 2002 4.20 4.20 American Century VP Ultra May 1, 2001 23.15 / -4.52 American Century VP Vista October 5, 2001 40.34 / 5.35 Dreyfus IP Technology Growth August 31, 1999 48.98 -9.35 Fidelity VIP Contrafund January 3, 1995 26.50 1.87 / 12.36 Fidelity VIP Equity-Income November 3, 1986 28.31 2.01 9.37 9.47 Fidelity VIP Growth October 31, 1986 30.80 -2.87 8.05 9.94 Fidelity VIP Mid Cap December 28, 1998 36.49 17.44 / 18.12 Fidelity VIP Overseas January 28, 1987 41.16 -0.75 3.67 4.78 Goldman Sachs VIT Mid Cap Value May 1, 1998 26.70 10.74 6.44 Goldman Sachs VIT Core Small Cap Equity February 13, 1998 44.07 7.74 4.55 Neuberger Berman AMT Partners March 22, 1994 33.31 0.12 8.59 Neuberger Berman AMT Socially Responsive February 18, 1999 32.62 3.36 Neuberger Berman AMT Fasciano July 12, 2002 23.41 / 14.21 Principal VCF Asset Allocation June 1, 1994 20.00 2.92 7.07 Principal VCF Bond December 18, 1987 3.19 4.01 5.13 6.79 Principal VCF Capital Value May 13, 1970 23.84 -1.87 7.40 10.45 Principal VCF Equity Growth June 1, 1994 24.28 -2.25 / 9.97 Principal VCF Equity Income May 1, 1998 12.31 -3.91 / -1.14 Principal VCF Government Securities April 9, 1987 0.47 4.37 5.00 6.46 Principal VCF Growth May 2, 1994 24.79 -8.19 / 3.64 Principal VCF International May 2, 1994 30.59 -1.93 3.96 Principal VCF International Emerging Markets October 24, 2000 55.15 7.22 Principal VCF International SmallCap May 1, 1998 52.14 10.14 / 6.63 Principal VCF LargeCap Blend May 1, 2002 22.12 / 1.34 Principal VCF LargeCap Stock Index May 3, 1999 26.63 / -4.49 Principal VCF LargeCap Value May 1, 2002 26.36 / 4.34 Principal VCF Limited Term Bond May 1, 2003 -0.16 Principal VCF MidCap December 18, 1987 31.06 7.17 10.27 12.74 Principal VCF MidCap Growth May 1, 1998 38.73 -0.76 / -1.44 Principal VCF MidCap Value May 3, 1999 34.70 / 10.98 Principal VCF Money Market March 18, 1983 -0.62 1.98 2.80 Principal VCF Real Estate Securities May 1, 1998 37.09 13.76 10.53 Principal VCF SmallCap Growth May 1, 1998 43.74 -3.33 -2.60 Principal VCF SmallCap Value May 1, 1998 48.64 15.48 10.12 T. Rowe Price Blue Chip Growth December 29, 2000 26.79 -6.88 T. Rowe Price Heath Sciences December 29, 2000 34.09 -5.12
CONTRACT WITH PURCHASE PAYMENT CREDIT RIDER WITH SURRENDER CHARGE --------------------------------------------------------- EFFECTIVE ONE FIVE TEN SINCE DIVISION DATE YEAR YEARS YEARS INCEPTION -------- --------- ---- ----- ----- --------- AIM V.I. Basic Value September 10, 2001 23.10% / -1.78% AIM V.I. SmallCap Equity August 29, 2003 5.11 AllianceBernstein Small Cap Growth August 15, 1996 38.08 -3.35 0.09 American Century VP Inflation Protection December 31, 2002 -4.43 -4.43 American Century VP Ultra May 1, 2001 14.41 -7.60 American Century VP Vista October 5, 2001 31.50 / 2.15 Dreyfus IP Technology Growth August 31, 1999 40.09 -11.24 Fidelity VIP Contrafund January 3, 1995 17.75 0.48 / 11.69 Fidelity VIP Equity-Income November 3, 1986 19.55 0.64 8.72 8.81 Fidelity VIP Growth October 31, 1986 22.01 -4.40 7.40 9.28 Fidelity VIP Mid Cap December 28, 1998 27.68 16.30 / 17.10 Fidelity VIP Overseas January 28, 1987 32.32 -2.21 3.04 4.15 Goldman Sachs VIT Mid Cap Value May 1, 1998 17.94 9.53 5.39 Goldman Sachs VIT Core Small Cap Equity February 13, 1998 35.21 6.48 3.49 Neuberger Berman AMT Partners March 22, 1994 24.51 -1.31 7.94 Neuberger Berman AMT Socially Responsive February 18, 1999 23.82 1.99 Neuberger Berman AMT Fasciano July 12, 2002 14.67 / 9.01 Principal VCF Asset Allocation June 1, 1994 11.28 1.57 6.43 Principal VCF Bond December 18, 1987 -5.43 2.68 4.50 6.15 Principal VCF Capital Value May 13, 1970 15.10 -3.36 6.76 9.79 Principal VCF Equity Growth June 1, 1994 15.54 -3.76 / 9.31 Principal VCF Equity Income May 1, 1998 3.64 -5.47 / -2.32 Principal VCF Government Securities April 9, 1987 -8.13 3.05 4.37 5.82 Principal VCF Growth May 2, 1994 16.05 -9.91 / 3.03 Principal VCF International May 2, 1994 21.81 -3.42 3.33 Principal VCF International Emerging Markets October 24, 2000 46.22 5.19 Principal VCF International SmallCap May 1, 1998 43.23 8.92 / 5.58 Principal VCF LargeCap Blend May 1, 2002 13.39 / -3.51 Principal VCF LargeCap Stock Index May 3, 1999 17.87 / -6.12 Principal VCF LargeCap Value May 1, 2002 17.61 / -0.44 Principal VCF Limited Term Bond May 1, 2003 -8.56 Principal VCF MidCap December 18, 1987 22.28 5.90 9.61 12.07 Principal VCF MidCap Growth May 1, 1998 29.90 -2.21 / -2.62 Principal VCF MidCap Value May 3, 1999 25.89 9.71 Principal VCF Money Market March 18, 1983 -9.21 0.60 2.18 Principal VCF Real Estate Securities May 1, 1998 28.27 12.58 9.52 Principal VCF SmallCap Growth May 1, 1998 34.88 -4.86 -3.81 Principal VCF SmallCap Value May 1, 1998 39.75 14.33 9.11 T. Rowe Price Blue Chip Growth December 29, 2000 18.04 -9.43 T. Rowe Price Heath Sciences December 29, 2000 25.29 -7.60
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 2004 and 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 ---- -------------- ---------------------------- 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 ---- --------- --------- ---- --------- --------- 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 ---- ----------------- --------------------- 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 ---- ----------------- --------------------- ----------------------------------- 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 2004 and 2005 and $1,000 in 2006 and beyond.
ROTH IRA - MAXIMUM ANNUAL CONTRIBUTION ------------------------------------------------ YEAR INDIVIDUAL ROTH IRA CATCH-UP CONTRIBUTION ---- ------------------- --------------------- 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. FINANCIAL STATEMENTS 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, AIM V.I. Premier Equity, American Century VP Income & Growth, American Century VP Ultra, American Century VP Value, Asset Allocation, Balanced, 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 MidCap Growth (formerly Janus Aspen Aggressive Growth), LargeCap Blend, LargeCap Growth Equity, LargeCap Stock Index, LargeCap Value, Limited Term Bond, MidCap, MidCap Growth, MidCap Value, Money Market, Real Estate, SmallCap, SmallCap Growth, SmallCap Value, Templeton Growth Securities, and Utilities Divisions] as of December 31, 2003, and the related statements of operations for the year then ended, and changes in net assets for the periods disclosed in the financial statements. These financial statements are the responsibility of the management of Principal Life Insurance Company. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with 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, 2003, 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, 2003, 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 LLP Des Moines, Iowa February 20, 2004 Principal Life Insurance Company Separate Account B Statements of Assets and Liabilities December 31, 2003 AIM V.I. Growth AIM V.I. Division Core Equity Division --------------------------------- --------------------------------- Assets Investments in shares of mutual funds, at marke $20,390,427 $37,820,862 Liabilities - - --------------------------------- --------------------------------- Net assets $20,390,427 $37,820,862 ================================= ================================= 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 18,044,651 31,417,377 The Principal Variable Annuity With Purchase Payment Credit Rider 2,345,776 6,403,485 Contracts in annuitization period: Bankers Flexible Annuity - - Pension Builder Plus - Rollover IRA - - --------------------------------- --------------------------------- Total net assets $20,390,427 $37,820,862 ================================= ================================= Investments in shares of mutual funds, at cost $37,644,636 $47,878,027 Shares of mutual fund owned 1,374,944 1,806,154 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 3,250,196 3,941,555 The Principal Variable Annuity With Purchase Payment Credit Rider 430,468 818,474 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 5.55 7.97 The Principal Variable Annuity With Purchase Payment Credit Rider 5.45 7.82 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 Income American Century American Century Premier & Growth VP Ultra VP II Value Asset Equity Division Division Division Allocation Balanced Division Division Division - ----------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------- $34,478,905 $24,813,567 $7,951,779 $11,980,780 $84,285,312 $109,670,750 - - - - - - - ----------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------- $34,478,905 $24,813,567 $7,951,779 $11,980,780 $84,285,312 $109,670,750 =========================================================================================================== =========================================================================================================== $ -$ -$ - $ - $ $ - - - - - - - - - - - - - - - - - - - 2,528,703 - - - - 51,720 10,074,608 - 3,136,734 - - - - 28,242,400 14,486,880 5,290,952 8,288,586 75,378,403 87,741,289 6,236,505 7,189,953 2,660,827 3,692,194 8,855,189 9,326,150 - - - - - - - - - - - - - ----------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------- $34,478,905 $24,813,567 $7,951,779 $11,980,780 $84,285,312 $109,670,750 =========================================================================================================== =========================================================================================================== $45,181,933 $22,561,333 $7,429,164 $10,363,668 $84,867,486 $120,368,420 1,704,345 3,776,799 866,207 1,539,946 7,208,873 8,239,726 - - - - - - - - - - - - - - - - - - - - - - - 1,498,564 - - - - 49,445 5,850,443 - 341,907 - - - - 3,947,940 1,588,628 616,274 774,898 3,892,867 5,378,747 888,179 800,959 314,843 348,564 465,913 582,456 $ - $ - $ - $ - $ - $ - - - - - - - - - - - - - - - - - - - - 1.69 - - - - 1.05 1.72 - 9.17 - - - - 7.15 9.12 8.59 10.70 19.36 16.31 7.02 8.98 8.45 10.59 19.01 16.01 - - - - - - - - - - - - $ - $ - $ - $ - $ - $ - - - - - - - - -
Principal Life Insurance Company Separate Account B Statements of Assets and Liabilities (continued) December 31, 2003
Bond Capital Value Division Division ------------------------------------ ------------------------------------ Assets Investments in shares of mutual funds, at market $234,068,815 $205,388,604 Liabilities - - ------------------------------------ ------------------------------------ Net assets $234,068,815 $205,388,604 ==================================== ==================================== Net assets Accumulation units: Bankers Flexible Annuity $ - $ 2,816,487 - Pension Builder Plus - 3,624,391 Pension Builder Plus - Rollover IRA - 361,270 Personal Variable 1,777,852 4,048,865 Premier Variable 7,936,106 20,135,527 Principal Freedom Variable Annuity 8,101,234 2,194,702 The Principal Variable Annuity 171,918,761 156,299,660 The Principal Variable Annuity With Purchase Payment Credit Rider 44,334,862 15,637,953 Contracts in annuitization period: Bankers Flexible Annuity - 43,250 Pension Builder Plus - Rollover IRA - 226,499 ------------------------------------ ------------------------------------ Total net assets $234,068,815 $205,388,604 ==================================== ==================================== Investments in shares of mutual funds, at cost $223,802,888 $214,666,449 Shares of mutual fund owned 19,014,526 7,026,637 Accumulation units outstanding: Bankers Flexible Annuity - 94,247 Pension Builder Plus - 682,229 Pension Builder Plus - Rollover IRA - 59,846 Personal Variable 958,753 1,618,427 Premier Variable 4,193,719 7,849,047 Principal Freedom Variable Annuity 646,003 251,458 The Principal Variable Annuity 9,857,760 7,375,957 The Principal Variable Annuity With Purchase Payment Credit Rider 2,589,879 751,838 Accumulation unit value: Bankers Flexible Annuity $ 29.88 - Pension Builder Plus - 5.31 Pension Builder Plus - Rollover IRA - 6.04 Personal Variable 1.85 2.50 Premier Variable 1.89 2.57 Principal Freedom Variable Annuity 12.54 8.73 The Principal Variable Annuity 17.44 21.19 The Principal Variable Annuity With Purchase Payment Credit Rider 17.12 20.80 Annuitized units outstanding: Bankers Flexible Annuity - 1,444 Pension Builder Plus - Rollover IRA - 37,520 Annuitized unit value: Bankers Flexible Annuity $ 29.95 - Pension Builder Plus - Rollover IRA - 6.04 See accompanying notes.
Dreyfus DIP Fidelity Fidelity Founders Equity VIP II VIP Equity- Fidelity VIP Government Discovery Growth Contrafund Income Growth Securities Division Division Division Division Division Division - ----------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------- $6,592,127 $208,587,034 $62,013,988 $24,125,340 $41,285,813 $341,729,801 - - - - - - - ----------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------- $6,592,127 $208,587,034 $62,013,988 $24,125,340 $41,285,813 $341,729,801 =========================================================================================================== =========================================================================================================== $ - $ - $ - $ - $ - $ - - - - - - - - - - 287,126 - - - - - 53,401 - - - - - 2,651,048 - 72,039 - - - 9,904,817 - - - - - 1,969,397 3,995,919 193,535,123 50,895,534 16,150,888 34,799,588 254,772,944 2,596,208 14,979,872 11,118,454 7,974,452 6,486,225 72,091,068 - - - - - - - - - - - - - ----------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------- $6,592,127 $208,587,034 $62,013,988 $24,125,340 $41,285,813 $341,729,801 =========================================================================================================== =========================================================================================================== $5,614,570 $250,390,820 $61,536,230 $20,380,959 $58,014,035 $329,106,342 739,028 14,160,695 2,689,245 1,050,755 1,335,246 29,033,968 - - - - - - - - - - - 107,440 - - - - - 18,385 - - - - - 1,358,239 - 83,897 - - - 4,948,427 - - - - - 198,162 510,594 7,750,226 4,984,662 1,570,415 4,455,612 14,674,895 337,007 611,156 1,109,393 782,983 846,087 4,230,409 $ - $ - $ - $ - $ - $ - - - - - - - - - - 2.67 - - - - - 2.90 - - - - - 1.95 - .86 - - - 2.00 - - - - - 9.94 7.83 24.97 10.21 10.28 7.81 17.36 7.70 24.51 10.02 10.18 7.67 17.04 - - - - - - - - - - - - $ - $ - $ - $ - $ - $ - - - - - - - - - - -
Principal Life Insurance Company Separate Account B Statements of Assets and Liabilities (continued) December 31, 2003
Growth International Division Division ------------------------------------ ------------------------------------ Assets Investments in shares of mutual funds, at market $123,359,235 $137,067,625 Liabilities - - ------------------------------------ ------------------------------------ Net assets $123,359,235 $137,067,625 ==================================== ==================================== Net assets Accumulation units: Bankers Flexible Annuity $ $ - - Pension Builder Plus - - Pension Builder Plus - Rollover IRA - - Personal Variable 3,039,321 1,882,070 Premier Variable 14,695,419 6,911,107 Principal Freedom Variable Annuity - 1,255,151 The Principal Variable Annuity 99,902,040 109,123,449 The Principal Variable Annuity With Purchase Payment Credit Rider 5,722,455 17,895,848 Contracts in annuitization period: Bankers Flexible Annuity - - Pension Builder Plus - Rollover IRA - - ------------------------------------ ------------------------------------ Total net assets $123,359,235 $137,067,625 ==================================== ==================================== Investments in shares of mutual funds, at cost $177,082,616 $145,457,300 Shares of mutual fund owned 11,265,684 11,939,689 Accumulation units outstanding: Bankers Flexible Annuity - - Pension Builder Plus - - Pension Builder Plus - Rollover IRA - - Personal Variable 2,111,941 1,215,117 Premier Variable 10,006,463 4,372,431 Principal Freedom Variable Annuity - 144,213 The Principal Variable Annuity 7,024,539 7,445,734 The Principal Variable Annuity With Purchase Payment Credit Rider 409,938 1,244,027 Accumulation unit value: Bankers Flexible Annuity $ $ - - Pension Builder Plus - - Pension Builder Plus - Rollover IRA - - Personal Variable 1.44 1.55 Premier Variable 1.47 1.58 Principal Freedom Variable Annuity - 8.70 The Principal Variable Annuity 14.22 14.66 The Principal Variable Annuity With Purchase Payment Credit Rider 13.96 14.39 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 International INVESCO VIF-Small Emerging Markets International INVESCO VIF-Health Company Growth INVESCO Division SmallCap Division VIF-Dynamics Sciences Division Division VIF-Technology Division Division - ----------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------- $16,413,769 $51,539,854 $2,038,741 $12,246,239 $2,496,782 $5,577,617 - - - - - - - ----------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------- $16,413,769 $51,539,854 $2,038,741 $12,246,239 $2,496,782 $5,577,617 =========================================================================================================== =========================================================================================================== $ - $ -$ - $ -$ - $ - - - - - - - - - - - - - - - - - - - 44,972 19,475 - - - - - - - - - - 10,692,158 42,419,290 1,176,857 7,725,376 1,775,134 3,814,306 5,676,639 9,101,089 861,884 4,520,863 721,648 1,763,311 - - - - - - - - - - - - - ----------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------- $16,413,769 $51,539,854 $2,038,741 $12,246,239 $2,496,782 $5,577,617 =========================================================================================================== =========================================================================================================== $12,224,583 $47,573,432 $1,827,894 $11,311,212 $2,279,001 $5,079,343 1,276,343 3,753,813 173,215 696,997 184,537 469,892 - - - - - - - - - - - - - - - - - - - - - - - - 32,473 17,002 - - - - - - - - - - 805,643 2,904,637 160,978 830,053 234,547 716,265 435,767 634,905 119,766 493,448 96,864 336,381 $ -$ -$ - $ - $ - $ - - - - - - - - - - - - - - - - - - - 1.38 1.15 - - - - - - - - - - 13.27 14.60 7.31 9.31 7.57 5.33 13.03 14.33 7.20 9.16 7.45 5.24 - - - - - - - - - - - - $ -$ -$ - $ - $ - $ - - - - - - -
Principal Life Insurance Company Separate Account B Statements of Assets and Liabilities (continued) December 31, 2003
Janus Aspen MidCap Growth LargeCap Division Blend Division ------------------------------------ ------------------------------------ Assets Investments in shares of mutual funds, at market $14,913,079 $50,195,427 Liabilities - - ------------------------------------ ------------------------------------ Net assets $14,913,079 $50,195,427 ==================================== ==================================== 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 9,565,435 34,773,984 The Principal Variable Annuity With Purchase Payment Credit Rider 5,347,644 15,421,443 Contracts in annuitization period: Bankers Flexible Annuity - - Pension Builder Plus - Rollover IRA - - ------------------------------------ ------------------------------------ Total net assets $14,913,079 $50,195,427 ==================================== ==================================== Investments in shares of mutual funds, at cost $16,375,416 $44,092,659 Shares of mutual fund owned 708,460 4,840,446 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 1,819,265 3,446,682 The Principal Variable Annuity With Purchase Payment Credit Rider 1,036,215 1,543,500 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 5.26 10.09 The Principal Variable Annuity With Purchase Payment Credit Rider 5.16 9.99 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.
LargeCap Growth LargeCap LargeCap Limited MidCap Growth Equity Division Stock Index Value Term Bond Division MidCap Division Division Division Division - ----------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------- $15,477,925 $93,977,440 $42,122,329 $20,445,921 $277,285,964 $41,401,897 - - - - - - ----------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------- $15,477,925 $93,977,440 $42,122,329 $20,445,921 $277,285,964 $41,401,897 =========================================================================================================== =========================================================================================================== $ -$ -$ $ - $ $ - - - - - - - - - - - - - - - - - - - 3,804,262 - 32,736 222,192 - - 15,928,229 83,880 1,153,783 9,007,623 - 1,163,815 2,060,700 921,697 9,000,888 62,559,154 31,037,619 13,748,453 227,134,683 30,325,632 5,290,518 22,188,471 11,084,710 5,533,653 28,358,090 10,070,688 - - - - - - - - - - - - - - ----------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------- $15,477,925 $93,977,440 $42,122,329 $20,445,921 $277,285,964 $41,401,897 =========================================================================================================== =========================================================================================================== $15,534,139 $97,832,680 $36,138,507 $20,467,800 $228,494,284 $41,046,736 3,462,623 11,659,732 3,900,216 2,046,639 7,382,480 4,704,761 - - - - - - - - - - - - - - - - - - - - - - 1,351,969 - 45,516 239,143 - - 5,547,002 88,132 101,203 1,073,502 - 116,562 145,693 90,773 1,674,654 7,596,333 2,947,666 1,380,439 8,364,124 3,254,774 1,002,839 2,744,912 1,063,037 557,713 1,063,890 1,101,189 $ - $ -$ $ -$ $ - - - - - - - - - - - - - - - - - - - 2.81 - .72 .93 - 2.87 .95 11.40 8.39 - 9.98 14.14 10.15 5.37 8.24 10.53 9.96 27.16 9.32 5.28 8.08 10.43 9.92 26.66 9.15 - - - - - - - - - - - - $ - $ -$ $ -$ $ - - - - - - - - -
Principal Life Insurance Company Separate Account B Statements of Assets and Liabilities (continued) December 31, 2003
MidCapValue Money Market Division Division ------------------------------------ ------------------------------------ Assets Investments in shares of mutual funds, at market $37,405,845 $107,056,300 Liabilities - - ------------------------------------ ------------------------------------ Net assets $37,405,845 $107,056,300 ==================================== ==================================== Net assets Accumulation units: Bankers Flexible Annuity $ $ 684,160 - Pension Builder Plus - 7,419 Pension Builder Plus - Rollover IRA - - Personal Variable - 2,249,802 Premier Variable 207,724 8,837,131 Principal Freedom Variable Annuity 2,986,713 5,538,037 The Principal Variable Annuity 24,402,826 67,934,959 The Principal Variable Annuity With Purchase Payment Credit Rider 9,808,582 21,804,792 Contracts in annuitization period: Bankers Flexible Annuity - - Pension Builder Plus - Rollover IRA - - ------------------------------------ ------------------------------------ Total net assets $37,405,845 $107,056,300 ==================================== ==================================== Investments in shares of mutual funds, at cost $30,972,017 $107,056,300 Shares of mutual fund owned 2,647,264 107,056,300 Accumulation units outstanding: Bankers Flexible Annuity - - Pension Builder Plus - 318,871 Pension Builder Plus - Rollover IRA - 3,224 Personal Variable - 1,540,908 Premier Variable 172,631 5,902,643 Principal Freedom Variable Annuity 175,874 495,764 The Principal Variable Annuity 2,126,346 5,146,528 The Principal Variable Annuity With Purchase Payment Credit Rider 868,228 1,682,884 Accumulation unit value: Bankers Flexible Annuity $ $ - - Pension Builder Plus - 2.15 Pension Builder Plus - Rollover IRA - 2.30 Personal Variable - 1.46 Premier Variable 1.20 1.50 Principal Freedom Variable Annuity 16.98 11.17 The Principal Variable Annuity 11.48 13.20 The Principal Variable Annuity With Purchase Payment Credit Rider 11.30 12.96 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 SmallCap SmallCap Growth Real Estate SmallCap Division Growth Value Securities Utilities Division Division Division Division Division - ----------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------- $71,203,391 $50,283,315 $41,565,742 $56,508,984 $1,193,400 $27,202,954 - - - - - - - ----------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------- $71,203,391 $50,283,315 $41,565,742 $56,508,984 $1,193,400 $27,202,954 =========================================================================================================== =========================================================================================================== $ -$ -$ $ - $ - $ - - - - - - - - - - - - - - - - - - - - 277,574 27,900 78,279 158,958 - 13,897 - 2,183,307 886,372 - - - 53,486,975 39,125,515 34,318,730 43,093,686 1,193,400 22,479,806 17,438,842 8,946,593 6,282,361 13,256,340 - 4,709,251 - - - - - - - - - - - - - ----------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------- $71,203,391 $50,283,315 $41,565,742 $56,508,984 $1,193,400 $27,202,954 =========================================================================================================== =========================================================================================================== $57,114,464 $50,456,140 $67,035,992 $43,367,484 $1,164,379 $34,158,322 4,778,751 6,309,073 4,971,979 3,757,246 106,649 3,430,385 - - - - - - - - - - - - - - - - - - - - - - - - 183,596 30,325 125,381 121,112 - 17,546 - 181,997 115,648 - 94,381 - 3,015,095 4,064,872 3,973,466 2,477,509 - 2,380,899 1,001,493 946,964 741,069 776,437 - 508,141 $ -$ -$ $ -$ $ - - - - - - - - - - - - - - - - - - - - - 1.51 .92 .62 1.31 - .79 - 12.00 7.66 - 12.64 - 17.74 9.63 8.64 17.39 - 9.44 17.41 9.45 8.48 17.07 - 9.27 - - - - - - - - - - - - $ - $ $ $ -$ $ - - - - - - - - -
Principal Life Insurance Company Separate Account B Statements of Operations For the Year Ended December 31, 2003
American AIM V.I. Century VP AIM V.I. Growth AIM V.I. Core Premier Equity Income & Growth Division Equity Division Division Division --------------------------------------------------------------- --------------------------------------------------------------- Investment income (loss) Income: Dividends $ $ 342,528 $ 94,948 $ 200,551 - Expenses: Mortality and expense risks 221,104 414,692 374,638 211,698 Separate account rider charges 10,808 30,921 29,689 30,828 --------------------------------------------------------------- Net investment income (loss) (231,912) (103,085) (309,379) (41,975) --------------------------------------------------------------- Realized gains (losses) on investments Realized gain (losses) on sale of fund (3,698,841) (2,904,706) (1,931,457) (160,698) shares Capital gain distributions - - - - --------------------------------------------------------------- --------------------------------------------------------------- Total realized gain (losses) on investments (3,698,841) (2,904,706) (1,931,457) (160,698) Change in net unrealized appreciation or depreciation of investments 8,522,752 9,923,491 8,657,841 4,819,595 --------------------------------------------------------------- --------------------------------------------------------------- Net increase (decrease) in net assets $4,591,999 $6,915,700 $6,417,005 $4,616,922 resulting from operations =============================================================== See accompanying notes.
American Century American Century VP Ultra VP Value Asset Allocation Division Division Division Balanced Bond Capital Value Division Division Division - ------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------ $ - $ 27,160 $ 1,467,485 $ 2,947,777 $9,567,023 $ 2,634,886 84,793 66,675 949,988 1,146,408 2,712,941 2,070,594 12,923 9,765 42,431 38,177 224,414 70,556 - ------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------ (97,716) (49,280) 475,066 1,763,192 6,629,668 493,736 - ------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------ (79,603) (6,818) (1,888,873) (3,761,560) 694,334 (4,531,146) - - - - - - - ------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------ (79,603) (6,818) (1,888,873) (3,761,560) 694,334 (4,531,146) 1,424,749 1,686,630 15,469,547 18,072,534 (229,444) 43,922,707 - ------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------ $1,247,430 $1,630,532 $14,055,740 $16,074,166 $7,094,558 $39,885,297 ======================================================================================================
Principal Life Insurance Company Separate Account B Statements of Operations (continued) For the Year Ended December 31, 2003
Dreyfus DIP Fidelity Fidelity VIP Founders Equity Growth VIP II Equity- Income Discovery Division Contrafund Division Division Division --------------------------------------------------------------- --------------------------------------------------------------- Investment income (loss) Income: Dividends $ - $ 774,845 $ 166,971 $ 88,336 Expenses: Mortality and expense risks 42,921 2,342,450 614,994 146,629 Separate account rider charges 8,549 67,452 50,628 21,945 --------------------------------------------------------------- Net investment income (loss) (51,470) (1,635,057) (498,651) (80,238) --------------------------------------------------------------- Realized gains (losses) on investments Realized gain (loss) on sale of fund shares 20,353 (8,432,347) (862,882) 6,993 Capital gain distributions - - - - --------------------------------------------------------------- --------------------------------------------------------------- Total realized gain (loss) on investments 20,353 (8,432,347) (862,882) 6,993 Change in net unrealized appreciation or depreciation of investments 1,177,986 50,974,630 13,482,385 3,817,936 --------------------------------------------------------------- --------------------------------------------------------------- Net increase (decrease) in net assets $1,146,869 $40,907,226 $12,120,852 $3,744,691 resulting from operations =============================================================== See accompanying notes.
International Fidelity VIP Government Emerging Markets International Growth Division Securities Growth International Division SmallCap Division Division Division Division - ------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------ $ 66,790 $12,157,064 $ 257,644 $ 1,132,605 $ 108,991 $ 509,465 434,207 4,298,321 1,293,105 1,280,973 118,428 460,118 28,525 429,981 28,245 68,497 20,123 35,160 - ------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------ (395,942) 7,428,762 (1,063,706) (216,865) (29,560) 14,187 - ------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------ (2,771,173) 2,047,895 (12,722,688) (5,388,986) (37,158) (2,820,743) - - - - - - - ------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------ (2,771,173) 2,047,895 (12,722,688) (5,388,986) (37,158) (2,820,743) 12,649,041 (8,300,799) 39,344,003 36,598,232 4,657,895 19,529,973 - ------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------ $ 9,481,926 $ 1,175,858 $25,557,609 $30,992,381 $4,591,177 $16,723,417 ======================================================================================================
Principal Life Insurance Company Separate Account B Statements of Operations (continued) For the Year Ended December 31, 2003
INVESCO INVESCO INVESCO VIF-Small INVESCO VIF-Dynamics VIF-Health Company Growth VIF-Technology Division Sciences Division Division Division --------------------------------------------------------------- --------------------------------------------------------------- Investment income (loss) Income: Dividends $ - $ $ - $ - - Expenses: Mortality and expense risks 12,167 107,608 20,855 38,727 Separate account rider charges 2,374 18,336 3,005 5,813 --------------------------------------------------------------- Net investment income (loss) (14,541) (125,944) (23,860) (44,540) --------------------------------------------------------------- Realized gains (losses) on investments Realized gain (loss) on sale of fund shares 12,763 (80,827) (10,029) (41,504) Capital gain distributions - - - - --------------------------------------------------------------- --------------------------------------------------------------- Total realized gain (loss) on investments 12,763 (80,827) (10,029) (41,504) Change in net unrealized appreciation or depreciation of investments 310,340 2,291,382 487,677 1,133,877 --------------------------------------------------------------- --------------------------------------------------------------- Net increase (decrease) in net assets $308,562 $2,084,611 $453,788 $1,047,833 resulting from operations =============================================================== (1) Commenced operations May 17, 2003. (2) Represented the operations of the Janus Aspen Aggressive Growth Division until May 17, 2003 name change. See accompanying notes.
Janus Aspen LargeCap Growth MidCap Growth LargeCap Blend Equity LargeCap LargeCap Value Limited Division (2) Division Division Stock Index Division Term Bond Division Division (1) - ------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------ $ - $ 281,907 $ - $ 978,764 $ 396,945 $157,681 150,205 335,755 66,322 826,478 285,785 61,391 26,270 46,768 10,959 86,362 33,606 9,132 - ------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------ (176,475) (100,616) (77,281) 65,924 77,554 87,158 - ------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------ (352,135) (48) (101,279) (1,165,193) (3,999) 1,228 - - - - - - - ------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------ (352,135) (48) (101,279) (1,165,193) (3,999) 1,228 3,984,036 6,532,064 1,403,871 18,057,963 6,379,123 (21,879) - ------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------ $3,455,426 $6,431,400 $1,225,311 $16,958,694 $6,452,678 $ 66,507 ======================================================================================================
Principal Life Insurance Company Separate Account B Statements of Operations (continued) For the Year Ended December 31, 2003
MidCap Money MidCap Growth MidCap Value Market Division Division Division Division --------------------------------------------------------------- --------------------------------------------------------------- Investment income (loss) Income: Dividends $ 2,459,871 $ $ 19,422 $1,037,931 - Expenses: Mortality and expense risks 2,705,262 263,987 293,820 1,589,581 Separate account rider charges 117,018 26,932 36,614 179,544 --------------------------------------------------------------- Net investment income (loss) (362,409) (290,919) (311,012) (731,194) --------------------------------------------------------------- Realized gains (losses) on investments Realized gain (loss) on sale of fund shares (755,382) (423,898) 36,054 - Capital gain distributions - - 416,300 - --------------------------------------------------------------- --------------------------------------------------------------- Total realized gain (loss) on investments (755,382) (423,898) 452,354 - Change in net unrealized appreciation or depreciation of investments 65,228,283 7,786,159 7,814,399 - --------------------------------------------------------------- --------------------------------------------------------------- Net increase (decrease) in net assets resulting from operations $64,110,492 $7,071,342 $7,955,741 $ (731,194) =============================================================== See accompanying notes.
Templeton SmallCap SmallCap Growth Real Estate SmallCap Growth Value Securities Utilities Division Division Division Division Division Division - ------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------ $ 1,866,654 $ 34,210 $ $ 179,433 $ 13,448 $1,074,213 - 611,426 394,638 385,167 496,890 7,646 299,982 70,679 31,477 26,411 54,747 - 23,085 - ------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------ 1,184,549 (391,905) (411,578) (372,204) 5,802 751,146 - ------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------ 261,686 (745,178) (4,266,680) 130,481 (68,690) (955,971) 1,226,227 - - 1,482,483 - - - ------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------ 1,487,913 (745,178) (4,266,680) 1,612,964 (68,690) (955,971) 13,421,069 11,383,631 16,062,643 15,400,567 312,071 3,056,569 - ------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------ $16,093,531 $10,246,548 $11,384,385 $16,641,327 $249,183 $2,851,744 ======================================================================================================
Principal Life Insurance Company Separate Account B Statements of Changes in Net Assets For the Years Ended December 31, 2003 and 2002
AIM V.I. Growth AIM V.I. Core Equity Division Division (1) ------------------------------- -------------------------------- 2003 2002 2003 2002 ------------------------------- -------------------------------- Increase (decrease) in net assets from operations: Net investment income (loss) $ (231,912) $ (293,651) $ (103,085) $ (399,322) Net realized gains (losses) on investments (3,698,841) (6,562,643) (2,904,706) (4,379,890) Change in net unrealized appreciation or depreciation of investments 8,522,752 (2,200,917) 9,923,491 (2,768,818) ------------------------------- -------------------------------- ------------------------------- -------------------------------- Net increase (decrease) in net assets resulting from operations 4,591,999 (9,507,211) 6,915,700 (7,548,030) Changes from principal transactions: Purchase payments, less sales charges, per payment fees and applicable premium taxes 2,921,012 3,141,075 6,542,195 8,378,629 Administration charges (6,286) (6,463) (16,246) (14,614) Contingent sales charges (28,226) (40,128) (66,785) (72,832) Contract terminations (1,343,370) (1,528,972) (2,811,000) (2,700,901) Death benefit payments (54,747) (162,128) (264,248) (225,707) Flexible withdrawal option payments (288,978) (387,082) (742,859) (798,578) Transfer payments to other contracts (2,357,133) (4,727,076) (4,906,450) (8,400,299) Annuity payments - - - - ------------------------------- -------------------------------- ------------------------------- -------------------------------- Increase (decrease) in net assets from principal transactions (1,157,728) (3,710,774) (2,265,393) (3,834,302) ------------------------------- -------------------------------- ------------------------------- -------------------------------- Total increase (decrease) 3,434,271 (12,767,985) 4,650,307 (11,382,332) Net assets at beginning of period 16,956,156 29,724,141 33,170,555 44,552,887 ------------------------------- -------------------------------- ------------------------------- -------------------------------- Net assets at end of period $20,390,427 $16,956,156 $37,820,862 $33,170,555 =============================== ================================ (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. See accompanying notes.
American Century AIM V.I. Premier VP Income & American Century Equity Division (2) Growth Division VP Ultra Division - ----------------------------------------------------------------------- ----------------------------------- 2003 2002 2003 2002 2003 2002 - ----------------------------------------------------------------------- ----------------------------------- - ----------------------------------------------------------------------- $ (309,379) $ (313,140) $ (41,975) $ (65,453) $ (97,716) $ (40,659) (1,931,457) (3,583,818) (160,698) (286,509) (79,603) (121,058) 8,657,841 (9,453,512) 4,819,595 (2,407,849) 1,424,749 (959,449) - ----------------------------------------------------------------------- ----------------------------------- - ----------------------------------------------------------------------- ----------------------------------- 6,417,005 4,616,922 (2,759,811) (13,350,470) 1,247,430 (1,121,166) 7,157,212 12,322,649 10,218,486 12,770,864 2,927,583 4,927,420 (7,644) (8,719) (3,560) (1,758) (1,742) (939) (44,892) (56,189) (18,233) (7,556) (9,358) (3,346) (2,056,163) (2,095,174) (804,312) (417,814) (346,709) (97,881) (234,753) (124,382) (10,074) (35,436) (8,725) - (510,080) (493,217) (271,922) (163,510) (51,921) (48,044) (3,552,051) (7,034,946) (2,478,544) (2,268,159) (654,233) (874,218) - - - - - - - ----------------------------------------------------------------------- ----------------------------------- - ----------------------------------------------------------------------- ----------------------------------- 751,629 6,631,841 9,876,631 2,510,022 1,854,895 3,902,992 - ----------------------------------------------------------------------- ----------------------------------- - ----------------------------------------------------------------------- ----------------------------------- 7,168,634 (10,840,448) 11,248,763 7,116,820 3,102,325 2,781,826 27,310,271 38,150,719 13,564,804 6,447,984 4,849,454 2,067,628 - ----------------------------------------------------------------------- ----------------------------------- - ----------------------------------------------------------------------- ----------------------------------- $34,478,905 $27,310,271 $24,813,567 $13,564,804 $7,951,779 $4,849,454 ======================================================================= ===================================
Principal Life Insurance Company Separate Account B Statements of Changes in Net Assets (continued) For the Years Ended December 31, 2003 and 2002
American Century VP II Value Asset Allocation Division (3) Division ---------------------------------------------------------------- -------------------------------- 2003 2002 2003 2002 ---------------------------------------------------------------- ---------------------------------------------------------------- Increase (decrease) in net assets from operations: Net investment income (loss) $ (49,280) $ (11,633) $ 475,066 $ (1,083,838) Net realized gains (losses) on investments (6,818) (28,192) (1,888,873) (2,324,940) Change in net unrealized appreciation or depreciation of 1,686,630 (69,518) investments 15,469,547 (9,672,375) ---------------------------------------------------------------- ---------------------------------------------------------------- Net increase (decrease) in net assets 14,055,740 (13,081,153) resulting from operations 1,630,532 (109,343) Changes from principal transactions: Purchase payments, less sales charges, per payment fees and applicable premium taxes 8,985,918 2,672,246 11,761,426 15,341,850 Administration charges (1,114) (140) (29,105) (30,872) Contingent sales charges (6,831) (673) (156,397) (131,152) Contract terminations (261,686) (23,371) (7,402,576) (5,022,589) Death benefit payments - - (341,236) (463,984) Flexible withdrawal option payments (667,673) (15,310) (1,859,777) (1,801,025) Transfer payments to other contracts (62,670) (159,105) (6,141,476) (12,685,206) Annuity payments - - - - ---------------------------------------------------------------- ---------------------------------------------------------------- Increase (decrease) in net assets from (4,169,143) (4,792,978) principal transactions 7,985,944 2,473,647 ---------------------------------------------------------------- ---------------------------------------------------------------- Total increase (decrease) 9,616,476 2,364,304 9,886,597 (17,874,131) Net assets at beginning of period 2,364,304 - 74,398,715 92,272,845 ---------------------------------------------------------------- ---------------------------------------------------------------- Net assets at end of period $11,980,780 $2,364,304 $84,285,312 $74,398,715 ================================================================ (3) Commenced operations May 18, 2002. See accompanying notes.
Balanced Division Bond Division Capital Value Division - ----------------------------------------------------------------------- ----------------------------------- ---------------------------------- ----------------------------------- ----------------------------------- 2003 2002 2003 2002 2003 2002 ---------------------------------- ----------------------------------- ----------------------------------- ---------------------------------- ----------------------------------- ------------------ $ 1,763,192 $ 2,447,992 $ 6,629,668 $ 5,175,224 $ 493,736 $ 539,576 (3,761,560) (4,926,549) 694,334 84,496 (4,531,146) (5,809,835) 18,072,534 (15,452,608) (229,444) 8,617,399 43,922,707 (27,195,743) ---------------------------------- ----------------------------------- ----------------------------------- ---------------------------------- ----------------------------------- ----------------------------------- 16,074,166 (17,931,165) 7,094,558 13,877,119 39,885,297 (32,466,002) 18,779,318 15,422,255 97,781,743 92,915,609 26,528,937 29,628,338 (42,969) (45,045) (87,292) (54,891) (84,185) (95,165) (169,951) (196,260) (424,783) (303,357) (268,398) (287,845) (11,408,037) (11,270,150) (23,108,476) (14,209,960) (20,481,847) (20,152,500) (599,887) (915,403) (1,479,648) (1,085,450) (693,211) (1,075,581) (2,545,782) (2,449,677) (6,658,430) (5,185,135) (3,045,849) (2,921,981) (8,997,884) (15,120,111) (49,825,765) (26,892,927) (12,151,950) (21,164,987) - - - - - (27,230) ---------------------------------- ----------------------------------- ----------------------------------- ---------------------------------- ----------------------------------- ----------------------------------- (4,985,192) (14,574,391) 16,197,349 45,183,889 (10,196,503) (16,096,951) ---------------------------------- ----------------------------------- ----------------------------------- 11,088,974 (32,505,556) 23,291,907 59,061,008 29,688,794 (48,562,953) 98,581,776 131,087,332 210,776,908 151,715,900 175,699,810 224,262,763 ---------------------------------- ----------------------------------- ----------------------------------- ---------------------------------- ----------------------------------- ----------------------------------- $109,670,750 $ 98,581,776 $234,068,815 $210,776,908 $205,388,604 $175,699,810 ================================== =================================== ===================================
Principal Life Insurance Company Separate Account B Statements of Changes in Net Assets (continued) For the Years Ended December 31, 2003 and 2002
Dreyfus DIP Founders Equity Growth Discovery Division Division -------------------------------- ------------------------------- -------------------------------- ------------------------------- 2003 2002 2003 2002 -------------------------------- ------------------------------- -------------------------------- Increase (decrease) in net assets from operations: Net investment income (loss) $ (51,470) $ (9,418) $ (1,635,057)$ (2,276,003) Net realized gains (losses) on (14,482,208) investments 20,353 (15,326) (8,432,347) Change in net unrealized appreciation or depreciation of investments 1,177,986 (210,949) 50,974,630 (62,423,911) -------------------------------- ------------------------------- -------------------------------- ------------------------------- Net increase (decrease) in net assets 1,146,869 (235,693) 40,907,226 (79,182,122) resulting from operations Changes from principal transactions: Purchase payments, less sales charges, per payment fees and applicable premium taxes 4,670,327 1,474,948 23,721,939 29,873,196 Administration charges (635) (210) (110,042) (143,434) Contingent sales charges (3,693) (413) (310,937) (394,218) Contract terminations (113,190) (12,304) (14,794,323) (15,198,811) Death benefit payments - - (489,218) (1,583,658) Flexible withdrawal option payments (18,693) (3,416) (2,499,045) (2,707,304) Transfer payments to other contracts (449,843) (158,464) (16,359,178) (35,873,947) Annuity payments - - - - -------------------------------- ------------------------------- -------------------------------- ------------------------------- Increase (decrease) in net assets from 4,084,273 1,300,141 (10,840,804) (26,028,176) principal transactions -------------------------------- ------------------------------- -------------------------------- ------------------------------- Total increase (decrease) 5,231,142 1,064,448 30,066,422 (105,210,298) Net assets at beginning of period 1,360,985 296,537 178,520,612 283,730,910 -------------------------------- ------------------------------- -------------------------------- ------------------------------- Net assets at end of period $6,592,127 $1,360,985 $208,587,034 $178,520,612 ================================ =============================== (3) Commenced operations May 18, 2002. See accompanying notes.
Fidelity VIP II Fidelity VIP Equity-Income Fidelity VIP Growth Contrafund Division Division (3) Division - ----------------------------------------------------------------------- ----------------------------------- ----------------------------------- ----------------------------------- 2003 2002 2003 2002 2003 2002 - ----------------------------------------------------------------------- ----------------------------------- - ----------------------------------------------------------------------- ----------------------------------- $ (498,651) $ (281,879) $ (80,238) $ (15,101) $ (395,942) $ (468,727) (862,882) (1,140,471) 6,993 (4,586) (2,771,173) (5,339,145) 13,482,385 (3,739,862) 3,817,936 (73,555) 12,649,041 (9,894,594) - ----------------------------------------------------------------------- ----------------------------------- - ----------------------------------------------------------------------- ----------------------------------- 12,120,852 9,481,926 (15,702,466) (5,162,212) 3,744,691 (93,242) 16,621,826 16,911,048 18,497,777 4,429,431 6,797,857 9,529,932 (1,981) (153) (12,988) (12,411) (33,487) (32,971) (13,974) (804) (55,883) (66,297) (87,188) (71,372) (476,172) (28,152) (2,443,549) (2,502,664) (3,668,213) (2,707,975) (46,212) (17,135) (238,352) (343,631) (263,210) (266,439) (92,982) (11,271) (564,683) (601,760) (583,563) (518,109) (1,623,880) (140,601) (3,348,036) (8,191,771) (5,078,808) (7,379,607) - - - - - ----------------------------------------------------------------------- ----------------------------------- - ----------------------------------------------------------------------- ----------------------------------- 6,907,357 5,934,575 134,366 (2,188,602) 16,242,576 4,231,315 - ----------------------------------------------------------------------- ----------------------------------- - ----------------------------------------------------------------------- ----------------------------------- 19,028,209 772,363 19,987,267 4,138,073 9,616,292 (17,891,068) 42,985,779 42,213,416 4,138,073 - 31,669,521 49,560,589 - ----------------------------------------------------------------------- ----------------------------------- - ----------------------------------------------------------------------- ----------------------------------- $62,013,988 $42,985,779 $24,125,340 $4,138,073 $41,285,813 $31,669,521 ======================================================================= ===================================
Principal Life Insurance Company Separate Account B Statements of Changes in Net Assets (continued) For the Years Ended December 31, 2003 and 2002
Government Securities Division Growth Division ---------------------------------------------------------------- ---------------------------------------------------------------- 2003 2002 2003 2002 ---------------------------------------------------------------- ---------------------------------------------------------------- Increase (decrease) in net assets from operations: Net investment income (loss) $ 7,428,762 $ 5,283,966 $ (1,063,706) $ (1,678,271) Net realized gains (losses) on investments $2,047,895 1,095,749 (12,722,688) (21,124,015) Change in net unrealized 10,603,309 appreciation or depreciation of investments (8,300,799) 39,344,003 (31,876,676) ---------------------------------------------------------------- ---------------------------------------------------------------- Net increase (decrease) in net assets 1,175,858 16,983,024 25,557,609 (54,678,962) resulting from operations Changes from principal transactions: Purchase payments, less sales charges, per payment fees and applicable premium taxes 166,618,130 178,463,010 11,123,850 14,753,416 Administration charges (111,613) (85,506) (31,657) (38,633) Contingent sales charges (602,033) (420,021) (174,622) (259,390) Contract terminations (33,380,238) (18,261,751) (13,004,103) (16,905,205) Death benefit payments (1,758,443) (1,432,966) (450,714) (834,250) Flexible withdrawal option payments (10,288,006) (6,347,844) (2,055,322) (2,237,307) Transfer payments to other contracts (98,132,041) (33,558,128) (9,204,804) (22,888,160) Annuity payments - - - - ---------------------------------------------------------------- ---------------------------------------------------------------- Increase (decrease) in net assets from 22,345,756 118,356,794 (13,797,372) (28,409,529) principal transactions ---------------------------------------------------------------- ---------------------------------------------------------------- Total increase (decrease) 23,521,614 135,339,818 11,760,237 (83,088,491) Net assets at beginning of period 318,208,187 182,868,369 111,598,998 194,687,489 ---------------------------------------------------------------- ---------------------------------------------------------------- Net assets at end of period $341,729,801 $318,208,187 $123,359,235 $111,598,998 ================================================================ See accompanying notes.
International Emerging Markets International SmallCap International Division Division Division - ----------------------------------------------------------------------- ----------------------------------- ----------------------------------- ----------------------------------- 2003 2002 2003 2002 2003 2002 - ----------------------------------------------------------------------- ----------------------------------- - ----------------------------------------------------------------------- ----------------------------------- $ (216,865) $ (820,866) $ (29,560) $ (66,338) $ 14,187 $ (362,402) (5,388,986) (8,262,501) (37,158) (305,102) (2,820,743) (4,043,181) 36,598,232 (12,240,046) 4,657,895 (487,259) 19,529,973 (1,967,979) - ----------------------------------------------------------------------- ----------------------------------- - ----------------------------------------------------------------------- ----------------------------------- 30,992,381 (21,323,413) 4,591,177 16,723,417 (6,373,562) (858,699) 34,589,910 28,567,567 12,465,791 10,446,681 15,841,515 15,777,321 (27,472) (23,561) (4,177) (2,204) (18,378) (17,838) (165,000) (184,054) (11,172) (4,362) (56,382) (56,734) (12,302,266) (9,916,613) (406,037) (145,034) (2,381,535) (2,142,940) (357,558) (428,285) (14,928) (1,693) (64,560) (124,755) (1,464,149) (1,402,413) (114,370) (67,941) (362,724) (369,452) (14,243,398) (23,343,025) (6,623,773) (5,304,443) (9,014,578) (11,885,022) - - - - - - - ----------------------------------------------------------------------- ----------------------------------- - ----------------------------------------------------------------------- ----------------------------------- 6,030,066 (6,730,384) 5,291,334 3,943,358 1,180,580 4,921,004 - ----------------------------------------------------------------------- ----------------------------------- - ----------------------------------------------------------------------- ----------------------------------- 37,022,447 (28,053,797) 9,882,511 4,062,305 20,666,775 (5,192,982) 100,045,178 128,098,975 6,531,258 2,468,953 30,873,079 36,066,061 - ----------------------------------------------------------------------- ----------------------------------- - ----------------------------------------------------------------------- ----------------------------------- $137,067,625 $100,045,178 $16,413,769 $ 6,531,258 $51,539,854 $30,873,079 ======================================================================= ===================================
Principal Life Insurance Company Separate Account B Statements of Changes in Net Assets (continued) For the Years Ended December 31, 2003 and 2002
INVESCO VIF-Dynamics INVESCO VIF-Health Division Sciences Division ---------------------------------------------------------------- 2003 2002 2003 2002 ---------------------------------------------------------------- ---------------------------------------------------------------- Increase (decrease) in net assets from operations: Net investment income (loss) $ (14,541) $ (5,129) $ (125,944) $ (70,378) Net realized gains (losses) on investments 12,763 (32,450) (80,827) (209,680) Change in net unrealized appreciation or depreciation of investments 310,340 (111,822) 2,291,382 (1,415,145) ---------------------------------------------------------------- ---------------------------------------------------------------- Net increase (decrease) in net assets 2,084,611 (1,695,203) resulting from operations 308,562 (149,401) Changes from principal transactions: Purchase payments, less sales charges, per payment fees and applicable premium taxes 1,803,907 426,735 5,541,177 6,280,236 Administration charges (141) (56) (2,778) (1,510) Contingent sales charges (881) (1,094) (12,459) (6,240) Contract terminations (29,106) (39,433) (433,839) (212,500) Death benefit payments - - (6,184) (39,490) Flexible withdrawal option payments (6,369) (1,464) (83,096) (40,670) Transfer payments to other contracts (394,445) (165,437) (1,214,703) (1,580,969) Annuity payments - - - - ---------------------------------------------------------------- ---------------------------------------------------------------- Increase (decrease) in net assets from 3,788,118 4,398,857 principal transactions 1,372,965 219,251 ---------------------------------------------------------------- ---------------------------------------------------------------- Total increase (decrease) 1,681,527 69,850 5,872,729 2,703,654 Net assets at beginning of period 357,214 287,364 6,373,510 3,669,856 ---------------------------------------------------------------- ---------------------------------------------------------------- Net assets at end of period $2,038,741 $357,214 $12,246,239 $6,373,510 ================================================================ See accompanying notes.
INVESCO VIF-Small INVESCO Janus Aspen Company Growth VIF-Technology MidCap Division Division Growth Division - ----------------------------------------------------------------------- ----------------------------------- - ----------------------------------------------------------------------- ----------------------------------- 2003 2002 2003 2002 2003 2002 - ----------------------------------------------------------------------- ------------------ - ----------------------------------------------------------------------- ----------------------------------- $ (23,860) $ (14,147) $ (44,540) $ (19,149) $ (176,475) $ (158,263) (10,029) (50,771) (41,504) (227,517) (352,135) (996,833) 487,677 (299,182) 1,133,877 (662,859) 3,984,036 (2,761,018) - ----------------------------------------------------------------------- ----------------------------------- - ----------------------------------------------------------------------- ----------------------------------- 453,788 (364,100) 1,047,833 (909,525) 3,455,426 (3,916,114) 1,441,771 1,336,165 4,922,714 2,296,732 3,279,814 6,030,231 (289) (99) (829) (199) (5,960) (3,205) (4,298) (2,368) (3,577) (2,901) (13,260) (11,199) (110,457) (71,841) (118,005) (104,603) (450,697) (364,582) - - (1,101) (11,949) (9,238) (16,316) (7,277) (6,046) (35,858) (6,380) (63,481) (81,867) (500,675) (214,401) (1,590,439) (926,474) (1,307,473) (3,024,293) - - - - - - - ----------------------------------------------------------------------- ----------------------------------- - ----------------------------------------------------------------------- ----------------------------------- 818,775 1,041,410 3,172,905 1,244,226 1,429,705 2,528,769 - ----------------------------------------------------------------------- ----------------------------------- - ----------------------------------------------------------------------- ----------------------------------- 1,272,563 677,310 4,220,738 334,701 4,885,131 (1,387,345) 1,224,219 546,909 1,356,879 1,022,178 10,027,948 11,415,293 - ----------------------------------------------------------------------- ----------------------------------- - ----------------------------------------------------------------------- ----------------------------------- $2,496,782 $1,224,219 $5,577,617 $1,356,879 $14,913,079 $10,027,948 ======================================================================= ===================================
Principal Life Insurance Company Separate Account B Statements of Changes in Net Assets (continued) For the Years Ended December 31, 2003 and 2002
LargeCap Blend LargeCap Growth Division (3) Equity Division ---------------------------------------------------------------- -------------------------------- 2003 2002 2003 2002 ---------------------------------------------------------------- ---------------------------------------------------------------- Increase (decrease) in net assets from operations: Net investment income (loss) $ (100,616)$ (16,959) $ (77,281) $ (50,755) Net realized gains (losses) on investments (48) (12,201) (101,279) (205,054) Change in net unrealized appreciation or depreciation of 6,532,064 investments (429,296) 1,403,871 (1,229,077) ---------------------------------------------------------------- ---------------------------------------------------------------- Net increase (decrease) in net assets (458,456) 1,225,311 (1,484,886) resulting from operations 6,431,400 Changes from principal transactions: Purchase payments, less sales charges, per payment fees and applicable premium taxes 35,880,756 13,010,576 11,412,991 3,629,465 Administration charges (4,453) (487) (1,468) (681) Contingent sales charges (28,597) (1,718) (8,718) (3,794) Contract terminations (1,007,200) (55,448) (345,271) (130,419) Death benefit payments (78,070) - - (5,914) Flexible withdrawal option payments (345,381) (48,562) (80,392) (52,501) Transfer payments to other contracts (2,301,433) (797,500) (485,490) (642,758) Annuity payments - - - - ---------------------------------------------------------------- ---------------------------------------------------------------- Increase (decrease) in net assets from 10,491,652 2,793,398 principal transactions 32,115,622 12,106,861 ---------------------------------------------------------------- ---------------------------------------------------------------- Total increase (decrease) 38,547,022 11,648,405 11,716,963 1,308,512 Net assets at beginning of period 11,648,405 - 3,760,962 2,452,450 ---------------------------------------------------------------- ---------------------------------------------------------------- Net assets at end of period $50,195,427 $11,648,405 $15,477,925 $3,760,962 ================================================================ (3) Commenced operations May 18, 2002. (4) Commenced operations May 17, 2003. See accompanying notes.
Limited LargeCap Stock LargeCap Term Bond Division Index Division Value Division (3) (4) - ------------------------------------------------------------------------- --------------------- - ------------------------------------------------------------------------- --------------------- 2003 2002 2003 2002 2003 - ------------------------------------------------------------------------- --------------------- $ 65,924 $ (55,607) $ 77,554 $ 19,210 $ 87,158 (1,165,193) (2,543,046) (3,999) (37,589) 1,228 18,057,963 (13,234,086) 6,379,123 (395,301) (21,879) - ------------------------------------------------------------------------- --------------------- - ------------------------------------------------------------------------- --------------------- 16,958,694 (15,832,739) 66,507 6,452,678 (413,680) 36,342,637 31,404,881 28,340,750 12,749,044 22,826,289 (23,569) (20,388) (3,619) (609) (822) (99,678) (90,317) (22,642) (3,077) (7,709) (4,675,389) (3,619,103) (840,148) (112,881) (241,429) (372,242) (472,685) (171,149) - - (931,678) (816,819) (328,436) (80,571) (126,810) (8,252,408) (12,159,066) (2,263,092) (1,180,239) (2,070,105) - - - - - - ------------------------------------------------------------------------- --------------------- - ------------------------------------------------------------------------- --------------------- 21,987,673 14,226,503 20,379,414 24,711,664 11,371,667 - ------------------------------------------------------------------------- --------------------- - ------------------------------------------------------------------------- --------------------- 38,946,367 (1,606,236) 31,164,342 10,957,987 20,445,921 55,031,073 56,637,309 10,957,987 - - - ------------------------------------------------------------------------- --------------------- - ------------------------------------------------------------------------- --------------------- $93,977,440 $55,031,073 $41,122,329 $10,957,987 $20,445,921 ========================================================================= =====================
Principal Life Insurance Company Separate Account B Statements of Changes in Net Assets (continued) For the Years Ended December 31, 2003 and 2002
MidCap Growth MidCap Division Division ---------------------------------------------------------------- -------------------------------- 2003 2002 2003 2002 ---------------------------------------------------------------- ---------------------------------------------------------------- Increase (decrease) in net assets from operations: Net investment income (loss) $ (362,409) $ (541,852) $ (290,919) $ (221,771) Net realized gains (losses) on investments (755,382) (1,744,481) (423,898) (1,183,678) Change in net unrealized appreciation or depreciation of investments 65,228,283 (25,759,650) 7,786,159 (4,244,450) ---------------------------------------------------------------- ---------------------------------------------------------------- Net increase (decrease) in net assets 64,110,492 (24,557,021) 7,071,342 (5,649,899) resulting from operations Changes from principal transactions: Purchase payments, less sales charges, per payment fees and applicable premium taxes 46,948,409 43,208,980 24,367,262 5,350,625 Administration charges (151,823) (152,071) (9,593) (6,951) Contingent sales charges (354,125) (314,421) (25,053) (25,805) Contract terminations (22,917,904) (18,862,302) (1,082,557) (1,032,418) Death benefit payments (721,203) (1,316,002) (44,507) (194,120) Flexible withdrawal option payments (2,809,581) (2,314,016) (254,214) (178,143) Transfer payments to other contracts (16,710,381) (25,034,994) (3,558,250) (2,955,675) Annuity payments - - - - ---------------------------------------------------------------- ---------------------------------------------------------------- Increase (decrease) in net assets from 3,283,392 (4,784,826) 19,393,083 957,513 principal transactions ---------------------------------------------------------------- ---------------------------------------------------------------- Total increase (decrease) 67,393,884 (29,341,847) 26,464,430 (4,692,386) Net assets at beginning of period 209,892,080 239,233,927 14,937,467 19,629,853 ---------------------------------------------------------------- ---------------------------------------------------------------- Net assets at end of period $277,285,964 $209,892,080 $41,401,897 $14,937,467 ================================================================ See accompanying notes.
MidCap Value Division Money Market Division Real Estate Division - ----------------------------------------------------------------------- ----------------------------------- - ----------------------------------------------------------------------- 2003 2002 2003 2002 2003 2002 - ----------------------------------------------------------------------- ----------------------------------- - ----------------------------------------------------------------------- $ (311,012) $ (140,463) $ (731,194) $ 176,936 $ 1,184,549 $ 709,590 452,354 (84,545) - - 1,487,913 53,604 7,814,399 (1,432,854) - - 13,421,069 (127,053) - ----------------------------------------------------------------------- ----------------------------------- - ----------------------------------------------------------------------- ----------------------------------- 7,955,741 (1,657,862) (731,194) 176,936 16,093,531 636,141 19,350,493 17,078,556 217,597,516 243,677,082 33,670,363 29,659,384 (4,873) (1,842) (41,244) (41,512) (20,597) (9,677) (29,423) (12,713) (596,012) (631,403) (63,577) (35,049) (1,357,377) (544,299) (34,795,034) (28,356,420) (2,678,121) (1,278,438) (64,534) (7,893) (366,961) (520,141) (171,470) (41,983) (298,623) (125,099) (4,470,525) (3,795,995) (929,465) (598,412) (4,289,273) (2,932,228) (226,802,386) (203,885,485) (9,557,821) (6,246,781) - - - - - - - ----------------------------------------------------------------------- ----------------------------------- - ----------------------------------------------------------------------- ----------------------------------- 13,306,390 13,454,482 (49,474,646) 6,446,126 20,249,312 21,449,044 - ----------------------------------------------------------------------- ----------------------------------- - ----------------------------------------------------------------------- ----------------------------------- 21,262,131 11,796,620 (50,205,840) 6,623,062 36,342,843 22,085,185 16,143,714 4,347,094 157,262,140 150,639,078 34,860,548 12,775,363 - ----------------------------------------------------------------------- ----------------------------------- - ----------------------------------------------------------------------- ----------------------------------- $37,405,845 $16,143,714 $107,056,300 $157,262,140 $71,203,391 $34,860,548 ======================================================================= ===================================
Principal Life Insurance Company Separate Account B Statements of Changes in Net Assets (continued) For the Years Ended December 31, 2003 and 2002
SmallCap Growth SmallCap Division Division ------------------------------- -------------------------------- ------------------------------- -------------------------------- 2003 2002 2003 2002 ------------------------------- -------------------------------- ---------------------------------------------------------------- Increase (decrease) in net assets from operations: Net investment income (loss) $ (391,905) $ (337,335) $ (411,578) $ (436,810) Net realized gains (losses) on investments (745,178) (1,243,067) (4,266,680) (6,181,169) Change in net unrealized appreciation or depreciation of investments 11,383,631 (7,851,136) 16,062,643 (15,584,689) ------------------------------- -------------------------------- ------------------------------- -------------------------------- Net increase (decrease) in net assets 10,246,548 (9,431,538) 11,384,385 (22,202,668) resulting from operations Changes from principal transactions: Purchase payments, less sales charges, per payment fees and applicable premium taxes 20,802,456 14,076,016 12,995,577 10,865,423 Administration charges (9,149) (9,299) (8,527) (7,892) Contingent sales charges (41,695) (41,053) (40,596) (58,629) Contract terminations (1,877,815) (1,606,783) (1,735,316) (2,237,702) Death benefit payments (51,960) (35,185) (60,987) (189,814) Flexible withdrawal option payments (561,919) (419,394) (375,134) (456,625) Transfer payments to other contracts (4,081,417) (6,501,182) (5,761,304) (6,430,692) Annuity payments - - - - ------------------------------- -------------------------------- ------------------------------- -------------------------------- Increase (decrease) in net assets from 14,178,501 5,463,120 5,013,712 1,484,069 principal transactions ------------------------------- -------------------------------- ------------------------------- -------------------------------- Total increase (decrease) 24,425,0549 (3,968,418) 16,398,097 (20,718,599) Net assets at beginning of period 25,858,266 29,826,684 25,167,645 45,886,244 ------------------------------- -------------------------------- ------------------------------- -------------------------------- Net assets at end of period $50,283,315 $25,858,266 $41,565,742 $25,167,645 =============================== ================================ See accompanying notes.
Templeton SmallCapValue Growth Securities Division Division Utilities Division - ----------------------------------------------------------------------- ----------------------------------- - ----------------------------------------------------------------------- ----------------------------------- 2003 2002 2003 2002 2003 2002 - ----------------------------------------------------------------------- ----------------------------------- - ----------------------------------------------------------------------- ----------------------------------- $ (372,204) $ (185,267) $ 5,802 $ 13,044 $ 751,146 $ 778,200 1,612,964 (156,414) (68,690) (14,672) (955,971) (2,329,517) 15,400,567 (3,626,861) 312,071 (193,807) 3,056,569 (2,601,000) - ----------------------------------------------------------------------- ----------------------------------- - ----------------------------------------------------------------------- ----------------------------------- 16,641,327 (3,968,542) 249,183 (195,435) 2,851,744 (4,152,317) 19,857,714 24,920,511 393,889 533,068 6,513,404 6,289,771 (14,930) (10,392) - - (9,835) (8,784) (51,339) (40,565) (1,104) (631) (36,510) (41,772) (2,238,513) (1,449,663) (192,171) (101,914) (1,662,129) (1,503,094) (67,528) (75,303) (630) - (136,040) (113,986) (484,269) (281,412) (9,061) (13,184) (534,159) (541,725) (7,898,990) (7,054,164) (70,616) (83,290) (2,744,435) (6,533,759) - - - - - - - ----------------------------------------------------------------------- ----------------------------------- - ----------------------------------------------------------------------- ----------------------------------- 9,102,145 16,009,012 120,307 334,049 1,390,296 (2,453,349) - ----------------------------------------------------------------------- ----------------------------------- - ----------------------------------------------------------------------- ----------------------------------- 25,743,472 12,040,470 369,490 138,614 4,242,040 (6,605,666) 30,765,512 18,725,042 823,910 685,296 22,960,914 29,566,580 - ----------------------------------------------------------------------- ----------------------------------- - ----------------------------------------------------------------------- ----------------------------------- $56,508,984 $30,765,512 $1,193,400 $823,910 $27,202,954 $22,960,914 ======================================================================= ===================================
Principal Life Insurance Company Separate Account B Notes to Financial Statements December 31, 2003 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, 2003, contractholder investment options include the following open-end management investment companies: Principal Variable Contracts Fund, Inc. (3) AIM V.I. Growth Fund Asset Allocation Division AIM V.I. Core Equity Fund Balanced Division AIM V.I. Premier Equity Fund Bond Division American Century Variable Portfolios Inc.: Capital Value Division VP Income & Growth Equity Growth Division VP Ultra Government Securities Division VP Value (1) Growth Division Dreyfus Investment Portfolios - Founders International Division Discovery Portfolio International Emerging Markets Division Fidelity Variable Insurance Products Fund II: International SmallCap Division Equity - Income Portfolio LargeCap Blend Division Fidelity Variable Insurance Products Fund: LargeCap Growth Equity Division Contrafund Portfolio LargeCap Stock Index Division Growth Portfolio LargeCap Value Division Franklin Templeton Variable Insurance Limited Term Bond Division (2) Products Series Trust: MidCap Division Growth Securities Fund Class 2 MidCap Growth Division INVESCO Variable Investment Funds: MidCap Value Division Dynamics Fund Money Market Division Health Sciences Fund Real Estate Division Small Company Growth Fund SmallCap Division Technology Fund SmallCap Growth Division Janus Aspen MidCap Growth Portfolio SmallCap Value Division Utilities Division (1) Additional investment option available to contractholders as of May 18, 2002. (2) Additional investment option available to contractholders as of May 17, 2003. (3) Organized by Principal Life Insurance Company.
Investments are stated at the closing net asset values per share on December 31, 2003. 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 daily charge resulting in a reduction of the unit value equivalent to an annual rate of 0.48% of the asset value of each contract. An annual administration charge of $7 for each participant's account is deducted as compensation for administrative expenses. 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 daily charge resulting in a reduction of the unit value 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 daily charge resulting in a reduction of the unit value equivalent to an annual rate of 0.64% of the asset value of each contract. A contingent sales charge of up to 5% may be deducted from withdrawals from an investment account during the first seven years from the date the first contribution which relates to such participant is accepted by Principal Life. This charge does not apply to withdrawals made from investment accounts which correlate to a plan participant as a result of the plan participant's death or permanent disability. An annual administration charge of $34 for each participant's account plus 0.35% of the annual average balance of investment account values which correlate to a plan participant will be deducted on a quarterly basis. Premier Variable Contracts - Mortality and expense risks assumed by Principal Life are compensated for by a daily charge resulting in a reduction of the unit value equivalent to an annual rate of 0.42% of the asset value of each contract. The Contractholder must also pay contract administration charges. The annual charge ranges from a minimum charge of $2,150 to $7,725 plus .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 daily charge resulting in a reduction of the unit value equivalent to an annual rate of 1.25% of the asset value of each contract. A contingent sales charge of up to 6% may be deducted from the withdrawals made during the first six years of a contract, except for 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, 2003, 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 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, Limited Term Bond 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 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 ------------------------------------------------------------------------ ------------------------------------------------------------------------ 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 International Emerging Markets 1.25 - 1.05 3. Federal Income Taxes The investment advisory and management fees for the LargeCap Growth Equity Account and LargeCap Stock Index Account are based on an annual rate of the average daily net assets, which are fixed at 1% and .35%, respectively. 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, 2003:
Division Purchases Sales -------------------------------------------------------------------------------------------------------- AIM V.I. Growth: The Principal Variable Annuity $ 2,371,818 $ 4,064,676 The Principal Variable Annuity With Purchase Payment Credit Rider 549,194 245,976 AIM V.I. Core Equity: The Principal Variable Annuity 4,108,128 7,226,595 The Principal Variable Annuity With Purchase Payment Credit Rider 2,776,596 2,026,607 AIM V.I. Premier Equity: The Principal Variable Annuity 5,220,140 5,999,778 The Principal Variable Annuity With Purchase Payment Credit Rider 2,032,022 810,134 American Century VP Income and Growth: Principal Freedom Variable Annuity 1,278,537 518,882 The Principal Variable Annuity 6,456,393 2,781,760 The Principal Variable Annuity With Purchase Payment Credit Rider 2,684,108 528,530 American Century VP Ultra: The Principal Variable Annuity 2,048,619 680,948 The Principal Variable Annuity With Purchase Payment Credit Rider 878,963 489,455 American Century VP II Value: The Principal Variable Annuity $ 6,325,739 $ 831,438 The Principal Variable Annuity With Purchase Payment Credit Rider 2,687,338 244,975 Asset Allocation: Premier Variable 48,843 648 The Principal Variable Annuity 10,011,147 15,454,626 The Principal Variable Annuity With Purchase Payment Credit Rider 3,168,919 1,467,712 Balanced: Personal Variable 508,304 584,977 Premier Variable 2,799,176 4,048,051 The Principal Variable Annuity 13,321,580 19,267,337 The Principal Variable Annuity With Purchase Payment Credit Rider 5,098,033 1,048,728 Bond: Personal Variable 695,829 397,501 Premier Variable 3,506,574 4,748,183 Principal Freedom Variable Annuity 4,492,318 2,859,390 The Principal Variable Annuity 66,279,535 60,605,876 The Principal Variable Annuity With Purchase Payment Credit Rider 32,374,511 15,910,800 Capital Value: Bankers Flexible Annuity 36,574 390,222 Pension Builder Plus 61,924 288,249 Pension Builder - Rollover IRA 6,177 259,341 Personal Variable 479,330 870,985 Premier Variable 2,777,047 6,961,005 Principal Freedom Variable Annuity 938,656 503,578 The Principal Variable Annuity 18,368,404 27,342,243 The Principal Variable Annuity With Purchase Payment Credit Rider 6,495,711 2,250,967 Dreyfus DIP Founders Discovery: The Principal Variable Annuity $ 2,870,682 $ 389,877 The Principal Variable Annuity With Purchase Payment Credit Rider 1,799,645 247,647 Equity Growth: Premier Variable 46,210 14,404 The Principal Variable Annuity 18,796,507 34,663,624 The Principal Variable Annuity With Purchase Payment Credit Rider 5,654,067 2,294,617 Fidelity VIP II Contrafund: The Principal Variable Annuity 12,569,813 8,676,947 The Principal Variable Annuity With Purchase Payment Credit Rider 4,218,984 1,703,144 Fidelity VIP Equity-Income: The Principal Variable Annuity 12,454,329 1,949,062 The Principal Variable Annuity With Purchase Payment Credit Rider 6,131,784 474,713 Fidelity VIP Growth: The Principal Variable Annuity 4,844,940 6,441,971 The Principal Variable Annuity With Purchase Payment Credit Rider 2,019,709 684,254 Government Securities: Pension Builder 53,521 264,120 Pension Builder - Rollover IRA 2,588 18,364 Personal Variable 644,075 1,013,144 Premier Variable 3,971,220 7,600,107 Principal Freedom Variable Annuity 2,130,863 179,764 The Principal Variable Annuity 122,813,471 107,207,719 The Principal Variable Annuity With Purchase Payment Credit Rider 49,159,457 32,717,459 Growth: Personal Variable $ 548,019 $ 657,528 Premier Variable 2,583,483 4,716,857 The Principal Variable Annuity 5,966,332 19,216,656 The Principal Variable Annuity With Purchase Payment Credit Rider 2,283,660 1,651,531 International: Personal Variable 2,496,088 2,575,915 Premier Variable 1,056,354 2,356,270 Principal Freedom Variable Annuity 433,070 109,344 The Principal Variable Annuity 19,252,086 18,343,619 The Principal Variable Annuity With Purchase Payment Credit Rider 12,484,919 6,524,168 International Emerging Markets: Premier Variable 39,668 290 The Principal Variable Annuity 5,610,011 2,451,944 The Principal Variable Annuity With Purchase Payment Credit Rider 6,925,102 4,860,773 International SmallCap: Premier Variable 24,169 7,691 The Principal Variable Annuity 8,599,030 6,903,460 The Principal Variable Annuity With Purchase Payment Credit Rider 7,727,779 5,482,282 INVESCO VIF-Dynamics: The Principal Variable Annuity 1,136,386 411,628 The Principal Variable Annuity With Purchase Payment Credit Rider 667,520 33,854 INVESCO VIF-Health Science: The Principal Variable Annuity 3,185,917 1,081,237 The Principal Variable Annuity With Purchase Payment Credit Rider 2,355,261 797,767 INVESCO VIF-Small Company Growth: The Principal Variable Annuity $ 1,170,993 $ 538,332 The Principal Variable Annuity With Purchase Payment Credit Rider 270,778 108,524 INVESCO VIF-Technology: The Principal Variable Annuity 3,820,526 1,612,412 The Principal Variable Annuity With Purchase Payment Credit Rider 1,102,188 181,937 Janus Aspen MidCap Growth: The Principal Variable Annuity 2,027,308 1,282,325 The Principal Variable Annuity With Purchase Payment Credit Rider 1,252,505 744,258 LargeCap Blend: The Principal Variable Annuity 24,481,205 3,024,107 The Principal Variable Annuity With Purchase Payment Credit Rider 11,681,459 1,123,551 LargeCap Growth Equity: Premier Variable Annuity 31,782 10 Principal Freedom Variable Annuity 1,133,013 16,791 The Principal Variable Annuity 6,360,857 722,567 The Principal Variable Annuity With Purchase Payment Credit Rider 3,887,339 259,252 LargeCap Stock Index: Premier Variable Annuity 317,980 199,164 Principal Freedom Variable Annuity 5,078,213 1,646,979 The Principal Variable Annuity 20,445,320 10,930,145 The Principal Variable Annuity With Purchase Payment Credit Rider 11,479,887 2,491,515 LargeCap Value: The Principal Variable Annuity $ 20,774,242 $ 3,025,687 The Principal Variable Annuity With Purchase Payment Credit Rider 7,963,453 922,790 Limited Term Bond: Freedom Variable Annuity 1,200,249 36,086 The Principal Variable Annuity 15,562,969 1,815,924 The Principal Variable Annuity With Purchase Payment Credit Rider 6,220,753 665,388 MidCap: Personal Variable Annuity 684,979 858,797 Premier Variable Annuity 2,528,759 5,948,976 Principal Freedom Variable Annuity 1,047,485 253,570 The Principal Variable Annuity 32,349,996 35,604,725 The Principal Variable Annuity With Purchase Payment Credit Rider 12,797,062 3,821,230 MidCap Growth: Premier Variable 79,482 3,550 Principal Freedom Variable Annuity 314,218 84,511 The Principal Variable Annuity 17,156,810 4,305,783 The Principal Variable Annuity With Purchase Payment Credit Rider 6,816,753 871,250 MidCap Value: Premier Variable 150,689 2,037 Principal Freedom Variable Annuity 1,184,820 357,820 The Principal Variable Annuity 12,703,443 4,498,070 The Principal Variable Annuity With Purchase Payment Credit Rider 5,747,266 1,516,613 Money Market: Pension Builder $ 5,300 $ 30,334 Pension Builder - Rollover IRA 120 8,649 Personal Variable 3,121,721 3,190,990 Premier Variable 8,136,388 11,609,636 Principal Freedom Variable Annuity 10,221,887 8,229,799 The Principal Variable Annuity 127,846,480 161,056,649 The Principal Variable Annuity With Purchase Payment Credit Rider 69,303,551 84,715,230 Real Estate: Premier Variable 196,318 27,018 The Principal Variable Annuity 27,227,924 11,304,211 The Principal Variable Annuity With Purchase Payment Credit Rider 9,339,002 2,771,927 SmallCap: Premier Variable 31,203 6,053 Principal Freedom Variable Annuity 917,646 266,891 The Principal Variable Annuity 15,127,491 5,791,906 The Principal Variable Annuity With Purchase Payment Credit Rider 4,760,327 985,221 SmallCap Growth: Premier Variable 55,623 344 Principal Freedom Variable Annuity 410,509 73,230 The Principal Variable Annuity 10,052,807 7,502,258 The Principal Variable Annuity With Purchase Payment Credit Rider 2,476,636 817,609 SmallCap Value: Premier Variable 96,456 6,546 The Principal Variable Annuity 16,290,658 9,401,540 The Principal Variable Annuity With Purchase Payment Credit Rider 5,132,516 1,899,120 Templeton Growth Securities: Principal Freedom Variable Annuity $ 407,337 $ 281,228 Utilities: Premier Variable 11,295 1,487 The Principal Variable Annuity 5,747,737 4,727,504 The Principal Variable Annuity With Purchase Payment Credit Rider 1,828,585 717,184
5. Changes in Units Outstanding Transactions in units were as follows for each of the years ended December 31:
2003 2002 --------------------------------- -------------------------------- --------------------------------- -------------------------------- Division Purchased Redeemed Purchased Redeemed ----------------------------------------------------------------------- -------------------------------- AIM V.I. Growth: The Principal Variable Annuity 484,359 828,814 450,650 1,292,911 The Principal Variable Annuity With Purchase Payment Credit Rider 112,153 50,156 157,476 103,273 AIM V.I. Core Equity: The Principal Variable Annuity 569,227 1,028,132 796,051 1,547,782 The Principal Variable Annuity With Purchase Payment Credit Rider 384,728 288,326 356,115 211,475 AIM V.I. Premier Equity: The Principal Variable Annuity 830,402 918,040 1,391,604 1,367,431 The Principal Variable Annuity With Purchase Payment Credit Rider 323,247 123,961 399,618 149,824 American Century VP Income and Growth: Principal Freedom Variable Annuity 151,175 61,297 133,152 52,242 The Principal Variable Annuity 803,449 336,761 986,394 232,719 The Principal Variable Annuity With Purchase Payment Credit Rider 334,017 63,984 448,526 98,507 American Century VP Ultra: The Principal Variable Annuity 265,152 84,858 392,613 76,978 The Principal Variable Annuity With Purchase Payment Credit Rider 113,764 60,994 214,502 59,239 American Century VP II Value: The Principal Variable Annuity 669,378 83,363 202,948 11,065 The Principal Variable Annuity With Purchase Payment Credit Rider 284,369 25,446 102,729 13,088 Asset Allocation: Premier Variable 49,380 608 177 608 The Principal Variable Annuity 516,704 859,149 699,433 1,107,937 The Principal Variable Annuity With Purchase Payment Credit Rider 163,557 81,593 180,040 74,444 Balanced: Personal Variable 287,170 374,542 251,621 292,453 Premier Variable 1,620,244 2,581,193 1,582,260 2,900,370 The Principal Variable Annuity 764,228 1,247,645 597,222 1,660,752 The Principal Variable Annuity With Purchase Payment Credit Rider 292,462 67,910 247,320 39,549 Bond: Personal Variable 344,432 211,067 285,082 227,502 Premier Variable 1,689,114 2,542,934 1,751,775 1,768,796 Principal Freedom Variable Annuity 340,614 228,130 318,311 86,169 The Principal Variable Annuity 3,538,733 3,415,480 4,001,168 2,325,586 The Principal Variable Annuity With Purchase Payment Credit Rider 1,728,507 896,662 1,302,671 350,097 Capital Value: Bankers Flexible Annuity - 14,192 - 34,847 Pension Builder 3,798 52,094 2,620 108,092 Pension Builder - Rollover IRA - 46,325 3,091 35,839 Personal Variable 196,235 391,931 214,089 647,157 Premier Variable 1,113,028 3,086,904 1,129,392 3,134,635 Principal Freedom Variable Annuity 113,326 62,464 53,849 33,599 The Principal Variable Annuity 908,167 1,415,207 974,682 1,816,212 The Principal Variable Annuity With Purchase Payment Credit Rider 321,160 116,508 408,318 120,147 Dreyfus DIP Founders Discovery: The Principal Variable Annuity 428,938 52,052 129,255 17,087 The Principal Variable Annuity With Purchase Payment Credit Rider 268,903 33,063 97,573 8,515 Equity Growth: Premier Variable 60,015 17,093 65,036 24,572 The Principal Variable Annuity 823,878 1,507,088 984,343 2,356,674 The Principal Variable Annuity With Purchase Payment Credit Rider 247,826 99,764 284,490 105,889 Fidelity VIP II Contrafund: The Principal Variable Annuity 1,407,331 946,698 1,417,094 1,165,210 The Principal Variable Annuity With Purchase Payment Credit Rider 472,362 185,821 527,886 123,405 Fidelity VIP Equity-Income: The Principal Variable Annuity 1,400,843 204,545 392,209 18,092 The Principal Variable Annuity With Purchase Payment Credit Rider 689,693 49,819 150,297 7,188 Fidelity VIP Growth: The Principal Variable Annuity 703,551 922,581 960,906 1,571,530 The Principal Variable Annuity With Purchase Payment Credit Rider 293,289 97,995 358,576 161,496 Government Securities: Pension Builder 12,859 95,979 472 42,001 Pension Builder - Rollover IRA - 6,073 - 2,705 Personal Variable 271,996 511,325 327,960 313,459 Premier Variable 1,756,820 3,795,310 2,397,856 1,375,930 Principal Freedom Variable Annuity 215,886 17,724 - - The Principal Variable Annuity 6,640,193 6,020,910 7,207,006 2,553,992 The Principal Variable Annuity With Purchase Payment Credit Rider 2,657,919 1,837,450 3,160,128 844,323 Growth: Personal Variable 424,611 512,337 422,806 461,139 Premier Variable 2,003,622 3,575,437 2,282,355 5,523,939 The Principal Variable Annuity 469,031 1,484,340 592,034 2,529,680 The Principal Variable Annuity With Purchase Payment Credit Rider 179,525 127,568 210,960 124,127 International: Personal Variable 1,838,583 1,902,086 226,081 304,176 Premier Variable 759,923 1,782,059 940,361 2,522,426 Principal Freedom Variable Annuity 56,689 14,401 42,289 19,922 The Principal Variable Annuity 1,556,109 1,500,893 1,334,537 2,074,309 The Principal Variable Annuity With Purchase Payment Credit Rider 1,009,132 533,814 899,641 542,765 International Emerging Markets: Premier Variable 32,214 284 543 - The Principal Variable Annuity 560,042 260,591 572,129 218,641 The Principal Variable Annuity With Purchase Payment Credit Rider 691,327 516,600 563,541 414,003 International SmallCap: Premier Variable 23,530 7,068 540 - The Principal Variable Annuity 777,547 646,940 886,632 960,686 The Principal Variable Annuity With Purchase Payment Credit Rider 698,766 513,758 617,296 432,463 INVESCO VIF-Dynamics: The Principal Variable Annuity 175,599 59,802 42,827 28,373 The Principal Variable Annuity With Purchase Payment Credit Rider 103,148 4,918 21,062 4,803 INVESCO VIF-Health Science: The Principal Variable Annuity 388,598 126,290 505,616 189,872 The Principal Variable Annuity With Purchase Payment Credit Rider 287,280 93,181 221,075 42,685 INVESCO VIF-Small Company Growth: The Principal Variable Annuity 170,189 76,562 131,333 35,436 The Principal Variable Annuity With Purchase Payment Credit Rider 39,354 15,434 67,376 14,266 INVESCO VIF-Technology: The Principal Variable Annuity 817,643 330,529 307,217 178,237 The Principal Variable Annuity With Purchase Payment Credit Rider 235,883 37,295 114,766 21,551 Janus Aspen MidCap Growth: The Principal Variable Annuity 447,141 264,331 778,524 590,146 The Principal Variable Annuity With Purchase Payment Credit Rider 276,253 153,417 523,072 216,894 LargeCap Blend: The Principal Variable Annuity 2,707,763 307,743 1,144,371 97,709 The Principal Variable Annuity With Purchase Payment Credit Rider 1,292,037 114,336 378,406 12,607 LargeCap Growth Equity: Premier Variable 45,514 - - - The Principal Variable Annuity 1,247,739 137,913 452,792 106,255 The Principal Variable Annuity With Purchase Payment Credit Rider 762,537 49,483 198,616 57,185 Principal Freedom Variable Annuity 102,633 1,430 - - LargeCap Stock Index: Premier Variable 396,040 236,783 44,264 16,509 Principal Freedom Variable Annuity 652,264 214,607 373,982 213,128 The Principal Variable Annuity 2,754,982 1,460,914 2,645,069 1,826,840 The Principal Variable Annuity With Purchase Payment Credit Rider 1,546,901 333,014 1,212,394 391,687 LargeCap Value: The Principal Variable Annuity 2,239,085 309,520 1,157,007 138,906 The Principal Variable Annuity With Purchase Payment Credit Rider 858,315 94,399 329,795 30,674 Limited Term Bond: Freedom Variable Annuity 119,931 3,369 - - Flexible Variable Annuity 1,558,552 178,113 - - Flexible Variable Annuity With Purchase Payment Credit Rider 622,977 65,264 - - MidCap: Personal Variable 270,727 359,057 235,969 392,570 Premier Variable 971,618 2,448,608 1,334,981 3,168,504 Principal Freedom Variable Annuity 82,488 20,935 43,395 22,298 The Principal Variable Annuity 1,329,612 1,485,789 1,291,229 1,733,622 The Principal Variable Annuity With Purchase Payment Credit Rider 525,970 159,460 486,011 123,744 MidCap Growth: Premier Variable 91,221 3,662 732 159 Principal Freedom Variable Annuity 2,009,469 508,510 18,372 16,139 The Principal Variable Annuity 798,403 102,894 401,230 514,628 The Principal Variable Annuity With Purchase Payment Credit Rider 34,516 9,419 270,549 60,177 MidCap Value: Premier Variable 134,054 1,698 41,236 1,953 Principal Freedom Variable Annuity 77,798 24,519 83,966 25,456 The Principal Variable Annuity 1,304,130 459,954 1,326,059 305,387 The Principal Variable Annuity With Purchase Payment Credit Rider 590,012 155,083 404,553 69,964 Money Market: Pension Builder - 9,230 - 15,040 Pension Builder - Rollover IRA - 3,690 - 44 Personal Variable 2,125,679 2,174,945 718,311 694,825 Premier Variable 5,387,943 7,735,487 4,884,967 6,023,337 Principal Freedom Variable Annuity 911,375 732,695 716,580 539,327 The Principal Variable Annuity 9,667,999 12,150,811 10,035,799 9,944,024 The Principal Variable Annuity With Purchase Payment Credit Rider 5,240,869 6,391,284 7,168,381 6,792,273 Real Estate: Premier Variable 139,195 19,128 68,767 9,373 The Principal Variable Annuity 1,658,694 730,167 1,760,670 567,550 The Principal Variable Annuity With Purchase Payment Credit Rider 568,921 179,046 529,742 76,407 SmallCap: Premier Variable 36,118 6,689 353 890 Principal Freedom Variable Annuity 85,994 25,858 95,765 47,255 The Principal Variable Annuity 1,776,722 691,461 1,167,677 885,447 The Principal Variable Annuity With Purchase Payment Credit Rider 559,100 117,620 398,685 111,467 SmallCap Growth: Premier Variable 93,066 498 33,955 1,141 Principal Freedom Variable Annuity 62,059 10,328 47,056 19,660 The Principal Variable Annuity 1,349,339 997,551 950,879 1,094,881 The Principal Variable Annuity With Purchase Payment Credit Rider 332,427 108,715 344,682 117,939 SmallCap Value: Premier Variable 90,885 5,997 25,857 2,828 The Principal Variable Annuity 1,077,174 663,797 1,426,853 575,240 The Principal Variable Annuity With Purchase Payment Credit Rider 339,373 134,088 487,623 145,625 Templeton Growth Securities: Principal Freedom Variable Annuity 36,790 27,779 46,311 18,329 Utilities: Premier Variable 14,396 1,922 5,863 791 The Principal Variable Annuity 565,142 516,008 547,952 909,833 The Principal Variable Annuity With Purchase Payment Credit Rider 179,794 78,281 169,753 109,959
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 2003, 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 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.
Unit Fair Value Expenses Total Return (3) Corresponding to Investment Ratio (2) Corresponding to Units Lowest to Highest Net Assets Income Lowest to Lowest to Highest Division (000's) Expense Ratio (000s) Ratio (1) Highest Expense Ratio ----------------------------------------------------------------------------------------------------------------- ----------------------------- ------------------------------------------------------ AIM V.I. Growth: 2003 3,681 $5.55 to $5.45 $20,390 - % 1.25% to 1.85% 29.61% to 28.84% 2002 3,963 4.28 to 4.23 16,956 - 1.25 to 1.85 (31.83) to (32.24) 2001 4,751 6.28 to 6.24 29,724 0.22 1.25 to 1.85 (34.68) to (35.14) AIM V.I. Core Equity: 2003 4,760 7.97 to 7.82 37,821 1.03 1.25 to 1.85 22.88 to 22.14 2002 5,123 6.49 to 6.41 33,171 0.31 1.25 to 1.85 (16.63) to (17.13) 2001 5,730 7.78 to 7.73 44,553 0.05 1.25 to 1.85 (23.79) to (24.29) AIM V.I. Premier Equity: 2003 4,836 7.15 to 7.02 34,479 0.31 1.25 to 1.85 23.53 to 22.79 2002 4,724 5.79 to 5.72 27,310 0.34 1.25 to 1.85 (31.13) to (31.54) 2001 4,451 8.41 to 8.35 38,150 0.14 1.25 to 1.85 (13.67) to (14.18) American Century VP Income & Growth: 2003 2,731 8.98 to 9.12 24,814 1.11 0.85 to 1.85 26.98 to 27.75 2002 1,905 7.15 to 7.07 13,565 0.72 0.85 to 1.85 (20.05) to (20.85) 2001 720 8.95 to 8.93 6,448 0.29 0.85 to 1.85 (9.17) to (20.46) American Century VP Ultra: 2003 931 8.59 to 8.45 7,952 - 1.25 to 1.85 23.35 to 22.61 2002 698 6.96 to 6.89 4,849 0.24 1.25 to 1.85 (23.67) to (24.13) 2001 (6) 227 9.12 to 9.08 2,068 - 1.25 to 1.85 (17.57) to (18.22) American Century VP Value: 2003 1,123 10.70 to 10.59 11,981 0.47 1.25 to 1.85 27.21 to 26.45 2002 (5) 282 8.41 to 8.38 2,364 - 1.25 to 1.85 (14.96) to (15.28) Asset Allocation: 2003 4,408 $1.05 to $19.01 $ 84,285 1.93% 0.42% to 1.85% 21.08% to 19.38% 2002 4,620 0.86 to 15.92 74,399 - 0.42 to 1.85 (12.78) to (14.54) 2001 4,923 0.99 to 18.63 92,273 2.18 0.42 to 1.85 (2.40) to (5.67) Balanced: 2003 13,310 1.72 to 16.01 109,671 2.96 0.42 to 1.85 18.33 to 16.65 2002 14,617 1.46 to 13.73 98,582 3.17 0.42 to 1.85 (13.55) to (14.78) 2001 16,832 1.68 to 16.11 131,087 3.40 0.42 to 1.85 (7.69) to (8.67) Bond: 2003 18,246 1.89 to 17.12 234,069 4.19 0.42 to 1.85 4.15 to 2.67 2002 17,899 1.82 to 16.67 210,777 4.09 0.42 to 1.85 8.80 to 7.26 2001 14,998 1.67 to 15.55 151,716 6.02 0.42 to 1.85 7.74 to 6.14 Capital Value: 2003 18,722 2.57 to 20.80 205,389 1.44 0.42 to 1.85 24.97 to 23.20 2002 21,252 2.05 to 16.88 175,700 0.78 0.42 to 1.85 (14.02) to (15.25) 2001 24,351 2.39 to 19.92 224,263 1.21 0.42 to 1.85 (8.43) to (9.74) Dreyfus DIP Founders Discovery: 2003 848 7.83 to 7.70 6,592 - 1.25 to 1.85 34.49 to 33.69 2002 235 5.82 to 5.76 1,361 - 1.25 to 1.85 (34.06) to (34.46) 2001 (6) 34 8.82 to 0.79 297 - 1.25 to 1.85 (23.55) to (24.13) Equity Growth: 2003 8,445 0.86 to 24.51 208,587 0.41 0.42 to 1.85 25.42 to 23.64 2002 8,938 0.68 to 19.82 178,521 0.27 0.42 to 1.85 (28.02) to (29.04) 2001 10,091 0.95 to 27.94 283,731 0.11 0.42 to 1.85 (12.00) to (16.42) Fidelity VIP II Contrafund: 2003 6,094 10.21 to 10.02 62,014 0.33 1.25 to l.85 26.76 to 26.00 2002 5,347 8.05 to 7.95 42,986 0.68 1.25 to 1.85 (10.55) to (11.09) 2001 4,691 9.01 to 8.95 42,213 0.67 1.25 to 1.85 (13.50) to (13.94) Fidelity VIP Equity-Income: 2003 2,353 10.28 to 10.18 24,125 0.70 1.25 to 1.85 28.41 to 27.65 2002 (5) 517 8.01 to 7.98 4,138 - 1.25 to 1.85 (19.14) to (19.44) Fidelity VIP Growth: 2003 5,302 $7.81 to $7.67 $41,286 0.19% 1.25% to 1.85% 31.13% to 30.35% 2002 5,325 5.96 to 5.88 31,670 0.15 1.25 to 1.85 (31.07) to (31.48) 2001 5,739 8.64 to 8.58 49,561 - 1.25 to 1.85 (18.72) to (19.29) Government Securities: 2003 25,536 2.00 to 17.04 341,730 3.41 0.42 to 1.85 1.41 to (0.03) 2002 26,265 1.97 to 17.05 318,208 3.45 0.42 to 1.85 8.34 to 6.80 2001 18,304 1.82 to 15.96 182,868 4.93 0.42 to 1.85 7.06 to 5.63 Growth: 2003 19,553 1.47 to 13.96 123,359 0.23 0.42 to 1.85 25.93 to 24.15 2002 22,176 1.17 to 11.24 111,599 0.02 0.42 to 1.85 (29.37) to (30.37) 2001 27,307 1.65 to 16.15 194,687 - 0.42 to 1.85 (26.01) to (26.89) International: 2003 14,422 1.47 to 14.39 137,068 1.04 0.42 to 1.85 31.78 to 29.91 2002 14,934 1.20 to 11.07 100,045 0.49 0.42 to 1.85 (16.42) to (17.61) 2001 16,955 1.44 to 13.44 128,099 0.15 0.42 to 1.85 (24.21) to (25.66) International Emerging Markets: 2003 1,274 1.38 to 13.03 16,414 1.11 0.42 to 1.85 56.56 to 54.32 2002 768 8.55 to 8.44 6,532 0.14 0.42 to 1.85 (8.78) to (9.32) 2001 264 9.37 to 9.31 2,469 0.50 1.25 to 1.85 (5.44) to (5.96) International SmallCap: 2003 3,557 1.15 to 14.33 51,540 1.36 0.42 to 1.85 53.55 to 51.33 2002 3,225 0.88 to 9.47 30,873 0.27 0.42 to 1.85 (2.56) to (17.74) 2001 3,113 11.59 to 11.52 36,066 - 1.25 to 1.85 (22.83) to (23.25) INVESCO VIF-Dynamics: 2003 281 7.31 to 7.20 2,039 - 1.25 to 1.85 36.11 to 35.30 2002 67 5.37 to 5.32 357 - 1.25 to 1.85 (32.75) to (33.15) 2001 (6) 36 7.99 to 7.96 287 - 1.25 to 1.85 (40.42) to (40.85) INVESCO VIF-Health Science: 2003 1,324 $9.31 to $9.16 $ 12,246 - % 1.25% to 1.85% 26.20% to 25.44% 2002 867 7.38 to 7.30 6,374 0.21 1.25 to 1.85 (25.14) to (25.59) 2001 (6) 373 9.85 to 9.82 3,670 - 1.25 to 1.85 (6.01) to (6.55) INVESCO VIF-Small Company Growth: 2003 331 7.57 to 7.45 2,497 - 1.25 to 1.85 31.78 to 30.99 2002 214 5.74 to 5.69 1,224 - 1.25 to 1.85 (31.97) to (32.38) 2001 (6) 65 8.44 to 8.41 547 - 1.25 to 1.85 (31.05) to (31.46) INVESCO VIF-Technology: 2003 1,053 5.33 to 5.24 5,578 - 1.25 to 1.85 43.49 to 42.63 2002 367 3.71 to 3.68 1,357 - 1.25 to 1.85 (47.51) to (47.82) 2001 (6) 145 7.07 to 7.04 1,022 - 1.25 to 1.85 (58.05) to (55.94) Janus Aspen MidCap Growth: 2003 2,855 5.26 to 5.16 14,913 - 1.25 to 1.85 33.09 to 32.30 2002 2,550 3.95 to 3.90 10,028 - 1.25 to 1.85 (29.01) to (29.44) 2001 2,055 5.57 to 5.53 11,415 - 1.25 to 1.85 (40.35) to (40.67) LargeCap Blend: 2003 4,990 10.09 to 9.99 50,195 0.98 1.25 to 1.85 22.22 to 21.49 2002 (5) 1,412 8.25 to 8.22 11,648 0.87 1.25 to 1.85 (16.46) to (16.76) LargeCap Growth Equity: 2003 2,824 0.72 to 5.28 15,478 - 0.42 to 1.85 22.63 to 20.89 2002 855 4.42 to 4.36 3,761 - 1.25 to 1.85 (34.10) to (34.50) 2001 367 6.71 to 6.66 2,452 - 1.25 to 1.85 (30.93) to (31.41) LargeCap Stock Index: 2003 11,654 0.93 to 8.08 93,977 1.41 0.42 to 1.85 27.78 to 25.97 2002 8,549 0.73 to 6.42 55,031 1.21 0.42 to 1.85 (22.77) to (23.86) 2001 6,721 0.94 to 8.43 56,637 1.06 0.42 to 1.85 (14.40) to (13.72) LargeCap Value 2003 4,011 $10.53 to $10.43 $ 42,122 1.63% 1.25% to 1.85% 26.46% to 25.71% 2002 (5) 1,317 8.33 to 8.29 10,958 1.89 1.25 to 1.85 (15.99) to (16.30) Limited Term Bond: 2003 (4) 2,055 9.98 to 9.92 20,446 2.63 0.85 to 1.85 (0.25) to (0.86) MidCap: 2003 16,473 2.87 to 26.66 277,286 1.06 0.42 to 1.85 32.25 to 30.38 2002 17,766 2.17 to 20.44 209,892 0.96 0.42 to 1.85 (9.13) to (10.42) 2001 19,815 2.39 to 22.82 239,234 0.76 0.42 to 1.85 (4.02) to (5.51) MidCap Growth: 2003 4,535 0.95 to 9.15 41,402 - 0.42 to 1.85 39.99 to 38.00 2002 2,226 0.68 to 6.63 14,937 - 0.42 to 1.85 (39.86) to (27.62) 2001 2,126 9.96 to 9.16 19,630 - 0.85 to 1.85 (17.65) to (18.43) MidCap Value: 2003 3,343 1.20 to 11.30 37,406 0.08 0.42 to 1.85 35.92 to 33.99 2002 1,878 0.89 to 8.43 16,144 0.73 0.42 to 1.85 (10.34) to (11.61) 2001 425 0.99 to 9.54 4,347 0.21 0.42 to 1.85 (2.40) to (10.14) Money Market: 2003 15,091 1.50 to 12.96 107,056 0.78 0.42 to 1.85 0.31 to (1.11) 2002 20,955 1.49 to 13.11 157,262 1.40 0.42 to 1.85 0.99 to (0.45) 2001 21,440 1.48 to 13.16 150,639 3.67 0.42 to 1.85 3.50 to 2.02 Real Estate: 2003 4,200 1.51 to 17.41 71,203 3.69 0.42 to 1.85 38.33 to 36.37 2002 2,762 1.09 to 12.77 34,861 4.15 0.42 to 1.85 7.27 to 5.75 2001 1,056 1.02 to 12.07 12,775 4.80 0.42 to 1.85 4.80 to 6.72 SmallCap: 2003 5,224 0.92 to 9.45 50,283 0.10 0.42 to 1.85 36.29 to 34.32 2002 3,608 0.68 to 7.03 25,858 0.09 0.42 to 1.85 (27.63) to (28.66) 2001 2,990 0.93 to 9.86 29,827 - 0.42 to 1.85 (16.80) to 0.61 SmallCap Growth: 2003 4,956 0.62 to 8.48 41,566 - 0.42 to 1.85 45.04 to 42.98 2002 4,236 0.43 to 5.93 25,168 - 0.42 to 1.85 (44.13) to (46.85) 2001 4,093 9.88 to 11.15 45,886 - 0.85 to 1.85 (32.57) to (33.27) SmallCap Value: 2003 3,375 1.31 to 17.07 56,509 0.44 0.42 to 1.85 49.98 to 47.85 2002 2,672 0.88 to 11.55 30,766 0.66 0.42 to 1.85 (9.25) to (10.54) 2001 1,455 0.96 to 12.91 18,725 0.99 0.42 to 1.85 (9.60) to 4.28 Templeton Growth Securities: 2003 94 $12.64 $ 1,193 1.48% 0.85% 31.02% 2002 85 9.65 824 2.44 0.85 (19.18) 2001 57 11.94 685 1.88 0.85 (1.31) Utilities: 2003 2,907 0.79 to 9.27 27,203 4.44 0.42 to 1.85 13.36 to 11.74 2002 2,743 0.70 to 8.29 22,961 4.42 0.42 to 1.85 (3.82) to (14.21) 2001 3,040 9.73 to 9.67 29,567 2.52 1.25 to 1.85 (28.60) to (29.00) (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 17, 2003. Investment income ratio has been annualized. (5)Commencement of operations, May 18, 2002. Investment income ratio has been annualized. (6)Commencement of operations, May 19, 2001. Investment income ratio has been annualized.
6. Financial Highlights (continued) There are divisions that have total return outside of the ranges indicated above. The following is a list of the divisions and corresponding lowest total return and highest total return. 2003 Total Division Return Range - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- American Century VP Income & Growth Division 26.98% to 28.26% Government Securities Division (0.69) to 1.41 LargeCap Growth Equity Division 17.63 to 22.63 2002 Total Division Return Range - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- LargeCap Growth Division (31.57)% to (30.46)% MidCap Growth Division (39.86) to (26.89) 2001 Total Division Return Range - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- Balanced Division (8.67)% to (7.26)% Growth Division (26.89) to (25.91) LargeCap Stock Index Division (14.40) to (12.85) Real Estate Securities Division 4.80 to 7.38 SmallCap Division (16.80) to 1.67 SmallCap Value Division (9.60) to 4.95 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"), as of December 31, 2003 and 2002, 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, 2003. 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, 2003 and 2002, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2003, in conformity with accounting principles generally accepted in the United States. As discussed in Note 1 to the consolidated financial statements, in response to new accounting standards, the Company changed its methods of accounting for derivative instruments and hedging activities effective January 1, 2001, goodwill and other intangible assets effective January 1, 2002, and variable interest entities effective July 1, 2003. /s/ Ernst & Young LLP Des Moines, Iowa January 30, 2004 Principal Life Insurance Company Consolidated Statements of Financial Position December 31, -------------------------------------- 2003 2002 -------------------------------------- (in millions, except per share data) Assets Fixed maturities, available-for-sale. $ 35,964.0 $ 32,752.6 Fixed maturities, trading............ 102.9 101.7 Equity securities, available-for-sale 669.2 348.1 Mortgage loans....................... 13,175.1 10,829.4 Real estate.......................... 1,197.8 974.1 Policy loans......................... 804.1 818.5 Other investments.................... 1,243.0 1,067.5 -------------------------------------- Total investments................. 53,156.1 46,891.9 Cash and cash equivalents............ 1,399.7 1,168.5 Accrued investment income............ 637.2 632.5 Premiums due and other receivables... 526.4 431.8 Deferred policy acquisition costs.... 1,519.6 1,374.4 Property and equipment............... 435.7 472.8 Goodwill............................. 131.3 75.7 Other intangibles.................... 19.3 11.1 Mortgage loan servicing rights....... 1,951.9 1,517.9 Separate account assets.............. 42,775.5 33,105.9 Other assets......................... 1,200.0 1,413.1 -------------------------------------- -------------------------------------- Total assets...................... $ 103,752.7 $87,095.6 ====================================== ====================================== Liabilities Contractholder funds................. $ 28,890.6 $26,297.3 Future policy benefits and claims.... 14,025.4 13,634.9 Other policyholder funds............. 706.2 635.5 Short-term debt...................... 1,678.0 1,243.9 Long-term debt....................... 1,974.5 578.7 Income taxes currently payable....... 76.4 197.3 Deferred income taxes................ 1,539.7 1,104.7 Separate account liabilities......... 42,775.5 33,105.9 Other liabilities.................... 5,220.4 4,559.5 -------------------------------------- -------------------------------------- Total liabilities................. 96,886.7 81,357.7 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.................... 5,052.1 5,015.0 Retained earnings (deficit)................... 594.6 (64.7) Accumulated other comprehensive income........ 1,216.8 785.1 ---------------------------- Total stockholder's equity................. 6,866.0 5,737.9 ---------------------------- ---------------------------- Total liabilities and stockholder's equity. $103,752.7 $87,095.6 ============================ See accompanying notes.
Principal Life Insurance Company Consolidated Statements of Operations For the year ended December 31, -------------------------------------------------------- -------------------------------------------------------- 2003 2002 2001 ------------------ ------------------ ------------------ (in millions) Revenues Premiums and other considerations............... $3,439.0 $ 3,720.0 $ 3,795.7 Fees and other revenues......................... 2,255.4 1,871.6 1,502.3 Net investment income........................... 3,202.1 3,069.8 3,211.4 Net realized/unrealized capital losses.......... (90.4) (395.2) (492.7) ------------------ ------------------ ------------------ ------------------ ------------------ ------------------ Total revenues................................ 8,806.1 8,266.2 8,016.7 Expenses Benefits, claims, and settlement expenses....... 4,592.2 4,958.9 5,092.4 Dividends to policyholders...................... 307.9 316.6 313.7 Operating expenses.............................. 3,047.8 2,413.8 2,140.4 ------------------ ------------------ ------------------ ------------------ ------------------ ------------------ Total expenses................................ 7,947.9 7,689.3 7,546.5 ------------------ ------------------ ------------------ ------------------ ------------------ ------------------ Income before income taxes and cumulative effect of accounting changes................. 858.2 576.9 470.2 Income taxes.................................... 195.5 20.2 92.4 ------------------ ------------------ ------------------ ------------------ ------------------ ------------------ Income before cumulative effect of accounting 662.7 556.7 377.8 changes...................................... Cumulative effect of accounting changes, net of related income taxes...................... (3.4) (4.6) (10.7) ------------------ ------------------ ------------------ ------------------ ------------------ ------------------ Net income...................................... $ 659.3 $ 552.1 $ 367.1 ================== ================== ================== See accompanying notes.
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, 2001........... $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 issued and 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 Principal Financial Group, Inc. shares sold by rabbi trusts...... - 1.3 - - 6.7 8.0 Stock-based compensation.............. - 9.1 - - - 9.1 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 Capital contribution.................. - 15.0 - - - 15.0 Stock-based compensation.............. - 22.1 - - - 22.1 Comprehensive income: Net income........................ - - 659.3 - - 659.3 Net unrealized gains.............. - - - 646.6 - 646.6 Provision for deferred income taxes.......................... - - - (220.0) - (220.0) Foreign currency translation adjustment...................... - - - (0.1) - (0.1) Minimum pension liability......... - - - (3.9) - (3.9) Cumulative effect of accounting change, net of related income taxes.......................... - - - 9.1 - 9.1 -------------- -------------- Comprehensive income.................. 1,091.0 --------------------------------------------------------------------------- Balances at December 31, 2003......... $2.5 $5,052.1 $ 594.6 $1,216.8 $ - $6,866.0 =========================================================================== See accompanying notes.
Principal Life Insurance Company Consolidated Statements of Cash Flows For the year ended December 31, ---------------------------------------------------- ---------------------------------------------------- 2003 2002 2001 ----------------- ---------------- ----------------- (in millions) Operating activities Net income........................................... $ 659.3 $ 552.1 $ 367.1 Adjustments to reconcile net income to net cash provided by operating activities: Cumulative effect of accounting changes, net of related income taxes................... 3.4 4.6 10.7 Amortization of deferred policy acquisition costs............................. 144.0 141.1 157.6 Additions to deferred policy acquisition costs.. (337.4) (314.8) (249.0) Accrued investment income....................... 5.4 (39.0) (66.8) Premiums due and other receivables.............. (39.4) 31.8 (79.7) Contractholder and policyholder liabilities and dividends................................. 1,705.1 2,082.8 1,805.5 Current and deferred income taxes............... 96.8 342.1 62.2 Net realized/unrealized capital losses.......... 90.4 395.2 492.7 Depreciation and amortization expense........... 92.4 91.4 96.0 Amortization of mortgage servicing rights....... 434.9 364.9 212.9 Stock-based compensation........................ 20.3 9.1 - Mortgage servicing rights valuation adjustments. 412.5 926.7 101.8 Other........................................... 131.5 286.2 654.7 ----------------- ---------------- ----------------- ----------------- ---------------- ----------------- Net adjustments...................................... 2,759.9 4,322.1 3,198.6 ----------------- ---------------- ----------------- ----------------- ---------------- ----------------- Net cash provided by operating activities............ 3,419.2 4,874.2 3,565.7 Investing activities Available-for-sale securities: Purchases......................................... (10,338.7) (15,001.2) (12,078.9) Sales............................................. 2,732.4 8,113.0 6,427.7 Maturities........................................ 4,634.7 3,629.2 2,501.2 Net cash flows from trading securities............... - (82.4) (17.0) Mortgage loans acquired or originated................ (62,741.1) (50,131.5) (40,430.2) Mortgage loans sold or repaid........................ 64,081.7 50,028.3 40,895.8 Purchase of mortgage servicing rights................ (1,098.4) (931.7) (968.4) Proceeds from sale of mortgage servicing rights...... 29.9 8.6 31.5 Real estate acquired................................. (264.8) (265.4) (290.0) Real estate sold..................................... 132.2 255.5 803.8 Net change in property and equipment................. (24.4) (57.8) (86.6) Net proceeds (disbursements) from sales of subsidiaries...................................... 29.4 1.4 (14.8) Purchases of interest in subsidiaries, net of cash acquired....................... (55.8) (6.5) (8.4) Net change in other investments...................... 288.3 439.9 (217.5) ----------------- ---------------- ----------------- ----------------- ---------------- ----------------- Net cash used in investing activities................ $(2,594.6) $ (4,000.6) $ (3,451.8)
Principal Life Insurance Company Consolidated Statements of Cash Flows (continued) For the year ended December 31, ---------------------------------------------------- ---------------------------------------------------- 2003 2002 2001 ----------------- ---------------- ----------------- (in millions) Financing activities Issuance of common stock............................. $ (0.1) $ - $ - Payments to eligible policyholders under Principal Mutual Holding Company's plan of conversion....... - - (1,177.5) Contribution from parent............................. - - 1,689.7 Sale of treasury stock............................... - 8.0 - Proceeds from financing element derivatives.......... 118.0 - - Payments for financing element derivatives........... (107.3) - - Dividends paid to parent............................. - (590.2) (498.9) Issuance of long-term debt........................... 6.1 64.1 149.2 Principal repayments of long-term debt............... (85.5) (103.0) (203.9) Net proceeds (repayments) of short-term borrowings........................................ (1,817.1) (134.5) 38.5 Investment contract deposits......................... 9,586.0 7,014.1 5,054.9 Investment contract withdrawals...................... (8,666.2) (7,225.7) (6,075.1) Net increase in banking operation deposits........... 372.7 184.4 144.8 ----------------- ---------------- ----------------- ----------------- ---------------- ----------------- Net cash used in financing activities................ (593.4) (782.8) (878.3) ----------------- ---------------- ----------------- Net increase (decrease) in cash and cash equivalents....................................... 231.2 90.8 (764.4) Cash and cash equivalents at beginning of year....... 1,168.5 1,077.7 1,842.1 ----------------- ---------------- ----------------- ----------------- ---------------- ----------------- Cash and cash equivalents at end of year............. $ 1,399.7 $ 1,168.5 $ 1,077.7 ================= ================ ================= ================= ================ ================= 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 $ (136.3) liabilities of subsidiary - Principal International, Inc. to Principal Financial Services, Inc. on April 1, 2001................ ================= See accompanying notes.
Principal Life Insurance Company Notes to Consolidated Financial Statements (continued) December 31, 2003 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. Demutualization and Initial Public Offering 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, Principal Financial Group, Inc. ("PFG"), a new Delaware business corporation, and 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 and $18.6 million, net of income taxes, in 2002 and 2001, respectively. Basis of Presentation The accompanying consolidated financial statements, which include our majority-owned subsidiaries and, subsequent to June 30, 2003, consolidated variable interest entities ("VIEs"), 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 9 for further details regarding the Closed Block. 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. 1. Nature of Operations and Significant Accounting Policies (continued) Recent Accounting Pronouncements The Financial Accounting Standards Board (the "FASB") issued Interpretation No. 46, Consolidation of Variable Interest Entities ("FIN 46"), in January 2003. FIN 46 applies to certain entities in which equity investors do not have the characteristics of a controlling financial interest, or do not have sufficient equity at risk for the entities to finance their activities without additional subordinated financial support from other parties. FIN 46 requires the consolidation of VIEs in which an enterprise, known as the primary beneficiary, absorbs a majority of the entity's expected losses, receives a majority of the entity's expected residual returns, or both, as a result of ownership, contractual or other financial interests in the entity. The guidance was effective immediately for all VIEs created after January 31, 2003, and effective July 1, 2003, for all VIEs created before February 1, 2003. In October 2003, the FASB released Staff Position FIN 46-6, Effective Date of FASB Interpretation No. 46, Consolidation of Variable Interest Entities, that allows the deferral of FIN 46 for all VIEs created or acquired prior to February 1, 2003, until the end of the first interim or annual period ending after December 15, 2003, if certain conditions are met. Effective July 1, 2003, we consolidated all VIEs created or acquired prior to February 1, 2003, for which we are the primary beneficiary. At July 1, 2003, our consolidated financial statements were adjusted to record a cumulative effect of adopting FIN 46, as follows (in millions): Accumulated other Net loss comprehensive income ----------- ------------------ Adjustment for intercompany gains and carrying value of assets consolidated.. $(6.1) $14.1 Income tax impact........................ 2.7 (5.0) ----------- ------------------ ----------- ------------------ Total.................................... $(3.4) $ 9.1 =========== ================== See Note 5 for the disclosures relating to VIEs and the impact of such adoption on our consolidated financial statements. On December 24, 2003, the FASB issued a revision to FIN 46, Interpretation No. 46 (Revised 2003): Consolidation of Variable Interest Entities ("FIN 46R"), to clarify some of the provisions of FIN 46 and to exempt certain entities from its requirements. Under FIN 46R, special effective date provisions apply to entities that have fully or partially applied FIN 46 prior to issuance of FIN 46R. We plan to adopt FIN 46R effective January 1, 2004, and do not anticipate that this will have a material impact on our consolidated statements of operations. In December 2003, the FASB issued Statement of Financial Accounting Standards ("SFAS") No. 132 (Revised 2003), Employers' Disclosures about Pensions and Other Postretirement Benefits ("SFAS 132R"). SFAS 132R requires the disclosure of more information about pension plan assets, obligations, benefit payments, contributions and net benefit cost. This statement is effective for financial statements with fiscal years ending after December 15, 2003, except for disclosure of estimated future benefit payments which is effective for fiscal years ending after June 15, 2004. We have adopted SFAS 132R for fiscal year 2003 reporting. Refer to Note 14 for more information on our pension and other postretirement benefits. 1. Nature of Operations and Significant Accounting Policies (continued) On July 7, 2003, the American Institute of Certified Public Accountants issued Statement of Position ("SOP") 03-1, Accounting and Reporting by Insurance Enterprises for Certain Nontraditional Long-Duration Contracts and for Separate Accounts. This SOP addresses an insurance enterprise's accounting for certain fixed and variable contract features not covered by other authoritative accounting guidance. This SOP is effective for financial statements for fiscal years beginning after December 15, 2003. This SOP is not expected to have a material impact on our consolidated financial statements. In October 2003, the FASB added a project to its agenda to clarify 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 ("SFAS 138") and SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities, with respect to determining the fair value of interest rate lock commitments ("IRLC"). Specifically, the FASB project will address what information should be used to determine the fair value of an IRLC and whether an IRLC should ever be reported as an asset by the issuer. In December 2003, the SEC staff announced that it intends to release a Staff Accounting Bulletin that will require IRLCs issued after April 1, 2004, be accounted for as written options that would be reported as a liability until expiration or termination of the commitment. Neither the FASB nor the SEC has issued final technical guidance in this area and as such it is not possible to know for certain the impact of this guidance. In December 2002, the FASB issued 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. We are 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 the 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 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 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. Net income for the years ended December 31, 2003, 2002 and 2001, 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, ---------------------------- ---------------------------- 2003 2002 2001 -------- ------------------- Reported net income............................. $659.3 $ 552.1 $367.1 Adjustment for amortization expense for goodwill and indefinite-lived intangibles (1). - - 7.8 Tax impacts of amortization expense ............ - - (2.4) -------- ------------------- -------- ------------------- Adjusted net income............................. 659.3 552.1 372.5 Adjustment for cumulative effect of accounting changes, net of related income taxes.......... 3.4 4.6 10.7 -------- ------------------- -------- ------------------- Adjusted income before cumulative effect of accounting changes............................ $662.7 $ 556.7 $ 383.2 ======== =================== (1) Includes amortization expenses related to our equity investment subsidiaries. 1. Nature of Operations and Significant Accounting Policies (continued) Effective January 1, 2001, we adopted SFAS 133, as amended by SFAS 138. 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): Accumulated other comprehensive Net loss 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. 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 17 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. 1. Nature of Operations and Significant Accounting Policies (continued) 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 17 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). 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 $2,190.4 million and $386.4 million and commercial mortgage loans held-for-sale in the amount of $278.1 million and $444.2 million at December 31, 2003 and 2002, 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. 1. Nature of Operations and Significant Accounting Policies (continued) Securitizations We, along with other contributors, sell commercial mortgage loans to trusts, which are unconsolidated qualified special purpose entities which then issue commercial mortgage-backed securities. We retain primary servicing responsibilities and may retain other immaterial interests in the trusts by purchasing portions of the securities from the issuance. Gain or loss on the sales of the loans is reported as fees and other revenues. 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 estimated fair values at the date of the transfer. To estimate 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. Mortgage Loan Servicing Rights Mortgage loan servicing rights represent the value 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 related 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 estimated fair values at the date of sale. Cost basis of the mortgage servicing rights also includes adjustments resulting from the application of hedge accounting. Capitalized servicing rights are carried at the lower of cost or estimated fair 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 lives of the underlying loans using loan prepayment, discount rate, ancillary fee income and other assumptions we believe market participants would use to value such assets. The reasonableness of our assumptions is confirmed through comparisons against qualified mortgage servicing rights trades that were completed in the prior quarter and quarterly independent surveys. Independent appraisals of the fair value of our servicing portfolio are obtained periodically during the year and are used to evaluate the reasonableness of our fair value conclusions. For purposes of performing our impairment evaluation, we stratify the servicing portfolio on the basis of certain predominant risk characteristics, including loan type, note rate and rate type. To the extent that the carrying value of the servicing rights exceeds estimated fair value for any stratum, a valuation allowance is established, which may be adjusted in the future as the estimated fair value of the servicing rights increase or decrease. Changes in the valuation allowance are recognized in the consolidated statements of operations during the period in which impairment or recovery occurs. 1. Nature of Operations and Significant Accounting Policies (continued) During 2003, we established a policy of further evaluating our mortgage servicing rights valuation allowance by identifying portions of the allowance that represent a permanent impairment (i.e., direct write-downs). Each quarter, we will recognize a direct write-down when the gross carrying value is not expected to be recovered in the foreseeable future. We estimate the amount of direct write-downs based on an analysis of the mortgage servicing rights valuation allowance related to loans that have prepaid. Direct write-downs reduce the gross carrying value and the valuation allowance of the mortgage servicing rights, thereby precluding subsequent recapture of previous valuation allowances. The direct write-downs have no impact on net income or financial position in the period of adjustment but may result in a reduction of amortization expense and reduced recovery of impairments in periods subsequent to adjustment. Derivatives 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. 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. 1. Nature of Operations and Significant Accounting Policies (continued) 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 cash flow 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. 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, accident and health insurance and disability income policies, as well as a provision for dividends on participating policies. Investment contracts are contractholders' funds on deposit with us and generally include reserves for pension and annuity contracts. Reserves on investment contracts are equal to the cumulative deposits less any applicable charges 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 and disability income contracts are computed on a basis of assumed investment yield, mortality, morbidity and expenses, including a provision for adverse deviation, which generally varies by plan, year of issue and policy duration. Investment yield is based on our experience. Mortality, morbidity and withdrawal rate assumptions are based on our experience and are periodically reviewed against both industry standards and experience. Reserves for participating life insurance contracts are based on the net level premium reserve for death and endowment policy benefits. This net level premium reserve is calculated based on dividend fund interest rate and mortality rates guaranteed in calculating the cash surrender values described in the contract. Participating business represented approximately 33%, 34% and 36% of our life insurance in force and 75%, 77% and 80% of the number of life insurance policies in force at December 31, 2003, 2002 and 2001, respectively. Participating business represented approximately 80%, 80% and 76% of life insurance premiums for the years ended December 31, 2003, 2002 and 2001, 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. Certain group contracts contain experience premium refund provisions based on a pre-defined formula that reflects their claim experience. Experience premium refunds are recognized over the term of the coverage and adjusted to reflect current experience. Fees for contracts providing claim processing or other administrative services are recorded over the period the service is provided. Related policy benefits and expenses for individual and group life, annuity and health insurance products are associated with earned premiums and result in the recognition of profits over the expected term 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, premium credits, conversion bonuses 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. We utilize a mean reversion method (reversion to the mean assumption), a common industry practice, to determine the future market growth assumption used for the amortization of deferred policy acquisition costs on investment contracts pertaining to individual and group annuities which have separate accounting investment options. 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, except for the medical reinsurance agreement which is accounted for using the deposit method of accounting. 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, 2003, 2002 and 2001, respectively, we had reinsured $19.4 billion, $17.8 billion and $15.6 billion of life insurance in force, representing 15%, 14% and 12% 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, ---------------------------------- ---------------------------------- 2003 2002 2001 ----------- ----------- ---------- ----------- ----------- ---------- Premiums and other considerations: Direct.................................... $3,609.1 $3,916.3 $3,999.4 Assumed................................... 118.8 130.6 56.4 Ceded..................................... (288.8) (326.9) (260.1) ----------- ----------- ---------- ----------- ----------- ---------- Net premiums and other considerations........ $3,439.1 $3,720.0 $3,795.7 =========== =========== ========== Benefits, claims and settlement expenses: Direct.................................... $4,697.8 $5,074.7 $5,256.3 Assumed................................... 129.3 135.5 59.3 Ceded..................................... (234.9) (251.3) (223.2) ----------- ----------- ---------- Net benefits, claims and settlement expenses. $4,592.2 $4,958.9 $5,092.4 =========== =========== ========== 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, 2003 and 2002, the separate accounts include a separate account valued at $833.9 million and $1.0 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 the 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. PFG allocates income tax expenses and benefits to companies in the group generally based upon pro rata contribution of taxable income or operating losses. We are taxed at corporate rates on taxable income based on existing tax laws. Current income taxes are charged or credited to operations based upon amounts estimated to be payable or recoverable as a result of taxable operations for the current year. Deferred income taxes are provided for the tax effect of temporary differences in the financial reporting and income tax bases of assets and liabilities and net operating losses using enacted income tax rates and laws. The effect on deferred 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 recent accounting pronouncements 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 (described more fully in Note 20) using the fair value method for all stock-based awards granted subsequent to January 1, 2002. For stock-based awards granted prior to this date, PFG used the intrinsic value method. We are allocated our pro rata share of the expenses for these plans. Awards under these plans vest over periods ranging from one year to three years. Therefore, the cost related to stock-based compensation included in the determination of net income for 2003 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 the 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, -------------------------------- -------------------------------- 2003 2002 2001 ---------------------- --------- (in millions) Net income, as reported...................... $659.3 $552.1 $367.1 Add: Stock-based compensation expense included in reported net income, net of related tax effects........................ 18.2 9.7 5.1 Deduct: Total stock-based compensation expense determined under fair value based method for all awards, net of related tax effects.................................... 21.0 12.5 6.4 -------------------------------- -------------------------------- Pro forma net income......................... $656.5 $549.3 $365.8 ================================ 1. Nature of Operations and Significant Accounting Policies (continued) Reclassifications Reclassifications have been made to the 2001 and 2002 consolidated financial statements to conform to the 2003 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, 2003, 2002 and 2001, we received $94.0 million, $92.2 million and $72.8 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. We are a party to a cash advance agreement with our direct parent, PFSI, 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 LIBOR rate plus 20 basis points (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 $225.7 million and $366.0 million at December 31, 2003 and 2002, respectively, and earned interest of $7.7 million and $8.5 million during 2003 and 2002, respectively. PFSI also provides us with a source of short-term funding through revolving line of credit agreements. These agreements allow certain of our subsidiaries to borrow up to $1.7 billion from PFSI at the 30-day LIBOR rate plus 25 basis points. See our Short-term Debt disclosure (Note 12) for more information. Pursuant to certain regulatory requirements or otherwise in the ordinary course of business, we guarantee certain payments of our subsidiaries and have agreements with affiliates to provide and/or receive management, administrative and other services, all of which, individually and in the aggregate, are immaterial to our business, financial condition and net income. 3. Goodwill and Other Intangible Assets Amortized intangible assets were as follows (in millions):
As of December 31, 2003 As of December 31, 2002 -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- Gross Net Gross Net carrying Accumulated carrying carrying Accumulated carrying amount amortization amount amount amortization amount -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- Other intangibles with finite useful lives.. $11.6 $0.7 $10.9 $1.6 $0.4 $1.2 ================================================================================
Unamortized intangible assets were as follows (in millions): As of December 31, ---------------------------------- ---------------------------------- 2003 2002 ---------------------------------- ---------------------------------- Net carrying Net carrying amount amount ---------------------------------- ---------------------------------- Other indefinite-lived intangible assets . $8.4 $9.9 ================================== The amortization expense for intangible assets with finite useful lives was $1.1 million, $0.3 million and $0.8 million for 2003, 2002 and 2001, respectively. At December 31, 2003, the estimated amortization expense for the next four years is as follows (in millions): Estimated amortization expense -------------------- -------------------- 2004.............................................. $2.8 2005.............................................. 2.8 2006.............................................. 2.8 2007.............................................. 2.5 3. Goodwill and Other Intangible Assets (continued) The changes in the carrying amount of goodwill for the years ended December 31, 2002 and 2003 were as follows (in millions):
U.S. Asset Life Management and and Health Mortgage Accumulation Insurance Banking Consolidated -------------- ----------- ------------ ------------- -------------- ----------- ------------ ------------- Balance at January 1, 2002.................... $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 Goodwill from acquisitions.................... 30.5 25.1 - 55.6 -------------- ----------- ------------ ------------- Balance at December 31, 2003.................. $53.7 $69.2 $8.4 $ 131.3 ============== =========== ============ =============
4. Divestitures On February 1, 2002, we sold our remaining investment 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. 5. Variable Interest Entities We have relationships with various types of special purpose entities and other entities where we have a variable interest. After reviewing these relationships, we determined that we have investments in some of these entities that meet the definition of a VIE under FIN 46. Consolidated Variable Interest Entities As of July 1, 2003, we consolidated a residential mortgage loan funding VIE, three grantor trusts and several other immaterial VIEs in which we have determined we are the primary beneficiary. The incremental impact on certain financial data as of December 31, 2003, after consideration of our previous investment for these consolidated VIEs, is as follows (in millions): Total assets............................... $ 2,164.8 ================= ================= Total short-term debt...................... $ 615.0 Total long-term debt....................... 1,458.0 Total other liabilities.................... 96.1 ----------------- ----------------- Total liabilities.......................... 2,169.1 Total equity............................... (4.3) ----------------- ----------------- Total liabilities and equity........... $ 2,164.8 ================= The consolidation of these entities did not have a material impact on our income from continuing operations, net of related income taxes, for the year ended December 31, 2003. See Note 12 for details regarding the debt related to certain VIEs. 5. Variable Interest Entities (continued) Residential Mortgage Loan Funding VIE. Principal Residential Mortgage Capital Resources, LLC ("PRMCR") provides a source of funding for our residential mortgage loan production. The maximum amount of mortgage loans that can be warehoused in PRMCR is $4.0 billion. PRMCR held $2.0 billion in mortgage loans held-for-sale as of December 31, 2003. The portfolio of loans held-for-sale by PRMCR must meet portfolio criteria, eligibility representations and portfolio aging limitations. As of December 31, 2003, PRMCR's short- and long-term debt of $615.0 million and $1.4 billion, respectively, are included on our consolidated statement of financial position and are collateralized by the assets of PRMCR. These assets are primarily classified as mortgage loans held-for-sale on our consolidated statement of financial position. The creditors of PRMCR have no recourse to other assets of our company. Grantor Trusts. We contributed undated subordinated floating rate notes to three grantor trusts. The trusts separated the cash flows of the underlying notes by issuing an interest-only certificate and a residual certificate related to each note contributed. Each interest-only certificate entitles the holder to interest on the stated note for a specified term while the residual certificate entitles the holder to interest payments subsequent to the term of the interest-only certificate and to all principal payments. We retained the interest-only certificate and the residual certificates were subsequently sold to a third party. Upon adoption of FIN 46, we have determined that these grantor trusts are VIEs. In the event of a default or prepayment on the underlying notes, which is the main risk of loss, our interest-only certificates are exposed to the majority of the risk of loss. The restricted interest periods end between 2016 and 2020 and, at that time, the residual certificate holders' certificates are redeemed by the trust in return for the notes. It will be necessary for us to consolidate these entities until the expiration of the interest-only period. As of December 31, 2003, our consolidated statement of financial position included $351.8 million of undated subordinated floating rate notes of the grantor trusts, which are classified as available-for-sale fixed maturity securities.. The obligation to deliver the underlying securities to the residual certificate holders of $103.9 million as of December 31, 2003, is classified as an other liability and contains an embedded derivative of the forecasted transaction to deliver the underlying securities. The creditors of the grantor trusts have no recourse to the assets of our company. Other. In addition to the entities above, we have a number of relationships with a disparate group of entities, which meet the FIN 46 criteria for VIEs. Due to the nature of our direct investment in the equity and/or debt of these VIEs, we are the primary beneficiary of such entities, which requires us to consolidate them. These entities include a private investment trust and a real estate limited partnership. The consolidation of these VIEs did not have a material effect on either our consolidated statement of financial position or results of operation as of and for the year ended December 31, 2003. As of December 31, 2003, our consolidated financial position includes fixed maturity securities, available-for-sale ($12.7 million), equity securities, available-for-sale ($15.5 million), real estate ($53.9 million) and cash and other assets ($0.3 million), which are pledged as collateral for such entities short- and long-term debt of $27.2 million and $67.7 million, respectively. Of these amounts, $65.0 million is reflected in our consolidated statement of financial position as long-term debt. The remaining $27.2 million short-term debt and $2.7 million long-term debt was issued by affiliated entities and, therefore, eliminated upon consolidation of these VIEs. For the majority of these entities, the creditors have no recourse to the assets of our company. 5. Variable Interest Entities (continued) Significant Unconsolidated Variable Interest Entities We hold a significant variable interest in a number of VIEs where we are not the primary beneficiary. These entities include private investment trusts and custodial relationships that have issued trust certificates or custodial receipts that are recorded as available-for-sale fixed maturity securities in the consolidated financial statements. Between October 3, 1996 and September 21, 2001, we entered into seven separate but similar transactions where various third parties transferred funds to either a custodial account or a trust. The custodians or trusts purchased shares of specific money market funds and then separated the cash flows of the money market shares into share receipts and dividend receipts. The dividend receipts entitle the holder to dividends paid for a specified term while the share receipts purchased at a discount entitle the holder to dividend payments subsequent to the term of the dividend receipts and the rights to the underlying shares. We have purchased the share receipts. After the restricted dividend period ends between 2017 and 2021, we, as the share receipt holder, have the right to terminate the custodial account or trust agreement and will receive the underlying money market fund shares. The primary beneficiary is the dividend receipt holder, which has the majority of the risk of loss. Our maximum exposure to loss as a result of our involvement with these entities is our recorded investment of $180.8 million as of December 31, 2003. On June 20, 1997, we entered into a transaction in which we purchased a residual trust certificate. The trust separated the cash flows of an underlying security into an interest-only certificate that entitles the third party certificate holder to the stated interest on the underlying security through May 15, 2017, and into a residual certificate entitling the holder to interest payments subsequent to the term of the interest-only certificates and any principal payments. Subsequent to the restricted interest period, we, as the residual certificate holder, have the right to terminate the trust agreement and will receive the underlying security. The primary beneficiary is the interest-only certificate holder, which has the majority of the risk of loss. Our maximum exposure to loss as a result of our involvement with this entity is our recorded investment of $56.2 million as of December 31, 2003. We entered into various separate but similar transactions between August 15, 2000 and February 15, 2001, in which we contributed cash to trusts in return for a trust note. The trusts executed swaps in which the trust delivered cash to the counterparty in return for convertible, puttable fixed maturity securities. On the various dates in 2004 and 2005 that the trust notes are due, the underlying securities are returned to the swap counterparty and the trust notes are redeemed with the proceeds. The trust also swaps the equity option value embedded in the convertible security and the coupon on the security to the swap counterparty in return for a variable interest rate which the trust remits to the trust note holder. The swap counterparty has the right to instruct the trust to call the trust note and return the underlying security in order to utilize the convertible features of the security. We are not the primary beneficiary but we hold a significant variable interest in each of the trusts in which our notes have not yet been called by the swap counterparties. Our maximum exposure to loss as a result of our involvement with these entities is our recorded investment of $75.9 million as of December 31, 2003. 6. Investments Fixed Maturities and Equity Securities The cost, gross unrealized gains and losses and fair value of fixed maturities and equity securities available-for-sale as of December 31, 2003 and 2002, are summarized as follows (in millions):
Gross Gross unrealized unrealized Cost gains losses Fair value --------------- --------------- -------------- --------------- --------------- --------------- -------------- --------------- December 31, 2003 Fixed maturities, available-for-sale: U.S. government and agencies............. $ 589.7 $ 12.5 $ 0.9 $ 601.3 Non-U.S. governments..................... 357.4 64.1 - 421.5 States and political subdivisions........ 497.7 40.4 2.2 535.9 Corporate - public....................... 16,702.8 1,349.9 29.9 18,022.8 Corporate - private...................... 9,143.9 607.8 96.4 9,655.3 Mortgage-backed and other asset-backed securities................ 6,406.5 342.8 22.1 6,727.2 --------------- --------------- -------------- --------------- --------------- --------------- -------------- --------------- Total fixed maturities, available-for-sale. $ 33,698.0 $2,417.5 $ 151.5 $ 35,964.0 =============== =============== ============== =============== =============== =============== ============== =============== Total equity securities, available-for-sale $ 653.9 $ 19.0 $ 3.7 $ 669.2 =============== =============== ============== =============== =============== =============== ============== ===============
December 31, 2002 Fixed maturities, available-for-sale: U.S. government and agencies............. $ 478.1 $ 19.0 $ - $ 497.1 Non-U.S. 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, available-for-sale. $ 31,116.4 $ 2,127.3 $ 491.1 $ 32,752.6 =============== =============== ============== =============== Total equity securities, available-for-sale $ 349.8 $ 2.5 $ 4.2 $ 348.1 =============== =============== ============== ===============
The cost and fair value of fixed maturities available-for-sale at December 31, 2003, by expected maturity, were as follows (in millions): Cost Fair Value ------------ ------------- ------------ ------------- Due in one year or less........................... $ 2,113.4 $ 2,152.1 Due after one year through five years............. 8,878.6 9,426.1 Due after five years through ten years............ 8,258.7 9,001.9 Due after ten years............................... 8,040.8 8,656.8 ------------ ------------- ------------ ------------- 27,291.5 29,236.9 Mortgage-backed and other asset-backed securities. 6,406.5 6,727.1 ------------ ------------- ------------ ------------- Total............................................. $ 33,698.0 $ 35,964.0 ============ ============= 6. Investments (continued) 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, --------------------------------------- --------------------------------------- 2003 2002 2001 ------------- ------------ ------------ ------------- ------------ ------------ Fixed maturities, available-for-sale.. $2,169.6 $2,115.5 $2,120.8 Fixed maturities, trading............. 10.1 5.2 - Equity securities, available-for-sale. 45.4 27.4 27.6 Mortgage loans....................... 892.3 787.0 855.7 Real estate.......................... 80.9 78.6 177.5 Policy loans......................... 54.5 57.6 57.5 Cash and cash equivalents............ 15.5 23.3 58.3 Derivatives.......................... 12.7 (15.3) (34.0) Other................................ 79.8 97.5 78.9 ------------- ------------ ------------ ------------- ------------ ------------ 3,360.8 3,176.8 3,342.3 Less investment expenses............. (158.7) (107.0) (130.9) ------------- ------------ ------------ ------------- ------------ ------------ Net investment income................ $3,202.1 $3,069.8 $3,211.4 ============= ============ ============ Net Realized/Unrealized Capital Gains and Losses The major components of net realized/unrealized capital losses on investments are summarized as follows (in millions): For the year ended December 31, ------------------------------------- ------------------------------------- 2003 2002 2001 ------------ ------------ ----------- ------------ ------------ ----------- Fixed maturities, available-for-sale: Gross gains........................... $ 69.8 $ 141.1 $ 69.6 Gross losses.......................... (289.2) (535.7) (380.4) Fixed maturities, trading: Gross gains........................... 3.5 4.0 0.9 Gross losses.......................... (0.3) (0.1) (0.1) Equity securities, available-for-sale: Gross gains........................... 7.0 2.6 5.7 Gross losses.......................... 5.2 (32.5) (76.1) Mortgage loans.......................... (2.1) (10.3) 10.6 Real estate............................. 4.8 9.3 (19.0) Derivatives............................. 110.3 Other.................................... 0.6 26.4 (103.9) ------------ ------------ ----------- ------------ ------------ ----------- Net realized/unrealized capital losses.. $ (90.4) $(395.2) $ (492.7) ============ ============ =========== 6. Investments (continued) Proceeds from sales of investments (excluding call and maturity proceeds) in fixed maturities were $2.6 billion, $7.9 billion and $5.4 billion in 2003, 2002 and 2001, respectively. Of the 2003, 2002 and 2001 proceeds, $0.1 billion, $4.3 billion and $1.6 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 $0.4 million, $88.2 million and $22.5 million and gross losses of $0.9 million, $11.6 million and $5.0 million in 2003, 2002 and 2001, 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 $157.2 million, $357.0 million and $227.4 million in 2003, 2002 and 2001, respectively. Gross Unrealized Losses for Fixed Maturities and Equity Securities For fixed maturities and equity securities available-for-sale with unrealized losses as of December 31, 2003, the gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position are summarized as follows (in millions):
Less than Greater than or equal to twelve months twelve months -------------------------- -------------------------- Carrying Gross Carrying Gross Total Total gross unrealized unrealized carrying unrealized value losses value losses value losses -------------------------- ------------ ------------------------- -------------- Fixed maturities, available-for-sale: U.S. government and agencies............... $ 289.8 $ 0.9 $ - $ - $ 289.8 $ 0.9 States and political subdivisions........... 50.3 1.2 20.5 1.0 70.8 2.2 Corporate - public....... 866.3 20.7 77.7 9.2 944.0 29.9 Corporate - private...... 1,268.8 69.3 218.4 27.1 1,487.2 96.4 Mortgage-backed and other asset-backed securities............. 1,376.9 14.9 83.2 7.2 1,460.1 22.1 -------------------------- ------------ ------------------------- -------------- -------------------------- ------------ ------------------------- -------------- Total fixed maturities, $ 3,852.1 $ 107.0 $ 399.8 $ 151.5 available-for-sale....... $ 44.5 $ 4,251.9 ========================== ============ ========================= ============== ========================== ============ ========================= ============== Total equity securities, $ 91.0 $ 0.8 $ 241.7 $ 3.7 available-for-sale....... $ 2.9 $ 332.7 ========================== ============ ========================= ==============
As of December 31, 2003, we held $4,251.9 million in available-for-sale fixed maturity securities with unrealized losses of $151.5 million. Of these amounts, our General Account portfolio represented $3,786.2 million in available-for-sale fixed maturity securities with unrealized losses of $147.3 million. Our General Account portfolio consists of fixed maturity securities where 89% are investment grade (rated AAA through BBB-) with an average price of 95 (carrying value/amortized cost). Of the $151.5 million total gross unrealized losses, $24.8 million is related to fixed maturity securities that are part of a fair value hedging relationship that have been recognized in net income as of December 31, 2003. These securities are included in the less than twelve months Corporate-Private category. 6. Investments (continued) For those securities that have been in a loss position for less than twelve months, our General Account portfolio holds 349 securities with a carrying value of $3,386.4 million and unrealized losses of $102.8 million reflecting an average price of 97. Of this portfolio, 95.7% was investment grade (rated AAA through BBB-) at December 31, 2003, with associated unrealized losses of $67.5 million. The losses on these securities can primarily be attributed to changes in market interest rates and changes in credit spreads since the securities were acquired. For those securities that have been in a continuous loss position greater than or equal to twelve months, our General Account holds 60 securities with a carrying value of $399.8 million and unrealized losses of $44.5 million. The average rating of this portfolio is BBB- with an average price of 90 at December 31, 2003. The Corporate-Public and Corporate-Private sectors account for $36.4 million of the $44.5 million in unrealized losses. The average price of the corporate sectors is 89 and the average credit rating is BB/BB-. Included in the Corporate-Private sector and Mortgage-backed and other asset-backed securities sector are three previously impaired securities with a carrying value of $9.0 million and $2.0 million, respectively, and a current unrealized loss of $1.0 million and $0.8 million, respectively. We closely monitor our below investment grade holdings and those investment grade names where we have concerns. While we are in an unrealized loss position on these securities, all securities except those identified as previously impaired continue to make payments. We consider relevant facts and circumstances in evaluating whether the impairment of a security is other than temporary. Relevant facts and circumstances considered include: (1) the length of time the fair value has been below cost; (2) the financial position and access to capital of the issuer, including the current and future impact of any specific events; and (3) our ability and intent to hold the security to maturity or until it recovers in value. To the extent we determine that a security is deemed to be other than temporarily impaired, the difference between amortized cost and fair value is charged to earnings. 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. 6. Investments (continued) The cumulative amount of net unrealized gains and losses on available-for-sale securities was as follows (in millions):
As of December 31, ---------------------------------- ---------------------------------- 2003 2002 ---------------- ----------------- ---------------- ----------------- Net unrealized gains on fixed maturities, available-for-sale (1)...... $2,325.3 $1,633.4 Net unrealized gains on equity securities, available-for-sale......... 13.1 0.2 Adjustments for assumed changes in amortization patterns: Deferred policy acquisition costs................................... (274.3) (226.1) Unearned revenue reserves........................................... 15.2 13.5 Net unrealized losses on derivative instruments....................... (90.9) (167.1) Net unrealized loss on policyholder dividend obligation............... (99.0) (33.6) Net unrealized loss on equity method subsidiaries and minority interest adjustments.............................................. (8.4) - Provision for deferred income taxes................................... (653.1) (428.1) ---------------- ----------------- ---------------- ----------------- Net unrealized gains on available-for-sale securities................. $ 1,227.9 $ 792.2 ================ ================= (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, 2003 and 2002, the commercial mortgage portfolio is diversified by geographic region and specific collateral property type as follows (dollars in millions):
As of December 31, ----------------------------------------------------------------- 2003 2002 ----------------------------------------------------------------- Carrying amount Percent Carrying amount Percent of total of total ----------------------------------------------------------------- ----------------------------------------------------------------- Geographic distribution New England................. $ 398.9 4.1% $ 387.6 4.1% Middle Atlantic............. 1,686.8 17.5 1,617.0 17.3 East North Central.......... 945.7 9.8 913.7 9.8 West North Central.......... 336.4 3.5 311.5 3.3 South Atlantic.............. 2,285.2 23.7 2,180.8 23.3 East South Central.......... 312.1 3.2 345.5 3.7 West South Central.......... 662.1 6.9 641.8 6.9 Mountain.................... 702.0 7.3 711.8 7.6 Pacific..................... 2,350.8 24.5 2,339.7 24.9 Valuation allowance......... (49.6) (0.5) (83.6) (0.9) ----------------------------------------------------------------- ----------------------------------------------------------------- Total....................... $9,630.4 100.0% $ 9,365.8 100.0% ================================================================= ----------------------------------------------------------------- Property type distribution Office...................... $3,545.2 36.8% $ 3,166.2 33.8% Retail...................... 2,706.4 28.1 2,836.0 30.3 Industrial.................. 2,708.8 28.1 2,802.6 29.9 Apartments.................. 545.9 5.7 475.4 5.1 Hotel....................... 52.8 0.5 57.4 0.6 Mixed use/other............. 120.9 1.3 111.8 1.2 Valuation allowance......... (49.6) (0.5) (83.6) (0.9) ----------------------------------------------------------------- ----------------------------------------------------------------- Total....................... $9,630.4 100.0% $ 9,365.8 100.0% =================================================================
6. 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 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 and assessment of the adequacy of the allowance for losses and the need for mortgage impairments is based on known and inherent risks in the portfolio, adverse situations that may affect 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 of our loan specific reserve component is also subjective, as it requires estimating the amounts and timing of future cash flows expected to be received on impaired loans. Impaired mortgage loans along with the related allowance for losses were as follows (in millions): As of December 31, --------------------------------- --------------------------------- 2003 2002 ------------- ------------------ Impaired loans................... $149.6 $123.0 Allowance for losses............. (12.6) (26.9) ------------- ------------------ ------------- ------------------ Net impaired loans............... $137.0 $ 96.1 ============= ================== 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, ---------------------------------- ---------------------------------- 2003 2002 2001 ---------- ----------- ----------- Average recorded investment in impaired loans...................... $116.6 $88.4 $74.4 Interest income recognized on impaired loans.. 13.8 8.6 12.5 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. 6. Investments (continued) 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, ---------------------------------------- ---------------------------------------- 2003 2002 2001 ------------ --------------- ----------- ------------ --------------- ----------- Balance at beginning of year....... $ 87.0 $92.3 $110.4 Provision for losses............... 1.3 35.1 11.2 Releases due to write-downs, sales and foreclosures........... (35.3) (40.4) (29.3) ------------ --------------- ----------- ------------ --------------- ----------- Balance at end of year............. $ 53.0 $87.0 $ 92.3 ============ =============== =========== Residential Mortgage Banking Activities We were servicing approximately 960,000 and 920,000 residential mortgage loans with aggregate principal balances of approximately $118.7 billion and $107.7 billion at December 31, 2003 and 2002, respectively. In connection with these mortgage servicing activities, we held funds in trust for others totaling approximately $681.3 million and $646.7 million at December 31, 2003 and 2002, respectively. As of December 31, 2003 and 2002, $253.2 million and $273.9 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, PRMCR, to provide an off-balance sheet source of funding for our residential mortgage loan production. As described in Note 5, effective July 1, 2003, we consolidated PRMCR due to the adoption of FIN 46. We sell eligible residential mortgage loans to PRMCR, where they are warehoused until sold to the final investor. We sold $32.8 billion and $47.1 billion in mortgage loans to PRMCR for the six months ended June 30, 2003, and during 2002, respectively. The maximum amount of mortgage loans, which can be warehoused in PRMCR, increased from $1.0 billion at inception to $4.0 billion as of December 31, 2002. PRMCR held $4.0 billion in mortgage loans held-for-sale as of December 31, 2002. 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. For the six months ended June 30, 2003, and during 2002, we repurchased $74.7 million and $51.9 million, respectively, of ineligible loans from PRMCR. Prior to our adoption of FIN 46, PRMCR was capitalized by equity certificates owned by third party investors not affiliated with us or our affiliates, directors or officers. The equity holders bear the risk of loss on defaulted mortgages. At December 31, 2002, 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. All borrowings were collateralized by the assets of PRMCR. 6. Investments (continued) 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. Prior to our adoption of FIN 46, the balance in the account was $24.0 million at December 31, 2002, and was 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 $13.7 million, $23.3 million and $12.6 million in servicing and incentive servicing fees from PRMCR for the six months ended June 30, 2003, and in 2002 and 2001, respectively. Any unpaid and earned incentive 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 non-affiliated counterparties that 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 risk components are swapped back to us. In October 2000, our Mortgage Banking segment created a wholly owned, 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 $1.1 billion in August 2003. 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 and a qualifying special purpose entity. 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, 2003 and 2002, the Trust held $653.4 million and $405.1 million in mortgage loans, respectively, and had outstanding participation certificates of $618.4 million and $382.8 million, respectively. 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 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 $34.7 million and $23.4 million in servicing and successful servicing fees from PRMF in 2003 and 2002, respectively. At December 31, 2003 and 2002, our estimated residual interest in such cash flows was $50.9 million and $32.7 million, respectively, and was recorded in other assets on our consolidated statements of financial position. The value of the residual interest was estimated based on the net present value of expected cash flows from PRMF. 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. 6. Investments (continued) 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 ("SFAS 140"), PRMF is not required to be consolidated under the provisions of FIN 46. Real Estate Depreciation expense on invested real estate was $28.6 million, $25.5 million and $20.0 million in 2003, 2002 and 2001, respectively. Accumulated depreciation was $199.6 million and $151.1 million as of December 31, 2003 and 2002, 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 $2,412.4 million and $2,615.1 million at December 31, 2003 and 2002, respectively. Total revenues of the unconsolidated entities were $367.6 million, $324.3 million and $2,650.2 million in 2003, 2002 and 2001, respectively. During 2003, 2002 and 2001, we included $26.7 million, $13.9 million and $46.1 million, respectively, in net investment income representing our share of current year net income of the unconsolidated entities. Total revenues and net investment income of the unconsolidated entities during 2001 included our ownership interest in Coventry Health Care, Inc. On February 1, 2002, we sold our minority interest in Coventry Health Care, Inc. (See Note 4). At December 31, 2003 and 2002, our net investment in unconsolidated entities was $(41.6) million and $(52.1) million, respectively, which primarily included our minority interests in domestic joint ventures and partnerships. 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 $1,012.0 million and $525.1 million at December 31, 2003 and 2002, respectively. Derivatives are reflected on our consolidated statements of financial position and reported as a component of other investments. Certain seed money investments are carried at fair value with changes in fair value included in net income as net realized/unrealized capital losses. 7. Securitization Transactions Commercial Mortgage Loans We, along with other contributors, sell commercial mortgage loans in securitization transactions to trusts. As these trusts are classified as a qualifying special purpose entity pursuant to the guidance of SFAS 140, they are not required to be consolidated under the provisions of FIN 46. We retain primary servicing responsibilities and may retain 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. 7. Securitization Transactions (continued) In 2003 and 2002, we recognized gains of $16.4 million and $17.2 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 5% and 12% during 2003 and 6% and 11% during 2002. The assumed range of the loss severity, as a percentage of defaulted loans, was between 14% and 33% during 2003 and 12% and 32% during 2002. 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, 2003, the fair values of retained interests related to the securitizations of commercial mortgage loans were $255.4 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, 2003, as a result of these assumptions were not significant. Residential Mortgage Loans and Residential Mortgage Servicing Rights 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. In 2003, 2002 and 2001, we recognized gains of $472.0 million, $373.9 million and $237.2 million, respectively, on the sales of residential mortgage loans. Essentially all of our mortgage servicing rights are held by our mortgage banking operations. We receive annual servicing fees approximating 0.41% 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 and is amortized in proportion to, and over the period of, estimated net servicing income. Changes in capitalized mortgage servicing rights from our Mortgage Banking segment were as follows (in millions): As of December 31, ------------------------------- ------------------------------- 2003 2002 ------------- ---------------- Balance at beginning of year................... $2,011.5 $1,910.0 Additions...................................... 1,304.8 1,103.0 Sales.......................................... (66.9) (5.5) Valuation adjustments due to hedge accounting.. 224.4 (631.0) Release due to direct write-downs.............. (666.4) - Amortization................................... (434.8) (364.9) ------------- ---------------- ------------- ---------------- 2,372.6 2,011.6 Valuation allowance............................ (420.7) (493.7) ------------- ---------------- ------------- ---------------- Balance at end of year......................... $1,951.9 $1,517.9 ============= ================ 7. Securitization Transactions (continued) To the extent that the carrying value of the servicing rights exceeds estimated fair value for any stratum, a valuation allowance is established, which may be adjusted in the future as the estimated fair value of the servicing rights increase or decrease. Activity in the valuation allowance for mortgage loan servicing rights is summarized as follows (in millions): For the year ended December 31, ---------------------------------------- ---------------------------------------- 2003 2002 2001 ----------- ------------- ------------- ----------- ------------- ------------- Balance at beginning of year........... $493.7 $198.1 $ 2.3 Sales.................................. (43.5) - - Impairments............................ 636.9 318.3 196.0 Recoveries............................ - (22.7) (0.2) Release due to direct write-downs..... (666.4) - - ----------- ------------- ------------- ----------- ------------- ------------- Balance at end of year................. $420.7 $493.7 $ 198.1 =========== ============= ============= Impairments reflect the decline in the fair value of unhedged mortgage servicing rights during the years presented. Due to the continuing lack of an active servicing market, we obtained additional evidence to support our estimated fair value at December 31, 2003. Based on this information, we performed an analysis of our mortgage servicing rights portfolio, which resulted in an additional impairment charge of $141.3 million in our mortgage banking company in December 2003. During 2003, we established a policy of further evaluating our mortgage servicing rights valuation allowance by identifying portions of the allowance that represent a permanent impairment (i.e., direct write-downs). Each quarter, we will recognize a direct write-down when the gross carrying value is not expected to be recovered in the foreseeable future. We estimate the amount of direct write-downs based on an analysis of the mortgage servicing rights valuation allowance related to loans that have prepaid. The key economic assumptions used in estimating the fair value of mortgage servicing rights at the date of loan sale for sales completed in 2003, 2002 and 2001 were as follows: 2003 2002 2001 ----------------------------------------- ----------------------------------------- Weighted-average life (years)....... 6.78 6.42 7.84 Weighted-average prepayment speed... 10.20% 11.91% 9.48% Yield to maturity discount rate..... 6.48% 6.75% 7.45% Prepayment speed is the constant prepayment rate that results in the weighted-average life disclosed above. 7. Securitization Transactions (continued) At December 31, 2003, key economic assumptions and the sensitivity of the current estimated fair value of the mortgage servicing rights to immediate 10% and 20% adverse changes in those assumptions were as follows (dollars in millions): Estimated fair value of mortgage servicing rights........... $1,959.4 Expected weighted-average life (in years)................... 5.7 Prepayment speed *.......................................... 13.40% Decrease in estimated fair value of 10% adverse change... $ 88.4 Decrease in estimated fair value of 20% adverse change... $ 168.9 Yield to maturity discount rate *........................... 7.45% Decrease in estimated fair value of 10% adverse change... $ 111.6 Decrease in estimated fair value of 20% adverse change... $ 223.2 * 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 estimated 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 estimated fair value may not be linear. Also, in the above table, the effect of a variation in a particular assumption on the estimated 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, ------------------------------------------ ------------------------------------------ 2003 2002 2001 ------------------------------------------ Proceeds from new securitizations.. $59,351.4 $48,749.4 $39,200.6 Servicing fees received............ 488.7 443.1 307.8 Other cash flows received on retained interests............... 89.0 74.9 51.6 8. 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. 8. Derivatives Held or Issued for Purposes Other Than Trading (continued) 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 $1,197.3 million at December 31, 2003, and $424.4 million at December 31, 2002. Subsequent to the application of such credit enhancements, the net exposure to credit risk was $862.8 million at December 31, 2003, and $285.8 million at December 31, 2002. The notional amounts and credit exposure of our derivative financial instruments by type were as follows (in millions): As of December 31, ---------------------------- ---------------------------- 2003 2002 --------------- ------------ Notional amounts of derivative instruments Foreign currency swaps......................... $ 2,823.4 $ 3,217.0 Interest rate floors........................... 1,650.0 1,650.0 Interest rate swaps............................ 8,158.9 9,719.2 Principal only swaps........................... - 123.6 Mortgage-backed forwards and options........... 4,892.3 17,494.9 Swaptions...................................... 5,642.5 9,772.5 Bond forwards.................................. 467.2 363.7 Interest rate lock commitments................. 2,242.4 8,198.1 Call options................................... 30.0 30.0 U.S. Treasury futures.......................... 27.8 271.1 Currency forwards.............................. 135.8 - Treasury rate guarantees....................... - 63.0 Credit default swap long....................... 863.3 705.2 U.S. LIBOR..................................... 4,380.0 2,225.0 Bond options................................... 17.5 - --------------- ------------ Total notional amounts at end of year.......... $ 31,331.1 $53,833.3 =============== ============ =============== ============ Credit exposure of derivative instruments Foreign currency swaps......................... $ 637.1 $ 195.0 Interest rate floors........................... 1.9 1.7 Interest rate swaps............................ 89.6 48.4 Swaptions...................................... 29.2 31.4 Call options................................... 6.6 0.4 Currency forwards.............................. 0.3 - Bond forwards.................................. 52.2 - Credit default swap long....................... 45.9 8.9 ---------------- ----------- Total credit exposure at end of year............ $ 862.8 $ 285.8 ================ =========== 8. 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, 2003 and 2002, was $969.7 million and $1,129.9 million, respectively. Of this amount, the fair value of derivatives related to investment hedges at December 31, 2003 and 2002, was $736.4 million and $348.8 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, 2003 and 2002, was $233.3 million and $781.1 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, 2003 and 2002, was $142.6 million and $454.4 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. We recognized a pretax net gain of $128.4 million, $50.5 million and $95.5 million in 2003, 2002 and 2001, respectively, relating to our fair value hedges. These net gains consisted of the following components:
For the year ended December 31, ----------------------------------------- ----------------------------------------- 2003 2002 2001 ----------------------------------------- (in millions) Net gain (loss) related to the ineffective portion of our $ 18.1 $ (6.6) $ 151.7 fair 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.................................... 119.8 77.1 (43.6) Net loss related to the ineffective portion of (9.5) (20.0) (12.6) our investment hedge...................................... ----------------------------------------- Net gain relating to fair value hedges....................... $128.4 $ 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 losses on our consolidated statements of operations. 8. Derivatives Held or Issued for Purposes Other Than Trading (continued) Cash Flow Hedges We also utilize floating-to-fixed rate interest rate swaps to match cash flows. 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 2003, 2002 and 2001, we recognized a $49.6 million, $(74.5) million and $(5.8) million after-tax increase (decrease) in value, respectively, related to cash flow hedges in accumulated other comprehensive income. During this time period, none of our cash flow hedges have been discontinued because it was probable that the original forecasted transaction would not occur by the end of the originally specified time period. We reclassified $54.6 million and $17.8 million net losses from accumulated comprehensive income into earnings during 2003 and 2002, respectively (none was transferred during 2001), and we expect to reclassify $5.2 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. We have also entered into currency forward agreements to reduce the exposure to future currency volatility in various short-term foreign cash equivalents. 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 2003, 2002 and 2001, gains of $1.1 million, $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. 9. Closed Block In connection with the 1998 MIHC formation, we formed a Closed Block to provide reasonable assurance to policyholders included therein that, after the formation of the MIHC, assets would be available to maintain dividends in aggregate in accordance with the 1997 policy dividend scales, if the experience underlying such scales continued. 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, 2003 and 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 $99.0 million and $33.6 million as of December 31, 2003 and 2002, respectively. 9. Closed Block (continued) Closed Block liabilities and assets designated to the Closed Block were as follows: As of December 31, ------------------------------ ------------------------------ 2003 2002 ---------------- ------------- (in millions) Closed Block liabilities Future policy benefits and claims.............. $5,401.7 $5,320.0 Other policyholder funds....................... 30.7 33.0 Policyholder dividends payable................. 371.3 374.3 Policyholder dividend obligation............... 99.0 33.6 Other liabilities.............................. 42.9 20.1 ---------------- ------------- ---------------- ------------- Total Closed Block liabilities............... 5,945.6 5,781.0 Assets designated to the Closed Block Fixed maturities, available-for-sale............ 2,864.1 2,707.0 Equity securities, available-for-sale........... 80.7 23.4 Mortgage loans.................................. 849.9 862.9 Real estate..................................... 1.9 0.5 Policy loans.................................... 757.8 776.1 Other investments............................... 26.8 19.8 ---------------- ------------- ---------------- ------------- Total investments............................ 4,581.2 4,389.7 Cash and cash equivalents (deficit)............ (6.0) (5.4) Accrued investment income...................... 74.1 77.5 Deferred tax asset............................. 70.1 68.5 Premiums due and other receivables............. 28.1 29.5 Other assets................................... 22.3 - ---------------- ------------- ---------------- ------------- Total assets designated to the Closed Block.. 4,769.8 4,559.8 ---------------- ------------- ---------------- ------------- Excess of Closed Block liabilities over assets designated to the Closed Block................ 1,175.8 1,221.2 Amounts included in other comprehensive income.. 74.6 77.8 ---------------- ------------- ---------------- ------------- Maximum future earnings to be recognized from Closed Block assets and liabilities........... $1,250.4 $1,299.0 ================ ============= 9. Closed Block (continued) Closed Block revenues and expenses were as follows: For the year ended December 31, ----------------------------------- ----------------------------------- 2003 2002 2001 ---------- ---------- ------------- in millions) Revenues Premiums and other considerations......... $ 684.3 $ 710.0 $ 742.1 Net investment income..................... 306.6 309.9 311.8 Net realized/unrealized capital losses.... (6.6) (40.8) (19.7) ---------- ---------- ------------- ---------- ---------- ------------- Total revenues.......................... 984.3 979.1 1,034.2 Expenses Benefits, claims and settlement expenses................................ 557.4 583.3 614.4 Dividends to policyholders................ 298.6 305.2 305.8 Operating expenses........................ 8.3 12.3 12.7 ---------- ---------- ------------- ---------- ---------- ------------- Total expenses.......................... 864.3 900.8 932.9 ---------- ---------- ------------- ---------- ---------- ------------- Closed Block revenue, net of Closed Block expenses, before income taxes........... 120.0 78.3 101.3 Income taxes.............................. 39.5 25.2 33.5 ---------- ---------- ------------- ---------- ---------- ------------- Closed Block revenue, net of Closed Block 80.5 53.1 67.8 expenses and income taxes............... Funding adjustment charges................ (31.9) (3.5) (7.6) ---------- ---------- ------------- ---------- ---------- ------------- Closed Block revenue, net of Closed Block $ 48.6 $ 49.6 $ 60.2 expenses, income tax and funding adjustment charges...................... ========== ========== ============= The change in maximum future earnings of the Closed Block was as follows: As of December 31, ----------------------------------------- ----------------------------------------- 2003 2002 -------------------- ------------------- (in millions) Beginning of year.................. $ 1,299.0 $ 1,348.6 End of year........................ 1,250.4 1,299.0 -------------------- ------------------- -------------------- ------------------- Change in maximum future earnings.. $ (48.6) $ (49.6) ==================== =================== We charge the Closed Block with federal income taxes, payroll taxes, state and local premium taxes and other state or local taxes, licenses and fees as provided in the plan of reorganization. 10. Deferred Policy Acquisition Costs Policy acquisition costs deferred and amortized in 2003, 2002 and 2001 were as follows (in millions): As of December 31, ---------------------------------------- ---------------------------------------- 2003 2002 2001 ----------- ------------- -------------- ----------- ------------- -------------- Balance at beginning of year.......... $1,374.4 $1,322.3 $1,333.3 Cost deferred during the year......... 337.4 314.8 249.0 Amortized to expense during the year.. (144.0) (141.1) (198.5) Effect of unrealized gains............ (48.2) (121.6) (61.5) ----------- ------------- -------------- ----------- ------------- -------------- Balance at end of year................ $1,519.6 $1,374.4 $1,322.3 =========== ============= ============== 11. 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, ------------------------- ------------------------- 2003 2002 ------------------------- ------------------------- Liabilities for investment-type contracts: Guaranteed investment contracts................... $12,868.3 $13,894.4 Funding agreements................................ 9,336.2 6,246.3 Other investment-type contracts................... 1,563.4 1,775.3 ------------------------- Total liabilities for investment-type contracts..... 23,767.9 21,916.0 Liabilities for individual annuities................ 3,486.2 2,900.4 Universal life and other reserves................... 1,636.5 1,480.9 ------------------------- Total contractholder funds.......................... $28,890.6 $26,297.3 ========================= 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 include those issued domestically directly to nonqualified institutional investors, as well as to two separate programs where the funding agreements are issued directly or indirectly to unconsolidated special purpose entities. Claims for principal and interest under funding agreements are afforded equal priority to claims of life insurance and annuity policyholders under insolvency provisions of Iowa Insurance Laws. We are authorized to issue up to $4.0 billion of funding agreements under a program to support the prospective issuance of medium term notes by an unaffiliated entity in non-U.S. markets. Due to our adoption of FIN 46 in July 2003, we are no longer required to consolidate this program. As of December 31, 2003 and 2002, $3,618.7 million and $3,583.5 million, respectively, are outstanding under this program. 11. Insurance Liabilities (continued) In addition, we are authorized to issue up to $7.0 billion of funding agreements under another program to support the prospective issuance of medium term notes by an unaffiliated entity in both domestic and international markets. The $7.0 billion represents a $3.0 billion increase over the authorization amount we had at the end of 2002. The unaffiliated entity is an unconsolidated qualifying special purpose entity. As of December 31, 2003 and 2002, $5,613.4 million and $2,555.0 million, respectively, are outstanding 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, ----------------------------------------------- ----------------------------------------------- 2003 2002 2001 -------------- --------------- ---------------- -------------- --------------- ---------------- Balance at beginning of year.. $ 699.3 $ 714.8 $ 705.0 Incurred: Current year................ 1,572.3 1,588.3 1,597.1 Prior years................. (24.7 0.6 (17.5) -------------- --------------- ---------------- -------------- --------------- ---------------- Total incurred................ 1,547.6 1,588.9 1,579.6 Payments: Current year................ 1,304.6 1,333.2 1,283.2 Prior years................. 236.5 271.2 286.6 -------------- --------------- ---------------- -------------- --------------- ---------------- Total payments................ 1,541.1 1,604.4 1,569.8 Balance at end of year: Current year................ 267.7 255.1 313.9 Prior years................. 438.1 444.2 400.9 -------------- --------------- ---------------- -------------- --------------- ---------------- Total balance at end of year.. $ 705.8 $ 699.3 $ 714.8 ============== =============== ================ The activity summary in the liability for unpaid accident and health claims shows an increase (decrease) of $(24.7) million, $0.6 million and $(17.5) million for the year ended December 31, 2003, 2002 and 2001, respectively, relating to prior years. Such liability adjustments, which affected current operations during 2003, 2002 and 2001, respectively, resulted in part from developed claims for prior years being different than were anticipated when the liabilities for unpaid accident and health claims were originally estimated. In addition, in 2003 we established a premium deficiency reserve on our medical conversion business that was included in our incurred but not reported claim reserve in prior years. These trends have been considered in establishing the current year liability for unpaid accident and health claims. We also had claim adjustment expenses of $26.4 million, $22.0 million and $23.3 million, and related reinsurance recoverables of $2.5 million, $2.0 million and $1.4 million in 2003, 2002 and 2001, respectively, which are not included in the rollforward above. 12. Debt Short-Term Debt The components of short-term debt as of December 31, 2003 and 2002, were as follows (in millions): As of December 31, -------------------------------------- -------------------------------------- 2003 2002 ------------------- ------------------ ------------------- ------------------ PRMCR secured liquidity notes........... $ 215.0 $ - PRMCR fixed term notes.................. 400.0 - Mortgage servicing rights financing..... 300.0 - Intercompany revolving line of credit... 487.0 875.3 Nonrecourse short-term debt............. 276.0 368.6 ------------------- ------------------ ------------------- ------------------ Total short-term debt................... $ 1,678.0 $ 1,243.9 =================== ================== As of December 31, 2003, we had credit facilities with various financial institutions in an aggregate amount of $4.0 billion, which consisted of a $2.2 billion PRMCR credit facility and $1.8 billion in other credit facilities. We consolidated PRMCR in July 2003 as a result of adopting FIN 46. See Note 5 for more information regarding PRMCR. PRMCR can use the $2.2 billion credit facility to issue short-term debt. As of December 31, 2003, PRMCR had $215.0 million of short-term secured liquidity notes outstanding under this facility. All borrowings are collateralized by the assets of PRMCR. Of our other remaining credit facilities, as of December 31, 2003 and 2002, we had $975.9 million and $526.2 million of outstanding borrowings, with $1.0 billion and $436.8 million of assets pledged as support, respectively. Assets pledged consisted primarily of mortgage servicing rights, commercial mortgages and securities. Our credit facilities also include a $600.0 million back-stop facility to provide 100% support for our commercial paper program, of which there were no outstanding balances as of December 31, 2003 and 2002. PRMCR's $400.0 million outstanding short-term debt in fixed term notes as of December 31, 2003, was originally issued under a separate credit facility for long-term borrowings. Due to a maturity date of less than twelve months at the time of consolidation in July 2003, the fixed term notes were classified as short-term debt. See the Long-Term Debt section for further discussion. Our short-term debt also consists of a payable to PFSI of $487.0 million and $875.3 million as of December 31, 2003 and 2002, respectively. Interest paid on intercompany debt was $10.4 million and $19.9 million during 2003 and 2002, respectively. The weighted-average interest rates on short-term borrowings as of December 31, 2003 and 2002, were 2.9% and 1.8%, respectively. Excluding PRMCR, the weighted-average interest rates on short-term borrowings as of December 31, 2003, was 1.6%. 12. Debt (continued) Long-Term Debt The components of long-term debt as of December 31, 2003 and 2002, were as follows (in millions): As of December 31, ---------------------------------- ---------------------------------- 2003 2002 ------------------- -------------- ------------------- -------------- 7.875% surplus notes payable, due 2024....... 199.0 199.0 8% surplus notes payable, due 2044........... 99.2 99.1 PRMCR medium term notes...................... 1,200.0 - PRMCR equity certificates.................... 193.0 - Nonrecourse mortgages and notes payable...... 211.9 158.0 Other mortgages and notes payable............ 71.4 122.6 ------------------- -------------- Total long-term debt......................... $1,974.5 $578.7 =================== ============== 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. At December 31, 2003, PRMCR had a $1.8 billion credit facility for long-term debt, of which $1.4 billion of long-term debt was outstanding ($1,200.0 million in medium term notes and $193.0 million in equity certificates). In 2001, $1,600.0 million in medium term notes were issued under this facility, of which $1,200.0 million was classified as long-term debt on our consolidated statement of financial position as of December 31, 2003. The remaining $400.0 million in medium term notes were classified as short-term debt at the time of consolidation in July 2003 due to the maturity date ending in less than twelve months. Maturities for the long-term portion are three years for $400.0 million and five years for $800.0 million. The three-year medium term notes have a fixed rate. The five-year medium term notes pay interest based on LIBOR plus a spread. The weighted average interest rate on the medium term notes classified as long-term debt was 2.46% at December 31, 2003. Equity certificates were issued in 2000 and 2001, of which $193.0 million remains as outstanding long-term debt as of December 31, 2003. The equity certificates have a five-year maturity and pay interest based on LIBOR plus a spread. The weighted average interest rate on the equity certificates was 2.86% at December 31, 2003. All PRMCR borrowings are collateralized by the assets of PRMCR. 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, 2003, 2002 and 2001, 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. 12. 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 $192.5 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, 2003, range from $0.4 million to $99.9 million per development with interest rates generally ranging from 6.0% to 8.6%. 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 debt is secured by the underlying real estate properties, which were reported as real estate on our consolidated statements of financial position with a carrying value of $319.2 million and $260.4 million as of December 31, 2003 and 2002, respectively. At December 31, 2003, future annual maturities of the long-term debt were as follows (in millions): 2004 $ 450.6 2005 74.4 2006 971.3 2007 98.2 2008 76.2 Thereafter................................................... 303.8 ----------------- ----------------- Total future maturities of the long-term debt................ $ 1,974.5 ================= Cash paid for interest for 2003, 2002 and 2001, was $92.2 million, $59.4 million and $74.7 million, respectively. These amounts include interest paid on taxes during these years. Cash paid for interest in 2003 includes $37.6 million of interest paid by PRMCR. 13. Income Taxes Our income tax expense from continuing operations was as follows (in millions): For the year ended December 31, ------------------------------------- ------------------------------------- 2003 2002 2001 ----------- ------------ ------------ ----------- ------------ ------------ Current income taxes (benefit): U.S. federal........................... $ 72.2 $ (52.8) $ 30.0 State and foreign...................... 40.4 49.4 30.0 Net realized/unrealized capital losses. (121.7) (78.1) (210.1) ----------- ------------ ------------ ----------- ------------ ------------ Total current income tax benefits......... (9.1) (81.5) (150.1) Deferred income taxes..................... 204.6 101.7 242.5 ----------- ------------ ------------ ----------- ------------ ------------ Total income taxes........................ $ 195.5 $ 20.2 $ 92.4 =========== ============ ============ 13. 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 from continuing operations is as follows: For the year ended December 31, -------------------------------------- -------------------------------------- 2003 2002 2001 ------------- ------------ ----------- ------------- ------------ ----------- Statutory corporate tax rate........... 35% 35% 35% Dividends received deduction........... (7) (12) (13) Interest exclusion from taxable income. (1) (2) (3) Federal tax settlement for prior years. (3) (20) - Other.................................. (1) 3 1 ------------- ------------ ----------- Effective tax rate..................... 23% 4% 20% ============= ============ =========== Significant components of our net deferred income taxes were as follows (in millions): As of December 31, ------------------------ ------------------------ 2003 2002 ----------- ------------ ----------- ------------ Deferred income tax assets (liabilities): Insurance liabilities................................ $ 426.7 $ 263.1 Deferred policy acquisition costs.................... (494.4) (432.0) Net unrealized gains on available-for-sale securities (647.1) (422.7) Mortgage loan servicing rights....................... (482.5) (429.6) Other................................................ (342.4) (83.5) ----------- ------------ ----------- ------------ Total net deferred income tax liabilities............... $(1,539.7) $ (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, 2000 and 2001. We believe that there are adequate defenses against or sufficient provisions for any challenges. Net cash received (paid) for income taxes was $(122.4) million, $306.8 million and $(69.3) million in 2003, 2002 and 2001, respectively. Net cash received in 2002 was primarily due to refunds for 2001 capital losses and the favorable settlement of an Internal Revenue Service audit issue. 14. 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 14. Employee and Agent Benefits (continued) accrue with interest. For plan participants hired on and after January 1, 2002, only the cash balance plan applies. Our policy is to fund the cost of providing pension benefits in the years that the employees and agents are providing service to us. Our funding policy for the qualified defined benefit plan is to contribute an amount annually at least equal to the minimum annual contribution required under the Employee Retirement Income Security Act ("ERISA"), and, generally, not greater than the maximum amount that can be deducted for federal income tax purposes. Our funding policy for the non-qualified benefit plan is to fund the plan in the years that the employees are providing service to us using a methodology similar to the calculation of the net periodic benefit cost under U.S. GAAP, but using long-term assumptions. However, if the U.S. GAAP funded status is positive, no deposit is made. While we fund this plan, the assets are not included as part of the asset balances presented in this footnote as they do not qualify as assets under SFAS No. 87, Employers' Accounting for Pensions, ("SFAS 87"), however, they are included in our consolidated statements of financial position. We also provide certain health care, life insurance and long-term care benefits for retired employees. Subsidized retiree health benefits are provided for employees hired prior to January 1, 2002. Employees hired after December 31, 2001, will have access to retiree health benefits but will need to pay for the full cost of the coverage. The health care plans are contributory with participants' contributions adjusted annually; the contributions are based on the number of years of service and age at retirement for those hired prior to January 1, 2002. As part of the substantive plan, the retiree health contributions are assumed to be adjusted in the future as claim levels change. The life insurance plans are contributory for a small group of previously grandfathered participants that have elected supplemental coverage and dependent coverage. Covered employees are first eligible for the medical and life postretirement benefits when they reach age 57 and have completed ten years of service with us. Retiree long-term care benefits are provided for employees whose retirement was effective prior to July 1, 2000. Partial benefit accrual of these health, life and long-term care benefits is recognized from the employee's date of hire until retirement based on attained service divided by potential service to age 65 with a minimum of 35 years of potential service. Our policy is to fund the cost of providing retiree benefits in the years that the employees are providing service to us using a methodology similar to the calculation of the net periodic benefit cost under U.S. GAAP, but using long-term assumptions. However, if the U.S. GAAP funded status is positive, no deposit is made. We use a measurement date of October 1 for the pension and other postretirement benefit plans. 14. Employee and Agent Benefits (continued) Obligations and Funded Status The plans' combined funded status, reconciled to amounts recognized in the consolidated statements of financial position and consolidated statements of operations, was as follows (in millions):
Pension benefits Other postretirement benefits ----------------------------- ------------------------------ ----------------------------- ------------------------------ As of December 31, As of December 31, ----------------------------- ------------------------------ ----------------------------- ------------------------------ 2003 2002 2003 2002 ------------- -------------- -------------- --------------- Change in benefit obligation Benefit obligation at beginning of year..... $ (1,046.4) $ (856.0) $ (280.2) $ (231.1) Service cost................................ (49.0) (36.5) (12.3) (9.4) Interest cost............................... (66.9) (63.0) (17.9) (17.8) Actuarial gain (loss)....................... (65.5) (124.4) 55.0 (36.6) Participant contributions................... - - (2.5) (1.5) Benefits paid............................... 38.1 33.5 9.7 8.9 Other....................................... (1.7) - (5.1) 7.3 ------------- -------------- -------------- --------------- Benefit obligation at end of year........... $ (1,191.4) $(1,046.4) $ (253.3) $ (280.2) ============= ============== ============== =============== Change in plan assets Fair value of plan assets at beginning of year.................................. $ 893.3 $ 952.5 $ 354.0 $ 362.3 Actual return (loss) on plan assets......... 140.5 (32.2) 31.5 (2.2) Employer contribution....................... 37.8 6.5 0.5 1.3 Participant contributions................... - - 2.5 1.5 Benefits paid............................... (38.1) (33.5) (9.7) (8.9) ------------- -------------- -------------- --------------- ------------- -------------- -------------- --------------- Fair value of plan assets at end of year.... $ 1,033.5 $ 893.3 $ 378.8 $ 354.0 ============= ============== ============== =============== Funded (underfunded) status................. $ (157.9) $ (153.1) $ 125.5 $ 73.8 Unrecognized net actuarial loss............. 165.6 183.7 7.3 70.7 Unrecognized prior service cost (benefit)... 6.0 5.9 (24.4) (32.6) Unamortized transition asset................ (0.1) (0.5) - - ------------- -------------- -------------- --------------- ------------- -------------- -------------- --------------- Net amount recognized....................... $ 13.6 $ 36.0 $ 108.4 $ 111.9 ============= ============== ============== =============== ============= ============== ============== =============== Amounts recognized in statement of financial position consist of Prepaid benefit cost........................ $ 166.7 $ 175.1 $ 109.0 $ 112.5 Accrued benefit liability including minimum liability........................ (157.0) (139.1) (0.6) (0.6) Accumulated other comprehensive income...... 3.9 - - - ------------- -------------- -------------- --------------- ------------- -------------- -------------- --------------- Net amount recognized....................... $ 13.6 $ 36.0 $ 108.4 $ 111.9 ============= ============== ============== =============== ============= ============== ============== ===============
Employer contributions to the pension plans include contributions made directly to the qualified pension plan assets and contributions from corporate assets to pay nonqualified pension benefits. Nonqualified pension plan assets are not included as part of the asset balances presented in this footnote, as they do not qualify as assets under SFAS 87. Benefits paid from the pension plans include both qualified and nonqualified plan benefits. 14. Employee and Agent Benefits (continued) Employees of Professional Pensions, Inc ("PPI") are eligible for coverage under the pension plans, which was reflected in 2003. For 2002, the higher benefits and compensation limits of the Economic Growth and Tax Relief Reconciliation Act of 2001 were recognized in the accounting of the defined benefit plans. 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 87 is used. Effective for 2004, we moved to a 100% self insured medical plan for both the active and retiree participants. A co-pay structure that varies by benefit type and a coinsurance provision were added to the plans. Due to the changes, the premium structures and associated participant contribution rates changed. These changes were reflected in 2003 and increased the accumulated postretirement benefit obligation by $5.1 million. Effective for 2003, we amended the method for determining postretirement retiree health plan contributions for future years. As a result of this change, the accumulated postretirement obligation decreased by $7.2 million in 2002. Also effective January 1, 2004, a $1.0 million cap on active and retiree employer-provided life insurance was implemented. This cap only affected a small group of previously grandfathered employees. For those currently over the $1.0 million amount, their cap will be set equal to their coverage level as of January 1, 2004. This change was reflected in 2003 and resulted in a decrease in the accumulated postretirement benefit obligation by $0.1 million. An actuarial liability gain of $55.0 million occurred during 2003 for the other postretirement benefit plans. This was due to the demographic experience of the active employees (higher turnover rates than expected), a change in demographic assumptions including an increase in the turnover rates which more appropriately reflects past experience and our expectations for the future and only a slight increase in our claim cost per capita assumptions from last year. Claim costs are developed by looking at the plan's actual experience. Slightly offsetting these gains was a loss created by a lower discount rate assumption. The accumulated benefit obligation for all defined benefit pension plans was $976.8 million and $837.4 million at December 31, 2003, and 2002, respectively. Information for pension plans with an accumulated benefit obligation in excess of plan assets: The obligations below relate only to the nonqualified pension plan liabilities. 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, however, these assets are included in our consolidated statements of financial position. As of December 31, --------------------------------------------- -------------------- ------ ----------------- 2003 2002 -------------------- ----------------- (in millions) Projected benefit obligation...... $ 224.0 $ 180.6 Accumulated benefit obligation.... 157.0 125.1 14. Employee and Agent Benefits (continued) Information for other postretirement benefit plans with an accumulated postretirement benefit obligation in excess of plan assets: As of December 31, ---------------------------------- --------------- --- -------------- 2003 2002 --------------- -------------- (in millions) Accumulated postretirement benefit obligation. $ 88.3 $ 90.2 Fair value of plan assets..................... 84.6 80.0 Components of net periodic benefit cost (in millions):
Pension benefits Other postretirement benefits ------------------------------------------ ------------------------------------ ------------------------------------------ ------------------------------------ For the year ended December 31, For the year ended December 31, ------------------------------------------ ------------------------------------ 2003 2002 2001 2003 2002 2001 ----------------------------------------- ------------------------------------ Service cost............... $ 49.0 $ 36.5 $ 31.2 $ 12.3 $ 9.4 $ 8.3 Interest cost.............. 66.9 63.0 59.3 17.9 17.8 15.6 Expected return on plan assets................... (74.8) (84.6) (99.2) (25.8) (32.8) (32.3) Amortization of prior service cost (benefit)................ 1.7 1.7 1.7 (3.2) (2.7) (2.6) Amortization of transition (asset) obligation....... (0.5) (2.2) (11.5) - - 0.3 Recognized net actuarial (gain) loss.............. 17.9 (7.9) (14.1) 2.7 0.2 (1.3) ----------------------------------------- ------------------------------------ ----------------------------------------- ------------------------------------ Net periodic benefit cost $ 60.2 $ 6.5 $ (32.6) $ 3.9 $ (8.1) $(12.0) (income)................. ========================================= ====================================
Additional information: Pension benefits benefits Other postretirement --------------------------- ------------------------------------- For the year ended December 31, -------------------------------------------------------------------- ----------- ------------ -- ---------------- ----------------- 2003 2002 2003 2002 ----------- ------------ ---------------- ----------------- (in millions) Increase in minimum liability included in other comprehensive income........................... $ 3.9 $ - N/A N/A
14. Employee and Agent Benefits (continued) Assumptions: Weighted-average assumptions used to determine benefit obligations as disclosed under the Obligations and Funded Status section Other postretirement Pension benefits benefits ------------------------ --------------------- For the year ended December 31, ------------------------------------------------- --------- -------------- -- ------------ -------- 2003 2002 2003 2002 --------- -------------- ------------ -------- --------- -------------- ------------ -------- Discount rate..................6.25% 6.50% 6.25% 6.50% Rate of compensation increase..5.00% 5.00% 5.00% 5.00% Weighted-average assumptions used to determine net periodic benefit cost
Pension benefits Other postretirement benefits --------------------------------- ------------------------------------ For the year ended December 31, ------------------------------------------------------------------------- 2003 2002 2001 2003 2002 2001 ---------- ----------- ---------- ----------- ------------ ----------- ---------- ----------- ---------- ----------- ------------ ----------- Discount rate.................. 6.50% 7.50% 8.00% 6.50% 7.50% 8.00% Expected long-term return on plan assets................. 8.50% 9.00% 9.00% 7.36% 9.11% 9.02% Rate of compensation increase.. 5.00% 5.00% 5.80% 5.00% 5.00% 5.80%
For other postretirement benefits, the 7.36% rate for 2003 is based on the weighted average expected long-term asset returns for the health, life and long-term care plans. The expected long-term rates for the health, life and long-term care plans are 7.25%, 8.25% and 8.25%, respectively. The expected return on plan assets is set at the long-term rate expected to be earned based on the long-term investment strategy of the plans and the various classes of the invested funds. For each asset class, a long-term asset return assumption is developed taking into account the long-term level of risk of the asset and the tax status of the plan trusts. Historical returns of multiple asset classes were analyzed to develop risk premiums for each asset class. The risk premiums take into account the long-term level of risk of the asset. A long-term risk-free real rate of return was also developed. The overall expected rate for each asset class was developed by combining a long-term inflation component, the risk-free real rate of return, and the associated risk premium. A weighted average expected long-term rate was developed based on long-term returns for each asset class and the target asset allocation of the plan. Assumed health care cost trend rates For the year ended December 31, ------------------------- ----------- -- ---------- 2003 2002 ----------- ---------- ----------- ---------- Health care cost trend rate assumed for next year.. 12.5% 15.0% Rate to which the cost trend rate is assumed to decline (the ultimate trend rate) .............. 5.0% 5.0% Year that the rate reaches the ultimate trend rate. 2010 2009 14. Employee and Agent Benefits (continued) 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- 1-percentage- point increase point decrease --------------- ---------------- Effect on total of service and interest cost components. $ 9.5 $ (7.4) Effect on accumulated postretirement benefit obligation. 38.1 (31.1) Pension Plan Assets The pension plan's weighted-average asset allocations by asset category are as follows: Plan assets as of October 1, --------------------------------------- --------------------------------------- 2003 2002 ------------------- ------------------- Asset category Domestic equity securities............. 58% 41% International equity securities........ 10 14 Domestic debt securities............... 27 40 Real estate............................ 5 5 ------------------- ------------------- ------------------- ------------------- Total 100% 100% =================== =================== Our investment strategy is to achieve the following: o Obtain a reasonable long-term return consistent with the level of risk assumed and at a cost of operation within prudent levels. Performance benchmarks are monitored. o Ensure that sufficient cash is on hand to meet the emerging benefit liabilities for the plan. o Provide for diversification of assets in an effort to avoid the risk of large losses and maximize the investment return to the pension plan consistent with market and economic risk. In administering the qualified pension plan's asset allocation strategy, we consider the projected liability stream of benefit payments, the relationship between current and projected assets of the plan and the projected actuarial liabilities streams, the historical performance of capital markets adjusted for the perception of future short- and long-term capital market performance and the perception of future economic conditions. The overall target asset allocation for the qualified plan assets is: Asset category Target allocation -------------------------- Domestic equity securities......................... 40%-60% International equity securities.................... 5%-15% Domestic debt securities........................... 20%-30% International debt securities...................... 0%-7% Real estate........................................ 3%-10% Other.............................................. 0%-7% 14. Employee and Agent Benefits (continued) For 2003 and 2002, respectively, the plan assets include $66.8 million and $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 stock received in the demutualization was $56.7 million, which was amortized over the remaining service period of plan participants. We have a plan in place to liquidate these holdings, which we are planning to complete in 2005. Other Postretirement Benefit Plans' Assets The other postretirement benefit plans' weighted-average asset allocations by asset category are as follows: Plan assets as of October 1, ---------------------------------------- ---------------------------------------- 2003 2002 -------------------- ------------------- -------------------- Asset category Equity securities................ 47% 40% Debt securities.................. 53 60 -------------------- ------------------- Total......................... 100% 100% ==================== =================== The weighted average target asset allocation for the other postretirement benefit plans is: Asset category Target allocation -------------------------- -------------------------- Equity securities............................. 40-60% Debt securities............................... 40-60% The investment strategies and policies for the other postretirement benefit plans are similar to those employed by the qualified pension plan, but with respect to our retiree health, life and long-term care plans. In 2001, as a result of Principal Mutual Holding Company's demutualization, the other 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. Contributions We expect to contribute roughly $1.0 million to our other postretirement benefit plans in 2004. Our funding policy for the qualified pension plan is to fund the plan annually in an amount at least equal to the minimum annual contribution required under ERISA and, generally, not greater than the maximum amount that can be deducted for federal income tax purposes. We don't anticipate that we will be required to fund a minimum annual contribution under ERISA for the qualified pension plan. At this time, it is too early to estimate the amount that may be contributed, but it is possible that we may fund the plans in 2004 in the range of $10-$50 million. This includes funding for both our qualified and nonqualified plans. 14. Employee and Agent Benefits (continued) The information that follows shows supplemental information for our defined benefit pension plans. Certain key summary data is shown separately for qualified and non-qualified plans (in millions).
For the year ended December 31, --------------------------------------------------------------------------------- --------------------------------------------------------------------------------- 2003 2002 --------------------------------------- ----------------------------------------- --------------------------------------- Qualified Nonqualified Qualified Nonqualified plan plans Total plan plans Total --------------------------------------- ----------------------------------------- --------------------------------------- ----------------------------------------- Benefit obligation, end of the year................. $ (967.4) $ (224.0) $(1,191.4) $ (865.8) $(180.6) $(1,046.4) Fair value of plan assets, end of the year.......... 1,033.5 - 1,033.5 893.3 - 893.3 --------------------------------------- ----------------------------------------- --------------------------------------- ----------------------------------------- Funded (underfunded) status.. 66.1 (224.0) (157.9) 27.5 (180.6) (153.1) Unrecognized net actuarial loss...................... 85.5 80.1 165.6 132.1 51.6 183.7 Unrecognized prior service cost (benefit) ........... 15.3 (9.3) 6.0 17.4 (11.5) 5.9 Unrecognized transition (asset) liability......... (0.2) 0.1 (0.1) (1.9) 1.4 (0.5) --------------------------------------- ----------------------------------------- --------------------------------------- ----------------------------------------- Net amount recognized........ $ 166.7 $ (153.1) $ 13.6 $ 175.1 $(139.1) $ 36.0 ======================================= ========================================= ======================================= ========================================= Amounts recognized in statement of financial position Prepaid benefit cost......... $ 166.7 $ - $ 166.7 $ 175.1 $ - $ 175.1 Accrued benefit liability including minimum liability................. - (157.0) (157.0) - (139.1) (139.1) Accumulated other comprehensive income...... - 3.9 3.9 - - - --------------------------------------- ----------------------------------------- Net amount recognized........ $ 166.7 $ (153.1) $ 13.6 $ 175.1 $(139.1) $ 36.0 ======================================= ========================================= ======================================= ========================================= Components of net periodic benefit cost Service cost................ $ 41.5 $ 7.5 $ 49.0 $ 31.4 $ 5.1 $ 36.5 Interest cost............... 55.4 11.5 66.9 52.1 10.9 63.0 Expected return on plan assets.................... (74.8) - (74.8) (84.6) - (84.6) Amortization of prior service cost (benefit) .. 3.7 (2.0) 1.7 2.9 (1.2) 1.7 Amortization of transition (asset) obligation........ (1.6) 1.1 (0.5) (3.2) 1.0 (2.2) Recognized net actuarial (gain) loss............... 14.3 3.6 17.9 (8.8) 0.9 (7.9) --------------------------------------- ----------------------------------------- Net periodic benefit cost (income).................. $ 38.5 $ 21.7 $ 60.2 $ (10.2) $ 16.7 $ 6.5 ======================================= ========================================= ======================================= =========================================
14. Employee and Agent Benefits (continued) In addition, we have defined contribution plans that are generally available to all employees and agents who are age 21 or older. Eligible participants could not contribute more than $12,000 of their compensation to the plans in 2003. 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 plans allow 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 $18.5 million, $20.2 million and $18.9 million in 2003, 2002 and 2001, respectively, to our qualified defined contribution plans. We also have a nonqualified defined contribution plan available to select employees and agents who are age 21 and over which allows them to contribute amounts in excess of limits imposed by federal tax law. We match the participant's contribution at a 50% contribution rate up to a maximum contribution of 3% of the participant's compensation. We contributed $3.7 million, $3.5 million and $1.5 million in 2003, 2002 and 2001, respectively, to our nonqualified 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. On December 8, 2003 the Medicare Prescription Drug, Improvement and Modernization Act of 2003 ("the Act") was signed into law. The Act introduces a prescription drug benefit under Medicare (Medicare Part D), as well as a federal subsidy to sponsors of retiree health benefits. The benefit obligations and net periodic postretirement benefit costs do not reflect the effects of the Act on the retiree medical plans in accordance with FASB Staff Position FAS 106-1, "Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003". Specific authoritative guidance on the accounting for the federal subsidy is pending and that guidance, when issued, could require us to change previously reported information. We believe our plan would be actuarially equivalent to the new Medicare Part D prescription drug plan and thus would be eligible for the federal subsidy. However, it is anticipated that the plan would need to be amended to clarify how the plan would operate with respect to the new legislation. The Act will be reflected once the plan is amended or FASB issues finalized guidance on accounting for the impact of the Act. 15. Contingencies, Guarantees and Indemnifications Litigation We are regularly involved in litigation, both as a defendant and as a plaintiff but primarily as a defendant. Litigation naming us as a defendant ordinarily arises out of our business operations as a provider of asset management and accumulation products and services, life, health and disability insurance and mortgage banking. Some of the lawsuits are class actions, or purport to be, and some include claims for punitive damages. In addition, regulatory bodies, such as state insurance departments, the SEC, the National Association of Securities Dealers, Inc., the Department of Labor and other regulatory bodies regularly make inquiries and conduct examinations or investigations concerning our compliance with, among other things, insurance laws, securities laws, ERISA and laws governing the activities of broker-dealers. 15. Contingencies, Guarantees and Indemnifications (continued) Principal Life was a defendant in two class-action lawsuits that alleged improper sales practices. A number of persons and entities who were eligible to be class members excluded themselves from the class (or "opted out"), as the law permits them to do. Some of those who opted out from the class filed individual lawsuits making claims similar to those addressed by the class-action lawsuits. The two class-action lawsuits and the majority of the opt-out claims have been settled and dismissed with prejudice. The remaining opt-out claims are not expected to have a material impact on our business, financial condition or net income. 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 position or net income. The outcome of litigation is always uncertain, and unforeseen results can occur. It is possible that such outcomes could materially affect net income in a particular quarter or annual period. Guarantees and Indemnifications In the normal course of business, we have provided guarantees to third parties primarily related to a former subsidiary, joint ventures and industrial revenue bonds. These agreements generally expire from 2004 through 2019. The maximum exposure under these agreements as of December 31, 2003, was $175.9 million; however, we believe the likelihood is remote that material payments will be required and therefore have not accrued for a liability on our consolidated statements of financial position. Should we be required to perform under these guarantees, we generally could recover a portion of the loss from third parties through recourse provisions included in agreements with such parties, the sale of assets held as collateral that can be liquidated in the event that performance is required under the guarantees or other recourse generally available to us, minimizing the impact to net income. The fair value of such guarantees issued after January 1, 2003, was insignificant. In the normal course of business, we are subject to indemnification obligations related to the sale of residential mortgage loans. Under these indemnifications, we are required to repurchase certain mortgage loans that fail to meet the standard representations and warranties included in the sales contracts. The amount of our exposure is based on the potential loss that may be incurred if the repurchased mortgage loans are processed through the foreclosure process. Based on historical experience, total mortgage loans repurchased pursuant to these indemnification obligations are estimated to be approximately 0.04% of annual mortgage loan production levels. Total losses on the mortgage loans repurchased are estimated to approximate 25% of the unpaid principal balance of the related mortgage loans. As of December 31, 2003, $5.9 million has been accrued for representing the fair value of such indemnifications issued after January 1, 2003, in accordance with FASB's Interpretation No. 45, Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others. 15. Contingencies, Guarantees and Indemnifications (continued) We are also subject to various other indemnification obligations issued in conjunction with certain transactions, primarily divestitures, the sale of servicing rights in our mortgage banking business, acquisitions and financing transactions whose terms range in duration and often are not explicitly defined. Certain portions of these indemnifications may be capped, while other portions are not subject to such limitations. 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 net income. The fair value of such indemnifications issued after January 1, 2003, was insignificant. Securities Posted as Collateral We posted $756.4 million in mortgage-backed securities under collateral agreements at December 31, 2003, to satisfy collateral requirements associated with our mortgage banking company and derivatives credit support agreements. 16. Stockholder's Equity Treasury Stock As a result of Principal Mutual Holding Company's demutualization described in Note 1, 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 employee 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. 16. Stockholder's Equity (continued) The components of accumulated other comprehensive income (loss) were as follows (in millions):
Net Net unrealized unrealized gains (losses) gains Foreign on (losses) on currency Minimum Accumulated other available-for-sal e derivative translation pension comprehensive securities instruments adjustment liability 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......... (5.0) - - - (5.0) 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) Net change in unrealized gains and losses on equity method subsidiaries and minority interest - - adjustments................ 2.5 - 2.5 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 $ (9.1) $ 368.4 $(58.2) $ -
16. Stockholder's Equity (continued)
Net Net unrealized unrealized gains (losses) gains Foreign Accumulated on available- (losses) on currency Minimum other for-sale derivative translation pension comprehensive securities instruments adjustment liability income (loss) ------------------ ------------------------------------------------------------------ ------------------ ------------------------------------------------------------------ Balances at January 1, 2002... $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......... 63.4 - - - 63.4 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) Net change in unrealized gains (losses) on equity method subsidiaries and minority interest adjustments................ (2.5) - - - (2.5) Change in net foreign currency translation adjustment................. - - 2.0 - 2.0 ------------------ ----------------------------------------------------------- ------------------ ----------------------------------------------------------- Balances at December 31, 2002. $900.8 $(7.1) $785.1 $ (108.6) $ -
16. Stockholder's Equity (continued)
Net Net unrealized unrealized gains (losses) gains Foreign on available- (losses) on currency Minimum Accumulated other for-sale derivative translation pension comprehensive securities instruments adjustment liability income (loss) ------------------------------------------------------------------------------ Balances at January 1, 2003... $ 900.8 $(108.6) $(7.1) $ - $ 785.1 Net change in unrealized gains (losses) on fixed maturities, available-for-sale......... 677.7 - - - 677.7 Net change in unrealized gains (losses) on equity securities, available-for-sale......... 12.9 - - - 12.9 Adjustments for assumed changes in amortization pattern: Deferred policy acquisition costs..... (48.2) - - - (48.2) Unearned revenue reserves.. 1.6 - - - 1.6 Net change in unrealized gains (losses) on derivative instruments.. - 76.3 - - 76.3 Net change in unrealized gains (losses) on policyholder dividend - obligation................. (65.3) - - (65.3) Provision for deferred income tax benefit (expense)...... (195.1) (26.3) - 1.4 (220.0) Net change in unrealized gains (losses) on equity method subsidiaries and minority interest - adjustments................ (8.4) - - (8.4) Change in net foreign currency translation adjustment................. - - (0.1) - (0.1) Change in minimum pension liability.................. - - - (3.9) (3.9) Cumulative effect of accounting change, net of related income taxes....... 9.1 - - - 9.1 ------------------------------------------------------------------------------ Balances at December 31, 2003. $ 1,285.1 $(7.2) $ 1,216.8 $ (58.6) $ (2.5) ==============================================================================
16. 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, ---------------------------------------------- ---------------------------------------------- 2003 2002 2001 --------------- -------------- --------------- --------------- -------------- --------------- Unrealized gains on available-for-sale securities arising during the year.......................... $562.1 $674.2 $491.2 Adjustment for realized losses on available-for-sale securities included in net income.................. (126.3) (259.5) (234.8) --------------- -------------- --------------- --------------- -------------- --------------- Unrealized gains on available-for-sale securities, as adjusted............................................ $435.8 $414.7 $256.4 =============== ============== ===============
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 2003 statutory results, we could pay approximately $701.2 million in stockholder dividends in 2004 without exceeding the statutory limitation. 17. Fair Value of Financial Instruments The following discussion describes the methods and assumptions we utilize in estimating our fair value disclosures for financial instruments. Certain financial instruments, particularly policyholder liabilities other than investment-type contracts, are excluded from these fair value disclosure requirements. The techniques utilized in estimating the fair values of financial instruments are affected by the assumptions used, including discount rates and estimates of the amount and timing of future cash flows. Care should be exercised in deriving conclusions about our business, its value or financial position based on the fair value information of financial instruments presented below. The estimates shown are not necessarily indicative of the amounts that would be realized in a one-time, current market exchange of all of our financial instruments. We define fair value as the quoted market prices for those instruments that are actively traded in financial markets. In cases where quoted market prices are not available, fair values are estimated using present value or other valuation techniques. The fair value estimates are made at a specific point in time, based on available market information and judgments about the financial instrument, including estimates of timing, amount of expected future cash flows and the credit standing of counterparties. Such estimates do not consider the tax impact of the realization of unrealized gains or losses. In many cases, the fair value estimates cannot be substantiated by comparison to independent markets. In addition, the disclosed fair value may not be realized in the immediate settlement of the financial instrument. 17. Fair Value of Financial Instruments (continued) 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. 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. 17. 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, -------------------------------------------------------------------- -------------------------------------------------------------------- 2003 2002 ---------------------------------- --------------------------------- ---------------- ----------------- ---------------- ---------------- Carrying amount Fair value Carrying amount Fair value ---------------- ----------------- ---------------- ---------------- ---------------- ----------------- ---------------- ---------------- Assets (liabilities) Fixed maturities, available-for-sale.. $ 35,964.0 $ 35,964.0 $ 32,752.6 $ 32,752.6 Fixed maturities, trading............. 102.9 102.9 101.7 101.7 Equity securities, available-for-sale. 669.2 669.2 348.1 348.1 Mortgage loans........................ 13,175.1 14,367.4 10,829.4 12,213.6 Policy loans.......................... 804.1 804.1 818.5 818.5 Other investments..................... 1,214.9 1,214.9 1,013.4 1,013.4 Cash and cash equivalents............. 1,399.7 1,399.7 1,168.5 1,168.5 Investment-type insurance contracts... (27,254.1) (28,299.8) (24,816.4) (25,660.9) Short-term debt....................... (1,678.0) (1,678.0) (1,243.9) (1,243.9) Long-term debt........................ (1,974.5) (2,011.3) (578.7) (610.5)
18. Statutory Insurance Financial Information We prepare statutory financial statements in accordance with the accounting practices prescribed or permitted by the Insurance Division of the Department of Commerce of the State of Iowa (the "State of Iowa"). The State of Iowa recognizes only statutory accounting practices prescribed or permitted by the State of Iowa for determining and reporting the financial condition and results of operations of an insurance company to determine its solvency under the Iowa Insurance Law. The National Association of Insurance Commissioners' ("NAIC") Accounting Practices and Procedures manual ("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 2003 and 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, 2003 and 2002, respectively, our statutory surplus was $707.0 million and $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 years then ended. We are exploring other arrangements for the financing needs of this subsidiary, which would eliminate the pledging mentioned above. 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. At December 31, 2003, we meet the RBC requirements. 18. 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, ----------------------------------------------- ----------------------------------------------- 2003 2002 2001 -------------- ----------------- -------------- -------------- ----------------- -------------- Statutory net income...... $ 577.1 $ 402.1 $ 415.0 Statutory surplus......... 3,861.9 3,339.2 3,483.8 19. 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, the Corporate and Other segment and third-party clients. The Life and Health insurance segment provides individual and group life insurance, group health insurance and individual and group disability insurance throughout the U.S. The Mortgage Banking segment originates and services residential mortgage loan products for customers 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 (including interest expense), income on capital not allocated to other segments, intersegment eliminations, income tax risks and certain income, expenses and other after-tax adjustments not allocated to the segments based on the nature of such items. The Corporate and Other segment included 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 and $20.2 million during 2002 and 2001, respectively. Management uses segment operating earnings for goal setting, determining employee compensation and evaluating performance on a basis comparable to that used by securities analysts. We determine segment operating earnings by adjusting U.S. GAAP net income for net realized/unrealized capital gains and losses, as adjusted, and other after-tax adjustments which management believes are not indicative of overall operating trends. Net realized/unrealized capital gains and losses, as adjusted, are net of income taxes, related changes in the amortization pattern of deferred policy acquisition costs, recognition of front-end fee revenues for sales charges on pension products and services, net realized capital gains and losses distributed, minority interest capital gains and losses and certain market value adjustments to fee revenues. Segment operating revenues exclude net realized/unrealized capital gains and their impact on recognition of front-end fee revenues and certain market value adjustments to fee revenues. While these items may be significant components in understanding and assessing the consolidated financial performance, management believes the presentation of segment operating earnings enhances the understanding of our results of operations by highlighting earnings attributable to the normal, ongoing operations of the business. 19. Segment Information (continued) The accounting policies of the segments are consistent with the accounting policies for the consolidated financial statements, with the exception of capital allocation and income tax allocation. We allocate capital to our segments based upon an internal capital model that allows management to more effectively manage our capital. The Corporate and Other segment functions to absorb the risk inherent in interpreting and applying tax law. The segments are allocated tax adjustments consistent with the positions we took on our tax returns. The Corporate and Other segment results reflect any differences between the tax returns and the estimated resolution of any disputes. The following tables summarize selected financial information on a continuing basis by segment and reconcile segment totals to those reported in the consolidated financial statements: As of December 31, --------------------------------------- ------------------ - ------------------ 2003 2002 ------------------ ------------------ (in millions) Assets: U.S. Asset Management and Accumulation . $ 83,832.2 $ 70,311.8 Life and Health Insurance............... 12,158.4 11,356.3 Mortgage Banking........................ 5,558.8 3,740.1 Corporate and Other .................... 2,203.3 1,687.4 ------------------ ------------------ ------------------ ------------------ Total consolidated assets............ $ 103,752.7 $ 87,095.6 ================== ================== ================== ==================
For the year ended December 31, ------------------------------------------------------------- ------------------ - ------------------ ------------------ 2003 2002 2001 ------------------ ------------------ ------------------ (in millions) Operating revenues by segment: U.S. Asset Management and Accumulation.... $ 3,545.3 $ 3,690.2 $ 3,712.0 Life and Health Insurance................. 4,014.3 3,946.8 3,946.4 Mortgage Banking.......................... 1,343.8 1,074.0 714.4 Corporate and Other....................... 6.2 (3.8) 143.7 ------------------ ------------------ ------------------ ------------------ ------------------ ------------------ Total segment operating revenues........ 8,909.6 8,707.2 8,516.5 Net realized/unrealized capital losses, including recognition of front-end fee revenues and certain market value adjustments to fee revenues............. (103.5) (441.0) (506.1) Investment income generated from IPO proceeds................................ - - 6.3 ------------------ ------------------ ------------------ ------------------ ------------------ ------------------ Total revenue per consolidated $ 8,806.1 $ 8,266.2 $ 8,016.7 statements of operations............. ================== ================== ================== ================== ================== ==================
19. Segment Information (continued)
For the year ended December 31, -------------------------------------------------------------- ------------------- - ------------------- ------------------ 2003 2002 2001 ------------------- ------------------- ------------------ (in millions) Operating earnings (loss) by segment, net of related income taxes: U.S. Asset Management and Accumulation ... $ 436.3 $ 368.5 $ 349.0 Life and Health Insurance................. 241.2 233.1 201.2 Mortgage Banking.......................... (5.9) 93.3 99.6 Corporate and Other ...................... 21.4 10.1 56.9 ------------------- ------------------- ------------------ ------------------- ------------------- ------------------ Total segment operating earnings, net of 693.0 705.0 706.7 related income taxes................. Net realized/unrealized capital losses, as adjusted.......................... (59.2) (262.7) (308.5) Other after-tax adjustments (1)........... 25.5 109.8 (31.1) ------------------- ------------------- ------------------ ------------------- ------------------- ------------------ Net income per consolidated statements $ 659.3 $ 552.1 $ 367.1 of operations........................ =================== =================== ================== (1) In 2003, other after-tax adjustments of $25.5 million included (1) the positive effect of a decrease in income tax reserves established for contested IRS tax audit matters ($28.9 million) and (2) the negative effect of a cumulative effect of accounting change related to the implementation of FIN 46 ($3.4 million). In 2002, other after-tax adjustments of $109.8 million 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, other after-tax adjustments of ($31.1) million included (1) the negative effects of: (a) expenses related to the demutualization ($18.6 million); (b) a cumulative effect of accounting change related to the implementation of SFAS 133 ($10.7 million); and (c) an increase to a loss contingency reserve established for sales practice litigation ($5.9 million) and (2) the positive effect of investment income generated from the proceeds of the IPO ($4.1 million).
19. Segment Information (continued) The following is a summary of income tax expense (benefit) allocated to our segments for purposes of determining operating earnings. Segment income taxes are reconciled to income taxes reported on our consolidated statements of operations.
For the year ended December 31, -------------------------------------------------------------- ------------------- - ------------------- ------------------ 2003 2002 2001 ------------------- ------------------- ------------------ (in millions) Income tax expense (benefit) by segment: U.S. Asset Management and Accumulation.... $ 137.8 $ 94.4 $ 79.9 Life and Health Insurance................. 122.6 122.1 104.5 Mortgage Banking.......................... (3.8) 72.5 62.5 Corporate and Other....................... 2.4 (11.5) 35.5 ------------------- ------------------- ------------------ ------------------- ------------------- ------------------ Total segment income taxes from 259.0 277.5 282.4 operating earnings................. Taxes related to net realized/unrealized capital losses, as adjusted.......................... (37.4) (141.3) (179.0) Taxes related to other after-tax adjustments.......................... (26.1) (116.0) (11.0) ------------------- ------------------- ------------------ ------------------- ------------------- ------------------ Total income tax expense per $ 195.5 $ 20.2 $ 92.4 consolidated statements of operations......................... =================== =================== ==================
19. Segment Information (continued) The following table summarizes operating revenues for our products and services (in millions):
For the year ended December 31, ------------------------------------------------------------- ------------------------------------------------------------- 2003 2002 2001 ------------------------------------------------------------- ------------------------------------------------------------- ------------------------------------------- U.S. Asset Management and Accumulation: ------------------------------------------- Full-service accumulation................ $ 1,099.5 $ 1,076.5 $ 1,116.6 ------------------------------------------- Full-service payout...................... 862.5 1,191.8 1,214.8 ------------------------------------------- Investment only.......................... 905.9 886.4 918.1 -------------------- ------------------- ------------------- -------------------- ------------------- ------------------- Total pension.......................... 2,867.9 3,154.7 3,249.5 ------------------------------------------- ------------------------------------------- Individual annuities..................... 354.9 303.8 263.3 ------------------------------------------- Other and eliminations................... 52.9 49.7 33.9 -------------------- ------------------- ------------------- -------------------- ------------------- ------------------- Total U.S. Asset Accumulation.......... 3,275.7 3,508.2 3,546.7 ------------------------------------------- ------------------------------------------- Principal Global Investors............... 304.0 215.4 194.9 Eliminations............................. (34.4) (33.4) (29.6) ------------------------------------------- -------------------- ------------------- ------------------- -------------------- ------------------- ------------------- Total U.S. Asset Management and 3,545.3 3,690.2 3,712.0 Accumulation......................... ------------------------------------------- ------------------------------------------- ------------------------------------------- Life and Health Insurance: ------------------------------------------- Life insurance........................... 1,607.7 1,629.6 1,658.7 ------------------------------------------- Health insurance......................... 2,104.4 2,058.3 2,061.3 Disability insurance..................... 302.2 258.9 226.4 ------------------------------------------- -------------------- ------------------- ------------------- -------------------- ------------------- ------------------- Total Life and Health Insurance........ 4,014.3 3,946.8 3,946.4 ------------------------------------------- ------------------------------------------- ------------------------------------------- Mortgage Banking: ------------------------------------------- Mortgage loan production................. 641.3 483.9 311.4 Mortgage loan servicing.................. 702.5 590.1 403.0 ------------------------------------------- -------------------- ------------------- ------------------- -------------------- ------------------- ------------------- Total Mortgage Banking................. 1,343.8 1,074.0 714.4 ------------------------------------------- ------------------------------------------- Corporate and Other...................... 6.2 (3.8) 143.7 ------------------------------------------- -------------------- ------------------- ------------------- -------------------- ------------------- ------------------- ------------------------------------------- ------------------------------------------- Total operating revenues................. $ 8,909.6 $ 8,707.2 $ 8,516.5 ==================== =================== =================== ==================== =================== =================== ------------------------------------------- ------------------------------------------- Total operating revenues................. $ 8,909.6 $ 8,707.2 $8,516.5 ------------------------------------------- Net realized/unrealized capital losses, including recognition of front-end fee revenues and certain market value adjustments to fee revenues (103.5) (441.0) (506.1) ------------------------------------------- Other after-tax adjustments.............. - - 6.3 -------------------- ------------------- ------------------- -------------------- ------------------- ------------------- Total GAAP revenues...................... $ 8,806.1 $ 8,266.2 $8,016.7 =========================================== ==================== =================== ==================--
20. Stock-Based Compensation Plans As of December 31, 2003, our parent, 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 or 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, and expire ten years after the grant date. Options granted in 2001 have cliff vesting over a three-year period. Subsequent to 2001, all options granted have graded vesting over a three-year period. In 2003, restricted stock units were issued to certain employees pursuant to the Stock Incentive Plan and have graded or cliff vesting over a three-year period. In 2003, stock appreciation rights were issued to agents meeting certain production requirements and will vest ratably over a three-year-period. At December 31, 2003, we recorded $0.1 million in compensation expense related to the plan. 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, 2003, 2002 and 2001, we recorded compensation expense of $6.6 million, $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. For 2001, 2002 and 2003, the maximum amount an employee could contribute during any plan year was the lesser of $10,000, or such greater or lesser amount as determined by the plan administrator, and 10% of the employee's salary. Effective January 1, 2004, employees may purchase up to $25,000 worth of PFG stock each year. 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 $20.3 million, $9.1 million and $0.01 million for 2003, 2002 and 2001, respectively. 20. Stock-Based Compensation Plans (continued) The weighted-average estimated fair value of stock options granted during 2003, 2002 and 2001, using the Black-Scholes option valuation model was $10.64, $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: 2003 2002 2001 ------------- ------------- ------------- ------------- Dividend yield............ .91 % .91 % 1.12 % ============= ============= ============= ============= Expected volatility....... 38.6 % 32.5 % 37.5 % ============= ============= ============= ============= Risk-free interest rate... 3.1 % 4.7 % 3.7 % ============= ============= ============= ============= Expected life (in years).. 6 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. 21. Quarterly Results of Operations (Unaudited) The following is a summary of unaudited quarterly results of operations for 2003 and 2002:
For the three months ended March 31 June 30 September 30 December 31 ----------------------------------- ----------------------------------- ----------------------------------------------------------------------- (in millions) 2003 Total revenues........................ $2,164.0 $2,242.0 $2,070.6 $2,329.5 Total expenses........................ 1,968.3 1,990.1 1,865.7 2,123.8 Income before cumulative effect of accounting change, net of related income taxes....................... 139.6 179.9 154.4 188.8 Net income............................ 139.6 179.9 151.0 188.8 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
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 year ended December 31, 2003. (2) Part B: Principal Life Insurance Company Separate Account B: Report of Independent Auditors. Statement of Assets and Liabilities, December 31, 2003. Statement of Operations for the year ended December 31, 2003. Statements of Changes in Net Assets for the years ended December 31, 2003 and 2002. Notes to Financial Statements. Principal Life Insurance Company: Report of Independent Auditors. Consolidated Statements of Financial Position, December 31, 2003 and 2002. Consolidated Statements of Operations for the years ended December 31, 2003, 2002 and 2001. Consolidated Statements of Financial Position, December 31, 2003 and 2002. Consolidated Statements of Stockholder's Equity for the years ended December 31, 2003, 2002 and 2001. Consolidated Statements of Cash Flows for the years ended December 31, 2003, 2002 and 2001. Notes to Consolidated Financial Statements. (b) Exhibits (1) Board Resolution of Registrant (filed 06/07/2004) (3a) Distribution Agreement * (3b) Selling Agreement (filed 06/07/2004) (4a) Form of Variable Annuity Contract (filed 06/07/2004) (5) Form of Variable Annuity Application (filed 06/07/2004) (6a) Articles of Incorporation of the Depositor (filed 06/07/2004) (6b) Bylaws of Depositor (filed 06/07/2004) (9) Opinion of Counsel * (10a) Consent of E&Y LLP * (10b) Powers of Attorney (filed 06/07/2004) (11) Financial Statement Schedules * * Filed herein ** To be filed by amendment 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 Director 40 Shalebrook Drive Chair, Nominating and Governance Morristown, NJ 07960 Committee JOCELYN CARTER-MILLER TechEdventures Director 3698 Northwest 15th Street Member, Audit Committee Lauderhill, FL 33311 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 President, Chairman of the Board and Chief Executive Officer 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, Nominating and Governance Lake Forest, IL 60045-5201 Committee VICTOR. H. LOEWENSTEIN Avenue Wellington 146 Director B-1180 Member, Nominating and Governance Brussels, Belgium Committee ARJUN K. MATHRANI 176 East 71st Street, Apt. 9-F Director New York, NY 10021 Member, Audit Committee FEDERICO F. PENA Vestar Capital Partners Member, Nominating and Governance 1225 17th Street, Ste 1660 Committee Denver, CO 80202 ELIZABETH E. TALLETT Hunter Partners, LLC Director 48 Federal Twist Road Chair, Audit Committee Stockton, NJ 08559 Member, Executive Committee EXECUTIVE OFFICERS (OTHER THAN DIRECTORS):
JOHN EDWARD ASCHENBRENNER President, Insurance and Financial Services PAUL FRANCIS BOGNANNO Senior Vice President GARY MERLYN CAIN Senior Vice President Life and Health Division RONALD L. DANILSON Senior Vice President - Retirement and Investor Services JAMES DAVID DEVRIES Senior Vice President - Human Resources RALPH CRAIG EUCHER Senior Vice President - Retirement and Investor Services NORA MARY EVERETT Senior Vice President and Deputy General Counsel MICHAEL HARRY GERSIE Executive Vice President and Chief Financial Officer THOMAS JOHN GRAF Senior Vice President - Investor Relations JOYCE NIXSON HOFFMAN Senior Vice President and Corporate Secretary DANIEL JOSEPH HOUSTON Senior Vice President - Retirement and Investor Services ELLEN ZISLIN LAMALE Senior Vice President and Chief Actuary JULIA MARIE LAWLER Senior Vice President and Chief Investment Officer JAMES PATRICK MCCAUGHAN President, Global Asset Management MARY AGNES O'KEEFE Senior Vice President and Chief Marketing Officer GARY PAUL SCHOLTEN Senior Vice President and Chief Information Officer KAREN ELIZABETH SHAFF Executive Vice President and General Counsel ROBERT ALLEN SLEPICKA Senior Vice President - Life and Health Division NORMAN RAUL SORENSEN Senior Vice President - International Asset Accumulation LARRY DONALD ZIMPLEMAN President, Retirement and Investor Services
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. JF Molloy & Associates, Inc. e. Molloy Medical Management Company, Inc. f. Molloy Wellness Company g. Molloy Actuarial and Consulting Corporation h. Capstone Insurance Group, Inc. i. Principal Health Insurance Company (Iowa) a stock life insurance company engaged in the business of health insurance. j. Principal Global Investors Holding Company, Inc. (Delaware) a holding company. k. ING/Principal Pensions Co., Ltd. (Japan) a Japanese pension company. l. Principal Financial Group (Mauritius) Ltd. a Mauritius holding company. m. Principal Life Insurance Company (an Iowa corporation) a stock life insurance company engaged in the business of insurance and retirement services. n. Principal Financial Services (Australia), Inc. an Iowa holding company. o. Principal Investors Corporation (New Jersey) a general business corporation that holds investments. p. Principal International Holding Company, LLC a Delaware limited liability company that serves as a downstream holding company for Principal Financial Services, Inc. q. Principal International de Chile, S.A. (Chile) a holding company. r. Principal Financial Services (NZ), Inc. (an Iowa holding company) formed to facilitate the acquisition of the New Zealand business of BT Australia. s. 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 Asset Management Company (Asia) Ltd. (Hong Kong) an asset management company. c. Principal International (Asia) Limited (Hong Kong) a corporation operating as a regional headquarters for Asia. d. Principal Trust Company (Asia) Limited an Asia trust company. e. Principal International Argentina, S.A. (an Argentina corporation) a holding company that owns Argentina corporations offering annuities, group and individual insurance policies. 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 Mexico Servicios, S.A. de C.V. (Mexico) a company established to be the employer of Mexico administration employees. j. Distribuidora Principal Mexico, S.A. de C.V. (Mexico) a company established to be the employer of Mexico sales employees. k. Principal Genera, S.A. De C.V., Operadora De Fondos De Inversion (Mexico) a mutual fund company. l. 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 Global Investors Holding Company, Inc. a. Principal Global Investors (Ireland) Limited an Ireland company that engages in funds management. b. Principal Global Investors (Europe) Limited a United Kingdom company that engages in European representation and distribution of the Principal Investments Funds. c. Principal Global Investors (Singapore) Limited (a Singapore corporation) a company engaging in funds management. Subsidiaries wholly-owned by Principal Financial Group (Mauritius) Ltd. a. Principal Asset Management Company Private Limited (India) an India asset management company. b. Principal Trustee Company Private Limited (India) a trustee for mutual funds. Subsidiaries organized and wholly-owned by Principal Life Insurance Company: a. InSource Group, LLC (Delaware) a limited liability company engaged in marketing products for the Principal Financial Group, Inc. b. Principal Global Investors, 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) a corporation which engages in marketing, sales and administration of executive benefit services. g. BCI Group, LLC (Delaware) a limited liability company. 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 May 17, 2004. Principal Bond Fund, Inc.(a Maryland Corporation) 0.00% of shares outstanding owned by Principal Life Insurance Company (including subsidiaries and affiliates) on May 17, 2004. Principal Capital Value Fund, Inc. (a Maryland Corporation) 18.86% of outstanding shares owned by Principal Life Insurance Company (including subsidiaries and affiliates)on May 17, 2004. Principal Cash Management Fund, Inc. (a Maryland Corporation) 2.18% of outstanding shares owned by Principal Life Insurance Company (including subsidiaries and affiliates) on May 17, 2004. Principal Equity Income Fund, Inc. (f/k/a Principal Utilities Fund, Inc.) (a Maryland Corporation) 0.00% of shares outstanding owned by Principal Life Insurance Company (including subsidiaries and affiliates) on May 17, 2004. 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 May 17, 2004. Principal Growth Fund, Inc. (a Maryland Corporation) 0.00% of outstanding shares owned by Principal Life Insurance Company (including subsidiaries and affiliates) on May 17, 2004. Principal International Emerging Markets Fund, Inc. (a Maryland Corporation) 26.71% of shares outstanding owned by Principal Life Insurance Company (including subsidiaries and affiliates) on May 17, 2004. Principal International Fund, Inc. (a Maryland Corporation) 14.83% of shares outstanding owned by Principal Life Insurance Company (including subsidiaries and affiliates) on May 17, 2004. Principal International SmallCap Fund, Inc. (a Maryland Corporation) 0.00% of shares outstanding owned by Principal Life Insurance Company (including subsidiaries and affiliates) on May 17, 2004. Principal Limited Term Bond Fund, Inc. (a Maryland Corporation) 2.41% of shares outstanding owned by Principal Life Insurance Company (including subsidiaries and affiliates) on May 17, 2004. Principal LargeCap Stock Index Fund, Inc. (a Maryland Corporation) 0.00% of shares outstanding owned by Principal Life Insurance Company (including subsidiaries and affiliates) on May 17, 2004. Principal MidCap Fund, Inc. (a Maryland Corporation) 0.00% of shares outstanding owned by Principal Life Insurance Company (including subsidiaries and affiliates) on May 17, 2004 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 May 17, 2004. 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 May 17, 2004 Principal Partners LargeCap Blend Fund, Inc.(a Maryland Corporation) 6.99% of shares outstanding owned by Principal Life Insurance Company (including subsidiaries and affiliates) on May 17, 2004 Principal Partners LargeCap Value Fund, Inc.(a Maryland Corporation) 6.30% of shares outstanding owned by Principal Life Insurance Company (including subsidiaries and affiliates) on May 17, 2004 Principal Partners MidCap Growth Fund, Inc.(a Maryland Corporation) 5.96% of shares outstanding owned by Principal Life Insurance Company (including subsidiaries and affiliates) on May 17, 2004 Principal Partners SmallCap Growth Fund, Inc.(a Maryland Corporation) 14.82% of shares outstanding owned by Principal Life Insurance Company (including subsidiaries and affiliates) on May 17, 2004 Principal Real Estate Fund, Inc. (a Maryland Corporation) 0.00% of shares outstanding owned by Principal Life Insurance Company (including subsidiaries and affiliates) on May 17, 2004 Principal SmallCap Fund, Inc.(a Maryland Corporation) 0.00% of shares outstanding owned by Principal Life Insurance Company (including subsidiaries and affiliates) on May 17, 2004. Principal Investors Fund, Inc.(a Maryland Corporation), 0.12% of shares outstanding of the Bond & Mortgage Securitites Fund, 7.31% of shares outstanding of the Capital Preservation Fund, 0.01% of shares outstanding of the Governement Securities Fund, 0.03% of shares outstanding of the High Quality Intermediate-Term Bond Fund, 0.13% of shares outstanding of the High Quality Long-Term Bond Fund, 0.04% of shares outstanding of the High Quality Short-Term Bond Fund, 25.36% of shares outstanding of the International Emerging Markets Fund, 14.50% of shares outstanding of the International Fund I, 0.00% of shares outstanding of the International Fund II, 89.60% of shares outstanding of the LargeCap Blend Fund I, 21.09% of shares outstanding of the LargeCap Growth Fund, 0.00% of shares outstanding of the LargeCap S&P 500 Index Fund, 25.34% of shares outstanding of the LargeCap Value Fund, 0.03% of shares outstanding of the MidCap Blend Fund, 0.11% of shares outstanding of the MidCap Growth Fund, 0.02% of shares outstanding of the MidCap S&P 400 Index Fund, 0.00% of shares outstanding of the MidCap Value Fund, 0.01% of shares outstanding of the Money Market Fund, 63.94% of shares outstanding of the Partners International Fund, 0.00% of shares outstanding of the Partners LargeCap Blend Fund, 8.20% of shares outstanding of the Partners LargeCap Blend Fund I, 55.53% of shares outstanding of the Partners LargeCap Growth Fund, 0.00% of shares outstanding of the Partners LargeCap Growth Fund I, 0.00% of shares outstanding of the Partners LargeCap Growth Fund II, 0.00% of shares outstanding of the Partners LargeCap Value Fund, 0.05% of shares outstanding of the Partners MidCap Growth Fund, 3.61% of shares outstanding of the Partners MidCap Growth Fund I, 0.36% of shares outstanding of the Partners MidCap Value Fund, 2.20% of shares outstanding of the Partners MidCap Value Fund I, 2.77% of shares outstanding of the Partners SmallCap Blend Fund, 0.71% of shares outstanding of the Partners SmallCap Growth Fund I, 0.00% of shares outstanding of the Partners SmallCap Growth Fund II, 0.01% of shares outstanding of the Partners SmallCap Value Fund, 8.58% of shares outstanding of the Partners SmallCap Value Fund I, 0.00% of shares outstanding of the Preferred Securities Fund, 0.00% of shares outstanding of the Principal LifeTime 2010 Fund, 0.00% of shares outstanding of the Principal LifeTime 2020 Fund, 0.00% of shares outstanding of the Principal LifeTime 2030 Fund, 0.01% of shares outstanding of the Principal LifeTime 2040 Fund, 0.02% of shares outstanding of the Principal LifeTime 2050 Fund, 0.02% of shares outstanding of the Principal LifeTime Strategic Income Fund, 0.00% of shares outstanding of the Real Estate Fund, 14.29% of shares outstanding of the SmallCap Blend Fund, 6.20% of shares outstanding of the SmallCap Growth Fund, 0.00% of shares outstanding of the SmallCap S&P 600 Index Fund, 0.23% of shares outstanding of the SmallCap Value Fund, were owned by Principal Life Insurance Company (including subsidiaries and affiliates) on May 17, 2004. 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 May 17, 2004. 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 May 17, 2004: Asset Allocation, Balanced, Bond, Capital Value, Equity Growth, Equity Income (f/k/a Utilities), Government Securities, Growth, International, International Emerging Markets, International SmallCap, LargeCap Blend, LargeCap Growth Equity, LargeCap Stock Index, LargeCap Value, Limited Term Bond, MidCap, MidCap Growth, MidCap Value, Money Market, Real Estate, SmallCap, SmallCap Growth and SmallCap Value. Subsidiary wholly-owned by Principal Financial Services (Australia), Inc.: a. Principal Tactical Asset Management Pty Limited (Australia) a company that engages in management of futures positions. b. Principal Global Investors (Australia) Service Company Pty Limited a company established to be the employer of Australian employees. c. Principal Capital Global Investors Limited (Australia) An SEC registered investment advisor which manages international funds (non-Australian) residents). d. Principal Financial Group Australia Pty Ltd. an Australian holding company. Subsidiary wholly-owned by Principal International de Chile, S.A.: b. Principal Compania de Seguros de Vida Chile S.A. (Chile) life insurance company. Subsidiary organized and wholly-owned by Principal Financial Group Investments (Australia) Pty Limited: a. Principal Hotels Holdings Pty Ltd. an Australia holding company. Subsidiary wholly-owned by Principal Asset Management Company (Asia) Limited (Hong Kong) a. Dao Heng Fund Management Limited (Hong Kong) Subsidiary wholly-owned by Principal International (Asia) Limited (Hong Kong): a. Principal Global Investors (Asia) Limited a Hong Kong company that provides sales, marketing and client services support for Principal Capital management funds and institutional investors. 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 Afore, S.A. de C.V. (Mexico): a. Principal Siefore, S.A. de C.V. (Mexico) an investment fund company. Subsidiaries wholly-owned by Principal Global Investors, LLC: a. Post Advisory Group, LLC (Delaware) a limited liability company whose role is an asset management firm that specializes in high yield fixed-income investments. b. Principal Enterprise Capital, LLC (a Delaware Corporation) a limited liability company involved in the management of investments in real estate operating companies on behalf of institutional investors. c. Principal Commercial Acceptance, LLC (a Delaware Corporation) a limited liability company involved in the management of commercial real estate mortgage loans. d. Principal Real Estate Investors, LLC (a Delaware Corporation) a limited liability company involved as a registered investment advisor focusing on the management of commercial real estate investments on behalf of institutional investors. e. Principal Commercial Funding, LLC (a Delaware Corporation) a limited liability company engaged in the business of issuing commercial mortgage-backed securities. f. Principal Capital Futures Trading Advisor, LLC a Delaware limited liability company which is a commodities trading advisor. g. Principal Global Investors Trust (Delaware) a business trust and private investment company offering non-registered units, initially, to tax-exempt entities. h. Spectrum Asset Management, Inc. (Connecticut) A corporation specializing in all aspects of the preferred market including portfolio management, risk management and trading. Subsidiaries wholly-owned by Principal Holding Company: a. Principal Generation Plant, LLC a Delaware limited liability company that sells excess power. b. Principal Bank (a Federal Corporation) a Federally chartered direct delivery savings bank. c. Patrician Associates, Inc. (a California Corporation) a corporation that engages in real estate joint venture transactions with developers. d. Petula Associates, Ltd. (an Iowa Corporation) a corporation that engages in real estate joint venture transactions with developers. e. Principal Development Associates, Inc. (a California Corporation) a corporation that engages in real estate joint venture transactions with developers. 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) general business corporation which engages in commercial invsetment transactions. 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 coropration engaged in providing managed care expertise and administrative services to provider organizations involved in risk-assuming contracts for helth care ervices. n. Preferred Product Network, Inc. (a Delaware corporation) an insurance broker which markets selected products manufactured outside the Principal Financial Group. 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 offering asset allocation services for pension plans.. r. Delaware Charter Guarantee & Trust Company, d/b/a Trustar Retirement Services (a Delaware Corporation) a corporation that acts as a trustee through which individuals may direct the ivnestments of their IRA, HR-10 and 401(k) plan accounts, and also provides such prototype plans and record keeping services. 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. Subsidiary wholly-owned by Executive Benefit Services, Inc.: a. Executive Broker Dealers Services, LLC (a North Carolina Corporation) A limited liability company anticipated to be a registered broker-dealer. 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) currently inactive. b. Principal Mortgage Reinsurance Company (a Vermont corporation) a mortgage reinsurance company. c. Principal Residential Mortgage Funding, LLC (Delaware a limited liability company which purchases and holds residential mortgage loans. d. Principal Residential Mortgage Servicing, LLC (Delaware) a limited liability company which acquires mortgage servicing rights. e. Principal Residential Mortgage Capital Resources, LLC (Delaware) a limited liability company formed in 2000 for the limited purposes of holding, financing and selling mortgage loans acquired on a servicing released basis from Presidential Residential Mortgage, Inc. pending sales of the loans to third parties, primarily Freddie Mac, Fannie Mae and Ginnie Mae. 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 Rhode Island corporation) a corporation which serves as a corporate trustee for retirement trusts. Subsidiaries wholly-owned by Principal Global Investors (Australia) Service Company Pty Ltd.: a. Principal Global Investors (Australia) Limited a company established to hold the responsible entity license regarding non-property business. b. Principal Real Estate Investors (Australia) Limited a company established to hold the responsible entity license regarding property business. Subsidiary wholly-owned by Principal Financial Group Australia Pty Ltd. a. Principal Investments (Australia) Limited a Delaware holding company. Subsidiaries owned by Principal Compania de Seguros de Vida Chile S.A. (Chile): a. Principal Tanner Administradora General De Fondos Mutuos S.A. (Chile) a corporation organized for the administration of various funds. b. Principal Creditos Hipotecarios, S.A. (Chile) a residential mortgage company. Subsidiary organized and wholly-owned by Principal Hotels Holdings Pty Ltd.: a. Principal Hotels Australia Pty Ltd. an Australia holding company. Subsidiary wholly-owned by Principal Investments (Australia) Limited: a. Principal Australia (Holdings) Pty Limited (Australia) a commercial and investment banking and asset management company. Subsidiary organized and wholly-owned by Principal Hotels Australia Pty Ltd.: a. Principal Hotel Limited an Australia corporation, which is the hotel operating/managing company of the BT Hotel Group. Item 27. Number of Contractowners - As of: March 31, 2004 (1) (2) (3) Number of Plan Number of Title of Class Participants Contractowners -------------- -------------- -------------- BFA Variable Annuity Contracts 44 6 Pension Builder Contracts 315 188 Personal Variable Contracts 297 13 Premier Variable Contracts 1,074 48 Flexible Variable Annuity Contract 55,325 55,325 Freedom Variable Annuity Contract 1,416 1,416 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 Equity Income 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 Securities Fund, Inc., Principal SmallCap Fund, Inc., Principal Tax-Exempt Bond 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 Senior Vice President The Principal Financial Group Des Moines, IA 50392 Jill R. Brown Vice President and Chief Financial Officer The Principal Financial Group Des Moines, IA 50392 P. Scott Cawley Product Marketing Officer The Principal Financial Group Des Moines, IA 50392 Ralph C. Eucher Director , President and Chief Executive The Principal Officer Financial Group Des Moines, IA 50392 Arthur S. Filean Senior Vice President The Principal Financial Group Des Moines, IA 50392 Michael P. Finnegan Senior Vice President - Investment Services 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, Senior Vice President The Principal and General Counsel Financial Group Des Moines, IA 50392 Minoo Spellerberg Vice President and The Principal Compliance Officer Financial Group Des Moines, IA 50392 Jamie K. Stenger Assistant Director - Compliance The Principal Financial Group 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 $14,897,344 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 30th day of December, 2004. 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 12/30/2004 - -------------------- Chief Executive Officer J. B. Griswell /s/ G. B. Elming Vice President and 12/30/2004 - -------------------- Controller (Principal G. B. Elming Accounting Officer) /s/ M. H. Gersie Executive Vice President 12/30/2004 - -------------------- and Chief Financial Officer M. H. Gersie (Principal Financial Officer) (B. J. Bernard)* Director 12/30/2004 - -------------------- B. J. Bernard (J. Carter-Miller)* Director 12/30/2004 - -------------------- J. Carter-Miller (G. E. Costley)* Director 12/30/2004 - -------------------- G. E. Costley (D. J. Drury)* Director 12/30/2004 - -------------------- D. J. Drury (C. D. Gelatt, Jr.)* Director 12/30/2004 - -------------------- C. D. Gelatt, Jr. (S. L. Helton)* Director 12/30/2004 - -------------------- S. L. Helton (C. S. Johnson)* Director 12/30/2004 - -------------------- C. S. Johnson (W. T. Kerr)* Director 12/30/2004 - -------------------- W. T. Kerr (R. L. Keyser)* Director 12/30/2004 - -------------------- R. L. Keyser (V. H. Loewenstein)* Director 12/30/2004 - -------------------- V. H. Loewenstein (A. K. Mathrani)* Director 12/30/2004 - -------------------- A. K. Mathrani (F. F. Pena)* Director 12/30/2004 - -------------------- F. F. Pena (E. E. Tallett)* Director 12/30/2004 - -------------------- 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 EX-99.3 3 dist-agr.txt DISTRIBUTION AGREEMENT DISTRIBUTION AGREEMENT THIS DISTRIBUTION AGREEMENT is made this 15th day of September, 2004, between Principal Life Insurance Company ("Principal"), a life insurance company organized under the laws of the State of Iowa, and Princor Financial Services Corporation ("Princor"), an affiliate of Principal organized under the laws of the State of Iowa. WITNESSETH WHEREAS, Principal has established Separate Account B ("Separate Account") and registered such Separate Account as an investment company under the Investment Company Act of 1940 to fund variable annuity contracts issued by Principal Life Insurance Company; WHEREAS, Princor is registered with the Securities and Exchange Commission as a broker-dealer under the Securities Exchange Act of 1934 and is a member of the National Association of Securities Dealers, Inc.; and WHEREAS, Principal desires to issue certain Principal Investment Plus Variable AnnuitySM contracts ("Contracts") with respect to the Separate Account which will be sold and distributed by and through Princor, and Princor is willing to sell and distribute such Contracts under the terms and conditions stated herein; NOW, THEREFORE, the parties agree as follows: 1. Principal hereby appoints Princor as the principal underwriter of the Contracts issued with respect to the Separate Account, and Princor agrees to use its best efforts to sell and distribute the Contracts through its registered representatives or through other broker-dealers registered under the Securities and Exchange Act of 1934 whose registered representatives are authorized by applicable law to sell variable annuity contracts. 2. All payments and other monies payable upon the sale, distribution, renewal or other transaction involving the Contracts shall be the property of and be paid or remitted directly to Principal, who shall retain all such payments and monies for its own account except to the extent such payments and monies are allocated to the Separate Account. Princor shall not be deemed to have any interest in such payments. 3. For the administrative convenience of the parties, Principal shall (a) pay to the registered representatives of Princor the commissions earned on the sale, distribution, renewal or other transaction involving the Contracts as determined in the attached Commission Schedule, and provide Princor with accurate records of all such commissions paid on its behalf; and (b) pay to broker-dealers with whom Princor has entered into a Selling Agreement for the distribution of the Contracts any applicable dealer allowance or other compensation as provided in such Selling Agreement, and provide Princor with accurate records of all such payments paid on its behalf. 4. Principal shall pay to Princor an amount equal to the expenses incurred by Princor in the performance of this Agreement. Princor shall provide a statement of expenses to Principal at least semi-annually in a form and manner agreed to by the parties. 5. Princor shall be solely responsible for the supervision and control of the conduct and activities of its registered representatives with regard to the sale and distribution of the Contracts. 6. Principal shall assume the responsibility, including the costs thereof, for all administrative and legal functions pertaining to the Contracts not otherwise specifically assumed by Princor in this agreement, including but not limited to the following: the preparation, printing and filing of prospectuses; the development, filing, and compliance with federal and state securities laws and regulations of the Separate Account; contract development; SEC registration; filing and compliance with state insurance laws and regulations; underwriting; contract issue and contractowner service functions; developing sales and promotional material; and training agents. 7. Principal will prepare and maintain all the books and records in connection with the offer and sales of variable annuity contracts which are required to be maintained and preserved in accordance with applicable securities law; and all such books and records are to be maintained and held by Principal on behalf of and as agent for the broker-dealer whose property they are and shall remain; and all such books and records will be made available for inspection by the Securities and Exchange Commission at all times. 8. Principal shall send to each contractowner or such other person as appropriate a confirmation as required by law or regulation of any transaction made with respect to the Contracts which shall reflect the true facts of the transaction and show that confirmation of the transaction is being sent on behalf of the broker-dealer acting in the capacity of agent for the insurance company. 9. Princor and Principal may enter into agreements with other broker-dealers duly licensed under applicable federal and state laws and with their affiliated general agencies, if any, for the sale and distribution of the Contracts. The commission payable to registered representatives on the sale of Contracts thereunder may not exceed the amount shown on the attached Commission Schedule. 10. This agreement may be terminated by either party upon 60 days prior written notice. Princor shall promptly notify the Securities and Exchange Commission of any such termination. IN WITNESS WHEREOF, the parties hereto have caused this agreement to be executed on the day and year written above. PRINCIPAL LIFE INSURANCE COMPANY By: /s/Melissa Crew --------------------------------------------------------- Melissa Crew PRINCOR FINANCIAL SERVICES CORPORATION By: /s/A. S. Filean --------------------------------------------------------- A. S. Filean, Senior Vice President VA2004 Commission Schedules Standard First-Year Commission Schedule
Commissions Trails Band 1 Band 2 Under 76 76 & Over Over $2M Yrs 2-7 Yrs 8+ -------- --------- -------- - -------- - ------- 3.5% Schedule - Standard Option A 3.500 2.500 2.500 - 0.200 Option B 3.000 2.000 2.000 0.100 0.300 Option C 2.000 1.000 1.000 0.300 0.500 6.0% Schedule Option A 6.000 4.500 4.500 - - Option B 5.500 4.000 4.000 0.100 0.100 Option C 4.500 3.000 3.000 0.300 0.300 Option D - No Trail on Over Age 76 0.500 - 0.375 1.000 1.000 6.25% Schedule - Optional Option A 6.250 4.650 4.650 - - Option B 5.750 4.150 4.150 0.100 0.100 Option C 4.750 3.150 3.150 0.300 0.300 Option D - No Trail on Over Age 76 0.750 - 0.500 1.000 1.000 6.5% Schedule - Optional (Princor) Option A 6.500 4.875 4.875 - - Option B 6.000 4.375 4.375 0.100 0.100 Option C 5.000 3.375 3.375 0.300 0.300 Option D - No Trail on Over Age 76 1.000 - 0.750 1.000 1.000 ICCs Mgmt Comp Band 1 Band 2 Band 1 Band 2 Under 76 76 & Over Over $2M Under 76 76 & Over Over $2M -------- --------- -------- ---------- ----------- - --------- 3.5% Schedule - Standard Option A 1.750 1.250 1.250 - - - Option B 1.500 1.000 1.000 - - - Option C 1.000 0.500 0.500 - - - 6.0% Schedule Option A - - - - - - Option B - - - - - - Option C - - - - - - Option D - No Trail on Over Age 76 - - - - - - 6.25% Schedule - Optional Option A - - - - - - Option B - - - - - - Option C - - - - - - Option D - No Trail on Over Age 76 - - - - - - 6.5% Schedule - Optional (Princor) Option A - - - - - - Option B - - - - - - Option C - - - - - - Option D - No Trail on Over Age 76 - - - - - - Total Compensation Band 1 Band 2 Under 76 76 & Over Over $2M ---------- ----------- ---------- 3.5% Schedule - Standard Option A 3.500 2.500 2.500 Option B 3.000 2.000 2.000 Option C 2.000 1.000 1.000 6.0% Schedule Option A 6.000 4.500 4.500 Option B 5.500 4.000 4.000 Option C 4.500 3.000 3.000 Option D - No Trail on Over Age 76 0.500 - 0.375 6.25% Schedule - Optional Option A 6.250 4.650 4.650 Option B 5.750 4.150 4.150 Option C 4.750 3.150 3.150 Option D - No Trail on Over Age 76 0.750 - 0.500 6.5% Schedule - Optional (Princor) Option A 6.500 4.875 4.875 Option B 6.000 4.375 4.375 Option C 5.000 3.375 3.375 Option D - No Trail on Over Age 76 1.000 - 0.750
.. In the State of Washington, additional deposits on or after the later of policy anniversary age 70 and 10 years after issue are payable at 1% for Option A, .05% for Option B, and 0% for Option C. In the State of New jersey, additional deposits on or after the alter of policy anniversary age 64 and 4 years after issue are payable at 1% for Option A, .05% for Option B, and 0% for Option C. In the state of Massachusetts, no commissions are paid on additional deposits after the 11th contract year. Trail commissions are not affected. .. For Options B and C, one fourth of the annual trail commission is multiplied by the total VA account value on the last day of the contract quarter and paid quarterly beginning at the end of the fifth contract quarter through the end of the 28th contract quarter. Only available on new sales. The trail commission is paid to the current active servicing agent. .. For options A, B and C, one fourth of the annual trail commission is multiplied by the total VA account value on the last day of the contract quarter and paid quarterly beginning at the end of the 20th contract quarter. The trail commission is paid to the current active servicing agent. EX-99.9 COUNSEL 4 shaff-ltr.txt OPINION OF COUNSEL Principal Financial Principal Life Group Insurance Company August 6, 2004 Board of Directors Principal Life Insurance Company 711 High Street Des Moines, IA 50392 RE: Principal Life Insurance Company Separate Account B - Variable Annuity Contracts Dear Board of Directors: The Separate Account B was established by the Board of Directors of Principal Life Insurance Company as a separate account for assets applicable to variable annuity contracts. The Board established the separate account pursuant to then existing provisions of the Code of Iowa pertaining to the establishment of separate accounts by Iowa-domiciled life insurance companies. Principal Life Insurance Company is filing a Registration Statement on Form N-4 with the Securities and Exchange Commission under the Securities Act of 1933 with respect to the new Principal Investment Plus Variable Annuity Contract (the "Contract"). It is my opinion that: 1. The Separate Account B is a separate account of the Company duly created and validly existing pursuant to Iowa law. 2. The Contract, when issued in accordance with the Prospectus contained or referred to in the Registration Statement and upon compliance with applicable local law, will be the legal and binding obligation of the Company enforceable in accordance with its terms. 3. All income and expenses and all gains and losses, whether or not realized, of the Separate Account B, shall be credited to or charged against the Separate Account B, without regard to income and expenses or gains and losses of the Company. 4. The assets of Contracts participating in a division of the Separate Account B shall not be charged with any liabilities arising from any other business conducted by the Company. In arriving at the foregoing opinion, I or attorneys under my supervision have made such examination of law and examined such records and other documents as in my judgment are necessary or appropriate. I consent to the filing of this opinion as an exhibit to the Registration Statement for the Contracts and to the use of my name under the caption "Legal Opinions" in the prospectus contained in the Registration Statement. Very truly yours /s/Karen E. Shaff Karen E. Shaff Executive Vice President and General Counsel 711 High Street, Des Moines, Iowa 50392-0001 (515) 247-5111 EX-99.10 AUDITORS 5 ey-consent.txt E&Y AUDITORS CONSENT Consent of Independent Registered Public Accounting Firm We consent to the reference to our firm under the caption "Independent Registered Public Accounting Firm" in the Prospectus and Statement of Additional Information and to the use of our reports (1) dated February 20, 2004 with respect to the financial statements of Principal Life Insurance Company Separate Account B and (2) dated January 30, 2004 with respect to the consolidated financial statements and schedules of Principal Life Insurance Company in Post-Effective Amendment No. 1 to the Registration Statement (Form N-4 No. 333-116220) and related Statement of Additional Information of the Principal Life Insurance Company Separate Account B Principal Investment Plus Variable Annuity dated December 28, 2004. /s/ Ernst & Young LLP Des Moines, Iowa December 28, 2004 EX-99.11 AUDITORS 6 vaplic-finsched.txt PLIC FINANICAL SCHEDULES Report of Independent Auditors on Schedules The Board of Directors and Stockholder Principal Life Insurance Company We have audited the consolidated financial statements of Principal Life Insurance Company (the Company) as of December 31, 2003 and 2002, and for each of the three years in the period ended December 31, 2003, and have issued our report thereon dated January 30, 2004 (included elsewhere in this Form N-4). Our audits included the financial statement schedules listed in Item 24 of the Registration Statement of this Form N-4. These schedules are the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, the financial statement schedules referred to above, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein. Des Moines, Iowa January 30, 2004 Principal Life Insurance Company Schedule I -- Summary of Investments Other than Investments in Related Parties As of December 31, 2003
Amount at Which Shown in the Statement of Type of investment Cost Value Financial Position - -------------------------------------------------------------------------- ------------------------ ------------------------------ (in millions) Fixed maturities, available-for-sale: U.S. Treasury securities and obligations of U.S. Government corporations and agencies $ 589.7 $ 601.2 $ 601.2 States, municipalities and political subdivisions 497.7 536.0 536.0 Foreign governments 357.4 421.5 421.5 Public utilities 2,861.5 3,069.3 3,069.3 Convertibles and bonds with warrants attached - - - Redeemable preferred 329.4 333.7 333.7 All other corporate bonds 22,655.9 24,275.4 24,275.4 Mortgage-backed and other asset-backed securities 6,406.4 6,726.9 6,726.9 ---------------- ------------------------ ---------------------------- Total fixed maturities, available for sale 33,698.0 35,964.0 35,964.0 ---------------- ------------------------ ---------------------------- Fixed maturities, trading 94.9 102.9 102.9 Equity securities, available-for-sale Common stocks: Banks, trust and insurance companies 6.2 7.1 7.1 Public utilities - - - Industrial, miscellaneous and all other 45.1 48.6 48.6 Non-redeemable preferred stock 602.6 613.5 613.5 ---------------- ------------------------ ---------------------------- Total equity securities, available-for-sale 653.9 669.2 669.2 Mortgage loans (1) 13,228.1 XXXX 13,175.1 Real estate, net: Real estate acquired in satisfaction of debt (2) 52.2 XXXX 49.8 Other real estate (2) 1,155.6 XXXX 1,148.1 Policy loans 804.1 XXXX 804.1 Other investments (3) 1,243.1 XXXX 1,242.9 ---------------- ---------------------------- Total investments $ 50,929.9 XXXX $ 53,156.1 ================ ============================
(1) The amount shown in the Statement of Financial Position for mortgage loans differs from cost as 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 differences. (2) The amounts shown in the Statement of Financial Position for real estate differ from cost due to properties which were determined to be impaired. The cost bases of these 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. (3) The amount shown in the Statement of Financial Position for other investments differs from cost due to accumulated earnings from minority interests in unconsolidated entities and properties owned jointly with venture partners and operated by the partners. Other investments also includes derivatives and certain seed money investments, which are reported at fair value. Principal Life Insurance Company Schedule III - Supplementary Insurance Information As of December 31, 2003, 2002 and 2001 and for each of the years then ended
Deferred Future Contractholder Policy Policy and other Acquisition Benefits policyholder Costs and claims funds ------------------------ ------------------------- ------------------------- ------------------------ ------------------------- ------------------------- (in millions) 2003: U.S. Asset Management and Accumulation 615.4 7,146.4 27,502.9 Life and Health Insurance 904.2 6,876.1 2,243.7 Mortgage Banking - - - Corporate and Other - 2.9 (149.8) ------------------------ ------------------------- ------------------------- ------------------------ ------------------------- ------------------------- Total 1,519.6 14,025.4 29,596.8 ======================== ========================= ========================= ======================== ========================= ========================= 2002: U.S. Asset Management and Accumulation 501.7 6,956.3 24,985.6 Life and Health Insurance 872.7 6,675.6 2,024.2 Mortgage Banking - - - Corporate and Other - 3.0 (77.0) ------------------------ ------------------------- ------------------------- ------------------------ ------------------------- ------------------------- Total 1,374.4 13,634.9 26,932.8 ======================== ========================= ========================= ======================== ========================= ========================= 2001: U.S. Asset Management and Accumulation 411.6 6,463.2 23,421.7 Life and Health Insurance 910.7 6,544.4 1,880.2 Mortgage Banking - - - Corporate and Other - 4.1 (60.7) Total - - - ------------------------ ------------------------- ------------------------- ------------------------ ------------------------- ------------------------- 1,322.3 13,011.7 25,241.2 ======================== ========================= ========================= ======================== ========================= =========================
Benefits, Net claims and Premium investment settlement revenue income expenses ------------------------ ---------------------- ------------------------ ------------------------ ---------------------- ------------------------ 2003: U.S. Asset Management and Accumulation 420.0 2,396.2 2,139.7 Life and Health Insurance 3,019.0 656.5 2,457.7 Mortgage Banking - 102.3 - Corporate and Other - 47.1 (5.2) ------------------------ ---------------------- ------------------------ ------------------------ ---------------------- ------------------------ Total 3,439.0 3,202.1 4,592.2 ======================== ====================== ======================== ======================== ====================== ======================== 2002: U.S. Asset Management and Accumulation 746.5 2,352.1 2,530.3 Life and Health Insurance 2,973.4 660.2 2,433.4 Mortgage Banking - 20.8 - Corporate and Other 0.1 36.7 (4.8) ------------------------ ---------------------- ------------------------ ------------------------ ---------------------- ------------------------ Total 3,720.0 3,069.8 4,958.9 ======================== ====================== ======================== ======================== ====================== ======================== 2001: U.S. Asset Management and Accumulation 766.3 2,399.7 2,583.1 Life and Health Insurance 3,011.1 678.6 2,491.0 Mortgage Banking - (11.9) - Corporate and Other 18.3 145.0 18.3 Total - - - ------------------------ ---------------------- ------------------------ ------------------------ ---------------------- ------------------------ 3,795.7 3,211.4 5,092.4 ======================== ====================== ======================== ======================== ====================== ========================
Amortization of Deferred Policy Other Acquisition operating Costs expenses ---------------------- ----------------------- ---------------------- ----------------------- 2003: U.S. Asset Management and Accumulation 82.5 740.9 Life and Health Insurance 61.5 826.5 Mortgage Banking - 1,353.5 Corporate and Other - (17.1) ---------------------- ----------------------- ---------------------- ----------------------- Total 144.0 2,903.8 ====================== ======================= ====================== ======================= 2002: U.S. Asset Management and Accumulation 57.1 611.7 Life and Health Insurance 84.0 750.4 Mortgage Banking - 908.2 Corporate and Other - 2.4 ---------------------- ----------------------- ---------------------- ----------------------- Total 141.1 2,272.7 ====================== ======================= ====================== ======================= 2001: U.S. Asset Management and Accumulation 64.9 619.9 Life and Health Insurance 91.9 740.7 Mortgage Banking - 552.3 Corporate and Other 0.8 69.9 Total - - ---------------------- ----------------------- ---------------------- ----------------------- 157.6 1,982.8 ====================== ======================= ====================== =======================
Principal Life Insurance Company Schedule IV - Reinsurance As of December 31, 2003, 2002 and 2001 and for each of the years then ended
Percentage Ceded to Assumed of Amount Gross Other from Other Assumed to Amount Companies Companies Net Amount Net ---------------------- -------------------- ---------------- ---------------- -------------- ---------------------- -------------------- ---------------- ---------------- -------------- (in millions) 2003: Life insurance inforce 163,584.2 34,567.3 2,317.0 131,333.9 1.8% ====================== ==================== ================ ================ ====================== ==================== ================ ================ Premiums: Life insurance 1,249.3 63.5 118.7 1,304.5 9.1% Accident and health insurance 2,359.8 225.3 - 2,134.5 0.0% ---------------------- -------------------- ---------------- ---------------- ---------------------- -------------------- ---------------- ---------------- Total 3,609.1 288.8 118.7 3,439.0 3.5% ====================== ==================== ================ ================ ====================== ==================== ================ ================ 2002: Life insurance inforce 159,892.0 30,942.4 1,849.0 130,798.6 1.4% ====================== ==================== ================ ================ ====================== ==================== ================ ================ Premiums: Life insurance 1,587.6 55.8 130.6 1,662.4 7.9% Accident and health insurance 2,328.7 271.1 - 2,057.6 0.0% ---------------------- -------------------- ---------------- ---------------- ---------------------- -------------------- ---------------- ---------------- Total 3,916.3 326.9 130.6 3,720.0 3.5% ====================== ==================== ================ ================ ====================== ==================== ================ ================ 2001: Life insurance inforce 154,964.9 25,813.0 1,391.9 130,543.8 1.1% ====================== ==================== ================ ================ ====================== ==================== ================ ================ Premiums: Life insurance 1,756.1 48.9 56.4 1,763.6 3.2% Accident and health insurance 2,243.3 211.2 - 2,032.1 0.0% ---------------------- -------------------- ---------------- ---------------- ---------------------- -------------------- ---------------- ---------------- Total 3,999.4 260.1 56.4 3,795.7 1.5% ====================== ==================== ================ ================ ====================== ==================== ================ ================
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