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SUPPLEMENT DATED MAY 1, 1998 TO PROSPECTUS DATED MAY 1, 1998 FOR
PACIFIC INNOVATIONS INDIVIDUAL FLEXIBLE PREMIUM
DEFERRED VARIABLE ANNUITY CONTRACT (THE "CONTRACT")
Purchase Payments under your above referenced Contract may be allocated at your
discretion to one or more Investment Options, including the Variable Investment
Options, (the "Subaccounts") that comprise Separate Account B of Pacific Life
Insurance Company. The YOUR INVESTMENT OPTIONS section and other sections of the
Prospectus indicate that the Separate Account currently consists of eight
Subaccounts, each of which invests in a designated Fund of Pacific Innovations
Trust (the "Trust").
With respect to each Contract, the Subaccount that will invest in the Global
Value Fund of the Trust is not yet available to Contract Owners. We will notify
you when the Subaccount that will invest in the Global Value Fund becomes
available in your state of residence. As further described in the Prospectus,
seven Subaccounts are currently available to you and these Subaccounts invest in
the following Funds of the Trust: Money Market Fund, Managed Bond Fund, Capital
Income Fund, Blue Chip Fund, Mid-Cap Equity Fund, Aggressive Growth Fund, and
International Fund.
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PACIFIC INNOVATIONS
AN INDIVIDUAL FLEXIBLE PREMIUM DEFERRED VARIABLE ANNUITY CONTRACT
ISSUED BY PACIFIC LIFE INSURANCE COMPANY
MAILING ADDRESS: P.O. BOX 7187
PASADENA, CALIFORNIA 91109-7187
1-800-722-5558
This Prospectus describes Pacific Innovations (the "Contract") offered by
Pacific Life Insurance Company ("Pacific Life", formerly known as Pacific Mutual
Life Insurance Company). The Contracts provide purchasers with flexibility in
long-term financial planning, including planning for retirement, and is designed
to meet the insurance needs or financial objectives of the purchaser. Contracts
are available both to individuals and under certain tax-qualified retirement
plans. Payout options under the Contracts include variable annuities funded
through Pacific Life's Separate Account B (the "Separate Account") and fixed
annuities funded through Pacific Life's General Account.
Eight Variable Investment Options are currently available; each is a
subaccount of the Separate Account, and provides variable returns by investing
in shares of a corresponding Fund of Pacific Innovations Trust, a Delaware
Business Trust ("Pacific Innovations Trust"):
<TABLE>
<S> <C>
Money Market Fund Mid-Cap Equity Fund
Managed Bond Fund Aggressive Growth Fund
Capital Income Fund International Fund
Blue Chip Fund Global Value Fund
</TABLE>
A Fixed Option is also available; it provides a fixed rate of return and is
funded through Pacific Life's General Account.
THIS PROSPECTUS PROVIDES INFORMATION THAT YOU SHOULD KNOW BEFORE PURCHASING
A CONTRACT. IN ADDITION, THIS PROSPECTUS IS ACCOMPANIED BY A CURRENT PROSPECTUS
FOR THE PACIFIC INNOVATIONS TRUST. YOU SHOULD READ BOTH OF THESE PROSPECTUSES
CAREFULLY AND RETAIN THEM FOR YOUR FUTURE REFERENCE.
Additional information about the Contract and the Separate Account has been
filed with the Securities and Exchange Commission in a Statement of Additional
Information ("SAI") dated May 1, 1998. You may obtain a free copy of the SAI by
writing or calling Pacific Life. The information contained in the SAI is
incorporated by reference into this Prospectus. The table of contents for the
SAI appears on page 41 of this Prospectus. The SEC maintains a Web site
(http://www.sec.gov) that contains the SAI material incorporated by reference
and other information regarding registrants that file electronically with the
SEC.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY
OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------------
THE CONTRACT IS NOT A DEPOSIT OR OBLIGATION OF, OR GUARANTEED OR ENDORSED BY,
ANY BANK. IT IS NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER GOVERNMENT AGENCY.
INVESTMENT IN A CONTRACT INVOLVES RISK, INCLUDING POSSIBLE LOSS OF PRINCIPAL.
------------------------
THE CONTRACT IS NOT AVAILABLE IN ALL STATES AND THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER IN ANY JURISDICTION IN WHICH SUCH AN OFFER MAY NOT BE MADE
LAWFULLY. NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY
REPRESENTATIONS IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS OTHER THAN
THOSE CONTAINED IN THIS PROSPECTUS AND THE RELATED SAI (OR ANY SALES LITERATURE
APPROVED BY PACIFIC LIFE), AND ANY SUCH UNAUTHORIZED INFORMATION OR
REPRESENTATION IS, IF GIVEN OR MADE, NOT TO BE RELIED UPON.
DATED: MAY 1, 1998
<PAGE> 3
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
SPECIAL DEFINITIONS......................................... 4
SUMMARY..................................................... 7
FEE TABLE................................................... 8
FINANCIAL HIGHLIGHTS........................................ 10
SELECTED ACCUMULATION UNIT INFORMATION...................... 10
WHY BUY A CONTRACT.......................................... 11
YOUR INVESTMENT OPTIONS..................................... 11
Your Variable Investment Options....................... 11
Your Fixed Option...................................... 12
PURCHASING YOUR CONTRACT.................................... 13
How to Apply for Your Contract......................... 13
Making Your Purchase Payments.......................... 13
HOW YOUR PAYMENTS ARE ALLOCATED............................. 13
Choosing Your Investment Options....................... 13
Investing in Variable Investment Options............... 14
When Your Investment is Effective...................... 14
Transfers.............................................. 14
CHARGES, FEES AND DEDUCTIONS................................ 15
Withdrawal Charge...................................... 15
Premium Taxes.......................................... 17
Annual Fee............................................. 17
Waivers and Reduced Charges............................ 17
Mortality and Expense Risk Charge...................... 18
Administrative Fee..................................... 18
Expenses of the Trust.................................. 18
RETIREMENT BENEFITS AND OTHER PAYOUTS....................... 18
Selecting Your Annuitant............................... 18
Annuitization.......................................... 19
Choosing Your Annuity Date ("Annuity Start Date")...... 19
Default Annuity Date and Options....................... 20
Choosing Your Annuity Option........................... 20
Your Annuity Payments.................................. 21
Death Benefits......................................... 22
WITHDRAWALS................................................. 24
Optional Withdrawals................................... 24
Tax Consequences of Withdrawals........................ 25
Right to Cancel........................................ 25
PACIFIC LIFE AND THE SEPARATE ACCOUNT....................... 26
Pacific Life........................................... 26
Separate Account B..................................... 27
</TABLE>
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<TABLE>
<CAPTION>
PAGE
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<S> <C>
FEDERAL TAX STATUS.......................................... 27
Taxes Payable by Contract Owners: General Rules........ 28
Qualified Contracts.................................... 29
Loans.................................................. 30
Withholding............................................ 32
Impact of Federal Income Taxes......................... 33
Taxes on Pacific Life.................................. 33
ADDITIONAL INFORMATION...................................... 33
Performance Information................................ 33
Voting Rights.......................................... 34
Changes to Your Contract............................... 34
Changes to ALL Contracts............................... 35
Inquiries and Submitting Forms and Requests............ 36
Telephone Transactions................................. 36
Timing of Payments and Transactions.................... 37
Confirmations, Statements and Other Reports to Contract
Owners................................................ 37
Replacement of Life Insurance or Annuities............. 37
Sales Commissions...................................... 38
Preparation for the Year 2000.......................... 38
Financial Statements................................... 38
Legal Matters.......................................... 38
THE GENERAL ACCOUNT......................................... 39
General Information.................................... 39
Guarantee Terms........................................ 39
Withdrawals and Transfers.............................. 39
CONTENTS OF THE SAI......................................... 41
APPENDIX A: STATE LAW VARIATIONS............................ 42
</TABLE>
3
<PAGE> 5
SPECIAL DEFINITIONS
In this Prospectus, "we," "our" and "us" refer to Pacific Life Insurance Company
("Pacific Life"); "you" and "your" refer to the Contract Owner.
Account Value--The amount of your Contract Value allocated to a specified
Variable Investment Option or the Fixed Option.
Annual Fee--A $30 fee charged each year on your Contract Anniversary and at the
time of a full withdrawal, if your Net Contract Value is less than $50,000 on
that date.
Annuitant--A person on whose life annuity payments may be determined. An
Annuitant's life may also be used to determine certain increases in death
benefits, and to determine the Annuity Date. A Contract may name a single
("sole") Annuitant or two ("Joint") Annuitants, and may also name a "Contingent"
Annuitant. If you name Joint Annuitants or a Contingent Annuitant, "the
Annuitant" means the sole surviving Annuitant, unless otherwise stated.
Annuity Date ("Annuity Start Date")--The date specified in your Contract, or the
date you later elect, if any, for the start of annuity payments if the Annuitant
(or Joint Annuitants) is (or are) still living and your Contract is in force; or
if earlier, the date that annuity payments actually begin.
Annuity Option--Any one of the income options available for a series of payments
after your Annuity Date.
Beneficiary--A person who may have a right to receive the death benefit payable
upon the death of the Annuitant or a Contract Owner prior to the Annuity Date,
or has a right to receive remaining guaranteed annuity payments, if any, if the
Annuitant dies after the Annuity Date.
Business Day--Any day on which the value of an amount invested in a Variable
Investment Option can be determined, which currently includes each day that the
New York Stock Exchange is open for trading and on which our administrative
offices are open. The New York Stock Exchange is closed on weekends and on the
following holidays: New Year's Day, President's Day, Good Friday, Memorial Day,
July Fourth, Labor Day, Thanksgiving Day and Christmas Day. We may choose to
close on other holidays, a day immediately preceding or following a national
holiday, or in emergency situations. In this Prospectus, "day" or "date" means
Business Day unless otherwise specified. If a transaction is scheduled to occur
on a Business Day, the transaction shall be effected on the basis of Unit Values
determined as of 4:00 P.M. Eastern time on that Business Day. If any transaction
or event called for under a Contract is scheduled to occur on a day that is not
a Business Day, such transaction or event will be deemed to occur on the next
following Business Day unless otherwise specified. Special circumstances such as
leap years and months with fewer than 31 days are discussed in the SAI. Each
Business Day ends at 4:00 p.m. Eastern time.
Code--The Internal Revenue Code of 1986, as amended.
Contingent Annuitant--If designated, a person in your Contract, who will become
your sole surviving Annuitant if your existing sole Annuitant (or both Joint
Annuitants) should die before your Annuity Date.
Contingent Owner--If designated, a person in your Contract, who will succeed to
the rights as a Contract Owner of your Contract if all named Contract Owners
die.
Contract Anniversary--The same date, in each subsequent year, as your Contract
Date.
Contract Date--The date we issue your Contract.
Contract Debt--As of the end of any given Business Day, the principal amount you
have outstanding on any loan under your Contract, plus any accrued and unpaid
interest. Loans are available only on certain Qualified Contracts.
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Contract Owner (also called a "Policyholder")--Generally, a person who purchases
a Contract and makes the Purchase Payments. A Contract Owner has all rights in
the Contract, including the right to make withdrawals, designate and change
beneficiaries, transfer amounts among Investment Options, and designate an
Annuity Option. If your Contract names Joint Owners, both Joint Owners are
Contract Owners and share all such rights.
Contract Value--As of the end of any Business Day, the sum of your Variable
Account Value, Fixed Option Value, and the Loan Account Value.
Contract Year--A year that starts on the Contract Date or on a Contract
Anniversary.
Earnings--As of the end of any Business Day, your Earnings equal your Contract
Value less your aggregate Purchase Payments which are reduced by withdrawals of
prior Purchase Payments.
Fixed Option--If you allocate all or a part of your Purchase Payments or
Contract Value to the Fixed Option, such amounts are held in our General Account
and receive interest at rates declared periodically, but not less than an annual
rate of 3%.
Fixed Option Value--The aggregate amount of your Contract Value allocated to the
Fixed Option.
Fund--A separate portfolio of the Pacific Innovations Trust.
General Account--Our General Account consists of all our assets other than those
assets allocated to Separate Account B or to any of our other separate accounts.
Guaranteed Interest Rate--The interest rate guaranteed at the time of allocation
(or roll over) for the Guarantee Term on amounts allocated to the Fixed Option.
All Guaranteed Interest Rates are expressed as annual rates, and interest is
accrued daily. The rate will not be less than an annual rate of 3%.
Guarantee Term--The period during which the amount you allocate to the Fixed
Option earns a Guaranteed Interest Rate. This term is currently up to one-year.
Investment Option--A Variable Account or the Fixed Option offered under the
Contract.
Joint Annuitant--If your Contract is a Non-Qualified Contract, you may name two
Annuitants, called "Joint Annuitants," in your application for your Contract.
Special restrictions apply for Qualified Contracts.
Loan Account Value--The amount transferred from your Investment Options to the
General Account to secure a Contract Loan, increased by interest earned and
decreased by any principal repayments and/or withdrawals or transfers of
interest earned.
Net Contract Value--Your Contract Value less Contract Debt.
Non-Qualified Contract--A Contract other than a Qualified Contract.
Primary Annuitant--The individual that is named in your Contract, the events in
the life of whom are of primary importance in affecting the timing or amount of
the payout under the Contract.
Purchase Payment--An amount paid to us by or on behalf of a Contract Owner, as
consideration for the benefits provided under the Contract.
Qualified Contract--A Contract that qualifies under the Code as an individual
retirement annuity ("IRA"), or a Contract purchased by a Qualified Plan,
qualifying for special tax treatment under the Code.
Qualified Plan--A retirement plan that receives favorable tax treatment under
Section 401, 408, 408A, 403 or 457 of the Code.
SEC--Securities and Exchange Commission.
Separate Account B (the "Separate Account")--A separate account of Pacific Life
registered as a unit investment trust under the Investment Company Act of 1940.
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Subaccount (also called a "Variable Account")--An investment division of the
Separate Account. Each Subaccount invests its assets in shares of a
corresponding Fund.
Subaccount Annuity Unit--Subaccount Annuity Units (or "Annuity Units") are used
to measure variation in variable annuity payments. To the extent you elect to
convert all or some of your Contract Value into variable annuity payments, the
amount of each annuity payment (after the first payment) will vary with the
value and number of Annuity Units in each Subaccount attributed to any variable
annuity payments. At annuitization (after any applicable premium taxes and/or
other taxes are paid), the amount annuitized to a variable annuity determines
the amount of your first variable annuity payment and the number of Annuity
Units credited to your annuity in each Subaccount. The value of Subaccount
Annuity Units, like the value of Subaccount Units, is expected to fluctuate
daily, as described in the definition of "Unit Value."
Subaccount Unit--Before your Annuity Date, each time you allocate an amount to a
Subaccount, your Contract is credited with a number of Subaccount Units in that
Subaccount; these Units are used, for accounting purposes, to measure your
Account Value in that Subaccount. The value of Subaccount Units is expected to
fluctuate daily, as described in the definition of Unit Value.
Trust--Pacific Innovations Trust.
Unit Value--The value of a Subaccount Unit ("Subaccount Unit Value") or
Subaccount Annuity Unit ("Subaccount Annuity Unit Value"). Unit Value of any
Subaccount is subject to change on any Business Day in much the same way that
the value of a mutual fund share changes each day; the fluctuations in value
reflect the investment results, expenses of and charges against the Fund in
which the Subaccount invests its assets, and also reflect charges against the
Separate Account. Changes in Subaccount Annuity Unit Values also reflect an
additional factor that adjusts Subaccount Annuity Unit Values to offset our
Annuity Option Table's implicit assumption of an annual investment return of 5%;
the effect of this assumed investment return is explained in detail in the SAI.
Unit Value of a Subaccount Unit or Subaccount Annuity Unit on any Business Day
is measured as of 4:00 p.m., Eastern time, on that Business Day.
Variable Account Value--The aggregate amount of your Contract Value allocated to
all Subaccounts.
Variable Investment Option--A Subaccount.
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SUMMARY
This brief description is only an overview of the more significant features
of your Contract. More detailed information may be found in subsequent sections
of this Prospectus, in the SAI, and in the Contract itself. Endorsements to your
Contract may contain variations from the standardized information in this
Prospectus. In addition, certain variations due to requirements particular to
the issue state or jurisdiction may apply (see APPENDIX A: STATE LAW VARIATIONS
for variations in Right to Cancel). IF ANY CONTRACT ENDORSEMENTS OR SUPPLEMENTAL
VARIATIONS TO THIS PROSPECTUS CONFLICT WITH OTHER INFORMATION IN THE CONTRACT
FORM OR IN THIS PROSPECTUS, THE ENDORSEMENTS AND SUPPLEMENTS CONTROL YOUR
CONTRACT.
WHAT IS THE CONTRACT? Pacific Innovations (the "Contract") is an annuity
contract designed to be a long-term financial planning device, permitting you to
invest on a tax-deferred basis for retirement or other long-range goals, and to
receive a series of regular payments for life or a period of years. See FEDERAL
TAX STATUS.
HOW DO I PURCHASE A CONTRACT? Your initial purchase payment must be at
least $5,000 to buy a Non-Qualified Contract ($2,000 for a Qualified Contract).
After this initial payment you may make additional payments but you are not
required to do so. Your initial payment may be payable in automatic installments
over your first Contract Year. See PURCHASING YOUR CONTRACT.
WHAT ARE MY INVESTMENT OPTIONS? You select your own Investment Options.
Seven of the Investment Options are Variable Investment Options available
through Separate Account B. Each Variable Investment Option invests in a
corresponding Fund of the Trust. Bank of America National Trust and Savings
Association ("Bank of America") is the manager of the Trust, and Bank of America
and the Trust have retained other Subadvisers for two of the Funds. You bear the
investment risk associated with the Variable Investment Options, and you should
expect your Contract Value and any variable annuity payments allocated to these
Variable Investment Options to fluctuate. See HOW YOUR PAYMENTS ARE ALLOCATED.
Also available is a Fixed Option with a Guarantee Term of up to one year.
This option provides a fixed annual interest rate of at least 3%; the portion of
your Purchase Payments or Contract Value allocated to the Fixed Option is held
in our General Account. You may select as many Investment Options as you wish
until the Annuity Date. After the Annuity Date, the Variable Investment Options
may be selected if you choose variable annuity payments.
CAN I CHANGE MY INVESTMENT OPTIONS? You may transfer amounts from any
Investment Option to another on or prior to your Annuity Date; after your
Annuity Date, up to four exchanges of Subaccount Annuity Units may be made in
any twelve-month period. Certain restrictions apply to the Fixed Option. You may
transfer amounts automatically using dollar cost averaging, automatic portfolio
rebalancing, or an earnings sweep. Transaction fees may be imposed in the future
for excessive transfers. See HOW YOUR PAYMENTS ARE ALLOCATED--TRANSFERS and THE
GENERAL ACCOUNT--WITHDRAWALS AND TRANSFERS in this Prospectus and THE CONTRACTS
AND THE SEPARATE ACCOUNT--SYSTEMATIC TRANSFER PROGRAMS in the SAI.
WHAT CHARGES WILL I PAY? An Administrative Fee equal to an annual factor
expressed as a decimal (where 1.00 is equal to 100%) of 0.0015, and a mortality
and expense risk charge equal to an annual factor of 0.0125, are charged against
assets held in the Variable Investment Options. Amounts invested in the Variable
Investment Options are also subject to the operating expenses paid by the
corresponding Fund of the Trust. Before the Annuity Date, an Annual Fee of $30
is charged each year and at the time of a full withdrawal if your Net Contract
Value is less than $50,000. When you withdraw amounts attributed to Purchase
Payments from your Contract Value, you may be subject to a contingent deferred
sales charge (or "withdrawal charge") of up to 7%, which is determined by the
amount of your withdrawal and the length of time you held the Purchase Payment
considered withdrawn under your Contract. You may also be subject to other fees.
See CHARGES, FEES AND DEDUCTIONS.
CAN I WITHDRAW MY CONTRACT VALUE? Generally, you may withdraw all or part
of your Contract Value at any time on or prior to your Annuity Date. Certain
restrictions are imposed on withdrawals from the Fixed Option and certain
Qualified Contracts. Withdrawals may be subject to fees and charges, taxation
and, in
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certain circumstances, a tax penalty. See WITHDRAWALS, FEDERAL TAX STATUS and
THE GENERAL ACCOUNT--WITHDRAWALS AND TRANSFERS.
CAN I RETURN MY CONTRACT? For a limited time, usually 10 days after you receive
it, you may return your Contract for a refund in accordance with the terms of
its "Right to Cancel" provision. See WITHDRAWALS--RIGHT TO CANCEL.
HOW DO I REACH PACIFIC LIFE? You can reach our service representatives between
6:00 a.m. and 5:00 p.m., Pacific time, at 1-800-722-5558. To send payments,
forms, or requests, see ADDITIONAL INFORMATION--INQUIRIES AND SUBMITTING FORMS
AND REQUESTS.
FEE TABLE
The purpose of this fee table is to assist you in understanding the various
costs and expenses that you will bear directly or indirectly under your
Contract. Expenses shown under "Contract Owner Transaction Expenses" and
"Separate Account B Annual Expenses" are specified under the terms of the
Contract. Expenses shown under "Pacific Innovations Trust Annual Expenses" are
estimated expenses and may vary from year to year. In addition to the charges
and expenses described below, a charge for premium taxes and/or other taxes may
apply. See CHARGES, FEES AND DEDUCTIONS--PREMIUM TAXES in this Prospectus, the
discussion under ORGANIZATION AND MANAGEMENT OF THE TRUST in the Trust's
Prospectus, and MANAGER in the Trust's SAI.
<TABLE>
<S> <C>
CONTRACT OWNER TRANSACTION EXPENSES
Sales Charge Imposed on Purchase Payments................. None
Maximum Withdrawal Charge1................................ 7.0%
(computed as a percentage of Purchase Payments)
Withdrawal Transaction Fee2............................... None
Transfer Fee3............................................. None
Annual Fee4............................................... $30.00
SEPARATE ACCOUNT B ANNUAL EXPENSES
(as a percentage of average daily account value)
Mortality and Expense Risk Charge...................... 1.25%
Administrative Fee..................................... 0.15%
------
Total Separate Account B Annual Expenses............... 1.40%
======
</TABLE>
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1 The withdrawal charge, also called a "contingent deferred sales charge," may
not apply or may be reduced under certain circumstances. See CHARGES, FEES AND
DEDUCTIONS.
2 We reserve the right to impose a transaction fee in the future of up to $15
per withdrawal on partial withdrawals in excess of 15 in any Contract Year.
See WITHDRAWALS--OPTIONAL WITHDRAWALS.
3 We reserve the right to impose a transaction fee in the future of up to $15
per transfer on transfers in excess of 15 in any Contract Year. See HOW YOUR
PAYMENTS ARE ALLOCATED--TRANSFERS.
4 This fee will be charged on each Contract Anniversary prior to your Annuity
Date and at the time of a full withdrawal of any Contract Value, unless your
Net Contract Value is at least $50,000 on that date.
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PACIFIC INNOVATIONS TRUST ANNUAL EXPENSES (AFTER EXPENSE REIMBURSEMENTS)
(AS A PERCENTAGE OF FUND AVERAGE DAILY NET ASSETS)
<TABLE>
<CAPTION>
MANAGEMENT OTHER TOTAL
FEE EXPENSES EXPENSES
---------- -------- --------
<S> <C> <C> <C>
Money Market................................................ 0.22 0.38 0.60
Managed Bond................................................ 0.37 0.38 0.75
Capital Income.............................................. 0.48 0.39 0.87
Blue Chip................................................... 0.53 0.41 0.94
Mid-Cap Equity.............................................. 0.53 0.41 0.94
Aggressive Growth........................................... 0.61 0.42 1.03
International............................................... 0.66 0.58 1.24
Global Value................................................ 0.77 0.52 1.29
</TABLE>
Example: If, at the end of the indicated time period, you withdraw your
entire Variable Account Value or your entire Contract Value, you would pay
the following cumulative expenses on each $1,000 invested, assuming 5%
annual return on assets:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS
------ -------
<S> <C> <C>
Money Market................................................ $84.15 $110.21
Managed Bond................................................ 85.65 114.76
Capital Income.............................................. 86.85 118.38
Blue Chip................................................... 87.56 120.49
Mid-Cap Equity.............................................. 87.56 120.49
Aggressive Growth........................................... 88.46 123.19
International............................................... 90.55 129.47
Global Value................................................ 91.05 130.96
</TABLE>
Example: If, at the end of the indicated time period, you neither withdraw
your entire Variable Account Value nor your entire Contract Value, you
would pay the following cumulative expenses on each $1,000 invested,
assuming 5% annual return on assets:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS
------ -------
<S> <C> <C>
Money Market................................................ $21.15 $65.21
Managed Bond................................................ 22.65 69.76
Capital Income.............................................. 23.85 73.38
Blue Chip................................................... 24.56 75.49
Mid-Cap Equity.............................................. 24.56 75.49
Aggressive Growth........................................... 25.46 78.19
International............................................... 27.55 84.47
Global Value................................................ 28.05 85.96
</TABLE>
Example: If, at the end of the indicated time period, you annuitize your
Contract Value, you would pay the following cumulative expenses on each
$1,000 invested, assuming 5% annual return on assets:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS
------ -------
<S> <C> <C>
Money Market................................................ $84.15 $65.21
Managed Bond................................................ 85.65 69.76
Capital Income.............................................. 86.85 73.38
Blue Chip................................................... 87.56 75.49
Mid-Cap Equity.............................................. 87.56 75.49
Aggressive Growth........................................... 88.46 78.19
International............................................... 90.55 84.47
Global Value................................................ 91.05 85.96
</TABLE>
THE EXAMPLES SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES; ACTUAL EXPENSES INCURRED IN ANY GIVEN YEAR MAY BE MORE OR LESS THAN
THOSE SHOWN IN THE EXAMPLES. The Funds, except for the Global Value Fund, began
operations on March 1, 1997 and their "Other Expenses" are on an annualized
basis. The Global Value Fund had not begun operations as of January 1, 1998 and
its "Other Expenses" are estimated. The Total Expenses reflect the policy,
adopted by Bank of America and by Pacific Life to waive their fees for services
rendered to the Trust and reimburse expenses so that the Total Expenses on an
annual basis (exclusive of interest, taxes, brokerage commissions and other
portfolio transaction expenses, capital
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expenditures, and extraordinary expenses) are no greater than the Total Expenses
shown in the table above for each Fund. Bank of America and Pacific Life intend
to continue this policy until such time as the annualized expenses of a Fund are
less than the Total Expenses shown in the table; however, Bank of America and
Pacific Life may discontinue such fee waivers and expense reimbursements at any
time. See THE BUSINESS OF THE FUNDS in the Trust's Prospectus. Actual Total
Expenses (annualized) before fee waivers and reimbursements for the year ended
December 31, 1997 were: Money Market: 1.47%; Managed Bond: 1.39%; Capital
Income: 1.52%; Blue Chip: 1.53%; Mid-Cap Equity: 1.62%; Aggressive Growth:
1.73%; and International: 3.19%. In the absence of the policy to waive fees and
reimburse expenses, it is estimated that total annual expenses of the Global
Value Fund, as a percentage of average daily net assets, would be 1.34%.
The Annual Fee is reflected in the examples, using an assumed initial
single premium payment of $35,000. No Annual Fee is deducted from annuitized
amounts or if your Net Contract Value is at least $50,000.
FINANCIAL HIGHLIGHTS
The following tables present financial highlights with respect to each
Subaccount of the Separate Account. The information in the tables for the period
ended December 31, 1997 is included in the Separate Account's Financial
Statements that have been audited by Deloitte & Touche LLP, independent
auditors. The tables should be read in conjunction with the Separate Account's
Financial Statements, which are in the Separate Account's Report dated as of
December 31, 1997.
SELECTED ACCUMULATION UNIT* INFORMATION
Selected accumulation unit information as of the period beginning March 1,
1997 and ended December 31, 1997 for the period:
<TABLE>
<CAPTION>
1997
<S> <C>
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ACCUMULATION UNIT VALUE AT BEGINNING PERIOD:
Money Market Subaccount................................... $10.00
Managed Bond Subaccount................................... 10.00
Capital Income Subaccount................................. 10.00
Blue Chip Subaccount...................................... 10.00
Mid-Cap Equity Subaccount................................. 10.00
Aggressive Growth Subaccount.............................. 10.00
International Subaccount.................................. 10.00
- ---------------------------------------------------------------------------------
ACCUMULATION UNIT VALUE AT END OF PERIOD:
Money Market Subaccount................................... $10.30
Managed Bond Subaccount................................... 10.53
Capital Income Subaccount................................. 11.34
Blue Chip Subaccount...................................... 12.18
Mid-Cap Equity Subaccount................................. 12.63
Aggressive Growth Subaccount.............................. 11.63
International Subaccount.................................. 9.94
- ---------------------------------------------------------------------------------
NUMBER OF ACCUMULATION UNITS OUTSTANDING AT END OF PERIOD:
Money Market Subaccount................................... 144,343
Managed Bond Subaccount................................... 610,512
Capital Income Subaccount................................. 1,052,328
Blue Chip Subaccount...................................... 1,127,859
Mid-Cap Equity Subaccount................................. 376,936
Aggressive Growth Subaccount.............................. 303,100
International Subaccount.................................. 401,840
- ---------------------------------------------------------------------------------
</TABLE>
* Accumulation Unit: unit of measure used to calculate the value of a Contract
Owner's interest in a Subaccount during the Accumulation Period.
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<PAGE> 12
WHY BUY A CONTRACT
Your Pacific Innovations Contract (your "Contract") is an annuity contract that
provides you with flexibility in tax-deferred retirement planning or other
long-term financial planning. You may select among seven Variable Investment
Options and one Fixed Option. You may choose to add to your Contract Value at
any time before the Annuity Date, and your additional Purchase Payments may be
in any amount you choose (subject to certain limitations). When you annuitize,
we will send the payee a series of variable and/or fixed payments for life or
for a specified number of years.
If you purchase a Contract with after-tax dollars ("Non-Qualified Contract") or
if your Contract is purchased through a Qualified Plan or IRA ("Qualified
Contract"), your earnings on the Contract are not subject to tax until amounts
are withdrawn or distributed (including annuity payments). See FEDERAL TAX
STATUS.
YOUR INVESTMENT OPTIONS
You may choose among eight different Variable Investment Options and the Fixed
Option.
YOUR VARIABLE INVESTMENT OPTIONS
Separate Account B, a separate account of ours, currently offers you eight
"Variable Investment Options" (also called "Subaccounts"). Each Variable
Investment Option invests in a separate Fund of the Trust. Your Variable
Investment Options are:
-- Money Market Subaccount
-- Managed Bond Subaccount
-- Capital Income Subaccount
-- Blue Chip Subaccount
-- Mid-Cap Equity Subaccount
-- Aggressive Growth Subaccount
-- International Subaccount
-- Global Value Subaccount
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<PAGE> 13
What Are Each of These Options?
For your convenience, the following chart summarizes some basic data about
each Fund. THIS CHART IS ONLY A SUMMARY. FOR MORE COMPLETE INFORMATION ON EACH
FUND, INCLUDING A DISCUSSION OF THE FUND'S INVESTMENT TECHNIQUES AND THE RISKS
ASSOCIATED WITH ITS INVESTMENTS, SEE THE ACCOMPANYING TRUST PROSPECTUS. NO
ASSURANCE CAN BE GIVEN THAT A FUND WILL ACHIEVE ITS INVESTMENT OBJECTIVE. YOU
SHOULD READ THE TRUST PROSPECTUS CAREFULLY BEFORE INVESTING.
<TABLE>
<S> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------
FUND INVESTMENT OBJECTIVE PRIMARY INVESTMENTS MANAGER/SUBADVISER
(UNDER NORMAL
CONDITIONS)
========================================================================================================
Money Market Liquidity and current Short-term debt Bank of America
income consistent with obligations issued or
preservation of capital guaranteed by U.S.
Government, its
agencies, authorities
or instrumentalities
- --------------------------------------------------------------------------------------------------------
Managed Bond Interest income and Investment grade, Scudder Kemper Investments,
capital appreciation intermediate and longer Inc.
term bonds.
- --------------------------------------------------------------------------------------------------------
Capital Income Total investment Convertible bonds and Bank of America
return, comprised of convertible preferred
current income and stocks
capital appreciation
- --------------------------------------------------------------------------------------------------------
Blue Chip Long-term capital Blue chip stocks Bank of America
appreciation
- --------------------------------------------------------------------------------------------------------
Mid-Cap Equity Capital appreciation; Stocks of companies Bank of America
income is a secondary with medium market
consideration capitalizations
- --------------------------------------------------------------------------------------------------------
Aggressive Growth Maximum capital Common stocks and Bank of America
appreciation securities convertible
into common stocks of
companies with smaller
market capitalizations
- --------------------------------------------------------------------------------------------------------
International Long-term capital Foreign equity Wellington Management
growth securities Company, LLP
- --------------------------------------------------------------------------------------------------------
Global Value Long-term growth using Foreign and U.S. common Robertson, Stephens &
a value methodology stocks of issuers with Company Investment
market capitalizations Management, L.P. ("RSIM")
of $1 billion or more
- --------------------------------------------------------------------------------------------------------
</TABLE>
The Trust Manager
Bank of America is the manager of the Trust. Bank of America and the Trust
have retained other Subadvisers, supervised by Bank of America, for three of the
Funds.
YOUR FIXED OPTION
The Fixed Option offers you a guaranteed minimum interest rate on the
amounts you allocate to this Option. Amounts you allocate to the Fixed Option,
and your earnings credited, become part of Pacific Life's General Account. For
more detailed information about these Options, see THE GENERAL ACCOUNT section
in this Prospectus.
12
<PAGE> 14
PURCHASING YOUR CONTRACT
HOW TO APPLY FOR YOUR CONTRACT
To purchase a Contract, fill out an application and submit it along with your
initial Purchase Payment to Pacific Life Insurance Company at P.O. Box 100060,
Pasadena, California 91189-0060. If your application and payment are complete
when received, or once they have become complete, we will issue your Contract
within two Business Days. If some information is missing from your application,
we may delay issuing your Contract while we obtain the missing information;
however, we will not hold your initial Purchase Payment for more than five
Business Days without seeking your permission.
You may also purchase a Contract by exchanging your existing contract. You must
submit all contracts to be exchanged when you submit your application. Call your
representative, or call us at 1-800-722-5558, if you are interested in this
option.
We reserve the right to reject any application or Purchase Payment for any
reason, subject to any applicable nondiscrimination laws and to our own
standards and guidelines. The maximum age of a Contract Owner, including Joint
and Contingent Owners, for which a Contract will be issued is 85. The Contract
Owner's age is calculated as of his or her attained birthday. If the sole
Contract Owner or sole Annuitant named in the application for a Contract dies
prior to our issuance of a Contract, then the application for the Contract
and/or any Contract issued shall be deemed null and void; and any premiums we
receive, including any proceeds received in connection with an exchange or
transfer, will be returned to the applicant/owner or their estate.
MAKING YOUR PURCHASE PAYMENTS
Making Your Initial Payment
Your initial Purchase Payment must be at least $5,000 if you are buying a
Non-Qualified Contract, and at least $2,000 if you are buying a Qualified
Contract. You may pay this entire amount when you submit your application, or
you may choose our pre-authorized checking plan ("PAC"), which allows you to pay
in equal monthly installments over one year (at least $400 per month for
Non-Qualified Contracts, and at least $150 per month for Qualified Contracts).
If you choose PAC, you must make your first installment payment when you submit
your application. Further requirements for PAC are discussed in the PAC form.
You must obtain our consent before making an initial or additional Purchase
Payment that will bring your aggregate Purchase Payments over $1,000,000.
Making Additional Payments
You may choose to invest additional amounts in your Contract at any time. Each
additional Purchase Payment must be at least $100 for Non-Qualified Contracts
and $50 for Qualified Contracts.
Forms of Payment
Your initial and additional Purchase Payments may be sent by personal or bank
check or by wire transfer. You may also make additional PAC Purchase Payments
via electronic funds transfer. All checks must be drawn on U.S. funds. If you
make Purchase Payments by check other than a cashier's check, your payment of
any withdrawal proceeds and any refund during your "Right to Cancel" period may
be delayed until your check has cleared.
HOW YOUR PAYMENTS ARE ALLOCATED
CHOOSING YOUR INVESTMENT OPTIONS
You may allocate your Purchase Payments among the seven Subaccounts and the
Fixed Option. Allocations of your initial Purchase Payment to the Investment
Options you selected will be effective either on
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<PAGE> 15
your Contract Date or on your Right to Cancel Transfer Date. Any additional
Purchase Payments received prior to your Right to Cancel Transfer Date will be
allocated to the Investment Options you selected either on the Business Day we
receive the Payment in proper form or on your Right to Cancel Transfer Date. See
WITHDRAWALS--RIGHT TO CANCEL. Each additional Purchase Payment after the Right
to Cancel Transfer Date will be allocated to the Investment Options according to
your allocation instructions in your application, or most recent instructions,
if any. We reserve the right, in the future, to require that your allocation to
any particular Investment Option meet a certain minimum amount.
INVESTING IN VARIABLE INVESTMENT OPTIONS
Each time you allocate your investment to a Variable Investment Option, your
Contract is credited with a number of "Subaccount Units" in that Subaccount. The
number of Subaccount Units credited is equal to the amount you have allocated to
that Subaccount, divided by the "Unit Value" of one Unit of that Subaccount.
Example: You allocate $600 to the Capital Income Subaccount. At the end of
the Business Day on which your allocation is effective, the value of one
Unit in the Capital Income Subaccount is $15. As a result, 40 Subaccount
Units are credited to your Contract for your $600.
Your Variable Account Value Will Change
After we credit your Contract with Subaccount Units, the value of those Units
will usually fluctuate. This means that, from time to time, your investment
allocated to the Variable Investment Options may be worth more or less than the
original Purchase Payments to which those amounts can be attributed.
Fluctuations in Subaccount Unit Value will not change the number of Units
credited to your Contract.
Subaccount Unit Values will vary in accordance with the investment performance
of the corresponding Fund. For example, the value of Units in the Blue Chip
Subaccount will change to reflect the performance of the Blue Chip Fund
(including that Fund's investment income, its capital gains and losses, and its
expenses). Subaccount Unit Values are also adjusted to reflect the
Administrative Fee and Risk Charge imposed on the Separate Account.
We calculate the value of all Subaccount Units as of 4:00 p.m., Eastern time on
each Business Day. The SAI contains a detailed discussion of these calculations.
WHEN YOUR INVESTMENT IS EFFECTIVE
The day your allocation is effective determines the Unit Value at which
Subaccount Units are attributed to your Contract. In the case of transfers or
withdrawals, the effective day determines the Unit Value at which affected
Subaccount Units are debited and/or credited under your Contract. That Value is
the value of the Subaccount Units next calculated after your transaction is
effective. Your Variable Account Value begins to reflect the investment
performance results of your new allocations on the day after your transaction is
effective.
Your initial Purchase Payment is ordinarily effective on the day we issue your
Contract. Any additional allocation is effective on the day we receive your
Purchase Payment in proper form.
TRANSFERS
Once your payments are allocated to the Investment Options you selected, you may
transfer your Contract Value, less Loan Account Value, from any Investment
Option to any other. Certain restrictions apply to the Fixed Option. See THE
GENERAL ACCOUNT--WITHDRAWALS AND TRANSFERS. Transfer requests are normally
effective on the Business Day we receive them in proper form. If your Contract
was issued in a state that requires refund of Purchase Payments under your Right
to Cancel, or if your contract is an IRA, transfers may only be made after your
Right to Cancel Transfer Date. See WITHDRAWALS--RIGHT TO CANCEL.
No transfer fee is currently imposed for transfers among the Investment Options,
but we reserve the right to impose a transaction fee for transfers in the
future; a fee of up to $15 per transfer may apply to transfers in
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<PAGE> 16
excess of 15 in any Contract Year. Transfers under the dollar cost averaging and
earnings sweep options are counted toward your total transfers in a Contract
Year. Any such fee would be charged against your Investment Options
proportionately, based on your relative Account Value in each immediately after
the transfer.
We have the right, at our option, to require certain minimums in the future in
connection with transfers; these may include a minimum transfer amount and a
minimum Account Value, if any, for the Investment Option from which the transfer
is made or to which the transfer is made. If your transfer request results in
your having a remaining Account Value in an Investment Option that is less than
the minimum amount, we may transfer that remaining amount to your other
Investment Options in the proportions specified in your current allocation
instructions. We also reserve the right to limit the size of transfers, to limit
the number and frequency of transfers, to restrict transfers, and to suspend
transfers. We reserve the right to reject any transfer request. As of the date
of this prospectus, the only restriction is that we will not accept instructions
from agents acting under a power of attorney or otherwise on behalf of multiple
Contract Owners.
Exchanges of Annuity Units in any Subaccount(s) to any other Subaccount(s) after
annuitization are limited to four in any twelve-month period. See THE GENERAL
ACCOUNT--WITHDRAWALS AND TRANSFERS AND THE CONTRACTS AND THE SEPARATE ACCOUNT in
the SAI.
Dollar Cost Averaging
Dollar cost averaging is a method in which you buy securities in a series of
regular purchases instead of in a single purchase. This allows you to average
the securities' prices over time, and may permit a "smoothing" of abrupt peaks
and drops in price. Prior to your Annuity Date, you may use dollar cost
averaging to transfer amounts, over time, from any Variable Investment Option or
the Fixed Option with an Account Value of at least $5,000 to one or more other
Variable Investment Options. Each transfer must be for at least $250. Detailed
information appears in the SAI.
Portfolio Rebalancing
You may instruct us to maintain a specific balance of Variable Investment
Options under your Contract (e.g.,30% in the Blue Chip Subaccount, 40% in the
Capital Income Subaccount, and 30% in the Aggressive Growth Subaccount) prior to
your Annuity Date. Periodically, we will "rebalance" your values in the elected
Subaccounts to the percentages you have specified. Rebalancing may result in
transferring amounts from a Subaccount earning a relatively higher return to one
earning a relatively lower return. The Fixed Option is not available for
rebalancing. Detailed information appears in the SAI.
Earnings Sweep
You may instruct us to make automatic periodic transfers of your earnings from
the Money Market Subaccount or from the Fixed Option to one or more Variable
Investment Options (other than the Money Market Subaccount). Detailed
information appears in the SAI.
CHARGES, FEES AND DEDUCTIONS
WITHDRAWAL CHARGE
No sales charge is imposed on any Purchase Payment. Your Purchase Payments may,
however, be subject to a withdrawal charge; this charge may apply to amounts you
withdraw under your Contract, depending on the length of time each Purchase
Payment has been invested and on the amount you withdraw. No withdrawal charge
is imposed on (i) amounts annuitized after the first Contract Year, if
annuitized for at least five years, (ii) payments of death benefits, (iii)
withdrawals by Contract Owners to meet the minimum distribution rules for
Qualified Contracts as they apply to amounts held under the Contract, or (iv)
subject to medical evidence satisfactory to us, after the first Contract
Anniversary, full or partial withdrawals if the last or sole Annuitant has been
diagnosed with a medically determinable condition that results in a life
expectancy of twelve (12) months or less. We will not impose a withdrawal charge
on withdrawals of Purchase Payments held under your Contract for at least five
Contract Years. In no event will the aggregate withdrawal charges imposed exceed
7.0% of your total Purchase Payments.
15
<PAGE> 17
Free Withdrawals
We will not impose a withdrawal charge on your withdrawal to the extent that
total withdrawals that are free of charge during the Contract Year do not exceed
10% of the sum of your remaining Purchase Payments at the beginning of the
Contract Year that have been held under your Contract for less than six years
plus additional Purchase Payments applied to your Contract during that Contract
Year. Our calculations of the withdrawal charge deduct this "free 10%" from your
"oldest" Purchase Payment that is still otherwise subject to the charge.
Example: You make an initial Purchase Payment of $10,000 in Contract Year
1, and make additional Purchase Payments of $1,000 and $6,000 in Contract
Year 2. With Earnings, your Contract Value in Contract Year 3 is $19,000.
In Contract Year 3, you may withdraw $1,700 free of the withdrawal charges
(your total Purchase Payments were $17,000, so 10% of that total equals
$1,700). After this withdrawal, your Contract Value is $17,300 ($15,300
attributable to Purchase Payments and $2,000 attributable to earnings). In
Contract Year 4, your Contract Value falls to $12,500; you may withdraw
$1,530 (10% of $15,300) free of any withdrawal charges.
How the Charge is Determined
We calculate your withdrawal charge by assuming that amounts withdrawn are
attributed to Purchase Payments in the order the Payments were received by us,
then to Earnings. The amount of the charge depends on how long each Purchase
Payment was held under your Contract. Each Purchase Payment you make is
considered to have a certain "age," depending on the length of time since that
payment was effective. A payment is "one year old" or has an "age of one" from
the day it is effective until your next Contract Anniversary; beginning on that
Contract Anniversary, your payment will have an "age of two" for a full Contract
Year. When you withdraw an amount subject to the withdrawal charge, the "age" of
the Purchase Payment you withdraw determines the level of withdrawal charge as
follows:
<TABLE>
<CAPTION>
"AGE" OF PAYMENT WITHDRAWAL
IN YEARS CHARGE
- ------------------ ----------
<S> <C>
1 7%
2 6%
3 5%
4 3%
5 1%
6 or more 0%
</TABLE>
Example: If in the example above, in Contract Year 3, a gross withdrawal of
$2,000 instead of $1,700 was requested, it would generate a withdrawal
charge of $15, calculated by subtracting the "free 10%" (10% X $17,000 =
$1,700) from the withdrawal amount ($2,000) and applying to the result
($300) the applicable withdrawal charge percentage (5%). The net withdrawal
proceeds to you would be $1,985. After this withdrawal, the remaining
Contract Value would be $17,000, of which $15,000 would be attributable to
Purchase Payments and $2,000 to Earnings.
The withdrawal charge will be deducted proportionally among all Investment
Options from which the withdrawal occurs. Any applicable Annual Fee will be
deducted after the withdrawal charge is calculated. See THE GENERAL
ACCOUNT--WITHDRAWALS AND TRANSFERS.
We pay sales commissions and other expenses associated with promotion and sales
of the Contracts to broker-dealers. The withdrawal charge is designed to
reimburse us for these costs, although we expect that our actual expenses will
be greater than the amount of the withdrawal charge.
Transfers
Transfers of all or part of your Account Value from one Investment Option to
another is not considered a withdrawal of an amount from your Contract, so no
withdrawal charge is imposed at the time of
16
<PAGE> 18
transfer. See HOW YOUR PAYMENTS ARE ALLOCATED--TRANSFERS and THE GENERAL
ACCOUNT-- WITHDRAWALS AND TRANSFERS.
PREMIUM TAXES
Depending on (among other factors) your state of residence, a tax may be imposed
on your Purchase Payments at the time your payment is made, at the time of a
partial or full withdrawal, at the time any death benefit proceeds are paid, at
annuitization or at such other time as taxes may be imposed. Tax rates ranging
from 0% to 3.5% are currently in effect, but may change in the future. Some
local jurisdictions also impose a tax.
If we pay any taxes attributable to Purchase Payments ("premium taxes") on your
behalf, we will impose a similar charge against your Contract Value. We normally
will charge you when you annuitize some or all of your Contract Value. We
reserve the right to impose this charge for applicable premium taxes when you
make a full or partial withdrawal, at the time any death benefit proceeds are
paid, or when those taxes are incurred. For these purposes, "premium taxes"
include any state or local premium taxes and, where approval has been obtained,
federal premium taxes and any federal, state or local income, excise, business
or any other type of tax (or component thereof) measured by or based upon,
directly or indirectly, the amount of payments we have received. We will base
this charge on the Contract Value, the amount of the transaction, the aggregate
amount of Purchase Payments we receive under your Contract, or any other amount,
that in our sole discretion we deem appropriate.
We may also charge the Separate Account or your Contract Value for taxes
attributable to the Separate Account or the Contract, including income taxes
attributable to the Separate Account or to our operations with respect to the
Contract, or taxes attributable, directly or indirectly, to Purchase Payments or
payments we make under the Contract. Currently, we do not impose any such
charges.
ANNUAL FEE
We will charge you an Annual Fee of $30 on each Contract Anniversary prior to
the Annuity Date and at the time you withdraw your entire Net Contract Value, if
your Net Contract Value is less than $50,000 on that date. The fee is not
imposed on amounts you annuitize or on payment of death benefit proceeds. The
fee reimburses certain of our costs in administering the Contracts and the
Separate Account; we do not intend to realize a profit from this fee or the
Administrative Fee. This fee is guaranteed not to increase for the life of your
Contract.
Your Annual Fee will be charged proportionately against your Investment Options.
Assessments against your Variable Investment Options are made by debiting some
of the Subaccount Units previously credited to your Contract; that is,
assessment of the Annual Fee does not change the Unit Value for those
Subaccounts.
WAIVERS AND REDUCED CHARGES
We may reduce or waive the withdrawal charge or Annual Fee or credit additional
amounts in situations where selling and/or maintenance costs associated with the
Contracts are reduced, such as the sale of several Contracts to the same
Contract Owner(s), sales of large Contracts and group sales and on mass
transactions over multiple Contracts. In addition, we may waive the Annual Fee
and/or credit an additional amount to the Contract Value of those Contracts sold
to persons who meet criteria established by Pacific Life, which may include
officers, and employees of Pacific Life and our affiliates, registered
representatives and employees of broker-dealers with a current selling agreement
with us and their affiliates, and employees of affiliated asset management firms
("Eligible Persons") and immediate family members of Eligible Persons. We will
only reduce or waive such charges and fees or credit additional amounts on any
Contract where expenses associated with the sale of the Contract and/or costs
associated with administering and maintaining the Contract are reduced. Eligible
Persons and their immediate families also may purchase a Contract with reduced
minimum Purchase Payment requirements.
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<PAGE> 19
MORTALITY AND EXPENSE RISK CHARGE
We assess a charge against the assets of each Subaccount to compensate us
for certain mortality and expense risks that we assume under the Contracts (the
"Risk Charge"). The risk that Annuitants will live longer (and therefore receive
more annuity payments) than we predict through our actuarial calculations is
"mortality risk." We also bear mortality risk in connection with death benefits
payable under the Contracts. The risk that the expense charges and fees under
the Contracts and Separate Account are less than our actual administrative and
operating expenses is called "expense risk."
This Risk Charge is assessed daily at an annual factor expressed as a
decimal (where 1.00 is equal to 100%) of 0.0125 of each Subaccount's assets;
this charge may not be increased for the duration of your Contract.
The Risk Charge will stop at annuitization if you select a fixed annuity;
the Risk Charge will continue after annuitization if you choose any variable
annuity, even though we do not bear mortality risk if your Annuity Option is
Period Certain Only.
We will realize a gain if the Risk Charge exceeds our actual cost of
expenses and benefits, and will suffer a loss if such actual costs exceed the
Risk Charge. Any gain will become part of our General Account; we may use it for
any reason, including covering sales expenses on the Contracts.
ADMINISTRATIVE FEE
We charge an Administrative Fee as compensation for costs we incur in
operating the Separate Account and issuing and administering the Contracts,
including processing applications and payments, and issuing reports to you and
to regulatory authorities.
The Administrative Fee is assessed daily at an annual factor expressed as a
decimal (where 1.00 is equal to 100%) of 0.0015 of the assets of each
Subaccount. This fee is guaranteed not to increase for the life of your
Contract. A relationship will not necessarily exist between the actual
administrative expenses attributable to a particular Contract and the
Administrative Fee paid in respect of that particular Contract.
EXPENSES OF THE TRUST
Your Variable Account Value reflects advisory fees and other expenses
incurred by the various Funds of the Trust, net of any applicable
reimbursements. These fees and expenses may vary from year to year. The Trust is
governed by its own Board of Trustees, and your Contract does not fix or specify
the level of expenses of the Trust or any Fund. The Trust's fees and expenses
are described in detail in the SUMMARY and in the Trust's Prospectus and in its
SAI.
RETIREMENT BENEFITS AND OTHER PAYOUTS
SELECTING YOUR ANNUITANT
When you submit the application for your Contract, you must choose an
Annuitant and may choose a Joint Annuitant. We will send the annuity payments to
the payee that you designate. If you are buying a Qualified Contract, you must
be the sole Annuitant; if you are buying a Non-Qualified Contract you may choose
yourself and/or another person. Whether you choose to have a sole or two Joint
Annuitants, you may choose a Contingent Annuitant; more information on these
options is described in the SAI. You will not be able to add or change a sole or
Joint Annuitant after your Contract is issued; however, if you are buying a
Qualified Contract, you may add a Joint Annuitant at the time of annuitization.
You will be able to add or change a Contingent Annuitant until your Annuity Date
or the death of your sole Annuitant or both Joint Annuitants, whichever occurs
first; however, once your Contingent Annuitant has become the Annuitant under
your Contract, no additional Contingent Annuitant may be named. You may not
choose an Annuitant who has reached his or her 86th birthday at the time your
Contract is issued. This restriction applies to Joint and Contingent Annuitants
as well as to a sole Annuitant. When adding or changing Contingent Annuitants,
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<PAGE> 20
the newly named Contingent Annuitant must be less than age 86 at the time of
change or addition. In addition, we reserve the right to require proof of age or
survival of the Annuitant(s).
ANNUITIZATION
You may choose both your Annuity Date (or "Annuity Start Date") and your Annuity
Option. At the Annuity Date, you may elect to annuitize some or all of your Net
Contract Value, less any transaction fee, and any applicable charge for premium
taxes and/or other taxes, as long as the net amount you annuitize is at least
$10,000, subject to any exceptions under state law. If you annuitize only a
portion of this available Contract Value, you may have the remainder
distributed, less any applicable charge for premium taxes and/or other taxes,
any transaction fee, any applicable withdrawal charge, and any Annual Fee. We
will distribute your Net Contract Value, less any applicable charge for premium
taxes and/or other taxes, any applicable withdrawal charge, any Annual Fee, and
any transaction fee, to you in a single sum if the net amount of your Contract
Value available to convert to an annuity is less than $10,000 on your Annuity
Date. Distributions under your Contract may have tax consequences. You should
consult a qualified tax adviser for information on annuitization.
CHOOSING YOUR ANNUITY DATE ("ANNUITY START DATE")
You should choose your Annuity Start Date when you submit your application or we
will apply a default Annuity Date to your Contract.
You may change your Annuity Date by notifying us in writing (or other form
acceptable to us). We must receive your written notice at least ten Business
Days prior to the earlier of your old Annuity Date or your new Annuity Date.
Your Annuity Date cannot be earlier than your first Contract Anniversary and
must occur on or before a certain date: If you have a sole Annuitant, your
Annuity Date cannot be later than his or her 95th birthday; if you have Joint
Annuitants and a Non-Qualified Contract, your Annuity Date cannot be later than
your younger Joint Annuitant's 95th birthday; if you have Joint Annuitants and a
Qualified Contract, your Annuity Date cannot be later than your own 95th
birthday. In the case of certain trusts, the Annuity Date can not be later than
the Annuitant's 100th birthday. To meet IRS minimum distribution rules, your
Annuity Date may need to be earlier. Different requirements may apply in some
states. If your Contract is a Qualified Contract, you may also be subject to
additional restrictions. Adverse federal tax consequences may result if you
choose an Annuity Date that is prior to an Annuitant's attained age 59 1/2. See
FEDERAL TAX STATUS.
You should carefully review the Annuity Options with your financial or tax
adviser, and, for Contracts used in connection with a Qualified Plan, reference
should be made to the terms of the particular plan and the requirements of the
Internal Revenue Code for pertinent limitations respecting annuity payments and
other matters. For instance, under requirements for retirement plans that
qualify under Section 401 or 408 of the Internal Revenue Code, annuity payments
generally must begin no later than April 1 of the calendar year following the
year in which the Annuitant reaches age 70 1/2. However, if a plan qualified
under Section 401(a) of the Code or a 403(b) contract so provides, no
distributions are required for individuals who are employed after age 70 1/2
(other than 5% owners) until they retire.
For retirement plans that qualify under Section 401 or 408 of the Internal
Revenue Code, the period elected for receipt of annuity payments under Annuity
Options 1 and 4 generally may be no longer than the joint life expectancy of the
Annuitant and Beneficiary in the year that the Annuitant reaches age 70 1/2, and
must be shorter than such joint life expectancy if the Beneficiary is not the
Annuitant's spouse and is more than 10 years younger than the Annuitant. Under
Options 2 and 3, if the secondary or other Annuitant is not the Annuitant's
spouse and is more than 10 years younger than the Annuitant, the 66 2/3% and
100% elections specified above may not be available. The restrictions on options
for retirement plans that qualify under Sections 401 and 408 also apply to a
retirement plan that qualifies under Section 403(b) with respect to amounts that
accrued after December 31, 1986.
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<PAGE> 21
If you annuitize only a portion of your Net Contract Value on your Annuity Start
Date, you may, at that time, have the option to elect not to have the remainder
of your Contract Value distributed, but instead to continue your Contract with
that remaining Contract Value (a "continuing Contract"). If this option is
available, you would then choose a second Annuity Date for your continuing
Contract, and all references in this Prospectus to your "Annuity Date" would, in
connection with your continuing Contract, be deemed to refer to that second
Annuity Date. This option may not be available, or may be available only for
certain types of Contracts. You should be aware that some or all of the payments
received before the second Annuity Date may be fully taxable. We recommend that
you call your tax adviser for more information and specific tax advice if you
are interested in this option.
DEFAULT ANNUITY DATE AND OPTIONS
If you have a Non-Qualified Contract and you do not choose an Annuity Date when
you submit your application, your Annuity Date will be your Annuitant's 95th
birthday or your younger Joint Annuitant's 95th birthday, whichever applies;
however some states' laws may require a different Annuity Date. If you have a
Qualified Contract and fail to choose an Annuity Date, your Annuity Date will be
April 1 of the calendar year following the year your Annuitant attains age
70 1/2; if your Annuitant has already attained age 70 1/2 on the Contract Date,
your Annuity Date will be April 1 of the calendar year following your first
Contract Anniversary.
If you have not specified an Annuity Option or do not instruct us otherwise, at
your Annuity Date your Net Contract Value, less transaction fees and/or charges
for premium taxes and/or other taxes, will be annuitized (if this net amount is
at least $10,000) as follows: the net amount from your Fixed Option Value will
be converted into a fixed-dollar annuity and the net amount from your Variable
Account Value will be converted into a variable-dollar annuity directed to the
Subaccounts proportionate to your Account Value in each. If you have a
Non-Qualified Contract, or if you have a Qualified Contract and are not married,
your default Annuity Option will be Life with Ten Year Period Certain. If you
have a Qualified Contract and you are married, your default Annuity Option will
be Joint and Survivor Life with survivor payments of 50% and your spouse will
automatically be named your Joint Annuitant.
CHOOSING YOUR ANNUITY OPTION
You make three basic decisions about your annuity payments. First, you must
choose whether you want those payments to be a fixed-dollar amount and/or a
variable-dollar amount. Second, you must choose the form of annuity payments
(see ANNUITY OPTIONS). Third, you must decide how often you want annuity
payments to be made (the "frequency" of the payments). You may not change these
selections after annuitization.
Fixed and Variable Annuities
You may choose a fixed annuity (i.e., with fixed-dollar amounts), a variable
annuity (i.e., with variable-dollar amounts), or you may choose both, converting
one portion of the net amount you annuitize into a fixed annuity and another
portion into a variable annuity.
If you select a fixed annuity, each periodic annuity payment received will be
equal to the initial annuity payment, unless you select a joint and survivor
life annuity with reduced survivor payments and the Primary Annuitant dies. Any
net amount you convert to a fixed annuity will be part of our General Account.
If you select a variable annuity, you may choose as many Variable Investment
Options as you wish; the amount of the periodic annuity payments will vary with
the investment results of the Variable Investment Options selected. After the
Annuity Date, Annuity Units may be exchanged among available Variable Investment
Options up to four times in any twelve-month period. How your Contract converts
into a variable annuity is explained in more detail in THE CONTRACTS AND THE
SEPARATE ACCOUNT in the SAI.
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Annuity Options
Four Annuity Options are currently available under the Contracts, although
additional options may become available in the future.
-- Life Only. Periodic payments are made to the payee during his or her
lifetime. Payments stop when the Annuitant dies.
-- Life with Period Certain. Periodic payments are made to the payee
during the Annuitant's lifetime, with payments guaranteed for a
specified period. You may choose to have payments guaranteed for
anywhere from 5 through 30 years (in full years only). If the
Annuitant dies before the guaranteed payments are completed, the
Beneficiary receives the remainder of the guaranteed payments.
-- Joint and Survivor Life. Periodic payments are made to the Primary
Annuitant during the lifetime of the Primary Annuitant. After the
death of the Primary Annuitant, periodic payments are made to the
payee named in the election if and as long as the secondary Annuitant
lives. You may choose to have the payments based on the life
expectancy of the surviving secondary Annuitant equal to 50%, 66 2/3%
or 100% of the payments made during the lifetime of the Primary
Annuitant (you must make this election when you choose your Annuity
Option). Payments stop when both Annuitants die.
-- Period Certain Only. Periodic payments are made to the payee over a
specified period. You may choose to have payments continue for
anywhere from 5 through 30 years (in full years only). If the
Annuitant dies before the guaranteed payments are completed, the
Beneficiary receives the remainder of the guaranteed payments.
Frequency of Payments
You may choose to have annuity payments made monthly, quarterly, semiannually,
or annually. The amount of a variable payment will be determined in each period
on the date corresponding to your Annuity Date, and payment will be made on the
next succeeding day.
Your initial annuity payment must be at least $250. Depending on the net amount
you annuitize, this requirement may limit your options regarding the period
and/or frequency of annuity payments.
If your Contract was issued in connection with a Qualified Plan subject to Title
I of the Employee Retirement Income Security Act of 1974 ("ERISA"), your
spouse's consent may be required when you seek any distribution under your
Contract, unless your Annuity Option is Joint and Survivor Life with survivor
payments of at least 50%, and your spouse is your Joint Annuitant.
YOUR ANNUITY PAYMENTS
Amount of the First Payment
Your Contract contains tables that we use to determine the amount of the first
annuity payment under your Contract, taking into consideration the annuitized
portion of your Net Contract Value at the Annuity Date. This amount will vary,
depending on the annuity period and payment frequency you select; this amount
will be larger in the case of shorter Period Certain annuities and smaller for
longer Period Certain annuities. Similarly, this amount will be greater for a
Life Only annuity than for a Joint and Survivor Life annuity, because we will
expect to make payments for a shorter period of time on a Life Only annuity. If
you do not choose the Period Certain Only annuity, this amount will also vary
depending on the age of the Annuitant(s) on the Annuity Date and, for some
Contracts in some states, the sex of the Annuitant(s).
For fixed annuity payments, the guaranteed income factors in our tables are
based on an annual interest rate of 3% and the 1983a Annuity Mortality Table
with the ages set back 10 years. If you elect a fixed annuity, fixed annuity
payments will be based on the periodic income factors in effect for your
Contract on the Annuity Date which are at least the guaranteed income factors
under the Contract.
For variable annuity payments, the tables are based on an assumed annual
investment return of 5% and the 1983a Annuity Mortality Table with the ages set
back 10 years. If you elect a variable annuity, your initial
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variable annuity payment will be based on the applicable income factor in effect
for your Contract on the Annuity Date which is at least as great as the
applicable variable annuity income factor in our table. A higher assumed
investment return would mean a larger first variable annuity payment, but
subsequent payments would increase only when actual net investment performance
exceeds the higher assumed rate and would fall when actual net investment
performance is less than the higher assumed rate. A lower assumed rate would
mean a smaller first payment and a more favorable threshold for increases and
decreases. If the actual net investment performance is a constant 5% annually,
annuity payments will be level. The assumed investment return is explained in
more detail in the SAI under THE CONTRACTS AND THE SEPARATE ACCOUNT.
DEATH BENEFITS
A death benefit may be payable on proof of death before the Annuity Date of the
Annuitant or of any Contract Owner while the Contract is in force. The amount of
the death benefit will be paid according to the DEATH BENEFIT PROCEEDS section.
Death Benefit Proceeds
The proceeds of any death benefit payable will be paid upon receipt of proof of
death, in proper form, and instructions regarding payment and will be the amount
of the death benefit reduced by any charge for premium taxes and/or other taxes
and any Contract Debt. The death benefit proceeds will be payable in a single
sum, as an annuity, or in accordance with IRS regulations (see MANDATORY
DISTRIBUTION ON DEATH). Any such annuity is subject to all restrictions
(including minimum amount requirements) as are other annuities under this
Contract; in addition, there may be legal requirements that limit the
recipient's Annuity Options and the timing of any payments. A recipient should
consult a qualified tax adviser before electing to receive an annuity.
Additional provisions apply if your Contract names a Joint or Contingent Owner
or Annuitant, or if the Beneficiary, Joint Owner, or Contingent Owner is your
spouse. Further information about these provisions is contained in the SAI.
Mandatory Distribution on Death
If a Contract Owner of a Non-Qualified Contract dies before the Annuity Date,
any death benefit proceeds under this Contract must begin distribution within
five years after the Owner's death. In order to satisfy this requirement, the
designated recipient must receive a lump sum payment or elect to receive an
annuity for life or over a period that does not exceed the life expectancy of
the designated recipient with annuity payments that start within one year after
the Owner's death. If an election to receive an annuity is not made within 60
days of our receipt of proof in proper form of the Owner's death or, if earlier,
60 days (or shorter period as we permit) prior to the first anniversary of the
Owner's death, the lump sum option will be deemed elected, unless otherwise
required by law. If the lump sum option is deemed elected, we will consider that
deemed election as receipt of instructions regarding payment of death benefit
proceeds. If a Non-Qualified Contract has Joint Owners, this requirement applies
to the first Contract Owner to die.
If the Contract Owner was not an Annuitant but was a Joint Owner and there is a
surviving Joint Owner, that surviving Joint Owner is the designated recipient;
if no Joint Owner survives but a Contingent Owner is named in the Contract and
is living, he or she is the designated recipient, otherwise the designated
recipient is the Beneficiary; if no Beneficiary is living, the designated
recipient is the Owner's estate. If the Contract Owner was an Annuitant, the
designated recipient is the Beneficiary; if no Beneficiary is living, the
designated recipient is the Owner's estate. A sole designated recipient who is
the Contract Owner's spouse may elect to become the Contract Owner (and sole
Annuitant if the deceased Contract Owner had been the Annuitant) and continue
the Contract until the earliest of the spouse's death, the death of the
Annuitant, or the Annuity Start Date. A Joint or Contingent Owner who is the
designated recipient but not the Contract Owner's spouse may not continue the
Contract, but may purchase a new Contract.
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If you are a non-individual Owner of a Contract other than a Contract issued
under a Qualified Plan as defined in Section 401 or 403 of the Code, the Primary
Annuitant will be treated as the Owner of the Contract for purposes of these
Distribution Rules. If there is a change in the Primary Annuitant prior to the
Annuity Date, such change will be treated as the death of the Owner. The amount
of the death benefit in this situation will be (a) the Contract Value if the
non-individual owner elects to maintain the Contract and reinvest the Contract
Value into the Contract in the same amount as immediately prior to the
distribution, or (b) the Contract Value less any Annual Fee, and any withdrawal
and/or transaction fee, any charges for withdrawals, and/or premium taxes and/or
other taxes, if the non-individual elects a cash distribution. The amount of the
death benefit will be determined as of the Business Day we receive, in proper
form, the request to change the Primary Annuitant and instructions regarding
maintaining the Contract or cash distribution.
Death Benefit Amounts
The Death Benefit Amount as of the Notice Date and prior to the Annuity Date is
equal to the greater of (a) your Contract Value as of that day, or (b) your
aggregate Purchase Payments, reduced by any applicable charges and fees, and
further reduced by an amount for each withdrawal that is calculated by
multiplying the aggregate Purchase Payments received by the ratio of the amount
of each withdrawal, including applicable withdrawal charges, to the Contract
Value immediately prior to each withdrawal.
The Guaranteed Minimum Death Benefit ("GMDB") Amount will be calculated only
when a death benefit becomes payable as a result of the death of the sole
Annuitant and is determined as follows: We look at the Contract as of the first
Contract Anniversary and as of every subsequent Contract Anniversary prior to
the Annuity Date, that is, the 1st, 2nd, 3rd , etc., until the earlier of (i)
the date the Annuitant reaches his or her 81st birthday, (ii) the date of the
Annuitant's death, or (iii) the Annuity Date, (each of these Anniversaries is a
"Milestone Date"). For each Milestone Date, we calculate the Death Benefit
Amount and (a) add the aggregate amount of any Purchase Payments received by us
after that Milestone Date, (b) subtract an amount for each withdrawal that is
calculated by multiplying that Death Benefit Amount by the ratio of the amount
of each withdrawal that has occurred since that Milestone Date, including
applicable withdrawal charges, to the Contract Value immediately prior to each
withdrawal, and (c) subtract the aggregate amount of any previous charges, fees,
and/or taxes effected since that Milestone Date.
The highest of these adjusted Death Benefit Amounts, as of the Notice Date, is
the GMDB Amount. CALCULATIONS OF ANY GUARANTEED MINIMUM DEATH BENEFIT ARE ONLY
MADE ONCE DEATH BENEFIT PROCEEDS BECOME PAYABLE UNDER YOUR CONTRACT.
The Notice Date is the day on which we receive proof (in proper form) of death
and instructions regarding payment of death benefit proceeds.
Death Benefit: Death of the Annuitant
If the Annuitant dies on or before the first Contract Anniversary, or if the
Annuitant had already reached his or her 81st birthday as of the first Contract
Anniversary, the death benefit will be equal to the Death Benefit Amount as of
the Notice Date.
If the Annuitant dies prior to the Annuity Date but after the first Contract
Anniversary, and had not yet reached his or her 81st birthday as of the first
Contract Anniversary, the death benefit will be equal to the greater of (a) the
Death Benefit Amount as of the Notice Date; or (b) the GMDB Amount as of the
Notice Date.
The following procedures apply in the event of death of an Annuitant who is not
also a Contract Owner: If your Contract names Joint Annuitants and only one
Joint Annuitant dies, the surviving Joint Annuitant becomes your sole Annuitant
and the death benefit is not yet payable. If your sole Annuitant dies (or if no
Joint Annuitant survives) and your Contract names a surviving Contingent
Annuitant, he or she becomes the sole Annuitant and the death benefit is not yet
payable. If there is no surviving Joint or Contingent Annuitant, the death
benefit is payable to the Beneficiary, if living; if not, to the Owner's estate.
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If both Owner and Annuitant die simultaneously, the death benefit will be paid
to the Beneficiary, if living; if not, to the Owner's estate.
Death Benefit: Death of a Contract Owner
If a Contract Owner who is not the Annuitant dies before the Annuity Date, the
amount of the death benefit will be equal to the Death Benefit Amount as of the
Notice Date and will be paid in accordance with the Death Benefit Proceeds
section above. The death benefit proceeds will be paid to the Joint Owner, if
living; if not, to the Contingent Owner, if living; if not to the Beneficiary,
if living; if not, to the Owner's estate. See THE GENERAL ACCOUNT--WITHDRAWALS
AND TRANSFERS.
If a Contract Owner who is the Annuitant dies before the Annuity Date, the
amount of the death benefit will be equal to the greater of your Death Benefit
Amount or the GMDB Amount as of the Notice Date and will be paid in accordance
with the Death Benefit Proceeds section above. The death benefit proceeds will
be paid to the Beneficiary if living; if not, to the Owner's estate. Joint
and/or Contingent Owners and/or Annuitants will not be considered in determining
the recipient of death benefit proceeds.
WITHDRAWALS
OPTIONAL WITHDRAWALS
You may, on or prior to your Annuity Date, withdraw all or a portion of the
amount available under your Contract. You may surrender your Contract and make a
full withdrawal at any time. Except as provided below, beginning 30 days after
your Contract Date, you also may make partial withdrawals from your Investment
Options at any time. You may request to withdraw a specific dollar amount or a
specific percentage of an Account Value or your Net Contract Value. You may
choose to make your withdrawal from specified Investment Options; if you do not
specify Investment Options, your withdrawal will be made from all of your
Investment Options proportionately. Each partial withdrawal must be for $500 or
more, except pre-authorized withdrawals, which must be at least $250. If your
partial withdrawal from an Investment Option would leave a remaining Account
Value in that Investment Option of less than any minimum Account Value we may
require in the future, we have the right, at our option, to transfer that
remaining amount to your other Investment Options on a proportionate basis
relative to your most recent allocation instructions. If your partial withdrawal
leaves you with a Net Contract Value of less than $1,000, we have the right, at
our option, to terminate your Contract and send you the withdrawal proceeds
described in the next section. Partial withdrawals from the Fixed Option in any
Contract Year are subject to restrictions. See GENERAL ACCOUNT--WITHDRAWALS AND
TRANSFERS.
Amount Available for Withdrawal
The amount available for withdrawal is your Net Contract Value at the end of the
Business Day on which your withdrawal request is effective, less any applicable
Annual Fee, any withdrawal charge, any withdrawal transaction fee, and any
charge for premium tax and/or other taxes. The amount we send to you (your
"withdrawal proceeds") will also reflect any adjustment for federal and state
income tax withholding (See FEDERAL TAX STATUS). There may be additional
restrictions on partial withdrawals from the Fixed Option (see THE GENERAL
ACCOUNT--WITHDRAWALS AND TRANSFERS).
You assume investment risk on investments in the Subaccounts; as a result, the
amount available to you for withdrawal from any Subaccount may be more or less
than the total Purchase Payments you have allocated to that Subaccount.
Withdrawal Transaction Fees
There is currently no transaction fee for partial withdrawals. However, we
reserve the right to impose a withdrawal transaction fee in the future of up to
$15 for each partial withdrawal (including pre-authorized partial withdrawals)
in excess of 15 in any Contract Year. Any such fee would be charged against your
Investment Options proportionately based on your Account Value in each
immediately after the withdrawal.
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Pre-Authorized Withdrawals
If your Contract Value is at least $5,000, you may select the pre-authorized
withdrawal option, and you may choose monthly, quarterly, semiannual or annual
withdrawals. Each withdrawal must be for at least $250. Each pre-authorized
withdrawal is subject to federal income tax on its taxable portion and may be
subject to a 10% tax penalty if you have not reached age 59 1/2. See FEDERAL TAX
STATUS and THE GENERAL ACCOUNT--WITHDRAWALS AND TRANSFERS. Additional
information and options are set forth in the SAI and in the Pre-Authorized
Withdrawal section of your application.
Special Requirements for Full Withdrawals
If you wish to withdraw the entire amount available under your Contract, you
must either return your Contract to us or sign and submit to us a "lost Contract
affidavit."
Special Restrictions Under Qualified Plans
Individual Qualified Plans may have additional rules regarding withdrawals from
a Contract purchased under such a Plan. In general, if your Contract was issued
under certain Qualified Plans, you may not withdraw amounts attributable to
contributions made pursuant to a salary reduction agreement (as defined in
Section 402(g)(3)(A) of the Code) or to transfers from a custodial account (as
defined in Section 403(b)(7) of the Code) except in cases of your (a) separation
from service, (b) death, (c) disability as defined in Section 72(m)(7) of the
Code, (d) reaching age 59 1/2, or (e) hardship as defined for purposes of
Section 401(k) of the Code.
These limitations do not affect certain rollovers or exchanges between Qualified
Plans, and do not apply to rollovers from these Qualified Plans to an individual
retirement account or individual retirement annuity. In the case of tax
sheltered annuities, these limitations do not apply to certain salary reduction
contributions made, and investment results earned, prior to dates specified in
the Code.
Hardship withdrawals under the exception provided above are restricted to
amounts attributable to salary reduction contributions, and do not include
investment results; this additional restriction does not apply to salary
reduction contributions made, and investment results earned, prior to dates
specified in the Code.
Certain distributions, including rollovers, may be subject to mandatory
withholding of 20% for federal income tax and to a 10% penalty tax if the
distribution is not transferred directly to the trustee of another Qualified
Plan, or to the custodian of an individual retirement account or issuer of an
individual retirement annuity. See FEDERAL TAX STATUS. Distributions may also
trigger withholding for state income taxes. The tax and ERISA rules relating to
Contract withdrawals are complex. We are not the administrator of any Qualified
Plan. You should consult your tax adviser and/or your plan administrator before
you withdraw a portion of your Contract Value.
Effective Date of Withdrawal Requests
Withdrawal requests are normally effective on the Business Day we receive them
in proper form. If you make Purchase Payments by check and submit a withdrawal
request immediately afterwards, payment of your withdrawal proceeds may be
delayed until your check clears.
TAX CONSEQUENCES OF WITHDRAWALS
Withdrawals, including pre-authorized withdrawals, will generally have federal
income tax consequences, which could include tax penalties. YOU SHOULD CONSULT
WITH A TAX ADVISER BEFORE MAKING ANY WITHDRAWAL OR SELECTING THE PRE-AUTHORIZED
WITHDRAWAL OPTION. See FEDERAL TAX STATUS.
RIGHT TO CANCEL
You may return your Contract for cancellation and a full refund during your
Right to Cancel period. Your Right to Cancel period is usually the 10-day period
beginning on the day you receive your Contract, but may
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vary if required by state law. For more information, see APPENDIX A: STATE LAW
VARIATIONS. If you return your Contract, it will be canceled and treated as void
from your Contract Date. You will then receive a refund of your Contract Value
as of the end of the Business Day on which we receive your Contract for
cancellation, plus a refund of any amounts that may have been deducted as
Contract fees and charges. Thus, a Contract Owner who returns a Contract within
the Right to Cancel period bears only the investment risk (i.e., the Owner's
Account Value allocated to the Subaccounts may increase or decrease based on
investment performance), but the Owner will not be subject to any Contract
charges and fees which would otherwise be deducted from Account Values. Any
amounts credited to your Variable Account(s) as a result of any variation in
charges as described in "Waivers and Reduced Charges", and any earnings on such
amounts, will not be included in the amount refunded to you.
Some states' laws and IRA rules require us to refund your Purchase Payments
instead of your Account Value. If your Contract is issued in one of these states
(the "issue state"), or is an IRA, the Purchase Payments you have allocated to
any Subaccount will usually be allocated to the Money Market Subaccount during
your Right to Cancel period. In such cases, we will transfer your Contract Value
in the Money Market Subaccount to your chosen Variable Investment Options at the
end of the 15th calendar day after your Contract Date (your "Right to Cancel
Transfer Date"). We reserve the right to extend your Right to Cancel Transfer
Date by the number of days in excess of ten days that the issue state allows you
to return your Contract to us pursuant to your Right to Cancel right. You may
not waive your Right to Cancel.
PACIFIC LIFE AND THE SEPARATE ACCOUNT
PACIFIC LIFE
We are a life insurance company that is domiciled in California. Our operations
include both life insurance and annuity products as well as financial and
retirement services. As of the end of 1997, we had $80.0 billion of individual
life insurance in force and total admitted assets of approximately $31.8
billion. We have been ranked according to admitted assets as the 20th largest
life insurance carrier in the nation for 1997. The Pacific Life family of
companies has total assets and funds under management of over $236 billion. We
are authorized to conduct life insurance and annuity business in the District of
Columbia and all states except New York. Our principal offices are located at
700 Newport Center Drive, Newport Beach, California 92660.
We were originally organized on January 2, 1868, under the name "Pacific Mutual
Life Insurance Company of California" and reincorporated as "Pacific Mutual Life
Insurance Company" on July 22, 1936. On September 1, 1997, we converted from a
mutual life insurance company to a stock life insurance company ultimately
controlled by a mutual holding company and were authorized by California
regulatory authorities to change our name to Pacific Life Insurance Company.
We are a subsidiary of Pacific LifeCorp, a holding company which, in turn, is a
subsidiary of Pacific Mutual Holding Company, a mutual holding company. Under
their respective charters, Pacific Mutual Holding Company must always hold at
least 51% of the outstanding voting stock of Pacific LifeCorp, and Pacific
LifeCorp must always own 100% of the voting stock of Pacific Life. Owners of
Pacific Life's annuity contracts and life insurance policies have certain
membership interests in Pacific Mutual Holding Company, consisting principally
of the right to vote on the election of the Board of Directors of the mutual
holding company and on other matters, and certain rights upon liquidation or
dissolutions of the mutual holding company.
Our wholly-owned subsidiary, Pacific Mutual Distributors, Inc. ("PMD"), serves
as the principal underwriter for the Contracts. PMD is located at 700 Newport
Center Drive, Newport Beach, California 92660. PMD and Pacific Life enter into
selling agreements with broker-dealers, under which properly licensed registered
representatives of such broker-dealers act as agents of Pacific Life in the sale
of the Contracts.
We may provide you with reports of our ratings both as an insurance company and
as to our claims-paying ability with respect to our General Account assets. The
SAI presents more details about these ratings.
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SEPARATE ACCOUNT B
Separate Account B was established on September 25, 1996 as a separate account
of Pacific Life, and is registered with the SEC under the Investment Company Act
of 1940 (the "1940 Act"), as a type of investment company called a "unit
investment trust."
Obligations arising under your Contract are our general corporate obligations.
We are also the legal owner of the assets in the Separate Account.
Assets of the Separate Account attributed to the reserves and other liabilities
under the Contract and other contracts issued by us that are supported by the
Separate Account may not be charged with liabilities arising from any of our
other business; any income, gain or loss (whether or not realized) from the
assets of the Separate Account are credited to or charged against the Separate
Account without regard to our other income, gain or loss.
We may invest money in the Separate Account in order to commence its operations
and for other purposes, but not to support contracts other than variable annuity
contracts. A portion of the Separate Account's assets may include accumulations
of charges we make against the Separate Account and investment results of assets
so accumulated. These additional assets are ours and we may transfer them to our
General Account at any time; however, before making any such transfer, we will
consider any possible adverse impact the transfer might have on the Separate
Account. Subject to applicable law, we reserve the right to transfer our assets
in the Separate Account to our General Account.
Shares of the Trust currently are offered only for purchase by Separate Account
B. Shares of the Trust may also be sold in the future to other separate accounts
in connection with variable annuity and variable life insurance contracts may be
allowed in the future, which could create conflicts. See MORE ON THE TRUST'S
SHARES in the accompanying Prospectus for the Trust.
FEDERAL TAX STATUS
The following summary of federal income tax consequences is based on current tax
laws and regulations, which may be changed by legislative, judicial or
administrative action. The summary is general in nature, and does not consider
any applicable state or local tax laws. We do not make any guarantee regarding
the tax status, federal, state or local, of any Contract or any transaction
involving the Contracts. Accordingly, you should consult a qualified tax adviser
for complete information and advice before purchasing a Contract.
The following rules generally do not apply to variable annuity contracts held by
or for non-natural persons (e.g., corporations) unless such an entity holds the
contract as nominee for a natural person. If a contract is not owned or held by
a natural person or a nominee for a natural person, the contract generally will
not be treated as an "annuity" for tax purposes, meaning that the contract owner
will be taxed currently on annual increases in Contract Value at ordinary income
rates unless some other exception applies.
Section 72 of the Code governs the taxation of annuities in general, and we
attempted to design the Contracts to meet the requirements of Section 72 of the
Code. We believe that, under current law, the Contract will be treated as an
annuity for federal income tax purposes if the Contract Owner is a natural
person or a nominee for a natural person, and that we (as the issuing insurance
company), and not the Contract Owner(s), will be treated as the owner of the
investments underlying the Contract. Accordingly, no tax should be payable by
you as a Contract Owner as a result of any increase in Contract Value until you
receive money under your Contract. You should, however, consider how amounts
will be taxed when you do receive them. The following discussion assumes that
your Contract will be treated as an annuity for federal income tax purposes.
Section 817(h) of the Code provides that the investments underlying a variable
annuity must satisfy certain diversification requirements. Details on these
diversification requirements appear under OTHER INFORMATION ABOUT THE TRUST in
the Trust's Prospectus. We believe the underlying Variable Investment Options
for the Contract meet these requirements. In connection with the issuance of
temporary regulations relating to diversification requirements under Section
817(h), the Treasury Department announced that such regulations do not provide
guidance concerning the extent to which you may direct your investments to
particular divisions of a separate account. Such guidance may be included in
regulations or revenue rulings under Section 817(d) relating to the definition
of a variable contract. Because of this
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uncertainty, we reserve the right to make such changes to the Contract or to our
administrative procedures as we deem necessary or appropriate to ensure that
your Contract continues to qualify as an annuity for tax purposes. Any such
changes will apply uniformly to affected Contract Owners and will be made with
such notice to affected Contract Owners as is feasible under the circumstances.
TAXES PAYABLE BY CONTRACT OWNERS: GENERAL RULES
These general rules apply to Non-Qualified Contracts. As discussed below,
however, tax rules may differ for Qualified Contracts and you should consult a
qualified tax adviser if you are purchasing a Qualified Contract.
Distributions of net investment income or capital gains that each Subaccount
receives from its corresponding Fund are automatically reinvested in such Fund
unless we, on behalf of the Separate Account, elect otherwise. As noted above,
you will be subject to federal income taxes on the investment income from your
Contract only when it is distributed to you.
Taxes Payable on Withdrawals
Amounts you withdraw before annuitization, including amounts withdrawn from your
Contract Value in connection with partial withdrawals for payment of any charges
and fees, will be treated first as taxable income, to the extent that your
Contract Value exceeds the aggregate of your Purchase Payments (reduced by
non-taxable amounts previously received), and then as non-taxable recovery of
your Purchase Payments.
The assignment or pledge of (or agreement to assign or pledge) the value of the
Contract for a loan will be treated as a distribution. Moreover, all annuity
contracts issued to you in any given calendar year by us and any of our
affiliates are treated as a single annuity contract for purposes of determining
whether an amount is subject to tax under these rules. The Code further provides
that the taxable portion of a withdrawal may be subject to a penalty tax equal
to 10% of that taxable portion unless the withdrawal is: (1) made on or after
the date you reach age 59 1/2, (2) made by a Beneficiary after your death, (3)
attributable to your becoming disabled, or (4) in the form of level annuity
payments under a lifetime annuity.
Taxes Payable on Annuity Payments
A portion of each annuity payment you receive under a Contract generally will be
treated as a partial recovery of Purchase Payments (as used here, "Purchase
Payments" means the aggregate Purchase Payments less any amounts that were
previously received under the Contract but not included in income) and will not
be taxable. (In certain circumstances, subsequent modifications to an
initially-established payment pattern may result in the imposition of a penalty
tax.) The remainder of each annuity payment will be taxed as ordinary income.
However, after the full amount of aggregate Purchase Payments has been
recovered, the full amount of each annuity payment will be taxed as ordinary
income. Exactly how an annuity payment is divided into taxable and non-taxable
portions depends on the period over which annuity payments are expected to be
received, which in turn is governed by the form of annuity selected and, where a
lifetime annuity is chosen, by the life expectancy of the Annuitant(s) or
payee(s).
Should the death of a Contract Owner cause annuity payments to cease before
Purchase Payments have been fully recovered, an Annuitant (or in certain cases
the Beneficiary) is allowed a deduction on the final tax return for the
unrecovered Purchase Payments; however, if any remaining annuity payments are
made to a Beneficiary, the Beneficiary will recover the balance of the Purchase
Payments as payments are made. A lump sum payment taken in lieu of remaining
monthly annuity payments is not considered an annuity payment for tax purposes.
The portion of any lump sum payment to a Beneficiary in excess of aggregate
unrecovered Purchase Payments would be subject to income tax. Such a lump sum
payment may also be subject to a penalty tax.
If a Contract Owner dies before annuity payments begin, certain minimum
distribution requirements apply. If a Contract Owner dies after the Annuity
Date, the remaining interest in the Contract must be distributed at least as
rapidly as under the method of distribution in effect on the date of death.
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Generally, the same tax rules apply to amounts received by the Beneficiary
as those set forth above, except that the early withdrawal penalty tax does not
apply. Thus, any annuity payments or lump sum withdrawal will be divided into
taxable and non-taxable portions. If the Contract Owner or Annuitant dies and
within sixty days after the date on which a lump sum death benefit first becomes
payable the designated recipient elects to receive annuity payments in lieu of
the lump sum death benefit, then the designated recipient will not be treated
for tax purposes as having received the lump sum death benefit in the tax year
it first became payable. Rather, in that case, the designated recipient will be
taxed on the annuity payments as they are received.
In addition, designation of a Beneficiary who either is 37 1/2 or more
years younger or two or more generations younger (e.g. grandchild) than a
Contract Owner may have Generation Skipping Transfer Tax consequences under
section 2601 of the Code.
Certain transfers of a Contract for less than full consideration, such as a
gift, will trigger tax on the investment income in the Contract, and may also
trigger tax penalties and, if applicable, gift tax.
QUALIFIED CONTRACTS
The Contracts are available to a variety of Qualified Plans. Tax
restrictions and consequences for Contracts under each type of Qualified Plan
differ from each other and from those for Non-Qualified Contracts. In addition,
individual Qualified Plans may have terms and conditions that impose additional
rules. Therefore, no attempt is made herein to provide more than general
information about the use of the Contract with the various types of Qualified
Plans. Participants under such Qualified Plans, as well as Contract Owners,
Annuitants and Beneficiaries, are cautioned that the rights of any person to any
benefits under such Qualified Plans may be subject to the terms and conditions
of the Plans themselves or limited by applicable law, regardless of the terms
and conditions of the Contract issued in connection therewith.
THE FOLLOWING IS ONLY A GENERAL DISCUSSION ABOUT TYPES OF QUALIFIED PLANS
FOR WHICH THE CONTRACTS ARE AVAILABLE. WE ARE NOT THE ADMINISTRATOR OF ANY
QUALIFIED PLAN. IF YOU ARE PURCHASING A QUALIFIED CONTRACT, YOU SHOULD CONSULT
WITH YOUR PLAN ADMINISTRATOR AND/OR A QUALIFIED TAX ADVISER. YOU SHOULD ALSO
CONSULT WITH YOUR TAX ADVISER AND/OR PLAN ADMINISTRATOR BEFORE YOU WITHDRAW ANY
PORTION OF YOUR CONTRACT VALUE.
Individual Retirement Annuities ("IRAs")
Recent federal tax legislation has expanded the type of IRAs available to
individuals for tax deferred retirement savings. In addition to "traditional"
IRAs established under Code Section 408, there are Roth IRAs governed by Code
Section 408A and SIMPLE IRAs established under Code Section 408(p).
Contributions to each of these types of IRAs are subject to differing
limitations. In addition, distributions from each type of IRA are subject to
differing restrictions. The following is a very general description of each type
of IRA:
Traditional IRAs
- ------------------
Traditional IRAs are subject to limitations on the amount that may be
contributed, the persons who may be eligible, and on the time when distributions
must commence. Depending upon the circumstances of the individual, contributions
to a traditional IRA may be made on a deductible or non-deductible basis.
Failure to make mandatory distributions may result in imposition of a 50%
penalty tax on any difference between the required distribution amount and the
amount actually distributed. A 10% penalty tax is imposed on the amount
includable in gross income from distributions that occur before you attain age
59 1/2 and that are not made on account of death or disability, with certain
exceptions. These exceptions include distributions that are part of a series of
substantially equal periodic payments made over your life (or life expectancy)
or the joint lives (or joint life expectancies) of you and your Joint Annuitant.
Distributions of minimum amounts specified by the Code must commence by April 1
of the calendar year following the calendar year in which you attain age 70 1/2.
Additional distribution rules apply after your death.
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You may rollover funds from certain existing Qualified Plans (such as
proceeds from existing insurance policies, annuity contracts or securities) into
your traditional IRA if those funds are in cash; this will require you to
liquidate any value accumulated under the existing Qualified Plan. Mandatory
withholding of 20% may apply to any rollover distribution from your existing
Qualified Plan if the distribution is not transferred directly to your
traditional IRA; to avoid this withholding you should have cash transferred
directly from the insurance company or plan trustee to us. Similar limitations
and tax penalties apply to tax sheltered annuities, government plans, 401(k)
plans, and pension and profit-sharing plans.
SIMPLE Individual Retirement Annuities
- ---------------------------------------------
The Small Business Job Protection Act of 1996 created a new retirement
plan, the Savings Incentive Match Plan for Employees of Small Employers
("SIMPLE" Plans"). Depending upon the type of SIMPLE Plan, employers may deposit
the plan contributions into a single trust or into SIMPLE individual retirement
annuities ("SIMPLE IRAs") established by each participant. Contributions to a
SIMPLE IRA may be either salary deferral contributions or employer
contributions. Distributions from a SIMPLE IRA may be rolled over to another
SIMPLE IRA tax free or may be eligible for tax free rollover to a traditional
IRA after a required two year period. A distribution from a SIMPLE IRA, however,
is never eligible to be rolled over to a retirement plan qualified under Code
section 401 or a Section 403(b) annuity contract.
Roth IRAs
- -----------
Section 408A of the Code permits eligible individuals to establish a Roth
IRA, a new type of IRA which becomes available in 1998. Contributions to a Roth
IRA are not deductible, but withdrawals that meet certain requirements are not
subject to federal income tax. In general, Roth IRAs are subject to limitations
on the amount that may be contributed and the persons who may be eligible to
contribute and are subject to certain required distribution rules on the death
of the Contract Owner. Unlike a traditional IRA, Roth IRAs are not subject to
minimum required distribution rules during the Contract Owner's lifetime.
Generally, however, the amount remaining in a Roth IRA must be distributed by
the end of the fifth year after the death of the Contract Owner. Beginning in
1998, the owner of a traditional IRA may convert a traditional IRA into a Roth
IRA under certain circumstances. The conversion of a traditional IRA to a Roth
IRA will subject the amount of the converted traditional IRA to federal income
tax. Anyone considering the purchase of a Qualified Contract as a "conversion"
Roth IRA should consult with a qualified tax adviser.
Tax Sheltered Annuities ("TSAs")
Section 403(b) of the Code permits public school systems and certain
tax-exempt organizations to adopt annuity plans for their employees; Purchase
Payments made on Contracts purchased for these employees are excludable from the
employees' gross income (subject to maximum contribution limits). Distributions
under these Contracts must comply with certain limitations as to timing, or
result in tax penalties.
Government Plans
Section 457 of the Code permits employees of a state or local government
(or of certain other tax-exempt entities) to defer compensation through an
eligible government plan. Contributions to a Contract in connection with an
eligible government plan are subject to limitations.
401(K) Plans; Pension and Profit-Sharing Plans
Deferred compensation plans may be established by an employer for certain
eligible employees under Sections 401(a) and 401(k) of the Code. Contributions
to these plans are subject to limitations.
LOANS
Certain Qualified Contract Owners may borrow against their Contracts. If
yours is a Qualified Contract issued under Section 401 or 403 of the Code and
the terms of your Qualified Plan permit, you may request a loan from us, using
your Contract Value as your only security.
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Tax and Legal Matters
The tax and ERISA rules relating to Contract loans are complex and in many cases
unclear. For these reasons, and because the rules vary depending on the
individual circumstances of each Contract, WE URGE YOU TO CONSULT WITH A
QUALIFIED TAX ADVISER PRIOR TO EFFECTING ANY LOAN TRANSACTION UNDER YOUR
CONTRACT.
Interest paid on your loan under a 401 plan or 403 tax-sheltered annuity will be
considered "personal interest" under Section 163(h) of the Code, to the extent
the loan comes from your pre-tax contributions, even if the proceeds of your
loan are used to acquire your principal residence.
We may change these loan provisions or our administrative procedures to reflect
changes in the Code or interpretations thereof.
Loan Procedures
Your loan request must be submitted on our Loan Request Form. You may submit a
loan request at any time after your first Contract Anniversary and before your
Annuity Date; however, before requesting a new loan, you must wait thirty days
after the last payment of a previous loan. If approved, your loan will usually
be effective as of the end of the Business Day on which we receive all necessary
documentation in proper form. We will normally forward proceeds of your loan to
you within seven calendar days after the effective date of your loan. A loan
administration fee of $100 will be deducted from your loan proceeds, however, we
reserve the right to increase this fee to a maximum of $500.
In order to secure your loan, on the effective date of your loan, we will
transfer an amount equal to the principal amount of your loan into an account
called our "Loan Account." To make this transfer, we will transfer amounts
proportionately from your Fixed and Variable Investment Options, based on your
Account Value in each Investment Option.
As your loan is repaid, a portion, corresponding to the amount of the repayment
of any amount then held as security for your loan, will be transferred from the
Loan Account back into your Fixed Option and Variable Investment Options
relative to your current allocation instructions.
Loan Terms
You may have only one loan outstanding at any time. The minimum loan amount is
$1,000, subject to certain state limitations. Your Contract Debt at the
effective date of your loan may not exceed the lesser of:
-- 50% of your Contract Value;
-- $50,000 less your highest outstanding Contract Debt during the
12-month period immediately preceding the effective date of your loan.
You should refer to the terms of your particular Qualified Plan for any
additional loan restrictions. If you have other loans outstanding pursuant to
other Qualified Plans, the amount you may borrow may be further restricted.
You will be charged interest on your Contract Debt at an annual rate, set at the
time of the loan withdrawal, equal to the higher of (a) Moody's Corporate Bond
Yield Average-Monthly Average Corporates (the "Moody's Rate"), as published by
Moody's Investors Service, Inc., or its successor, for the calendar month ending
two months before the date on which the rate is determined, or (b) 5%. In the
event that the Moody's Rate is no longer available, we may substitute a
substantially similar average rate, subject to compliance with applicable state
regulations. The amount held in the Loan Account to secure your loan will earn a
return equal to an annual rate that is two percentage points lower than the
annual rate of interest charged on your Contract Debt. Interest charges accrue
on your Contract Debt daily, beginning on the effective date of your loan;
interest earnings on the Loan Account Value accrue daily beginning on the
following day, and those earnings will be transferred once a year to your Fixed
and Variable Investment Options in accordance with your current allocation
instructions.
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Repayment Terms
Your loan, including principal and accrued interest, must be repaid in quarterly
installments. An installment will be due in each quarter on the date
corresponding to the effective date of your loan, beginning with the first such
date following the effective date of your loan.
Example: On May 1, we receive your loan request, and your loan is
effective. Your first quarterly payment will be due on August 1.
Adverse tax consequences may result if you fail to meet the repayment
requirements for your loan. You must repay principal and interest of any loan in
substantially equal payments over the term of the loan. Normally, the term of
the loan will be five years from the effective date of the loan; however, if you
have certified to us that your loan proceeds are to be used to acquire a
principal residence for yourself, you may request a loan term of 30 years. In
either case, however, you must repay your loan prior to your Annuity Date. If
you elect to annuitize (or withdraw) your Net Contract Value while you have an
outstanding loan, we will deduct any Contract Debt from your Contract Value at
the time of the annuitization (or withdrawal) to repay the Contract Debt.
You may prepay your entire loan at any time; if you do so, we will bill you for
any accrued interest. Your loan will be considered repaid only when the interest
due has been paid. Subject to any necessary approval of state insurance
authorities, while you have Contract Debt outstanding, we will treat all
payments you send us as Purchase Payments unless you specifically indicate that
your payment is a loan repayment or include your loan repayment stub with your
payment. To the extent allowed by law, any loan repayments in excess of the
amount then due will be refunded to you, unless such amount is sufficient to pay
the balance of your loan.
If we have not received your full payment by its due date, we will declare the
entire remaining loan balance in default. At that time, we will send written
notification of the amount needed to bring the loan back to a current status.
You will have sixty (60) days from the date on which the loan was declared in
default (the "grace period") to make the required payment.
If the required payment is not received by the end of the grace period, the
defaulted loan balance plus accrued interest and any withdrawal charge will be
withdrawn from your Contract Value, if amounts under your Contract are eligible
for distribution. If those amounts are not eligible for distribution, the
defaulted loan balance plus accrued interest and any withdrawal charge will be
considered a Deemed Distribution and will be withdrawn when such Contract Values
become eligible for distribution. In either case, the Distribution or the Deemed
Distribution will be considered a currently taxable event, may be subject to the
mandatory 20% federal withholding, and may be subject to the early withdrawal
tax penalty.
If there is a Deemed Distribution under your Contract and to the extent allowed
by law, any future withdrawals will first be applied as repayment of the
defaulted Contract Debt, including accrued interest and charges for applicable
taxes. Any amounts withdrawn and applied as repayment of Contract Debt will
first be withdrawn from your Loan Account and then from your Investment Options
on a proportionate basis relative to the Account Value in each account. If you
have an outstanding loan that is in default, the defaulted Contract Debt will be
considered a withdrawal for the purpose of calculating any Death Benefit Amount
and/or Guaranteed Minimum Death Benefit Amount.
WITHHOLDING
Unless you elect to the contrary, any amounts you receive under your Contract
that are attributable to investment income will be subject to withholding to
meet federal and state income tax obligations. The rate of withholding on
annuity payments made to you will be determined on the basis of the withholding
information you provide to us with your application. If you do not provide us
with required withholding information, we will withhold, from every withdrawal
from your Contract and from every annuity payment to you, the appropriate
percentage of the taxable amount of the payment. Please call us at
1-800-722-5558 with any questions about the required withholding information.
For purposes of determining your withholding rate on annuity payments, you will
be treated as a married person with three exemptions, unless requested
otherwise. The rate of federal withholding on all other payments made to you
under your Contract, such as amounts you
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receive upon withdrawals, will be 10%, unless otherwise specified by the Code.
Generally, there will be no withholding for taxes until you actually receive
payments under your Contract.
Distributions from a Contract under a Qualified Plan (not including an
individual retirement annuity subject to Code Section 408 or Code Section 408A)
to an employee, surviving spouse, or former spouse who is an alternate payee
under a qualified domestic relations order, in the form of a lump sum settlement
or periodic annuity payments for a fixed period of fewer than 10 years are
subject to mandatory income tax withholding of 20% of the taxable amount of the
distribution, unless (1) the distributee directs the transfer of such amounts in
cash to another Qualified Plan or a traditional IRA; or (2) the payment is a
minimum distribution required under the Code. The taxable amount is the amount
of the distribution less the amount allocable to after-tax contributions. All
other types of taxable distributions are subject to withholding unless the
distributee elects not to have withholding apply.
Certain states have indicated that pension and annuity withholding will apply to
payments made to residents. Generally, an election out of federal withholding
will also be considered an election out of state withholding.
IMPACT OF FEDERAL INCOME TAXES
In general, if you expect to accumulate your Contract Value over a relatively
long period of time without making significant withdrawals, there should be tax
advantages, regardless of your tax bracket, in purchasing a Contract rather
than, for example, a mutual fund with a similar investment policy and
approximately the same level of expected investment results. This is because
little or no income taxes are incurred by you or by us while you are
participating in the Subaccounts, and it is generally advantageous to defer the
payment of income taxes, so that the investment return is compounded without any
deduction for income taxes. The advantage will be greater if you decide to
liquidate your Contract Value in the form of monthly annuity payments after your
retirement, or if your tax rate is lower at that time than during the period
that you held the Contract, or both.
TAXES ON PACIFIC LIFE
Although the Separate Account is registered as an investment company, it is not
a separate taxpayer for purposes of the Code. The earnings of the Separate
Account are taxed as part of our operations. No charge is made against the
Separate Account for our federal income taxes (excluding the charge for premium
taxes), but we will review, periodically, the question of charges to the
Separate Account or your Contract for such taxes. Such a charge may be made in
future years for any federal income taxes that would be attributable to the
Separate Account or to our operations with respect to your Contract, or
attributable, directly or indirectly, to Purchase Payments on your Contract.
Under current law, we may incur state and local taxes (in addition to premium
taxes) in several states. At present, these taxes are not significant and they
are not charged against the Contract or the Separate Account. If there is a
material change in applicable state or local tax laws, the imposition of any
such taxes upon us that are attributable to the Separate Account or to our
operations with respect to your Contract may result in a corresponding charge
against the Separate Account or your Contract.
ADDITIONAL INFORMATION
PERFORMANCE INFORMATION
We may provide you with historical performance information from time to time,
and we may include historical performance information in advertisements and
promotional literature. We may show performance information on total return of
the Subaccount, the yield and effective yield of the Subaccount investing in the
Money Market Fund, and the yield of the remaining Variable Accounts.
Calculations will be in accordance with formulas prescribed by the SEC, which
are described in the Statement of Additional Information.
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We may also provide you with reports on our rating as an insurance company and
on our claims-paying ability that are produced by rating agencies and
organizations.
VOTING RIGHTS
We are the legal owner of the shares of the Funds held by the Subaccounts, and
consequently have the right to vote on any matter voted on at Trust
shareholders' meetings. However, our interpretation of applicable law requires
us to vote the shares attributable to your Variable Account Value ("your voting
interest") in accordance with your directions.
We will pass shareholder proxy materials on to you so that you have an
opportunity to give us voting instructions for your voting interest. You may
provide your instructions by proxy or in person at the shareholders' meeting. If
there are shares of a Fund held by a Subaccount for which we do not receive
timely voting instructions, we will vote those shares in the same proportion as
all other shares of that Fund held by that Subaccount for which we have received
timely voting instructions. If we hold shares of a Fund in our General Account,
or hold unvoted shares in the Separate Account, and/or if any of our
non-insurance subsidiaries hold shares of a Fund, such shares will be voted in
the same proportion as other votes cast by all of our separate accounts in the
aggregate, including Separate Account B.
We may elect, in the future, to vote shares of the Funds held in Separate
Account B in our own right if we are permitted to do so through a change in
applicable federal securities laws or regulations, or in their interpretation.
The number of Fund shares that form the basis for your voting interest is
determined as of the record date set by the Board of Trustees of the Trust. It
is equal to (a) your number of Subaccount Units (or Subaccount Annuity Units
after annuitization) times the applicable Unit Value, divided by (b) the net
asset value per share of that Fund. Fractional votes will be counted. We reserve
the right, if required or permitted by a change in federal regulations or their
interpretation, to amend how we calculate your voting interest.
After your Annuity Date, if you have selected a variable annuity, the voting
rights under your Contract will continue during the payout period of your
annuity, but the number of shares that form the basis for your voting interest,
as described above, will decrease throughout the payout period.
CHANGES TO YOUR CONTRACT
Contract Owner(s) and Contingent Owner
You may change your Non-Qualified Contract at any time prior to your Annuity
Date to name a different Contract Owner or to add a Joint Owner, or to add or
change a Contingent Owner; if yours is a Qualified Contract, you must be the
only Contract Owner, but you may still add or change a Contingent Owner. Your
Contract cannot name more than two Contract Owners (Joint Owners) and one
Contingent Owner at any time. Any newly-named Contract Owners, including Joint
and/or Contingent Owners, must be under the age of 86 at the time of change or
addition. Joint ownership is in the form of a joint tenancy. The Contract
Owner(s) may make all decisions regarding the Contract, including making
allocation decisions and exercising voting rights. Transactions under jointly
owned Contracts require authorization from both Contract Owners. Transfer of
Contract ownership may involve federal income tax consequences; you should
consult a qualified tax adviser before effecting such a transfer. A change to
joint Contract ownership is considered a transfer of ownership.
Annuitant and Contingent or Joint Annuitant
Your sole Annuitant cannot be changed, and Joint Annuitants cannot be added or
changed, once your Contract is issued. Certain changes may be permitted in
connection with Contingent Annuitants. See RETIREMENT BENEFITS AND OTHER
PAYOUTS--SELECTING YOUR ANNUITANT. There may be limited exceptions for certain
Qualified Contracts.
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Beneficiaries
Your Beneficiary is a person(s) who may receive death benefits under your
Contract. You may change or remove your Beneficiary or add Beneficiaries at any
time prior to the death of the Annuitant or Owner, as applicable. If you have
named your Beneficiary irrevocably, you will need to obtain that Beneficiary's
consent before making any changes. Qualified Contracts may have additional
restrictions on naming and changing Beneficiaries; for example, if your Contract
was issued in connection with a Qualified Plan subject to Title I of ERISA, your
spouse must either be your Beneficiary or consent to your naming of a different
Beneficiary. If you leave no surviving Beneficiary, your estate will receive any
death benefit proceeds under your Contract.
CHANGES TO ALL CONTRACTS
If, in the judgment of our management, continued investment by Separate Account
B in one or more of the Funds becomes unsuitable or unavailable, we may seek to
alter the Variable Investment Options available under the Contracts. We do not
expect that a Fund will become unsuitable, but unsuitability issues could arise
due to changes in investment policies, market conditions, or tax laws, or due to
marketing or other reasons.
Alterations of Variable Investment Options may take differing forms. We reserve
the right to replace shares of any Fund that were already purchased under any
Contract (or shares that were to be purchased in the future under a Contract)
with shares of another Fund, shares of another investment company or series of
an investment company, or another investment vehicle. We may also purchase,
through a Subaccount, other securities for other series or other classes of
contracts, and may permit conversions or exchanges between series or classes of
contracts on the basis of Contract Owner requests. Required approvals of the SEC
and state insurance regulators will be obtained before any such substitutions
are effected, and you will be notified of any planned substitution.
We may add new Subaccounts to Separate Account B, and any new Subaccounts may
invest in Funds or in other investment vehicles; availability of any new
Subaccounts to existing Contract Owners will be determined at our discretion. We
will notify you, and will comply with the filing or other procedures established
by applicable state insurance regulators, to the extent required by applicable
law. We also reserve the right, after receiving any required regulatory
approvals, to do any of the following:
- cease offering any Subaccount
- combine Subaccounts
- delete or substitute Subaccounts
- combine Separate Account B or part of it with another of our separate
accounts or with any of our affiliates' separate accounts
- transfer Separate Account B assets attributable to the Contracts to
another of our separate accounts
- deregister the Separate Account under the 1940 Act
- operate Separate Account B as a management investment company under the
1940 Act or another form permitted by law
- establish a committee, board or other group to manage aspects of the
Separate Account's operations
- make any changes required by the 1940 Act or other federal securities
laws
- make any changes necessary to maintain the status of the Contracts as
annuities under the Code
- make other changes required under federal or state law relating to
annuities
- suspend or discontinue sale of the Contracts.
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INQUIRIES AND SUBMITTING FORMS AND REQUESTS
You may reach our service representatives at 1-800-722-5558 between the
hours of 6:00 a.m. and 5:00 p.m., Pacific time.
Please send your forms and written requests or questions to:
Pacific Life Insurance Company
P.O. Box 7187
Pasadena, California 91109-7187
If you are submitting a purchase or other payment by mail, please send it,
along with your application if you are submitting one, to:
Pacific Life Insurance Company
P.O. Box 100060
Pasadena, California 91189-0060
If you are using an overnight delivery service to send payments, please
send them to:
Pacific Life Insurance Company
c/o FCNPC
1111 South Arroyo Parkway, First Floor
Pasadena, California 91105
The effective date of certain notices or of instructions is determined by
the date and time on which we "receive" the notice or instructions. We "receive"
this information only when it arrives, in proper form, at the correct mailing
address set out above. Please call us at 1-800-722-5558 if you have any
questions regarding which address you should use.
Purchase Payments after your initial Purchase Payment, loan requests,
transfer requests, loan repayments and withdrawal requests we receive before
4:00 p.m. Eastern time will normally be effective on the same Business Day that
we receive them in "proper form," unless the transaction or event is scheduled
to occur on another day. Generally, whenever you submit any other form, notice
or request, your instructions will be effective on the next Business Day after
we receive them in "proper form" unless the transaction or event is scheduled to
occur on another day. "Proper form" may require, among other things, a signature
guarantee or other verification of authenticity. We may require a signature
guarantee if an executed application or confirmation of application, as
applicable and in proper form, has not been received by us; if it appears that
your signature has changed over time; or, due to other circumstances. Requests
regarding death benefits must be accompanied by both proof of death and
instructions regarding payment satisfactory to us. You should call your
registered representative or Pacific Life if you have questions regarding the
required form of a request.
TELEPHONE TRANSACTIONS
After your "Right to Cancel" period, you may make transfer requests by
telephone if you have authorized telephone requests (a "telephone
authorization"). We cannot guarantee that you will always be able to reach us to
complete a telephone transaction; for example, all telephone lines may be busy
during certain periods, such as periods of substantial market fluctuations or
other drastic economic or market change, or telephones may be out of service
during severe weather conditions or other emergencies. Under these
circumstances, you should submit your request in writing (or other form
acceptable to us). Transaction instructions we receive by telephone before 4:00
p.m. Eastern time on any Business Day will normally be effective on that day,
and we will send you written confirmation of each telephone transfer.
We have established procedures reasonably designed to confirm that
instructions communicated by telephone are genuine. These procedures may require
any person requesting a telephone transaction to provide certain personal
identification upon our request. We may also record all or part of any telephone
conversation with respect to transaction instructions. We reserve the right to
deny any transaction request made by
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telephone. When you make a proper request for a telephone authorization, you
authorize us to accept and to act upon instructions received by telephone with
respect to your Contract, and you agree that, as long as we comply with our
procedures, none of Pacific Life, our affiliates, the Trust, or any of their
directors, trustees, officers, employees or agents will be liable for any loss,
liability, cost or expense (including attorneys' fees) in connection with
requests that are effected in accordance with your telephone authorization and
that we believe to be genuine. This policy means that you will bear the risk of
loss arising out of your telephone transaction privileges. If a Contract has
Joint Owners, both Owners must sign the written request for a telephone
authorization, but each Owner individually may make transfer requests by
telephone.
TIMING OF PAYMENTS AND TRANSACTIONS
For withdrawals from the Variable Investment Options or for death benefit
payments attributable to your Variable Account Value, we will normally send the
proceeds within seven calendar days after your withdrawal request is effective
or after the Notice Date, as the case may be. Similarly, for transfers from the
Variable Investment Options, we will normally send the proceeds within seven
calendar days after your transfer (or exchange) request is effective. We will
normally effect periodic annuity payments on the day that corresponds to the
Annuity Date and will make payment on the following day. Payments or transfers
may be suspended for a longer period under certain abnormal circumstances. These
include a closing of the New York Stock Exchange other than on a regular holiday
or weekend, a trading restriction imposed by the SEC, or an emergency declared
by the SEC. For (i) withdrawals from the Fixed Option, (ii) death benefit
payments attributable to Fixed Option Value, or (iii) fixed periodic annuity
payments, payment of proceeds may be delayed for up to six (6) months after the
request is effective. Similar delays may apply to loans and transfers from the
Fixed Option. See THE GENERAL ACCOUNT for more details.
CONFIRMATIONS, STATEMENTS AND OTHER REPORTS TO CONTRACT OWNERS
Confirmations will be sent out for Purchase Payments and unscheduled transfers,
loans, loan repayments, unscheduled partial withdrawals, a full withdrawal, and
on payment of any death benefit proceeds. Each quarter prior to your Annuity
Date, we will send you a statement that provides certain information pertinent
to your Contract. These statements disclose Contract Value, Subaccount values,
values under the Fixed Option, fees and charges applied to your Contract Value,
transactions made and specific Contract data that apply to your Contract.
Confirmations of your transactions under the pre-authorized checking plan,
dollar cost averaging, earnings sweep, portfolio rebalancing, and pre-authorized
withdrawal options will appear on your quarterly account statements. Your
fourth-quarter statement will contain annual information about your Contract
Value and transactions. If you suspect an error on a confirmation or quarterly
statement, you must notify us in writing within 30 days from the date of the
first confirmation or statement on which the transaction you believe to be
erroneous appeared. When you write, tell us your name, contract number and a
description of the suspected error. You will also be sent an annual and a
semiannual report for the Separate Account and the Trust and a list of the
securities held in each Fund of the Trust, as required by the 1940 Act; or more
frequently if required by law.
REPLACEMENT OF LIFE INSURANCE OR ANNUITIES
The term "replacement" has a special meaning in the life insurance industry and
is described more fully below. Before you make your purchase decision, Pacific
Life wants you to understand how a replacement may impact your existing plan of
insurance.
A policy "replacement" occurs when a new policy or contract is purchased and, in
connection with the sale, an existing policy or contract is surrendered, lapsed,
forfeited, assigned to the replacing insurer, otherwise terminated, or used in a
financed purchase. A "financed purchase" occurs when the purchase of a new life
insurance policy or annuity contract involves the use of funds obtained from the
values of an existing life insurance policy or annuity contract through
withdrawal, surrender or loan.
There are circumstances in which replacing your existing life insurance policy
or annuity contract can benefit you. As a general rule, however, replacement is
not in your best interest. Accordingly, you should make
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<PAGE> 39
a careful comparison of the costs and benefits of your existing policy or
contract and the proposed policy or contract to determine whether replacement is
in your best interest.
SALES COMMISSIONS
We pay sales commissions directly to broker-dealers and other expenses
associated with promotion and sales of the Contracts. Broker-dealers may receive
aggregate commissions of up to 6.5% of your aggregate Purchase Payments. Under
certain circumstances and in exchange for lower initial commissions, certain
sellers of Contracts may be paid a persistency trail commission which will take
into account, among other things, the length of time Purchase Payments have been
held under a Contract, and Account Values. A trail commission is not anticipated
to exceed 0.25%, on an annual basis, of the Account Values considered in
connection with the trail commission. We may also pay override payments, expense
allowances, bonuses, wholesaler fees and training allowances. Registered
representatives earn commissions from the broker-dealers with which they are
affiliated and such arrangements may vary. In addition, registered
representatives who meet specified production levels may qualify, under sales
incentive programs adopted by Pacific Life, to receive non-cash compensation
such as expense-paid trips, expense-paid educational seminars, and merchandise,
or to receive compensation on a deferred basis.
PREPARATION FOR THE YEAR 2000
We rely significantly on computer systems and applications in our daily
operations. In 1995, we began the process of identifying, evaluating and
implementing changes to computer programs necessary to address the year 2000
issue. This issue involves the ability of computer systems to properly recognize
the year 2000. The inability to do so could result in major failures or
miscalculations.
We have a coordinated plan to remediate, or replace if necessary, any
non-compliant systems and to obtain assurances of the ability to be year 2000
compliant by our service providers, vendors and those with significant
relationships with us. Our plan is directed and overseen by an experienced Vice
President dedicated to year 2000 compliance. We completed the identification of
all critical systems and are in the process of remediating systems. In addition,
we have retained two internationally recognized consultants to assist in
reviewing and remediating our systems and interfaces with third parties. Our
plan calls for all remediation to be completed by the fourth quarter of 1998 and
testing to commence as remediation is completed and throughout 1999. Some
testing has already begun.
Remediation expenses to make our systems year 2000 compliant are currently
estimated to range from $15 to $20 million, which excludes the cost of our
personnel who support year 2000 compliance efforts. We do not anticipate any
other material future costs associated with the year 2000 compliance project,
although there can be no assurance. We currently expect to be year 2000
compliant; however there can be no assurances that we will succeed. In the event
we, or our significant service providers, vendors, financial institutions or
others with which we conduct business, fail to be year 2000 compliant, there
would be a materially adverse effect on us.
FINANCIAL STATEMENTS
Audited Financial Statements of Separate Account B as of December 31, 1997
are incorporated by reference in the Statement of Additional Information from
the Annual Report of Separate Account B dated December 31, 1997. Pacific Life's
audited consolidated financial statements as of December 31, 1997 and 1996 and
for the three years ended December 31, 1997 are contained in the SAI.
LEGAL MATTERS
Legal Matters in connection with the issue and sale of the Contracts
described in this Prospectus, Pacific Life's authority to issue the Contracts
under California law, and the validity of the forms of the Contracts under
California law have been passed upon by David R. Carmichael, Esq., Senior Vice
President and General Counsel of Pacific Life.
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<PAGE> 40
Legal matters relating to the Federal securities and Federal income tax
laws have been passed upon by Dechert Price & Rhoads, Washington, D.C.
THE GENERAL ACCOUNT
GENERAL INFORMATION
All amounts allocated to the Fixed Option become part of our General
Account. Subject to applicable law, we exercise sole discretion over the
investment of General Account assets, and bear the associated investment risk;
you will not share in the investment experience of General Account assets.
Because of exemptive and exclusionary provisions, interests in the General
Account under the Contract are not registered under the Securities Act of 1933
and the General Account has not been registered as an investment company under
the 1940 Act. Any interest you have in the Fixed Option is not subject to these
Acts, and we have been advised that the SEC staff has not reviewed disclosure in
this Prospectus relating to the Fixed Option. This disclosure may, however, be
subject to certain provisions of federal securities laws relating to the
accuracy and completeness of statements made in prospectuses.
GUARANTEE TERMS
When you allocate any portion of your Purchase Payments or Contract Value
to the Fixed Option in the General Account, we guarantee you an interest rate (a
"Guaranteed Interest Rate") for a specified period of time (a "Guarantee Term")
of up to one year. Guarantee Terms will be offered at our discretion.
Guaranteed Interest Rates for each Fixed Option may be changed periodically
for new allocations; your allocation will receive the Guaranteed Interest Rate
in effect for that Fixed Option on the effective date of your allocation. All
Guaranteed Interest Rates will be expressed as annual effective rates; however,
interest will accrue daily. The Guaranteed Interest Rate on your Fixed Option
will remain in effect for the Guarantee Term and will never be less than an
annual rate of 3%.
Fixed Option
EACH ALLOCATION (OR ROLL-OVER) YOU MAKE TO THE FIXED OPTION RECEIVES A
GUARANTEE TERM THAT BEGINS ON THE DAY THAT ALLOCATION OR ROLL-OVER IS EFFECTIVE
AND ENDS AT THE END OF EACH CONTRACT YEAR OR, IF EARLIER, ON YOUR ANNUITY DATE.
At the end of each Contract Year, we will roll over your Fixed Option Value on
that day into a new Guarantee Term of one year (or, if shorter, the time
remaining until your Annuity Date) with a new Guaranteed Interest Rate, unless
you instruct us otherwise.
Example: Your Contract Anniversary is February 1. On February 1 of year 1,
you allocate $1,000 to the Fixed Option and receive a Guarantee Term of one
year and a Guaranteed Interest Rate of 5%. On August 1, you allocate
another $500 to the Fixed Option and receive a Guaranteed Interest Rate of
6%. Through January 31, year 1, your first allocation of $1,000 earns 5%
interest and your second allocation of $500 earns 6% interest. On February
1, year 2, a new interest rate may go into effect for your entire Fixed
Option Value.
WITHDRAWALS AND TRANSFERS
Prior to the Annuity Date, you may withdraw amounts from your Fixed Option,
or transfer amounts from your Fixed Option to one or more of the other
Investment Options. If your Contract was issued in a state that requires refund
of Purchase Payments under the Right to Cancel Right, or if your contract is an
IRA, transfers may only be made after your Right to Cancel Transfer Date. In
addition, no partial withdrawal or transfer may be made from your Fixed Option
within 30 days of the Contract Date. If your withdrawal leaves you with a Net
Contract Value of less than $1,000, we have the right, at our option, to
terminate your Contract and send you the withdrawal proceeds.
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<PAGE> 41
Payments or transfers from the Fixed Option may be delayed, as described
under ADDITIONAL INFORMATION--TIMING OF PAYMENTS AND TRANSACTIONS; any amount
delayed will, as long as it is held under the Fixed Option, continue to earn
interest at the Guaranteed Interest Rate then in effect until that Guarantee
Term has ended, and the minimum guaranteed interest rate of 3% thereafter,
unless state law requires a greater rate be paid.
Fixed Option
You may make one transfer or partial withdrawal from your Fixed Option
during any Contract Year, except that this limitation does not apply under the
dollar cost averaging, earnings sweep and pre-authorized withdrawal programs.
You may make one transfer or one partial withdrawal within the 30 days after the
end of each Contract Anniversary. Normally, you may transfer or withdraw up to
one-half (50%) of your Fixed Option Value in any given Contract Year. However,
in consecutive Contract Years, you may transfer or withdraw 50% of your Fixed
Option Value in the first year and your remaining Fixed Option Value in the
second consecutive year. In addition, if, as a result of a partial withdrawal or
transfer, the Fixed Option Value is less than $500, we have the right, at our
option, to transfer the entire remaining amount to your other Investment Options
on a proportionate basis relative to your most recent allocation instructions.
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<PAGE> 42
CONTENTS OF THE STATEMENT OF ADDITIONAL INFORMATION
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PERFORMANCE................................................. 1
Total Returns.......................................... 1
Yields................................................. 2
Performance Comparisons and Benchmarks................. 3
Insurance Company Rating Information................... 3
Separate Account Performance........................... 4
Tax Deferred Accumulation.............................. 4
DISTRIBUTION OF THE CONTRACTS............................... 6
Pacific Mutual Distributors, Inc....................... 6
THE CONTRACTS AND THE SEPARATE ACCOUNT...................... 7
Calculating Subaccount Unit Values..................... 7
Variable Annuity Payment Amounts....................... 7
Corresponding Dates.................................... 9
Age and Sex of Annuitant............................... 10
Systematic Transfer Programs........................... 10
Pre-Authorized Withdrawals............................. 12
Death Benefit.......................................... 12
Joint Annuitants on Qualified Contracts................ 13
1035 Exchanges......................................... 13
Safekeeping of Assets.................................. 13
Dividends.............................................. 13
Waivers and Reduced Charges............................ 14
FINANCIAL STATEMENTS........................................ 14
</TABLE>
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APPENDIX A:
STATE LAW VARIATIONS
Issue Date--The term "Issue Date" shall be substituted for the term "Contract
Date" for Contracts issued to residents of the Commonwealth of Massachusetts.
RIGHT TO CANCEL
VARIATIONS TO THE LENGTH OF THE RIGHT TO CANCEL PERIOD. In most states, the
Right to Cancel period is a 10-day period beginning on the day you receive your
Contract. If your Contract was issued in one of the following states on your
Contract Date, the Right to Cancel period is as specified below:
Idaho (20 days)
Oregon (15 days)
In addition, if you reside in California and are age 60 or older on your
Contract Date, the Right to Cancel period is 30 days.
STATES THAT REQUIRE US TO REFUND YOUR PURCHASE PAYMENTS ALLOCATED TO THE
VARIABLE INVESTMENT OPTIONS INSTEAD OF YOUR VARIABLE ACCOUNT VALUE. If your
Contract was issued in one of the following states on your Contract Date and you
exercise your Right to Cancel and return your Contract to us within 10 days of
your receipt of your Contract (unless specified otherwise below), we will refund
your Purchase Payments under your Contract that we received:
Idaho (20 days)
Oregon (15 days)
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To receive a current copy of the Pacific Innovations SAI (Form No. 317-8A)
without charge, complete the following and send it to:
Pacific Life Insurance Company
Variable Annuities
Post Office Box 7187
Pasadena, California 91109-7187
<TABLE>
<S> <C> <C> <C>
Name
Address
City State Zip
</TABLE>
316-8A
<PAGE> 45
STATEMENT OF ADDITIONAL INFORMATION
MAY 1, 1998
PACIFIC INNOVATIONS VARIABLE ANNUITY
SEPARATE ACCOUNT B
------------------------
Pacific Innovations Variable Annuity (the "Contract") is a variable annuity
contract issued by Pacific Life Insurance Company ("Pacific Life").
This Statement of Additional Information is not a Prospectus and should be read
in conjunction with the Contract's Prospectus, dated May 1, 1998, which is
available without charge upon written or telephone request to Pacific Life.
Terms used in this Statement of Additional Information ("SAI") have the same
meanings as in the Prospectus, and some additional terms are defined
particularly for this SAI.
------------------------
Pacific Life Insurance Company
Mailing Address: P.O. Box 7187
Pasadena, California 91109-7187
1-800-722-5558
<PAGE> 46
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PERFORMANCE................................................. 1
Total Returns.......................................... 1
Yields................................................. 2
Performance Comparisons and Benchmarks................. 3
Insurance Company Rating Information................... 3
Separate Account Performance........................... 4
Tax Deferred Accumulation.............................. 4
DISTRIBUTION OF THE CONTRACTS............................... 6
Pacific Mutual Distributors, Inc....................... 6
THE CONTRACTS AND THE SEPARATE ACCOUNT...................... 7
Calculating Subaccount Unit Values..................... 7
Variable Annuity Payment Amounts....................... 7
Corresponding Dates.................................... 9
Age and Sex of Annuitant............................... 10
Systematic Transfer Programs........................... 10
Pre-Authorized Withdrawals............................. 12
Death Benefit.......................................... 12
Joint Annuitants on Qualified Contracts................ 13
1035 Exchanges......................................... 13
Safekeeping of Assets.................................. 13
Dividends.............................................. 13
Waivers and Reduced Charges............................ 14
FINANCIAL STATEMENTS........................................ 14
</TABLE>
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<PAGE> 47
PERFORMANCE
From time to time, our reports or other communications to current or
prospective Contract Owners or our advertising or other promotional material may
quote the performance (yield and total return) of a Subaccount. Quoted results
are based on past performance and reflect the performance of all assets held in
that Subaccount for the stated time period. QUOTED RESULTS ARE NEITHER AN
ESTIMATE NOR A GUARANTEE OF FUTURE INVESTMENT PERFORMANCE, AND DO NOT REPRESENT
THE ACTUAL EXPERIENCE OF AMOUNTS INVESTED BY ANY PARTICULAR CONTRACT OWNER.
TOTAL RETURNS
A Subaccount may advertise its "average annual total return" over various
periods of time. "Total return" represents the average percentage change in
value of an investment in the Subaccount from the beginning of a measuring
period to the end of that measuring period. "Annualized" total return assumes
that the total return achieved for the measuring period is achieved for each
such period for a full year. "Average annual" total return is computed in
accordance with a standard method prescribed by the SEC.
Average Annual Total Return
To calculate a Subaccount's average annual total return for a specific
measuring period, we first take a hypothetical $1,000 investment in that
Subaccount, at its then-applicable Subaccount Unit Value (the "initial payment")
and we compute the ending redeemable value ("Cash Surrender Value") of that
initial payment at the end of the measuring period. The redeemable value
reflects the effect of all recurring fees and charges applicable to a Contract
Owner under the Contract, including the Risk Charge, the asset-based
Administrative Fee and the deduction of the applicable withdrawal charge, but
does not reflect any charges for applicable premium taxes and/or other taxes.
The Annual Fee is also taken into account, assuming an average Contract Value of
$35,000. The redeemable value is then divided by the initial payment and this
quotient is taken to the Nth root (N represents the number of years in the
measuring period), and 1 is subtracted from this result. Average annual total
return is expressed as a percentage.
T = (ERV/P)to the power of [1/N] - 1
where T = average annual total return
ERV = ending redeemable value
P = hypothetical initial payment of $1,000
N = number of years
Average annual total return figures will be given for recent one-, five-
and ten-year periods (if applicable), and may be given for other periods as well
(such as from commencement of the Subaccount's operations, or on a year-by-year
basis). Average annual return information may be accompanied by total return
information that does not take the withdrawal charge or other fees into account.
When considering "average" total return figures for periods longer than one
year, it is important to note that the relevant Subaccount's annual total return
for any one year in the period might have been greater or less than the average
for the entire period.
Aggregate Total Return
A Subaccount may use "aggregate" total return figures along with its
"average annual" total return figures for various periods; these figures
represent the cumulative change in value of an investment in the Subaccount for
a specific period. Aggregate total returns may be shown by means of schedules,
charts or graphs and may indicate subtotals of the various components of total
return. The SEC has not prescribed standard formulas for calculating aggregate
total return.
Total returns may also be shown for the same periods that do not take into
account the withdrawal charge or the Annual Fee.
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<PAGE> 48
YIELDS
Money Market Subaccount
The "yield" (also called "current yield") of the Money Market Subaccount is
computed in accordance with a standard method prescribed by the SEC. The net
change in the Subaccount's Unit Value during a seven-day period is divided by
the Unit Value at the beginning of the period to obtain a base rate of return.
The current yield is generated when the base rate is "annualized" by multiplying
it by the fraction 365/7; that is, the base rate of return is assumed to be
generated each week over a 365-day period and is shown as a percentage of the
investment. At December 31, 1997, the Money Market Subaccount current yield was
2.97% and the effective yield was 3.02%. The "effective yield" of the Prime
Subaccount is calculated similarly but, when annualized, the base rate of return
is assumed to be reinvested. The effective yield will be slightly higher than
the current yield because of the compounding effect of this assumed
reinvestment.
The formula for effective yield is: [(Base Period Return +1) (To the power
of 365/7)] -1.
Realized capital gains or losses and unrealized appreciation or
depreciation of the assets of the underlying Money Market Portfolio are not
included in the yield calculation. Current yield and effective yield do not
reflect the deduction of charges for any applicable premium taxes and/or other
taxes, but do reflect a deduction for the Annual Fee, the Risk Charge and the
asset-based Administrative Fee and assume an average Contract Value of $35,000.
Yield information may be accompanied by yield quotations that do not take
certain charges into account.
Other Subaccounts
"Yield" of the other Subaccounts is computed in accordance with a different
standard method prescribed by the SEC. The net investment income (investment
income less expenses) per Subaccount Unit earned during a specified one-month or
30-day period is divided by the Subaccount Unit Value on the last day of the
specified period. This result is then annualized (that is, the yield is assumed
to be generated each month or each 30-day period for a year), according to the
following formula, which assumes semiannual compounding:
YIELD = 2([(((a-b)/cd) + 1) to the power of 6] - 1)
where: a = net investment income earned during the period by the
Portfolio attributable to the Subaccount.
b = expenses accrued for the period (net of reimbursements).
c = the average daily number of Subaccount Units outstanding
during the period that were entitled to receive dividends.
d = the Unit Value of the Subaccount Units on the last day of the
period.
The yield of each Subaccount reflects the deduction of all recurring fees
and charges applicable to the Subaccount, such as the Risk Charge, the
asset-based Administrative Fee and the Annual Fee (assuming an average Contract
Value of $35,000), but does not reflect any withdrawal charge or any charge for
applicable premium taxes and/or other taxes. Yield information may be
accompanied by yield quotations that do not take certain charges into account.
General
The Subaccounts' total return and yields will vary from time to time
depending upon market conditions, the composition of each Portfolio and
operating expenses of the Trust allocated to each Portfolio. Consequently, any
given performance quotation should not be considered representative of the
Subaccount's performance in the future. Total return and yield should also be
considered relative to changes in Subaccount Unit Values and to the relative
risks associated with the investment policies and objectives of the various
Portfolios. In addition, because performance will fluctuate, it may not provide
a basis for comparing the total return or yield of a Subaccount with certain
bank deposits or other investments that pay a fixed yield or return for a stated
period of time.
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<PAGE> 49
PERFORMANCE COMPARISONS AND BENCHMARKS
In advertisements and sales literature, we may compare the performance of some
or all of the Subaccounts to the performance of other variable annuity issuers
in general and to the performance of particular types of variable annuities
investing in mutual funds, or series of mutual funds, with investment objectives
similar to each of the Funds underlying the Subaccounts. This performance may be
presented as averages or rankings compiled by, among others, Lipper Analytical
Services, Inc. ("Lipper"), the Variable Annuity Research and Data Service
("VARDS(R)") or Morningstar, Inc. ("Morningstar"), which are independent
services that monitor and rank the performance of variable annuity issuers
and/or mutual funds in each of the major categories of investment objectives on
an industry-wide basis. Lipper's rankings include variable life issuers as well
as variable annuity issuers. VARDS(R) rankings compare only variable annuity
issuers. The performance analyses prepared by Lipper and VARDS(R) rank such
issuers on the basis of total return, assuming reinvestment of dividends and
distributions, but do not take sales charges, redemption fees or certain expense
deductions at the separate account level into consideration. In addition,
VARDS(R) prepares risk adjusted rankings, which consider the effects of market
risk on total return performance. We may also compare the performance of the
Subaccounts with performance information included in other publications and
services that monitor the performance of insurance company separate accounts or
other investment vehicles. These other services or publications may be general
interest business publications such as The Wall Street Journal, Barron's,
Business Week, Forbes, Fortune, and Money.
In addition, our reports and communications to Contract Owners, advertisements,
or sales literature may compare a Subaccount's performance to various benchmarks
that measure the performance of a pertinent group of securities widely regarded
by investors as being representative of the securities markets in general or as
being representative of a particular type of security. These benchmarks include
the following: (1) the Standard & Poor's 500 Composite Stock Price Index ("S&P
500"), an unmanaged weighted index of 500 companies that represent approximately
80% of the market capitalization of the United States equity markets; (2) the
Consumer Price Index ("CPI"), published by the U.S. Bureau of Labor Statistics,
a statistical measure of change, over time, in the prices of goods and services
in major expenditure groups and generally considered to be a measure of
inflation; (3) the Dow Jones Industrial Average ("DJIA"); (4) the Donoghue Money
Market Institutional Averages; (5) the Lehman Brothers Government Corporate
Index; (6) the Lehman Brothers Government Bond Index; (7) the Salomon Brothers
High Yield Bond Indices; and (8) the Morgan Stanley Capital International's EAFE
Index. We may also compare the performance of the Subaccounts with that of other
appropriate indices of investment securities and averages for peer universes of
funds or data developed by us derived from such indices or averages. Unmanaged
indices generally assume the reinvestment of dividends or interest but do not
generally reflect deductions for investment management or administrative costs
and expenses.
INSURANCE COMPANY RATING INFORMATION
We may also advertise or report to you our ratings as an insurance company by
the A.M. Best Company. Each year, A.M. Best reviews the financial status of
thousands of insurers, culminating in the assignment of Best's Ratings. These
ratings reflect Best's current opinion of the relative financial strength and
operating performance of an insurance company in comparison to the norms of the
life/health industry. Best's Ratings range from A++ to F. An A++ rating means,
in the opinion of A.M. Best, that the insurer has demonstrated the strongest
ability to meet its respective policyholder and other contractual obligations.
A.M. Best publishes Best's Insurance Reports, Life-Health Edition. As of the
date of this SAI, A.M. Best reported our rating for financial position and
operating performance as A+.
In addition, our claims-paying ability as measured by the Standard & Poor's
Corporation ("Standard & Poor's") may be referred to in advertisements or in
reports to Contract Owners. A Standard & Poor's insurance claims-paying ability
rating is an assessment of an operating insurance company's financial capacity
to meet the obligations of its insurance policies in accordance with their
terms. Standard & Poor's ratings range from AAA to D. As of the date of this
SAI, Standard & Poor's rates our claims-paying ability as AA+.
3
<PAGE> 50
We may additionally advertise our rating from Duff & Phelps Credit Rating
Co. ("Duff & Phelps"). A Duff & Phelps rating is an assessment of a company's
insurance claims-paying ability. Duff & Phelps ratings range from AAA to CCC. As
of the date of this SAI, Duff & Phelps rates our claims-paying ability as AA+.
We may advertise our insurance financial strength rating from Moody's
Investors Service, Inc. ("Moody's"). Moody's ratings range from Aaa to C. As of
the date of this SAI, Moody's gave us a rating of Aa3.
SEPARATE ACCOUNT PERFORMANCE
The following table presents the annualized total return for each
Subaccount for the period from each such Subaccount's commencement of operations
through December 31, 1997. The table is based on a Contract for which the
average initial premium is approximately $35,000. The Accumulated Value (AV)
reflects the deductions for all contractual expenses except the withdrawal
charge. The Full Withdrawal Value (FWV) reflects the deduction for all
contractual expenses.
The results shown in this section are not an estimate or guarantee of
future investment performance.
TOTAL RETURNS FOR PERIOD ENDED DECEMBER 31, 1997
ALL NUMBERS ARE EXPRESSED AS A PERCENTAGE
<TABLE>
<CAPTION>
SINCE INCEPTION*
----------------
SUBACCOUNTS AV FWV
----------- ------ ------
<S> <C> <C>
Money Market................................. 3.03% (3.36)%
Managed Bond................................. 5.35 (1.04)
Capital Income............................... 13.41 7.03
Blue Chip.................................... 21.83 15.44
Mid-Cap Equity............................... 26.31 19.92
Aggressive Growth............................ 16.28 9.89
International................................ (0.61) (7.00)
</TABLE>
- ---------------
* Date Subaccounts commenced operations is February 28, 1997.
TAX DEFERRED ACCUMULATION
In reports or other communications to you or in advertising or sales
materials, we may also describe the effects of tax-deferred compounding on the
Separate Account's investment returns or upon returns in general. These effects
may be illustrated in charts or graphs and may include comparisons at various
points in time of returns under the Contract or in general on a tax-deferred
basis with the returns on a taxable basis. Different tax rates may be assumed.
In general, individuals who own annuity contracts are not taxed on
increases in the value under the annuity contract until some form of
distribution is made from the contract. Thus, the annuity contract will benefit
from tax deferral during the accumulation period, which generally will have the
effect of permitting an investment in an annuity contract to grow more rapidly
than a comparable investment under which increases in value are taxed on a
current basis. The following chart illustrates this benefit by comparing
accumulation under a variable annuity contract with accumulations from an
investment on which gains are taxed on a current basis. The chart shows
accumulations on an initial Purchase Payment of $10,000, assuming hypothetical
annual returns of 0%, 4% and 8%, compounded annually, and a tax rate of 36%. The
values shown for the taxable investment do not include any deduction for
management fees or other expenses but assume that taxes are deducted annually
from investment returns. The values shown for the variable annuity do not
reflect the deduction of contractual expenses such as the Risk Charge (equal to
an annual rate of 1.25% of average daily account value), the Administrative Fee
(equal to an annual rate of 0.15% of average daily account value), and the
Annual Fee (equal to $30 per year if Net Contract Value is $50,000 or less), any
charge for premium taxes and/or other taxes, or the expenses of an underlying
investment vehicle, such as the Trust. The values shown also do not reflect the
withdrawal charge. Generally, the withdrawal charge is equal to 7% of the amount
withdrawn attributable to premiums that are one year old, 6% of the amount
withdrawn attributable to premiums that are two years old, 5% of the amount
withdrawn attributable to premiums that are three years old, 3% of the amount
withdrawn attributable to premiums that are four years old, 1% of the
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amount withdrawn attributable to premiums that are five years old, and 0% of the
amount withdrawn attributable to premiums that are six years old or older. The
age of premiums is determined as described in the Prospectus. There is no
withdrawal charge to the extent that total withdrawals that are free of charge
during the Contract Year do not exceed 10% of the sum of your remaining Purchase
Payments at the beginning of the Contract Year that have been held under your
Contract for less than six years plus additional Purchase Payments applied to
your Contract during that Contract Year. For a description of the charges and
expenses under the Contract, see FEE TABLE and CHARGES, FEES AND DEDUCTIONS in
the Prospectus. If these expenses and fees were taken into account, they would
reduce the investment return shown for both the taxable investment and the
hypothetical variable annuity contract. In addition, these values assume that
you do not surrender the Contract or make any withdrawals until the end of the
period shown. The chart assumes a full withdrawal, at the end of the period
shown, of all Contract Value and the payment of taxes at the 36% rate on the
amount in excess of the Purchase Payment.
The rates of return illustrated are hypothetical and are not an estimate or
guarantee of performance. Actual tax rates may vary for different taxpayers from
that illustrated and withdrawals by Contract Owners who have not reached age
59 1/2 may be subject to a tax penalty of 10%.
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POWER OF TAX DEFERRAL
$10,000 investment at annual rates of return of 0%, 4% and 8%, taxed @ 36%
PERFORMANCE GRAPH
DISTRIBUTION OF THE CONTRACTS
PACIFIC MUTUAL DISTRIBUTORS, INC.
Pacific Mutual Distributors, Inc. ("PMD"), a wholly-owned subsidiary of
ours, acts as the principal underwriter of the Contracts and offers the
Contracts on a continuous basis. We and PMD enter into selling agreements with
broker-dealers whose registered representatives are authorized by state
insurance departments to sell the Contracts.
The aggregate amount of underwriting commissions paid to PMD for 1997 with
regard to this Contract was $2,649,979, of which $0 was retained. We and PMD
enter into selling agreements with broker-dealer whose registered
representatives are authorized by state insurance departments to sell the
Contracts.
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THE CONTRACTS AND THE SEPARATE ACCOUNT
CALCULATING SUBACCOUNT UNIT VALUES
The Unit Value of the Subaccount Units in each Variable Investment Option
is computed as of the end of each Business Day. The initial Unit Value of each
Subaccount was $10 on the Business Day the Subaccount began operations. At the
end of each Business Day, the Unit Value for a Subaccount is equal to:
Y X Z
where (Y) = the Unit Value for that Subaccount as of the end of the
preceding Business Day; and
(Z) = the Net Investment Factor for that Subaccount for the period
(a "valuation period") between that Business Day and the
immediately preceding Business Day.
The "Net Investment Factor" for a Subaccount for any valuation period is
equal to:
(A X B) - C
where (A) = the "per share value of the assets" of that Subaccount as of
the end of that valuation period, which is equal to: a+b+c
where (a) = the net asset value per share of the corresponding Portfolio
shares held by that Subaccount as of the end of that valuation
period;
(b) = the per share amount of any dividend or capital gain
distributions made by the Trust for that Portfolio during that
valuation period; and
(c) = any per share charge (a negative number) or credit (a positive
number) for any income taxes and/or any other taxes or other
amounts set aside during that valuation period as a reserve
for any income and/or any other taxes which we determine to
have resulted from the operations of the Subaccount or
Contract, and/or any taxes attributable, directly or
indirectly, to Purchase Payments;
(B) = the net asset value per share of the corresponding Portfolio
shares held by the Subaccount as of the end of the preceding
valuation period; and
(C) = a factor that assesses against the Subaccount net assets for
each calendar day in the valuation period, the charge for
mortality and expense risks at a rate that is equal on an
annual basis to an annual factor expressed as a decimal (where
1.00 is equal to 100%) of 0.0125 and the Administrative Charge
at a rate that is equal on an annual basis to an annual factor
of 0.0015 (see CHARGES, FEES AND DEDUCTIONS in the
Prospectus).
As explained in the Prospectus, the Annual Fee, if applicable, is assessed
against your Variable Account Value through the automatic debit of Subaccount
Units; the Annual Fee decreases the number of Subaccount Units attributed to
your Contract but does not alter the Unit Value for any Subaccount.
VARIABLE ANNUITY PAYMENT AMOUNTS
The following steps show how we determine the amount of each variable
annuity payment under your Contract.
First: Pay Applicable Premium Taxes
When you convert your Net Contract Value into annuity payments, you must
pay any applicable charge for premium taxes and/or other taxes on your Contract
Value (unless applicable law requires those taxes to be paid at a later time).
We assess this charge by reducing your Contract Value, proportionately, relative
to your Account Value in each Subaccount and in the Fixed Option, in an amount
equal to the aggregate amount of the charges. The remaining amount of your
available Contract Value may be used to provide variable annuity
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payments. Alternatively, your remaining available Contract Value may be used to
provide fixed annuity payments, or it may be divided to provide both fixed and
variable annuity payments. You may also choose to withdraw some or all of your
remaining Net Contract Value, less any applicable Annual Fees, withdrawal
charge, and any charges for premium taxes and/or other taxes without converting
this amount into annuity payments.
Second: The First Variable Payment
We begin by referring to your Contract's Option Table for your Annuity Option
(the "Annuity Option Table"). The Annuity Option Table allows us to calculate
the dollar amount of the first variable annuity payment under your Contract,
based on the amount applied toward the variable annuity. The number that the
Annuity Option Table yields will be based on the Annuitant's age (and, in
certain cases, sex) and assumes a 5% investment return, as described in more
detail below.
Example: Assume a man is 65 years of age at his Annuity Date and has
selected a lifetime annuity with monthly payments guaranteed for 10 years.
According to the Annuity Option Table, this man should receive an initial
monthly payment of $5.79 for every $1,000 of his Contract Value (reduced by
applicable charges) that he will be using to provide variable payments.
Therefore, if his Contract Value after deducting applicable fees and
charges is $100,000 on his Annuity Date and he applies this entire amount
toward his variable annuity, his first monthly payment will be $579.00.
Third: Subaccount Annuity Units
For each Subaccount, we use the amount of the first variable annuity payment
under your Contract attributable to each Subaccount to determine the number of
Subaccount Annuity Units that will form the basis of subsequent payment amounts.
First, we use the Annuity Option Table to determine the amount of that first
variable payment for each Subaccount. Then, for each Subaccount, we divide that
amount of the first variable annuity payment by the value of one Subaccount
Annuity Unit (the "Subaccount Annuity Unit Value") as of the end of the Annuity
Date to obtain the number of Subaccount Annuity Units for that particular
Subaccount. The number of Subaccount Annuity Units used to calculate subsequent
payments under your Contract will not change unless exchanges of Annuity Units
are made (or if the Joint and Survivor Annuity Option is elected and the Primary
Annuitant dies first), but the value of those Annuity Units will change daily,
as described below.
Fourth: The Subsequent Variable Payments
The amount of each subsequent variable annuity payment will be the sum of the
amounts payable based on each Subaccount. The amount payable based on each
Subaccount is equal to the number of Subaccount Annuity Units for that
Subaccount multiplied by their Subaccount Annuity Unit Value at the end of the
Business Day in each payment period you elected that corresponds to the Annuity
Date.
Each Subaccount's Subaccount Annuity Unit Value, like its Subaccount Unit Value,
changes each day to reflect the net investment results of the underlying
investment vehicle, as well as the assessment of the Risk Charge at a rate equal
on an annual basis to the annual factor expressed as a decimal (where 1.00 is
equal to 100%) of 0.0125 and the Administrative Fee at a rate equal on an annual
basis to the annual factor of 0.0015. In addition, the calculation of Subaccount
Annuity Unit Value incorporates an additional factor; as discussed in more
detail below, this additional factor adjusts Subaccount Annuity Values to
correct for the Option Table's implicit assumption of a 5% annual investment
return on amounts applied but not yet used to furnish annuity benefits.
Different Subaccounts may be selected for your Contract before and after your
Annuity Date, subject to any restrictions we may establish. Currently, you may
exchange Subaccount Annuity Units in any Subaccount for Subaccount Annuity Units
in any other Subaccount(s) up to four times in any twelve month period after you
annuitize. The number of Subaccount Annuity Units in any Subaccount may change
due to such exchanges. Exchanges following annuitization will be made by
exchanging Subaccount Annuity Units of equivalent aggregate value, based on
their relative Subaccount Annuity Unit Values.
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Understanding the "Assumed Investment Return" Factor
The Annuity Option Table incorporates a number of implicit assumptions in
determining the amount of your first variable annuity payment. As noted above,
the numbers in the Annuity Option Table reflect certain actuarial assumptions
based on the Annuitant's age, and, in some cases, the Annuitant's sex. In
addition, these numbers assume that the amount of your Contract Value that you
convert to a variable annuity will have a positive investment return of 5% each
year during the payout of your annuity; thus 5% is referred to as an "assumed
investment return."
The Subaccount Annuity Unit Value for a Subaccount will increase only to the
extent that the investment performance of that Subaccount exceeds its Risk
Charge, the Administrative Fee, and the assumed investment return. The
Subaccount Annuity Unit Value for any Subaccount will generally be less than the
Subaccount Unit Value for that same Subaccount, and the difference will be the
amount of the assumed investment return factor.
Example: Assume the investment performance of a Subaccount is at a rate of
6.40% per year. The Subaccount Unit Value for that Subaccount would
increase at a rate of 5.00% per year (6.40% minus the Risk Charge at the
annual rate of 1.25% and minus the Administrative Fee at the annual rate of
0.15% equals 5.00%), but the Subaccount Annuity Unit Value would not
increase (or decrease) at all. The net investment factor for that 5% return
[1.05] is then divided by the factor for the 5% assumed investment return
[1.05] and 1 is subtracted from the result to determine the adjusted rate
of change in Subaccount Annuity Unit Value: 1.05/1.05 = 1; 1 - 1 = 0; 0 X
100% = 0%.
If the investment performance of a Subaccount's assets is at a rate less than
6.40% per year, the Subaccount Annuity Unit Value will decrease, even if the
Subaccount Unit Value is increasing.
Example: Assume the investment performance of a Subaccount is at a rate of
4.00% per year. The Subaccount Unit Value for that Subaccount would
increase at a rate of 2.60% per year (4.00% minus the Risk Charge at the
annual rate of 1.25% and minus the Administrative Fee at the annual rate of
0.15% equals 2.60%), but the Subaccount Annuity Unit Value would decrease
at a rate of 2.29% per year. The net investment factor for that 2.6% return
[1.026] is then divided by the factor for the 5% assumed investment return
[1.05] and 1 is subtracted from the result to determine the adjusted rate
of change in Subaccount Annuity Unit Value: 1.026/1.05 = 0.9771; 0.9771 - 1
= -0.0229; -0.0229 X 100% = -2.29%.
The assumed investment return will always cause increases in Subaccount Annuity
Unit Values to be somewhat less than if the assumption had not been made; will
cause decreases in Subaccount Annuity Unit Values to be somewhat greater than if
the assumption had not been made; and will (as shown in the example above)
sometimes cause a decrease in Subaccount Annuity Unit Values to take place when
an increase would have occurred if the assumption had not been made. If we had
assumed a higher investment return in our Annuity Option tables, it would
produce annuities with larger first payments, but the increases in subaccount
annuity payments would be smaller and the decreases in subsequent annuity
payments would be greater; a lower assumed investment return would produce
annuities with smaller first payments, and the increases in subsequent annuity
payments would be greater and the decreases in subsequent annuity payments would
be smaller.
CORRESPONDING DATES
If any transaction or event under your Contract is scheduled to occur on a
"corresponding date" that does not exist in a given calendar period, the
transaction or event will be deemed to occur on the following Business Day. In
addition, as stated in the Prospectus, any event scheduled to occur on a day
that is not a Business Day will occur on the next succeeding Business Day.
Example: If your Contract is issued on February 29 in year 1 (a leap year),
your Contract Anniversary in years 2, 3 and 4 will be on March 1.
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Example: If your Annuity Date is July 31 and you select monthly annuity
payments, the payments received will be based on valuations made on July
31, August 31, October 1 (for September), October 31, December 1 (for
November), December 31, January 31, March 1 (for February), March 31, May 1
(for April), May 31 and July 1 (for June).
AGE AND SEX OF ANNUITANT
As mentioned in the Prospectus, the Contracts generally provide for sex-distinct
annuity income factors in the case of life annuities. Statistically, females
tend to have longer life expectancies than males; consequently, if the amount of
annuity payments is based on life expectancy, they will ordinarily be higher if
an annuitant is male than if an annuitant is female. Certain states' regulations
prohibit sex-distinct annuity income factors, and Contracts issued in those
states will use unisex factors. In addition, Contracts issued in connection with
Qualified Plans are required to use unisex factors.
We may require proof of your Annuitant's age and sex before or after commencing
annuity payments. If the age or sex (or both) of your Annuitant are incorrectly
stated in your Contract, the amount payable will be corrected to equal the
amount that the annuitized portion of the Contract Value under that Contract
would have purchased for your Annuitant's correct age and sex. If the correction
is effected after annuity payments have commenced, and we have made overpayments
based on the incorrect information, we will deduct the amount of the
overpayment, with interest at 3% a year, from any payments due then or later; if
we have made underpayments, we will add the amount, with interest at 3% a year,
of the underpayments to the next payment we make after we receive proof of the
correct sex and/or date of birth.
SYSTEMATIC TRANSFER PROGRAMS
Dollar Cost Averaging
When you request dollar cost averaging, you are authorizing us to make periodic
reallocations of your Contract Value without waiting for any further instruction
from you. You may request to begin or stop dollar cost averaging at any time
prior to your Annuity Date; the effective date of your request will be the day
we receive written notice from you in proper form. Your request may specify the
date on which you want your first transfer to be made. If you do not specify a
date for your first transfer, we will treat your request as if you had specified
the effective date of your request. Your first transfer may not be made until 30
days after your Contract Date, and if you specify an earlier date, your first
transfer will be delayed until one calendar month after the date you specify. If
you request dollar cost averaging on your application for your Contract and you
fail to specify a date for your first transfer, your first transfer will be made
one period after your Contract Date (that is, if you specify monthly transfers,
the first transfer will occur 30 days after your Contract Date; quarterly
transfers, 90 days after your Contract Date; semiannual transfers, 180 days
after your Contract Date; and if you specify annual transfers, the first
transfer will occur on your Contract Anniversary). If you stop dollar cost
averaging, you must wait 30 days before you may begin this option again.
Your request to begin dollar cost averaging must specify the Investment Option
you wish to transfer money from (your "source account"). You may choose any one
Variable Investment Option or the Fixed Option as your source account. The
Account Value of your source account must be at least $5,000 for you to begin
dollar cost averaging.
Your request to begin dollar cost averaging must also specify the amount and
frequency of your transfers. You may choose monthly, quarterly, semiannual or
annual transfers. The amount of your transfers may be specified as a dollar
amount or a percentage of your source Account Value; however, each transfer must
be at least $250. Dollar cost averaging transfers are subject to the same
requirements and limitations as other transfers.
Finally, your request must specify the Variable Investment Option(s) you wish to
transfer amounts to (your "target account(s)"). If you select more than one
target account, your dollar cost averaging request must specify how transferred
amounts should be allocated among the target accounts. Your source account may
not also be a target account.
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Your dollar cost averaging transfers will continue until the earlier of (i) your
request to stop dollar cost averaging is effective, (ii) your source Account
Value is zero, or (iii) you annuitize. If, as a result of a dollar cost
averaging transfer, your source Account Value falls below any minimum Account
Value we may establish, we have the right, at our option, to transfer that
remaining Account Value to your target account(s) on a proportionate basis
relative to your most recent allocation instructions. You may not use dollar
cost averaging and the earnings sweep at the same time. We may change, terminate
or suspend the dollar cost averaging option at any time.
Portfolio Rebalancing
Portfolio rebalancing allows you to maintain the percentage of your Contract
Value allocated to each Variable Investment Option at a pre-set level prior to
annuitization. For example, you could specify that 30% of your Contract Value
should be in the Capital Income Subaccount, 40% in the Blue Chip Subaccount, and
30% in the Aggressive Growth Subaccount. Over time, the variations in each
Subaccount's investment results will shift this balance of these Subaccount
Value allocations. If you elect the portfolio rebalancing feature, we will
automatically transfer your Subaccount Value back to the percentages you
specify.
You may choose to have rebalances made quarterly, semiannually or annually until
your Annuity Date; portfolio rebalancing is not available after you annuitize.
Procedures for selecting portfolio rebalancing are generally the same as those
discussed in detail above for selecting dollar cost averaging: You may make your
request at any time prior to your Annuity Date and it will be effective when we
receive it in proper form. If you stop portfolio rebalancing, you must wait 30
days to begin again. You may specify a date for your first rebalance, or we will
use the request date as the effective date. If you specify a date fewer than 30
days after your Contract Date, your first rebalance will be delayed one month,
and if you request rebalancing on your application but do not specify a date for
the first rebalance, it will occur one period after your Contract Date, as
described above under Dollar Cost Averaging. We may change, terminate or suspend
the portfolio rebalancing feature at any time.
Earnings Sweep
An earnings sweep automatically transfers the earnings attributable to a
specified Investment Option (the "sweep option") to one or more other Investment
Options (your "target option(s)"). If you elect to use the earnings sweep, you
may select either the Fixed Option or the Money Market Subaccount as your sweep
option. The Account Value of your sweep option will be required to be at least
$5,000 when you elect the earnings sweep. You may select one or more Variable
Investment Options (but not the Money Market Subaccount) as your target
option(s).
You may choose to have earnings sweeps occur monthly, quarterly, semiannually or
annually until you annuitize. At each earnings sweep, we will automatically
transfer only your accumulated earnings attributable to your sweep option for
the previous period proportionately to your target option(s). That is, if you
select a monthly earnings sweep, we will transfer the sweep option earnings from
the preceding month; if you select a semiannual earnings sweep, we will transfer
the sweep option earnings accumulated over the preceding six months. Earnings
sweep transfers are subject to the same requirements and limitations as other
transfers.
To determine the earnings, we take the change in the sweep option's Account
Value during the sweep period, add any withdrawals or transfers out of the sweep
option Account that occurred during the sweep period, and subtract any
allocations to the sweep option Account during the sweep period. The result of
this calculation represents the "total earnings" for the sweep period.
If, during the sweep period, you withdraw or transfer amounts from the sweep
option Account, we assume that earnings are withdrawn or transferred before any
other Account Value. Therefore, your "total earnings" for the sweep period will
be reduced by any amounts withdrawn or transferred during the sweep option
period. The remaining earnings are eligible for the sweep transfer.
Procedures for selecting the earnings sweep are generally the same as those
discussed in detail above for selecting dollar cost averaging and portfolio
rebalancing: You may make your request at any time and it will be
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effective when we receive it in proper form. If you stop the earnings sweep, you
must wait 30 days to begin again. You may specify a date for your first sweep,
or we will use your request date as the effective date. If you specify a date
fewer than 30 days after your Contract Date, your first earnings sweep will be
delayed one month, and if you request the earnings sweep on your application but
do not specify a date for the first sweep, it will occur one period after your
Contract Date, as described above under Dollar Cost Averaging.
If you are using the earnings sweep, you may also use portfolio rebalancing only
if you selected the Fixed Option as your sweep option. You may not use the
earnings sweep and dollar cost averaging at the same time. If, as a result of an
earnings sweep transfer, your source Account Value falls below any minimum
Account Value we may establish, we have the right, at our option, to transfer
that remaining Account Value to your target account(s) on a proportionate basis
relative to your most recent allocation instructions. We may change, terminate
or suspend the earnings sweep option at any time.
PRE-AUTHORIZED WITHDRAWALS
You may specify a dollar amount for your pre-authorized withdrawals, or you may
specify a percentage of your Contract Value or an Account Value. You may direct
us to make your pre-authorized withdrawals from one or more specific Fixed or
Variable Investment Options; if you do not give us these specific directions,
amounts will be deducted proportionately from your Account Value in each Fixed
or Variable Investment Option.
Procedures for selecting pre-authorized withdrawals are generally the same as
those discussed in detail above for selecting dollar cost averaging, portfolio
rebalancing, and earnings sweeps. You may make your request at any time and it
will be effective when we receive it in proper form. If you stop the
pre-authorized withdrawals, you must wait 30 days to begin again. You may
specify a date for the first withdrawal, or we will use your request date as the
effective date. If you specify a date fewer than 30 days after your Contract
Date, your first pre-authorized withdrawal will be delayed one month, and if you
request the pre-authorized withdrawals on your application but do not specify a
date for the first withdrawal, it will occur one period after your Contract
Date.
If your pre-authorized withdrawals cause your Account Value in any Investment
Option to fall below any minimum Account Value we establish, we have the right,
at our option, to transfer that remaining Account Value to your other Investment
Options on a proportionate basis relative to your most recent allocation
instructions. If your pre-authorized withdrawals cause your Contract Value to
fall below $1,000, we may, at our option, terminate your Contract and send you
the remaining withdrawal proceeds.
Pre-authorized withdrawals are subject to the same withdrawal charges as are
other withdrawals, and each withdrawal is subject to any applicable charge for
premium taxes and/or other taxes, to federal income tax on its taxable portion,
and, if you have not reached age 59 1/2, a 10% tax penalty.
DEATH BENEFIT
The standard death benefit payable will be calculated as of the date we receive
proof (in proper form) of the Annuitant's death (or, if applicable, the Contract
Owner's death) and instructions regarding payment. Any Guaranteed Minimum Death
Benefit payable will be calculated as of the date we are first notified of the
death. Any claim of a death benefit must be made in proper form. A recipient of
death benefit proceeds may elect to have this benefit paid in one lump sum, in
periodic payments, in the form of a lifetime annuity or in some combination of
these. Annuity payments normally will begin within 30 days once we receive all
information necessary to process the claim.
If your Contract names Joint or Contingent Annuitants, no death benefit will be
payable unless and until the last Annuitant dies prior to the Annuity Date or a
Contract Owner dies prior to the Annuity Date. If yours is a Qualified Contract,
your Contingent Annuitant or Contingent Owner must be your spouse. If both the
Contract Owner(s) and the Annuitant(s) are non-natural persons, no death benefit
will be payable, and any distribution will be treated as a withdrawal and
subject to any applicable charges for Annual Fees, transaction fees, withdrawal
fees, premium taxes and/or other taxes, and withdrawal charges.
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Death of an Annuitant
If a Joint Annuitant who is not a Contract Owner dies prior to the Annuity Date,
the surviving Joint Annuitant becomes your Annuitant. If your Annuitant is not a
Contract Owner and dies, or if there is no surviving Joint Annuitant, your
surviving Contingent Annuitant becomes your Annuitant. If there is no surviving
Contingent Annuitant, the death benefit becomes payable.
Any death benefit payable on the death of your Annuitant is payable to the
surviving Beneficiary. If no Beneficiary survives, any death benefit will be
payable to the surviving Owner, if there is one; if not, any death benefit will
be payable to the Owner's estate.
Death of a Contract Owner
If any Contract Owner dies prior to the Annuity Date while the Annuitant is
still living, a death benefit may be payable. If that Contract Owner was the
sole Annuitant or a Joint Annuitant under the Contract, any death benefit will
be payable to the surviving Beneficiary, or to your estate if no Beneficiary
survives. If that Contract Owner was not an Annuitant under the Contract, any
death benefit will be payable to the surviving Joint Owner of the Contract, if
there is one; if not, the death benefit will be payable to the surviving
Contingent Owner, if there is one; if not, any death benefit will be payable to
the surviving designated Beneficiary, or to the Owner's estate if no designated
Beneficiary survives. If the Joint or Contingent Owner is the deceased Contract
Owner's surviving spouse, he or she may elect to become the Contract Owner and
continue the Contract rather than receive the death benefit proceeds.
JOINT ANNUITANTS ON QUALIFIED CONTRACTS
If your Contract was issued in connection with a Qualified Plan subject to Title
I of the Employee Retirement Income Security Act of 1974 ("ERISA"), you may be
permitted to add a Joint Annuitant on your Annuity Date. You may call us for
more information.
1035 EXCHANGES
You may make your initial Purchase Payment through an exchange of an existing
annuity contract. To exchange, you must complete a 1035 Exchange form, which is
available by calling your representative, or by calling us at 1-800-722-5558,
and mail the form along with the annuity contract you are exchanging (plus your
completed application if you are making an initial Purchase Payment) to us.
In general terms, Section 1035 of the Code provides that you recognize no gain
or loss when you exchange one annuity contract solely for another annuity
contract. However, transactions under Section 1035 may be subject to special
rules and may require special procedures and record-keeping, particularly if the
exchanged annuity contract was issued prior to August 14, 1982. You should
consult your tax adviser prior to effecting a 1035 Exchange.
SAFEKEEPING OF ASSETS
We are responsible for the safekeeping of the assets of the Separate Account.
These assets are held separate and apart from the assets of our General Account
and our other separate accounts.
DIVIDENDS
The current dividend scale is zero and we do not anticipate that dividends will
be paid. If any dividend is paid, you may elect to receive the dividend in cash
or to add the dividend to your Contract Value. If you make no election, the
dividend will be added to your Contract Value. We will allocate any dividend to
Contract Value in accordance with your most recent allocation instructions,
unless instructed otherwise. You should consult with your tax adviser before
making an election.
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WAIVERS AND REDUCED CHARGES
We will credit additional amounts to Contracts owned by Eligible Persons if such
Contracts are purchased directly through Pacific Mutual Distributors, Inc. Under
such circumstances, Eligible Persons will not be afforded the benefit of
services of any other broker/dealer nor will commissions be payable to any
broker/dealer in connection with such purchases. Eligible Persons must contact
us directly with servicing questions, Contract changes and other matters
relating to their Contracts. The amount credited to Contracts owned by Eligible
Persons will equal the reduction in expenses we enjoy by not incurring brokerage
commissions in selling such Contracts, with such crediting being made in
accordance with our administrative procedures.
FINANCIAL STATEMENTS
Audited financial statements of Separate Account B as of December 31, 1997 and
for the year then ended are incorporated by reference in this SAI from the
Annual Report of the Separate Account dated as of December 31, 1997. Pacific
Life's audited consolidated financial statements as of December 31, 1997 and
1996 and for the three years ended December 31, 1997 are set forth beginning on
the next page. These financial statements should be considered only as bearing
on our ability to meet our obligations under the Contracts and not as bearing on
the investment performance of the assets held in the Separate Account.
The consolidated financial statements of Pacific Life as of December 31, 1997
and 1996 and for the three years ended December 31, 1997 have been audited by
Deloitte & Touche LLP, independent auditors as stated in their report appearing
herein.
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INDEPENDENT AUDITORS' REPORT
Pacific Life Insurance Company and Subsidiaries:
We have audited the accompanying consolidated statements of financial condition
of Pacific Life Insurance Company (formerly Pacific Mutual Life Insurance
Company) and subsidiaries (the "Company") as of December 31, 1997 and 1996, 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, 1997. 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 generally accepted auditing
standards. 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, such consolidated financial statements present fairly, in all
material respects, the financial position of Pacific Life Insurance Company and
subsidiaries as of December 31, 1997 and 1996, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1997 in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Costa Mesa, California
February 19, 1998
15
<PAGE> 62
Pacific Life Insurance Company and Subsidiaries
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
December 31,
1997 1996
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
(In Millions)
ASSETS
Investments:
Securities available for sale at estimated fair value:
Fixed maturity securities $ 13,990.7 $ 12,193.8
Equity securities 346.4 260.8
Mortgage loans 1,922.1 1,477.3
Real estate 192.1 280.0
Policy loans 3,769.2 3,131.8
Short-term investments 83.8 66.1
Other investments 380.2 208.0
- ----------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS 20,684.5 17,617.8
Cash and cash equivalents 110.4 109.0
Deferred policy acquisition costs 716.9 531.5
Accrued investment income 255.4 202.5
Other assets 636.5 462.4
Separate account assets 11,605.1 8,142.1
- ----------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 34,008.8 $ 27,065.3
====================================================================================================
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities:
Universal life, annuity and other investment contract deposits $ 16,644.5 $ 13,877.4
Future policy benefits 2,133.8 2,506.5
Short-term and long-term debt 253.6 270.1
Other liabilities 1,224.5 572.0
Separate account liabilities 11,605.1 8,142.1
- ----------------------------------------------------------------------------------------------------
Total Liabilities 31,861.5 25,368.1
- ----------------------------------------------------------------------------------------------------
Commitments and contingencies
Stockholder's Equity:
Common stock - $50 par value; 600,000 shares authorized,
issued and outstanding 30.0
Paid-in capital 120.1
Retained earnings 1,422.0 1,318.0
Unrealized gain on securities available for sale, net 575.2 379.2
Total Stockholder's Equity 2,147.3 1,697.2
- ----------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $ 34,008.8 $ 27,065.3
====================================================================================================
</TABLE>
See Notes to Consolidated Financial Statements
16
<PAGE> 63
Pacific Life Insurance Company and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended December 31,
1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(In Millions)
REVENUES
Insurance premiums $ 504.3 $ 465.4 $ 458.5
Policy fees from universal life, annuity and other investment
contract deposits 431.2 348.6 309.0
Net investment income 1,225.3 1,087.3 1,038.4
Net realized capital gains 85.3 44.0 61.5
Commission revenue 146.6 79.6 62.0
Other income 181.7 123.1 90.3
- ----------------------------------------------------------------------------------------------------------------
TOTAL REVENUES 2,574.4 2,148.0 2,019.7
- ----------------------------------------------------------------------------------------------------------------
BENEFITS AND EXPENSES
Interest credited to universal life, annuity and other investment
contract deposits 797.8 665.0 675.2
Policy benefits paid or provided 675.7 652.9 647.5
Commission expenses 303.7 233.6 197.5
Operating expenses 507.7 316.2 278.6
- ----------------------------------------------------------------------------------------------------------------
TOTAL BENEFITS AND EXPENSES 2,284.9 1,867.7 1,798.8
- ----------------------------------------------------------------------------------------------------------------
INCOME BEFORE PROVISION FOR INCOME TAXES 289.5 280.3 220.9
Provision for income taxes 113.5 113.7 86.1
- ----------------------------------------------------------------------------------------------------------------
NET INCOME $ 176.0 $ 166.6 $ 134.8
================================================================================================================
</TABLE>
See Notes to Consolidated Financial Statements
17
<PAGE> 64
Pacific Life Insurance Company and Subsidiaries
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
Unrealized
Gain (Loss)
on Securities
Common Stock Paid-in Retained Available
Shares Amount Capital Earnings for Sale, net Total
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
(In Millions)
BALANCES,
JANUARY 1, 1995 -- -- -- $1,016.6 ($ 207.3) $ 809.3
Net income -- -- -- 134.8 -- 134.8
Change in unrealized gain (loss) on
securities available for sale, net -- -- -- -- 689.3 689.3
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCES,
DECEMBER 31, 1995 -- -- -- 1,151.4 482.0 1,633.4
Net income -- -- -- 166.6 -- 166.6
Change in unrealized gain on
securities available for sale, net -- -- -- -- (102.8) (102.8)
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCES,
DECEMBER 31, 1996 -- -- -- 1,318.0 379.2 1,697.2
Net income -- -- -- 176.0 -- 176.0
Change in unrealized gain on
securities available for sale, net -- -- -- -- 196.0 196.0
Issuance of partnership units by affiliate -- -- $ 85.1 -- -- 85.1
Initial member capitalization
of Pacific Mutual Holding Company -- -- -- (2.0) -- (2.0)
Issuance of common stock 0.6 $ 30.0 35.0 (65.0) --
Dividend paid to parent -- -- -- (5.0) -- (5.0)
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCES,
DECEMBER 31, 1997 0.6 $ 30.0 $ 120.1 $1,422.0 $ 575.2 $2,147.3
===================================================================================================================================
</TABLE>
See Notes to Consolidated Financial Statements
18
<PAGE> 65
Pacific Life Insurance Company and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31,
1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(In Millions)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 176.0 $ 166.6 $ 134.8
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization on fixed maturities (26.6) (45.2) (67.2)
Depreciation and other amortization 38.3 43.8 36.8
Deferred income taxes (14.4) (49.8) (30.3)
Net realized capital gains (85.3) (44.0) (61.5)
Net change in deferred policy acquisition costs (185.4) (140.4) 48.8
Interest credited to universal life, annuity and other
investment contract deposits 797.8 665.0 675.2
Change in accrued investment income (52.9) (3.7) (16.1)
Change in future policy benefits (372.7) 62.3 88.8
Change in other assets and liabilities 577.4 158.1 151.9
- ----------------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 852.2 812.7 961.2
- ----------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Securities available for sale:
Purchases (6,343.2) (4,525.0) (3,001.3)
Sales 2,247.5 2,511.0 1,940.3
Maturities and repayments 2,406.8 1,184.7 926.9
Held to maturity securities:
Purchases (181.9)
Sales 62.3
Maturities and repayments 111.0
Repayments of mortgage loans 179.3 220.4 267.7
Proceeds from sales of mortgage loans and real estate 104.4 14.5 27.4
Purchases of mortgage loans and real estate (643.7) (414.3) (244.7)
Distributions from partnerships 91.6 78.8 49.0
Change in policy loans (637.4) (338.5) (389.8)
Change in short-term investments (17.7) 37.2 (66.7)
Other investing activity, net 78.8 (144.5) (137.2)
- ----------------------------------------------------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (2,533.6) (1,375.7) (637.0)
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(Continued)
See Notes to Consolidated Financial Statements
19
<PAGE> 66
Pacific Life Insurance Company and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31,
(Continued) 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(In Millions)
CASH FLOWS FROM FINANCING ACTIVITIES
Policyholder account balances:
Deposits $ 4,373.6 $ 2,105.0 $ 1,437.9
Withdrawals (2,667.3) (1,756.6) (1,774.2)
Net change in short-term debt 8.5 42.5 (38.8)
Repayment of long-term debt (25.0) (5.0) (5.0)
Initial capitalization of Pacific Mutual Holding Company (2.0)
Dividend paid to parent (5.0)
- ----------------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 1,682.8 385.9 (380.1)
- ----------------------------------------------------------------------------------------------------------------------------------
Net change in cash and cash equivalents 1.4 (177.1) (55.9)
Cash and cash equivalents, beginning of year 109.0 286.1 342.0
- ----------------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 110.4 $ 109.0 $ 286.1
==================================================================================================================================
</TABLE>
SUPPLEMENTAL SCHEDULE OF INVESTING AND FINANCING ACTIVITIES
In connection with the acquisition of an insurance block of business as
discussed in Note 5, the following assets and liabilities were assumed:
<TABLE>
<S> <C>
Cash $1,215.9
Policy loans 440.3
Other assets 43.4
--------
Total assets assumed $1,699.6
========
Policyholder account values $1,693.8
Other liabilities 5.8
--------
Total liabilities assumed $1,699.6
========
</TABLE>
================================================================================
SUPPLEMENTAL SCHEDULE OF NON CASH FINANCING ACTIVITIES
As a result of the Conversion as discussed in Note 1, $65 million of retained
earnings was allocated for the issuance of 600,000 shares of common stock with
a par value totaling $30 million and $35 million was allocated to paid-in
capital.
================================================================================
<TABLE>
<CAPTION>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
<S> <C> <C> <C>
Income taxes paid $144.5 $185.9 $96.9
Interest paid $26.1 $27.2 $23.3
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements
20
<PAGE> 67
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
CONVERSION TO MUTUAL HOLDING COMPANY STRUCTURE
Pursuant to consent received from the Insurance Department of the State of
California, Pacific Mutual Life Insurance Company ("Pacific Mutual")
implemented a plan of conversion to form a mutual holding company
structure (the "Conversion") on September 1, 1997. The Conversion created
Pacific LifeCorp, an intermediate stock holding company and Pacific Mutual
Holding Company ("PMHC"), a mutual holding company. Pacific Mutual was
converted to a stock life insurance company and renamed Pacific Life
Insurance Company ("Pacific Life"). Under their respective charters, PMHC
must always own at least 51% of the outstanding voting stock of Pacific
LifeCorp, and Pacific LifeCorp must always own 100% of the voting stock of
Pacific Life. Owners of Pacific Life's annuity contracts and life
insurance policies have certain membership interests in PMHC, consisting
principally of the right to vote on the election of the Board of Directors
of PMHC and on other matters, and certain rights upon liquidation or
dissolution of PMHC.
As a result of the Conversion, $65 million of retained earnings was
allocated for the issuance of 600,000 shares of common stock with a par
value totaling $30 million and $35 million was allocated to paid-in
capital.
DESCRIPTION OF BUSINESS
Pacific Life was established in 1868 and is organized under the laws of
the State of California as a stock life insurance company. Pacific Life
conducts business in every state except New York.
Pacific Life and its subsidiaries and affiliates have primary business
operations which consist of life insurance, annuities, pension products,
group employee benefits and investment management and advisory services.
These primary business operations provide a broad range of life insurance,
asset accumulation and investment products for individuals and businesses
and offer a range of investment products to institutions and pension
plans. Additionally, through its major subsidiaries and affiliates,
Pacific Life provides a variety of group employee benefits, as well as
investment management and advisory services.
BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements of Pacific Life
Insurance Company and subsidiaries (the "Company") have been prepared in
accordance with generally accepted accounting principles ("GAAP") and
include the accounts of Pacific Life and its wholly-owned insurance
subsidiaries, PM Group Life Insurance Company ("PM Group") and World-Wide
Holdings Limited, and its noninsurance subsidiaries, Pacific Asset
Management LLC ("PAM"), Pacific Mutual Distributors, Inc. ("PMD"), Pacific
Mutual Realty Finance, Inc. and Pacific Mezzanine Associates, L.L.C. All
significant intercompany transactions and balances have been eliminated.
Pacific Life prepares its regulatory financial statements based on
accounting practices prescribed or permitted by the Insurance Department
of the State of California. These consolidated financial statements differ
from those followed in reports to regulatory authorities (Note 2).
PAM was initially capitalized on December 31, 1997, when Pacific Life
completed a subsidiary restructuring in which all the assets and
liabilities of Pacific Financial Asset Management Corporation ("PFAMCo")
were contributed into this newly formed limited liability company. PFAMCo
was then merged into Pacific Life. On October 30, 1997, Pacific Corinthian
Life Insurance Company ("PCL" - Note 4), a wholly-owned insurance
subsidiary, was merged into Pacific Life, with Pacific Life as the
surviving entity.
ACCOUNTING PRONOUNCEMENTS ADOPTED
In 1996, the Company adopted the provisions of Statement of Financial
Accounting Standards ("SFAS") No. 120, "Accounting and Reporting by Mutual
Life Insurance Enterprises and by Insurance Enterprises for Certain
Long-Duration Participating Contracts," and Interpretation No. 40,
"Applicability of Generally Accepted
21
<PAGE> 68
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Accounting Principles to Mutual Life Insurance and Other Enterprises" (the
"Interpretation") issued by the Financial Accounting Standards Board
("FASB"). SFAS No. 120 and the Interpretation permit mutual life insurance
companies and their insurance subsidiaries to adopt all applicable
authoritative GAAP pronouncements in any general purpose financial
statements that they may issue. This differs from prior years when the
Company issued its regulatory financial statements as general purpose
financial statements. The accompanying consolidated financial statements
for 1997, 1996 and 1995 reflect the effects of implementing SFAS No. 120
and the Interpretation.
On January 1, 1997, the Company adopted SFAS No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities," as amended by SFAS No. 127, "Deferral of the Effective Date
of Certain Provisions of FASB Statement No. 125." SFAS No. 125 is
effective for transfers and servicing of financial assets and
extinguishments of liabilities occurring after December 31, 1996. This
statement provides consistent accounting standards for securitizations and
other transfers of financial assets, determines when financial assets
(liabilities) should be considered sold (settled) and removed from the
statement of financial condition, and determines when related revenues and
expenses should be recognized. Adoption of this accounting standard did
not have a significant impact on the consolidated financial position or
results of operations of the Company.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income". SFAS No. 130 establishes standards for the reporting and display
of comprehensive income and its components in a full set of general
purpose financial statements. The Company currently plans to adopt SFAS
No. 130 on January 1, 1998.
In February 1998, the FASB issued SFAS No. 132 "Employers' Disclosures
about Pensions and Other Postretirement Benefits". SFAS No. 132 revises
current note disclosure requirements for employers' pensions and other
retiree benefits. It does not address recognition or measurement issues.
The Company plans to adopt SFAS No. 132 during 1998.
INVESTMENTS
Available for sale fixed maturity and equity securities are reported at
estimated fair value, with unrealized gains and losses, net of deferred
income tax and adjustments related to deferred policy acquisition costs,
included as a separate component of equity on the accompanying
consolidated statements of financial condition. Trading securities, which
are included in short-term investments, are reported at estimated fair
value with unrealized gains and losses included in net realized capital
gains on the accompanying consolidated statements of operations.
For mortgage-backed securities included in fixed maturity securities, the
Company recognizes income using a constant effective yield based on
anticipated prepayments and the estimated economic life of the securities.
When estimates of prepayments change, the effective yield is recalculated
to reflect actual payments to date and anticipated future payments. The
net investment in the securities is adjusted to the amount that would have
existed had the new effective yield been applied since the acquisition of
the securities. This adjustment is reflected in net investment income.
In the first and second quarter of 1995, Pacific Life sold two securities
from the held to maturity category. The amortized cost of the securities
was $62.3 million and a net after tax loss of $0.7 million was realized on
the sales. The securities were sold due to the significant deterioration
of the issuer's creditworthiness.
Beginning with the third quarter of 1995, Pacific Life transferred
approximately $1.5 billion of securities from the held to maturity
category to the available for sale category. This amount represented the
amortized cost of
22
<PAGE> 69
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
the securities at the date of transfer. The estimated fair value of those
securities was approximately $1.6 billion, resulting in a net after tax
unrealized gain of $52.5 million, which was reflected as a direct increase
to equity. The change in classification was a result of a change in
management's intent with respect to these securities. In order to have the
flexibility to respond to changes in interest rates and to take advantage
of changes in the availability of and the yield on alternative
investments, management determined that the reclassification of these
securities as available for sale was appropriate.
Realized gains and losses on investment transactions are determined on a
specific identification basis and are included in revenues.
Short-term investments are carried at estimated fair value and include all
trading securities.
Derivative financial instruments are carried at estimated fair value.
Unrealized gains and losses of derivatives used to hedge securities
classified as available for sale are reflected in a separate component of
equity, similar to the accounting of the underlying hedged assets.
Realized gains and losses on derivatives used for hedging are deferred and
amortized over the average life of the related hedged assets or insurance
liabilities. Unrealized gains and losses of other derivatives are
reflected in operations.
Mortgage loans and policy loans are stated at unpaid principal balances.
Real estate is carried at depreciated cost, or for real estate acquired in
satisfaction of debt, estimated fair value less estimated selling costs at
the date of acquisition if lower than the related unpaid balance.
On November 15, 1994, certain of the Company's investment management and
advisory subsidiaries entered into an agreement and plan of consolidation
with Thomson Advisory Group L.P., a Delaware limited partnership with
publicly traded units, to merge into a newly capitalized partnership named
PIMCO Advisors L.P. ("PIMCO Advisors"). In December 1997, PIMCO Advisors
completed a transaction in which it acquired the assets of Oppenheimer
Capital, L.P., including its interest in Oppenheimer Capital, by issuing
approximately 33 million PIMCO Advisors General and Limited Partner units.
In connection with this transaction, the Company increased its investment
in PIMCO Advisors to reflect the excess of the Company's pro rata share of
PIMCO Advisors partners' capital subsequent to this transaction over the
carrying value of the Company's investment in PIMCO Advisors. The net
result of this transaction was to directly increase stockholder's equity
by $85.1 million. The Company's beneficial ownership in PIMCO Advisors was
approximately 42% prior to this transaction and 31% subsequent to the
transaction. Deferred taxes as a result of this transaction have been
established on the accompanying consolidated financial statements. This
investment, which is included in other investments on the accompanying
consolidated statements of financial condition, is accounted for using the
equity method.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include all liquid debt instruments with an
original maturity of three months or less.
DEFERRED POLICY ACQUISITION COSTS
The costs of acquiring new insurance business, principally commissions,
medical examinations, underwriting, policy issue and other expenses, all
of which vary with and are primarily related to the production of new
business, have been deferred. For universal life, annuity and other
investment contract products, such costs are generally amortized in
proportion to the present value of expected gross profits using the
assumed crediting rate. Adjustments are reflected in earnings or equity in
the period the Company experiences deviations in gross profit assumptions.
Adjustments directly affecting equity result from experience deviations
due to changes in unrealized gains and losses in investments classified as
available for sale. For life insurance products, such costs are being
amortized over the premium-paying period of the related policies in
proportion to premium revenues
23
<PAGE> 70
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
recognized, using assumptions consistent with those used in computing
policy reserves. For the years ended December 31, 1997, 1996 and 1995, net
amortization of deferred policy acquisition costs included in commission
expenses amounted to $50.2 million, $42.6 million and $39.4 million,
respectively, and included in operating expenses amounted to $29.4
million, $27.4 million and $20.8 million, respectively, on the
accompanying consolidated statements of operations.
PRESENT VALUE OF FUTURE PROFITS
Included in other assets on the accompanying consolidated statement of
financial condition as of December 31, 1996 was $16.1 million which
represented the present value of estimated future profits of acquired
business in connection with the rehabilitation of First Capital Life
Insurance Company ("FCL" - Note 4). The aforementioned future profits were
discounted to provide an appropriate rate of return and were being
amortized over the rehabilitation plan period. Amortization for the years
ended December 31, 1997, 1996 and 1995 amounted to $16.1 million, $24.2
million and $17.1 million, respectively, and is included in commission
expenses in the accompanying consolidated statements of operations. During
1996, the Company changed certain assumptions regarding the estimated life
which resulted in an increase in amortization in 1996 of approximately
$17.0 million.
UNIVERSAL LIFE, ANNUITY AND OTHER INVESTMENT CONTRACT DEPOSITS
Universal life, annuity and other investment contract deposits are valued
using the retrospective deposit method and consist principally of deposits
received plus interest credited less accumulated assessments. Interest
credited to these policies primarily ranged from 4.0% to 8.4% during 1997,
1996 and 1995.
FUTURE POLICY BENEFITS
Life insurance reserves are valued using the net level premium method.
Interest rate assumptions range from 4.5% to 9.3% for 1997, 1996 and 1995.
Mortality, morbidity and withdrawal assumptions are generally based on the
Company's experience, modified to provide for possible unfavorable
deviations. Future dividends for participating business are provided for
in the liability for future policy benefits. Included in policy benefits
paid or provided on the accompanying consolidated statements of operations
are dividends to policyholders.
Dividends are provided based on dividend formulas approved by the Board of
Directors and reviewed for reasonableness and equitable treatment of
policyholders by an independent consulting actuary. As of December 31,
1997 and 1996, participating experience rated policies paying dividends
represented approximately 1% of direct written life insurance in force.
STATE GUARANTY FUND ASSESSMENTS
Insurance companies are subject to assessments by life and health guaranty
associations in most states in which they are licensed to do business.
These assessments are based on the volume and type of business they sell
in those states and may be partially recovered in some states through a
future reduction in premium taxes. Based on current information available
from the National Organization of Life and Health Guaranty Association,
the Company, as of December 31, 1997, has accrued in other liabilities on
the accompanying consolidated statements of financial condition an amount
adequate for anticipated payments of known insolvencies, net of estimated
recoveries of premium tax offsets.
REVENUES AND EXPENSES
Insurance premiums are recognized as revenue when due. Benefits and
expenses, other than deferred policy acquisition costs, are recognized
when incurred.
24
<PAGE> 71
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Generally, receipts for universal life, annuities and other investment
contracts are classified as deposits. Policy fees from these contracts
include mortality charges, surrender charges and earned policy service
fees. Expenses related to these products include interest credited to
account balances and benefit amounts in excess of account balances.
Commission revenue from Pacific Life's broker dealer subsidiaries is
generally recorded on a settlement basis, generally the third business day
following the trade date. The difference between the settlement date and
trade date is not considered material.
DEPRECIATION AND AMORTIZATION
Depreciation of investment real estate is computed on the straight-line
method over the estimated useful lives which range from 15 to 30 years.
Certain other assets are depreciated or amortized on the straight-line
method over varying periods ranging from 3 to 40 years. Depreciation of
investment real estate is included in net investment income on the
accompanying consolidated statements of operations. Depreciation and
amortization of other assets is included in operating expenses on the
accompanying consolidated statements of operations.
INCOME TAXES
Pacific Life is taxed as a life insurance company for income tax purposes
and is included in the consolidated income tax returns of PMHC. The amount
of income tax expense includes an equity tax calculated by a prescribed
formula that incorporates a differential earnings rate between stock and
mutual life insurance companies. Deferred income taxes are provided for
timing differences in the recognition of revenues and expenses for
financial reporting and income tax purposes.
SEPARATE ACCOUNTS
Separate account assets are recorded at market value and the related
liabilities represent segregated contract owner funds maintained in
accounts with individual investment objectives. The investment results of
separate account assets generally pass through to separate account
contract owners.
ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value of financial instruments disclosed in Notes 6 and
7 have been determined using available market information and appropriate
valuation methodologies. However, considerable judgment is required to
interpret market data to develop the estimates of fair value. Accordingly,
the estimates presented may not be indicative of the amounts the Company
could realize in a current market exchange. The use of different market
assumptions and/or estimation methodologies could have a significant
effect on the estimated fair value amounts.
BUSINESS RISKS
The Company operates in a business environment which is subject to various
risks and uncertainties. Such risks and uncertainties include interest
rate risk, credit risk and legal and regulatory changes.
Interest rate risk is the potential for interest rates to change, which
can cause fluctuations in the value of investments. To the extent that
fluctuations in interest rates cause the duration of assets and
liabilities to differ, the Company may have to sell assets prior to their
maturity and realize losses. The Company controls its exposure to this
risk by, among other things, asset/liability matching techniques which
attempt to match the duration of assets and liabilities and utilization of
derivative instruments.
25
<PAGE> 72
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Credit risk is the risk that issuers of investments owned by the Company
may default or that other parties may not be able to pay amounts due to
the Company. The Company manages its investments to limit credit risk by
diversifying its portfolio among various security types and industry
sectors. The credit risk of financial instruments is controlled through
credit approvals, limits and monitoring procedures. Real estate and
mortgage loan investments are diversified by geographic location and
property type. Management believes that significant concentrations of
credit risk do not exist.
The Company is also exposed to credit loss in the event of nonperformance
by the counterparties to interest rate swap contracts and other derivative
securities. However, the Company does not anticipate nonperformance by the
counterparties.
The Company is subject to various state and Federal regulatory
authorities. The potential exists for changes in regulatory initiatives
which can result in additional, unanticipated expense to the Company.
Existing Federal laws and regulations affect the taxation of life
insurance or annuity products and insurance companies. There can be no
assurance as to what, if any, future legislation might be enacted, or if
enacted, whether such legislation would contain provisions with possible
negative effects on the Company's life insurance or annuity products.
USE OF ESTIMATES
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the 1997
financial statement presentation.
2. STATUTORY RESULTS
The following are reconciliations of statutory capital and surplus and
statutory net income for Pacific Life as calculated in accordance with
accounting practices prescribed or permitted by the Insurance Department
of the State of California, to the amounts reported as stockholder's
equity and net income included in the accompanying consolidated financial
statements:
<TABLE>
<CAPTION>
December 31,
-------------------------
1997 1996
-------------------------
<S> <C> <C>
(In Millions)
Statutory capital and surplus $ 944.8 $ 815.2
Deferred policy acquisition costs 730.7 542.0
Unrealized gain on securities available for sale, net 575.2 379.2
Asset valuation reserve 252.4 209.5
Deferred income tax 240.9 174.6
Subsidiary equity 108.7 60.7
Non-admitted assets 25.2 22.8
Surplus notes (149.6) (149.6)
Insurance and annuity reserves (511.5) (340.4)
Other (69.5) (16.8)
-------------------------
Stockholder's equity as reported herein $ 2,147.3 $ 1,697.2
=========================
</TABLE>
26
<PAGE> 73
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. STATUTORY RESULTS (CONTINUED)
<TABLE>
<CAPTION>
Years Ended December 31,
1997 1996 1995
----------------------------------
<S> <C> <C> <C>
(In Millions)
Statutory net income $ 121.5 $ 113.1 $ 85.1
Deferred policy acquisition costs 160.4 111.2 76.4
Deferred income tax 41.2 70.9 31.5
Interest maintenance reserve 7.6 3.8 12.2
Net realized gain (loss) on trading securities (5.8) (11.6) 13.2
Earnings of subsidiaries (40.6) (33.0) 5.9
Insurance and annuity reserves (107.0) (91.3) (95.5)
Other (1.3) 3.5 6.0
----------------------------------
Net income as reported herein $ 176.0 $ 166.6 $ 134.8
==================================
</TABLE>
RISK-BASED CAPITAL
Risk-based capital is a method developed by the National Association of
Insurance Commissioners ("NAIC") to measure the minimum amount of capital
appropriate for an insurance company to support its overall business
operations in consideration of its size and risk profile. The formulas for
determining the amount of risk-based capital specify various weighting
factors that are applied to financial balances or various levels of
activity based on the perceived degree of risk. The adequacy of a
company's actual capital is measured by comparing it to the risk-based
capital as determined by the formulas. Companies below minimum risk-based
capital requirements are classified within certain levels, each of which
requires specified corrective action. As of December 31, 1997 and 1996,
Pacific Life and PM Group exceeded the minimum risk-based capital
requirements.
DIVIDEND RESTRICTIONS
Dividend payments by Pacific Life to its parent cannot exceed the greater
of 10% of statutory capital and surplus as of the preceding year end or
the statutory net gain from operations for the previous calendar year,
without prior approval from the Insurance Department of the State of
California. Based on this limitation and 1997 statutory results, Pacific
Life could pay approximately $76.5 million in dividends in 1998 without
prior approval.
Extraordinary dividends to Pacific Life from PM Group are subject to
regulatory restrictions and approvals by the Insurance Department of the
State of Arizona, PM Group's state of domicile. The maximum amount of
ordinary dividends that can be paid by PM Group without restriction cannot
exceed the lesser of 10% of surplus as regards policyholders, or the
statutory net gain from operations. During 1997, 1996 and 1995, PM Group
received approval to pay dividends of $14 million, $25 million and $25
million for the years ended December 31, 1997, 1996 and 1995 of which $8
million, $18 million and $17.2 million, respectively, were considered
extraordinary.
In accordance with the terms of the rehabilitation agreement (Note 4), PCL
was precluded from paying any dividends during the rehabilitation period
without the prior consent of the Insurance Department of the State of
California. No such dividends were paid.
27
<PAGE> 74
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. CLOSED BLOCK
In connection with the Conversion, an arrangement known as a closed block
(the "Closed Block"), was established, for dividend purposes only, for the
exclusive benefit of certain individual life insurance policies that have
an experience based dividend scale for 1997. The Closed Block is designed
to give reasonable assurance to holders of Closed Block policies that
policy dividends will not change solely as a result of the Conversion.
Assets of Pacific Life have been allocated to the Closed Block in an
amount that produces cash flows, which, together with anticipated
revenues, are expected to be sufficient to support the policies. Pacific
Life is not required to support the payment of dividends on these policies
from its general funds. The Closed Block will continue in effect until
either the last policy is no longer in force, or the dissolution of the
Closed Block. Total assets of $316.2 million and total liabilities of
$356.0 million for the Closed Block are included in other assets and other
liabilities, respectively, in the accompanying consolidated statements of
financial condition as of December 31, 1997. The contribution to income
from the Closed Block of $5.7 million, consisting of net revenues and
expenses generated by the Closed Block is included in other income in the
accompanying consolidated statements of operations for the year ended
December 31, 1997.
4. REHABILITATION OF FIRST CAPITAL LIFE INSURANCE COMPANY
On September 30, 1997, PCL completed the rehabilitation of FCL pursuant to
a five-year rehabilitation plan approved by the California Superior Court
and the Insurance Department of the State of California (the
"Rehabilitation Plan"). Under the terms of the Rehabilitation Plan, FCL's
insurance policies in force, primarily individual annuities and universal
life insurance, were restructured and assumed by PCL on December 31, 1992,
pursuant to an assumption reinsurance agreement and asset purchase
agreement. On October 30, 1997, PCL was merged into Pacific Life, with
Pacific Life as the surviving entity.
5. ACQUISITION OF INSURANCE BLOCK OF BUSINESS
On June 1, 1997, Pacific Life acquired a block of corporate-owned life
insurance ("COLI") policies from Confederation Life Insurance Company
(U.S.) in Rehabilitation, which is currently under rehabilitation, which
consisted of approximately 38,000 policies having a face amount of
insurance of $8.6 billion and reserves of approximately $1.7 billion. The
assets received as part of this acquisition amounted to approximately $1.2
billion in cash and approximately $0.4 billion in policy loans. This block
is primarily non-leveraged COLI.
As part of this transaction, an amount equal to the excess of the
estimated fair value of the reserves assumed over the estimated fair value
of the assets acquired which represents the cost of acquiring the
business, amounting to $43.4 million at December 31, 1997, is included in
deferred policy acquisition costs in the accompanying consolidated
statements of financial condition. Amortization of this asset for the year
ended December 31, 1997 was $0.9 million and is included in commission
expenses in the accompanying consolidated statements of operations.
28
<PAGE> 75
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. INVESTMENT IN FIXED MATURITY AND EQUITY SECURITIES
The amortized cost, gross unrealized gains and losses, and estimated fair
value of fixed maturity and equity securities are shown below. The
estimated fair value of publicly traded securities is based on quoted
market prices. For securities not actively traded, estimated fair values
were provided by independent pricing services specializing in "matrix
pricing" and modeling techniques. The Company also estimates certain fair
values based on interest rates, credit quality and average maturity or
from securities with comparable trading characteristics.
<TABLE>
<CAPTION>
Gross Unrealized
Amortized -------------------- Estimated
Cost Gains Losses Fair Value
--------------------------------------------------
<S> <C> <C> <C> <C>
(In Millions)
Securities Available for Sale
As of December 31, 1997:
U.S. Treasury securities and obligations of
U.S. government authorities and agencies $ 85.4 $ 17.5 $ 102.9
Obligations of states, political subdivisions
and foreign governments 730.2 89.4 $ 3.0 816.6
Corporate securities 7,704.8 594.3 72.7 8,226.4
Mortgage-backed and asset-backed securities 4,597.7 147.1 15.5 4,729.3
Redeemable preferred stock 107.8 10.3 2.6 115.5
--------------------------------------------------
Total fixed maturity securities $ 13,225.9 $ 858.6 $ 93.8 $ 13,990.7
==================================================
Total equity securities $ 231.7 $ 123.6 $ 8.9 $ 346.4
==================================================
Securities Available for Sale
As of December 31, 1996:
U.S. Treasury securities and obligations of
U.S. government authorities and agencies $ 297.9 $ 11.2 $ 0.3 $ 308.8
Obligations of states, political subdivisions
and foreign governments 638.1 46.2 1.0 683.3
Corporate securities 6,848.3 506.3 91.9 7,262.7
Mortgage-backed and asset-backed securities 3,753.6 98.0 19.4 3,832.2
Redeemable preferred stock 102.5 6.4 2.1 106.8
--------------------------------------------------
Total fixed maturity securities $ 11,640.4 $ 668.1 $ 114.7 $ 12,193.8
==================================================
Total equity securities $ 229.6 $ 40.8 $ 9.6 $ 260.8
==================================================
</TABLE>
29
<PAGE> 76
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. INVESTMENT IN FIXED MATURITY AND EQUITY SECURITIES (CONTINUED)
The amortized cost and estimated fair values of fixed maturity securities
as of December 31, 1997, by contractual repayment date of principal, are
shown below. Expected maturities may differ from contractual maturities
because borrowers may have the right to call or prepay obligations with or
without call or prepayment penalties.
<TABLE>
<CAPTION>
Amortized Estimated Fair
Cost Value
--------------------------
<S> <C> <C>
(In Millions)
Securities Available for Sale:
Due in one year or less $ 969.9 $ 1,075.2
Due after one year through five years 2,678.4 2,823.1
Due after five years through ten years 2,810.1 2,939.3
Due after ten years 2,169.8 2,423.8
--------------------------
8,628.2 9,261.4
Mortgage-backed and asset-backed securities 4,597.7 4,729.3
--------------------------
Total $ 13,225.9 $ 13,990.7
==========================
</TABLE>
Proceeds from sales of all securities available for sale during 1997, 1996
and 1995 were $2.2 billion, $2.5 billion and $1.9 billion, respectively.
Gross gains of $69.1 million, $89.3 million and $58.0 million and gross
losses of $32.9 million, $29.9 million and $32.3 million were realized on
those sales during 1997, 1996 and 1995, respectively.
Major categories of investment income are summarized as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
1997 1996 1995
--------------------------------------
<S> <C> <C> <C>
(In Millions)
Fixed maturity securities $ 935.1 $ 831.6 $ 808.1
Equity securities 12.8 17.8 7.3
Mortgage loans 129.5 109.4 112.9
Real estate 53.6 51.3 43.2
Policy loans 137.1 113.0 105.2
Other 65.8 71.7 63.2
--------------------------------------
Gross investment income 1,333.9 1,194.8 1,139.9
Investment expense 108.6 107.5 101.5
--------------------------------------
Net investment income $ 1,225.3 $ 1,087.3 $ 1,038.4
======================================
</TABLE>
30
<PAGE> 77
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. INVESTMENT IN FIXED MATURITY AND EQUITY SECURITIES (CONTINUED)
The change in gross unrealized gain (loss) on investments in available for
sale and trading securities is as follows:
<TABLE>
<CAPTION>
December 31,
1997 1996 1995
-----------------------------------
<S> <C> <C> <C>
(In Millions)
Available for sale and trading securities:
Fixed maturity $ 222.4 ($ 169.1) $ 1,039.3
Equity 85.7 6.5 17.2
-----------------------------------
Total $ 308.1 ($ 162.6) $ 1,056.5
===================================
</TABLE>
As of December 31, 1997 and 1996, investments in fixed maturity securities
with a carrying value of $14.4 million and $19.6 million, respectively,
were on deposit with state insurance departments to satisfy regulatory
requirements.
No investment, aggregated by issuer, exceeded 10% of total equity as of
December 31, 1997. The Company has no non-income producing fixed maturity
securities, mortgage loans, real estate or other long-term investments as
of December 31, 1997.
7. FINANCIAL INSTRUMENTS
The estimated fair values of the Company's financial instruments are as
follows:
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1996
-------------------------- --------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
--------------------------------------------------------
<S> <C> <C> <C> <C>
(In Millions)
Assets:
Fixed maturity and equity securities (Note 6) $ 14,337.1 $ 14,337.1 $ 12,454.6 $ 12,454.6
Mortgage loans 1,922.1 1,990.9 1,477.3 1,533.9
Policy loans 3,769.2 3,769.2 3,131.8 3,131.8
Cash and cash equivalents 110.4 110.4 109.0 109.0
Derivative financial instruments:
Interest rate floors and caps, options and swaptions 22.9 22.9 59.3
Interest rate swap contracts 0.5 0.5 1.0 1.0
Credit and total return swaps 1.1 1.1
Foreign currency derivatives 4.1 4.1
Liabilities:
Guaranteed interest contracts 3,982.0 4,035.7 2,948.3 3,056.1
Deposit liabilities 733.5 737.4 799.6 800.6
Annuity liabilities 1,883.5 1,872.6 2,459.4 2,459.4
Surplus notes 149.6 164.7 149.6 157.5
Derivative financial instruments:
Options written 1.6 1.6 1.5 1.5
Asset swap contracts 12.6 12.6 12.5 12.5
Credit and total return swaps 4.0 4.0
Foreign currency derivatives 4.3 4.3
</TABLE>
31
<PAGE> 78
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. FINANCIAL INSTRUMENTS (CONTINUED)
The following methods and assumptions were used to estimate the fair value
of these financial instruments as of December 31, 1997 and 1996:
MORTGAGE LOANS
The estimated fair value of the mortgage loan portfolio is determined by
discounting the estimated future cash flows, using a year-end market rate
which is applicable to the yield, credit quality and average maturity of
the composite portfolio.
POLICY LOANS
The carrying amounts of policy loans are a reasonable estimate of their
fair values.
CASH AND CASH EQUIVALENTS
The carrying amounts of these items are a reasonable estimate of their
fair values.
DERIVATIVE FINANCIAL INSTRUMENTS
Derivatives are financial instruments whose value or cash flows are
"derived" from another source, such as an underlying security. They can
facilitate total return and, when used for hedging, they achieve the
lowest cost and most efficient execution of positions. Derivatives can
also be used to leverage by using very large notional amounts or by
creating formulas that multiply changes in the underlying security. The
Company's approach is to avoid highly leveraged or overly complex
investments. The Company utilizes certain derivative financial instruments
to diversify its business risk and to minimize its exposure to
fluctuations in market prices, interest rates or basis risk as well as for
facilitating total return. Risk is limited through modeling derivative
performance in product portfolios for hedging and setting loss limits in
total return portfolios.
Derivatives used by the Company involve elements of credit risk and market
risk in excess of amounts recognized in the accompanying consolidated
financial statements. The notional amounts of these instruments reflect
the extent of involvement in the various types of financial instruments.
The estimated fair values of these instruments are based on quoted market
prices, dealer quotations or internal price estimates believed to be
comparable to dealer quotations. These amounts estimate what the Company
would have to pay or receive if the contracts were terminated. The Company
determines, on an individual counterparty basis, the need for collateral
or other security to support financial instruments with off-balance sheet
counterparty risk.
32
<PAGE> 79
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. FINANCIAL INSTRUMENTS (CONTINUED)
A reconciliation of the notional or contract amounts and discussion of the
various derivative instruments is as follows:
<TABLE>
<CAPTION>
Balance Balance
Beginning Terminations End
of Year Acquisitions and Maturities of Year
----------------------------------------------------------
<S> <C> <C> <C> <C>
(In Millions)
December 31, 1997:
Interest rate floors and caps, options
and swaptions $ 4,538.2 $ 1,644.2 $ 3,452.4 $ 2,730.0
Interest rate swap contracts 988.3 1,356.0 318.2 2,026.1
Asset swap contracts 30.0 47.4 10.0 67.4
Credit and total return swaps 356.5 98.9 166.9 288.5
Financial futures contracts 609.2 3,930.6 4,325.7 214.1
Foreign currency derivatives 41.4 217.0 51.4 207.0
December 31, 1996:
Interest rate floors and caps, options
and swaptions 1,834.6 3,075.0 371.4 4,538.2
Interest rate swap contracts 619.6 620.9 252.2 988.3
Asset swap contracts 20.0 15.3 5.3 30.0
Credit and total return swaps 146.1 307.2 96.8 356.5
Financial futures contracts 310.1 3,358.9 3,059.8 609.2
Foreign currency derivatives 15.4 43.1 17.1 41.4
</TABLE>
Interest Rate Floors and Caps, Options and Swaptions
The Company uses interest rate floors and caps, options and swaptions to
hedge against fluctuations in interest rates and in its total return
portfolios. Interest rate floor agreements entitle the Company to receive
the differential, if below, between the specified rate and the current
value of the underlying index. Interest rate cap agreements entitle the
Company to receive the differential, if above, between the specified rate
and the current value of the underlying index. Options purchased involve
the right, but not the obligation, to purchase the underlying securities
at a specified price during a given time period. Swaptions are options to
enter into a swap transaction at a specified price. The Company uses
written covered call options on a limited basis. Gains and losses on
covered calls are offset by gains and losses on the underlying position.
Options and floors are reported as assets and options written are reported
as liabilities in the consolidated statements of financial condition. Cash
requirements for these instruments are generally limited to the premium
paid by the Company at acquisition. The purchase premium of these
instruments is amortized on a constant effective yield basis and included
as a component of net investment income over the term of the agreement.
Interest rate floors and caps, options and swaptions mature during fiscal
years 1998 through 2007.
Interest Rate Swap Contracts
The Company uses interest rate swaps to manage interest rate risk. The
interest rate swap agreements generally involve the exchange of fixed and
floating rate interest payments or the exchange of floating to floating
interest payments tied to different indexes. Generally, no premium is paid
to enter into the contract and no principal payments are made by either
party. The amounts to be received or paid pursuant to these agreements are
accrued and recognized through an adjustment to net investment income in
the accompanying consolidated statements of operations over the life of
the agreements. The interest rate swap contracts mature during fiscal
years 1998 through 2021.
33
<PAGE> 80
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. FINANCIAL INSTRUMENTS (CONTINUED)
Asset Swap Contracts
The Company uses asset swap contracts to manage interest rate and equity
risk to better match portfolio duration to liabilities. Asset swap
contracts involve the exchange of upside equity potential for preferred
cash flow streams. The amounts to be received or paid pursuant to these
agreements are accrued and recognized through an adjustment to net
investment income in the accompanying consolidated statements of
operations over the life of the agreements. The asset swap contracts
mature during fiscal years 1998 through 2003.
Credit and Total Return Swaps
The Company uses credit and total return swaps to take advantage of market
opportunities. Credit swaps involve the receipt of floating or fixed rate
payments in exchange for assuming potential credit losses of an underlying
security. Total return swaps involve the exchange of floating rate
payments for the total return performance of a specified index or market.
The amounts to be received or paid pursuant to these agreements are
accrued and recognized through an adjustment to net investment income in
the accompanying consolidated statements of operations over the life of
the agreements. Credit and total return swaps mature during fiscal years
1998 through 2013.
Financial Futures Contracts
The Company uses exchange-traded financial futures contracts to hedge cash
flow timing differences between assets and liabilities and overall
portfolio duration. Assets and liabilities are rarely acquired or sold at
the same time, which creates a need to hedge their change in value during
the unmatched period. In addition, foreign currency futures may be used to
hedge foreign currency risk on non-U.S. dollar denominated securities.
Financial futures contracts obligate the holder to buy or sell the
underlying financial instrument at a specified future date for a set price
and may be settled in cash or delivery of the financial instrument. Price
changes on futures are settled daily through the daily margin cash flows.
The notional amounts of the contracts do not represent future cash
requirements, as the Company intends to close out open positions prior to
expiration.
Foreign Currency Derivatives
The Company enters into foreign exchange forward contracts and swaps to
hedge against fluctuations in foreign currency exposure. Foreign currency
derivatives involve the exchange of foreign currency denominated payments
for U.S. dollar denominated payments. Gains and losses on foreign exchange
forward contracts offset currency gains and losses on the related assets.
The amounts to be received or paid under the foreign currency swaps are
accrued and recognized through an adjustment to net investment income in
the accompanying consolidated statements of operations over the life of
the agreements. Foreign currency derivatives expire during fiscal years
1998 through 2011.
GUARANTEED INTEREST CONTRACTS AND DEPOSIT LIABILITIES
The estimated fair values of fixed maturity guaranteed interest contracts
are estimated using the rates currently offered for deposits of similar
remaining maturities. The estimated fair value of deposit liabilities with
no defined maturities is the amount payable on demand.
ANNUITY LIABILITIES
The estimated fair value of annuity liabilities approximates carrying
value and primarily includes policyholder deposits and accumulated
credited interest.
34
<PAGE> 81
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. FINANCIAL INSTRUMENTS (CONTINUED)
SURPLUS NOTES
The estimated fair value of surplus notes is based on market quotes.
FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
Pacific Life has issued certain contracts to plan sponsors totaling $1.6
billion as of December 31, 1997, pursuant to the terms of which the plan
sponsor retains direct ownership and control of the assets related to
these contracts. Pacific Life agrees to provide benefit responsiveness in
the event that plan benefit requests exceed plan cash flows. In return for
this guarantee, Pacific Life receives a fee which varies by contract.
Pacific Life sets the investment guidelines to provide for appropriate
credit quality and cash flow matching.
8. UNIVERSAL LIFE, ANNUITY AND OTHER INVESTMENT CONTRACT DEPOSITS
Detail of universal life, annuity and other investment contract deposit
liabilities follows:
<TABLE>
<CAPTION>
December 31,
1997 1996
--------------------------
(In Millions)
<S> <C> <C>
Universal life $ 10,012.0 $ 7,562.5
Annuity 1,817.4 2,459.3
Other investment contract deposits 4,815.1 3,855.6
--------------------------
$ 16,644.5 $ 13,877.4
==========================
</TABLE>
Detail of universal life, annuity and other investment contract deposits
policy fees and interest credited net of reinsurance ceded follows:
<TABLE>
<CAPTION>
Years Ended December 31,
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
(In Millions)
Policy fees
Universal life $ 377.5 $ 318.4 $ 292.6
Annuity 50.3 26.6 12.8
Other investment contract deposits 3.4 3.6 3.6
--------------------------------
Total policy fees $ 431.2 $ 348.6 $ 309.0
--------------------------------
Interest credited
Universal life $ 368.2 $ 284.3 $ 267.3
Annuity 116.8 138.7 137.5
Other investment contract deposits 312.8 242.0 270.4
--------------------------------
Total interest credited $ 797.8 $ 665.0 $ 675.2
================================
</TABLE>
35
<PAGE> 82
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. SHORT-TERM AND LONG-TERM DEBT
Pacific Life borrows for short-term needs by issuing commercial paper.
There was no commercial paper debt outstanding as of December 31, 1997 and
1996. Pacific Life had a revolving credit facility available of $350
million and $250 million as of December 31, 1997 and 1996, respectively.
There was no debt outstanding under the revolving credit facility as of
December 31, 1997 and 1996.
The borrowing limit for PAM as of December 31, 1997 and 1996 was $200
million and $150 million, respectively. The interest rate averaged 5.8%,
5.6% and 6.1% for the years ended December 31, 1997, 1996 and 1995,
respectively. The balance outstanding as of December 31, 1997 and 1996
totaled $104 million and $95.5 million, respectively. Outstanding debt is
due and payable in 1998 and subject to renewal.
During 1992, a wholly-owned subsidiary of Pacific Life entered into a
credit agreement with a group of banks for borrowings of $45 million.
Proceeds of this note were paid to PCL in connection with the issuance of
a certificate of contribution by PCL (Note 4). On December 31, 1996, the
applicable interest rate was 6.2%. The outstanding balance of $25 million
was prepaid per the terms of the agreement on January 27, 1997.
Pacific Life has $150 million of long-term debt which consists of surplus
notes outstanding at an interest rate of 7.9% maturing on December 30,
2023. Interest is payable semiannually on June 30 and December 30. The
surplus notes may not be redeemed at the option of Pacific Life or any
holder of the surplus notes. The surplus notes are unsecured and
subordinated to all present and future senior indebtedness and policy
claims of Pacific Life. Each payment of interest on and the payment of
principal of the surplus notes may be made only with the prior approval of
the Insurance Commissioner of the State of California. Interest expense
amounted to $11.8 million for each of the years ended December 31, 1997,
1996 and 1995 and is included in net investment income in the accompanying
consolidated statements of operations.
10. INCOME TAXES
As required by SFAS No. 109, "Accounting for Income Taxes," the Company
accounts for income taxes using the liability method. Under SFAS No. 109,
the deferred tax consequences of changes in tax rates or laws must be
computed on the amounts of temporary differences and carryforwards
existing at the date a new law is enacted. Recording the effects of the
change involves adjusting deferred tax liabilities and assets with a
corresponding charge or credit recognized in the provision for income
taxes. The objective is to measure a deferred tax liability or asset using
the enacted tax rates and laws expected to apply to taxable income in the
periods in which the deferred tax liability or asset is expected to be
settled or realized.
The provision for income taxes is as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
1997 1996 1995
----------------------------------
<S> <C> <C> <C>
(In Millions)
Current $ 127.9 $ 163.5 $ 116.4
Deferred (14.4) (49.8) (30.3)
----------------------------------
$ 113.5 $ 113.7 $ 86.1
==================================
</TABLE>
36
<PAGE> 83
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. INCOME TAXES (CONTINUED)
The sources of the Company's provision for deferred taxes are as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
1997 1996 1995
-------------------------------
<S> <C> <C> <C>
(In Millions)
Reserves $ 20.1 ($ 28.5) ($ 28.7)
Investment valuation 3.9 (7.3) 8.1
Deferred policy acquisition costs (18.0) 2.1 (6.0)
Other (20.4) (16.1) (3.7)
-------------------------------
($ 14.4) ($ 49.8) ($ 30.3)
===============================
</TABLE>
A reconciliation of the provision for income taxes based on the prevailing
corporate tax rate to the provision reflected in the consolidated
financial statements is as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
1997 1996 1995
---------------------------------
(In Millions)
<S> <C> <C> <C>
Income taxes at the statutory rate $ 101.3 $ 98.1 $ 77.3
Equity tax 5.0 16.3
Amortization of intangibles on equity
method investments 7.6 6.5 6.5
Non-taxable investment income (2.6) (2.1) (2.1)
Other 2.2 (5.1) 4.4
---------------------------------
$ 113.5 $ 113.7 $ 86.1
=================================
</TABLE>
The net deferred tax asset (liability) included in other assets on the
accompanying consolidated statement of financial condition was comprised
of the tax effects of the following temporary differences:
<TABLE>
<CAPTION>
December 31,
1997 1996
---------------------
<S> <C> <C>
(In Millions)
Reserves $ 224.8 $ 244.9
Deferred compensation 25.9 27.6
Investment valuation 20.1 24.0
Postretirement benefits 9.3 9.8
Dividends 7.7 9.6
Depreciation (2.5) (9.8)
Deferred policy acquisition costs (25.9) (43.9)
Other 41.0 23.8
---------------------
Deferred taxes from operations 300.4 286.0
Issuance of partnership units by affiliate (47.9)
Unrealized gain on securities available for sale (307.8) (204.5)
---------------------
Net deferred tax asset (liability) ($ 55.3) $ 81.5
=====================
</TABLE>
37
<PAGE> 84
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. REINSURANCE
The Company accounts for reinsurance transactions utilizing SFAS No. 113,
"Accounting and Reporting for Reinsurance of Short-Duration And
Long-Duration Contracts". SFAS No. 113 establishes the conditions required
for a contract with a reinsurer to be accounted for as reinsurance and
prescribes accounting and reporting standards for those contracts. Amounts
receivable from reinsurers for reinsurance on future policy benefits,
universal life deposits, and unpaid losses is reported as an asset and
included in other assets on the accompanying consolidated statements of
financial condition.
The Company has reinsurance agreements with other insurance companies for
the purpose of diversifying risk and limiting exposure on larger risks or,
in the case of a producer-owned reinsurance company, to diversify risk and
retain top producing agents. All assets associated with reinsured business
remain with, and under the control of the Company. Approximate amounts
recoverable (payable) from (to) reinsurers include the following amounts:
<TABLE>
<CAPTION>
December 31,
1997 1996
------- -------
<S> <C> <C>
(In Millions)
Reinsured universal life deposits ($ 39.6) ($ 35.9)
Future policy benefits 92.2 90.0
Unpaid claims 14.0 4.6
Paid claims 10.2 8.4
</TABLE>
As of December 31, 1997, 72% of the reinsurance recoverables were from one
reinsurer, of which 100% is secured by payables to the reinsurer. To the
extent that the assuming companies become unable to meet their obligations
under these agreements, the Company remains contingently liable. The
Company does not anticipate nonperformance by the assuming companies.
Revenues and benefits are shown net of the following reinsurance
transactions:
<TABLE>
<CAPTION>
Years Ended December 31,
1997 1996 1995
--------------------------------
<S> <C> <C> <C>
(In Millions)
Ceded reinsurance netted against insurance premiums $ 70.7 $ 44.3 $ 29.2
Assumed reinsurance included in insurance premiums 18.1 17.8 15.6
Ceded reinsurance netted against policy fees 77.5 71.0 66.5
Ceded reinsurance netted against net investment income 204.9 192.5 176.6
Ceded reinsurance netted against interest credited 165.8 155.2 140.0
Ceded reinsurance netted against policy benefits 93.4 56.7 51.4
Assumed reinsurance included in policy benefits 12.7 9.9 14.5
</TABLE>
38
<PAGE> 85
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. SEGMENT INFORMATION
The operations of the Company have been classified into four business
segments as follows: Individual Life Insurance and Annuities, Pensions,
Group Employee Benefits and Corporate and Other. These segments are based
on the organization of the Company and are generally distinguished by the
products offered. The Corporate and Other segment generally includes the
assets and operations that do not support the other segments such as
certain non-life insurance related subsidiary operations. Depreciation
expense and capital expenditures are not material and have not been
reported. Revenues, income before income taxes and assets by segment are
as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
1997 1996 1995
---------------------------------------
<S> <C> <C> <C>
(In Millions)
Revenues:
Individual Life Insurance and Annuities $ 1,137.7 $ 964.0 $ 927.0
Pensions 584.0 507.3 513.9
Group Employee Benefits 507.5 456.0 419.3
Corporate and Other 345.2 220.7 159.5
---------------------------------------
Total $ 2,574.4 $ 2,148.0 $ 2,019.7
=======================================
Income before provision for income taxes:
Individual Life Insurance and Annuities $ 164.0 $ 93.9 $ 102.3
Pensions 98.3 80.7 53.3
Group Employee Benefits 28.8 26.5 25.2
Corporate and Other (1.6) 79.2 40.1
---------------------------------------
Total $ 289.5 $ 280.3 $ 220.9
=======================================
</TABLE>
<TABLE>
<CAPTION>
December 31,
1997 1996
--------------------------
<S> <C> <C>
(In Millions)
Assets:
Individual Life Insurance and Annuities $ 19,969.2 $ 15,484.4
Pensions 12,653.6 10,514.8
Group Employee Benefits 368.6 344.4
Corporate and Other 1,017.4 721.7
--------------------------
Total $ 34,008.8 $ 27,065.3
==========================
</TABLE>
13. PENSION PLANS, POSTRETIREMENT BENEFITS AND OTHER PLANS
PENSION PLANS
Pacific Life has defined benefit pension plans which cover all eligible
employees who have one year of continuous employment and have attained age
21. The full-benefit vesting period for all participants is five years.
Benefits for employees are based on years of service and the highest five
consecutive years of compensation during the last ten years of employment.
Pacific Life's funding policy is to contribute amounts to the plan
sufficient to meet the minimum funding requirements set forth in the
Employee Retirement Income Security Act of 1974, plus such additional
amounts as may be determined appropriate. Contributions are intended to
provide
39
<PAGE> 86
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. PENSION PLANS, POSTRETIREMENT BENEFITS AND OTHER PLANS (CONTINUED)
not only for benefits attributed to employment to date but also for those
expected to be earned in the future. All such contributions are made to a
tax-exempt trust. Plan assets consist primarily of group annuity contracts
issued by Pacific Life, as well as participating units of a real estate
trust and mutual funds managed by an indirect subsidiary of Pacific Life.
Components of net periodic pension cost are as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
1997 1996 1995
-------------------------------
<S> <C> <C> <C>
(In Millions)
Service cost - benefits earned during the year $ 3.6 $ 3.7 $ 2.8
Interest cost on projected benefit obligation 10.4 9.8 9.3
Actual return on plan assets (33.1) (21.7) (25.0)
Amortization of net obligations and prior service cost 18.9 9.1 14.0
-------------------------------
Net periodic pension cost ($ 0.2) $ 0.9 $ 1.1
===============================
</TABLE>
The following table sets forth the Plan's funded status and amounts
recognized on Pacific Life's consolidated statements of financial
condition:
<TABLE>
<CAPTION>
December 31,
1997 1996
---------------------
<S> <C> <C>
(In Millions)
Actuarial present value of benefit obligation:
Vested benefits $ 137.1 $ 121.2
Nonvested benefits 1.2 1.2
---------------------
Accumulated benefit obligation 138.3 122.4
Effect of projected future compensation increases 19.6 18.5
---------------------
Projected benefit obligation 157.9 140.9
Plan assets at fair value (180.3) (154.2)
---------------------
Plan assets in excess of projected benefit obligation (22.4) (13.3)
Unrecognized net gain 14.7 3.6
Unrecognized transition asset 4.8 6.0
Unrecognized prior service cost 1.2 2.2
---------------------
Prepaid pension cost ($ 1.7) ($ 1.5)
=====================
</TABLE>
In determining the actuarial present value of the projected benefit
obligation as of December 31, 1997 and 1996, the weighted average discount
rate used was 7.0% and 7.5%, respectively, and the rate of increase in
future compensation levels was 5.5% and 6.0%, respectively. The expected
long-term rate of return on plan assets was 8.5% in 1997 and 1996.
In connection with the merger of PCL into Pacific Life as discussed in
Note 4, Pacific Life assumed sponsorship of PCL's defined benefit pension
plan. This pension plan provides for retirement income benefits at age 65
with reduced benefits for early retirement. Effective December 31, 1997,
PCL's defined benefit plan merged into Pacific Life's plan. All benefits
associated with PCL's plan remain unchanged subsequent to the merger.
40
<PAGE> 87
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. PENSION PLANS, POSTRETIREMENT BENEFITS AND OTHER PLANS (CONTINUED)
POSTRETIREMENT HEALTH CARE AND LIFE INSURANCE PLANS
Pacific Life sponsors a defined benefit health care plan and a defined
benefit life insurance plan (the "Plans") that provide postretirement
benefits for all eligible retirees and their dependents. Generally,
qualified employees may become eligible for these benefits if they reach
normal retirement age, have been covered under Pacific Life's policy as an
active employee for a minimum continuous period prior to the date retired,
and have an employment date before January 1, 1990. The Plans contain
cost-sharing features such as deductibles and coinsurance, and require
retirees to make contributions which can be adjusted annually. Pacific
Life's commitment to qualified employees who retire after April 1, 1994 is
limited to specific dollar amounts. Pacific Life reserves the right to
modify or terminate the Plans at any time. As in the past, the general
policy is to fund these benefits on a pay-as-you-go basis. The amount of
benefits paid under the programs during 1997, 1996 and 1995 was
approximately $1.5 million, $1.6 million and $1.7 million, respectively.
Components of net periodic postretirement benefit cost are as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
(In Millions)
Service cost $ 0.1 $ 0.2 $ 0.2
Interest cost 1.4 1.5 1.9
Amortization (0.7) (0.3) (0.3)
----------------------------
Net periodic postretirement benefit cost $ 0.8 $ 1.4 $ 1.8
----------------------------
</TABLE>
The following table sets forth the Plan's funded status and amounts
recorded in other liabilities on the accompanying consolidated statements
of financial condition:
<TABLE>
<CAPTION>
December 31,
1997 1996
------------------
<S> <C> <C>
(In Millions)
Accumulated postretirement obligation:
Retirees $ 17.6 $ 17.3
Fully eligible active Plan participants 1.4 2.0
Other active Plan participants 1.1 2.5
------------------
Total accumulated postretirement obligation 20.1 21.8
Fair value of Plan assets -- --
------------------
Unfunded accumulated postretirement obligation 20.1 21.8
Unrecognized net gain 3.2 3.7
Prior service cost 2.7 1.3
------------------
Accrued postretirement benefit liability $ 26.0 $ 26.8
==================
</TABLE>
The assumed health care cost trend rate used in measuring the accumulated
benefit obligation was 9% for 1997 and 1996 and is assumed to decrease
gradually to 4% in 2003 and remain at that level thereafter. The amount
reported is materially effected by the health care cost trend rate
assumptions. If the health care cost trend rate assumptions were increased
by 1%, the accumulated postretirement benefit obligation as of December
31, 1997 and 1996 would be increased by 8.5% and 11.5%, respectively. The
effect of this change would increase the
41
<PAGE> 88
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. PENSION PLANS, POSTRETIREMENT BENEFITS AND OTHER PLANS (CONTINUED)
aggregate of the service and interest cost components of the net periodic
benefit cost by 7.7%, 12.3% and 11.4% for 1997, 1996 and 1995,
respectively.
The discount rate used in determining the accumulated postretirement
benefit obligation is 7.0% and 7.5% for 1997 and 1996, respectively.
OTHER PLANS
Pacific Life provides a voluntary Retirement Incentive Savings Plan
("RISP") pursuant to Section 401(k) of the Internal Revenue Code covering
all eligible employees of the Company. Effective October 1, 1997, Pacific
Life's RISP changed the matching percentage of each employee's
contributions from 50% to 75%, up to a maximum of six percent of eligible
employee compensation and restricted the matched investment to an Employee
Stock Option Plan ("ESOP") sponsored by Pacific LifeCorp. The ESOP was
formed at the time of the Conversion and is currently only available to
the participants of the RISP in the form of matching contributions.
Pacific Life also has a deferred compensation plan which permits certain
employees to defer portions of their compensation and earn a guaranteed
interest rate on the deferred amounts. The interest rate is determined
annually and is guaranteed for one year. The compensation which has been
deferred has been accrued and the primary expense, other than
compensation, related to this plan is interest on the deferred amounts.
The Company also has performance based incentive compensation plans for
its employees.
14. TRANSACTIONS WITH AFFILIATES
Pacific Life serves as the investment advisor for the Pacific Select Fund,
the investment vehicle provided to the Company's variable life and
variable annuity contractholders. Pacific Life charges fees based upon the
net asset value of the portfolios of the Pacific Select Fund, which
amounted to $27.5 million, $14.3 million and $6.5 million for the years
ended December 31, 1997, 1996 and 1995, respectively. In addition, Pacific
Life entered into an agreement with the Pacific Select Fund on October 1,
1995, to provide certain support services for an administration fee which
is based on an allocation of actual costs. Such administration fees
amounted to $165,000, $108,000 and $28,550 for the years ended December
31, 1997, 1996, and 1995, respectively.
PIMCO Advisors provides investment advisory services to the Company for
which the fees amounted to $11.4 million, $6.2 million and $5.0 million
for the years ended December 31, 1997, 1996 and 1995, respectively.
Included in equity securities on the accompanying consolidated statements
of financial condition are investments in mutual funds and other
investments managed by PIMCO Advisors which amounted to $46.5 million and
$90.8 million as of December 31, 1997 and 1996, respectively.
Pacific Life provides certain support services to PIMCO Advisors. Charges
for these services are based on an allocation of actual costs and amounted
to $1.2 million, $1.4 million and $1.9 million for the years ended
December 31, 1997, 1996 and 1995, respectively.
15. TERMINATION AND NON-COMPETITION AGREEMENTS
Effective November 15, 1994, in connection with the PIMCO Advisors
transaction (Note 1), termination and non-competition agreements were
entered into with certain former key employees of PAM's subsidiaries.
These agreements provide terms and conditions for the allocation of future
proceeds received from distributions and sales of certain PIMCO Advisors
units and other noncompete payments. When the amount of future obligations
to be made to a key employee is determinable, a liability for such amount
is established.
42
<PAGE> 89
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. TERMINATION AND NON-COMPETITION AGREEMENTS (CONTINUED)
For the years ended December 31, 1997, 1996 and 1995, approximately $85.8
million, $35.3 million and $28.6 million, respectively, is included in
operating expenses in the consolidated statements of operations related to
the termination and non-competition agreements. This includes payments of
$43.1 million in 1997 to former key employees who elected to sell to PAM's
subsidiaries their rights to the future proceeds from the PIMCO Advisors
units.
16. INVESTMENT COMMITMENTS
The Company has outstanding commitments to make investments primarily in
mortgage loans, limited partnerships and other investments as follows (In
Millions):
<TABLE>
<CAPTION>
Years Ending December 31:
-------------------------
<S> <C>
1998 $ 245.4
1999-2002 131.8
2003 and thereafter 16.6
--------
Total $ 393.8
========
</TABLE>
17. LITIGATION
The Company has been named in civil litigation proceedings which appear to
be substantially similar to other litigation brought against many life
insurers alleging misconduct in the sale of products. These matters are
sometimes referred to as market conduct litigation. The litigation against
the Company purports to include all persons in the United States who
purchased life insurance and annuity products from the Company during the
period from 1982 to present. The Company has retained national and local
counsel experienced in the handling of similar matters for other life
insurers. Informal discovery has commenced in these matters. At this time,
it is not feasible to make a meaningful estimate of the amount or range of
loss that could result from an unfavorable outcome in such actions.
Further, the Company is a respondent in a number of other legal
proceedings, some of which involve allegations for extra-contractual
damages.
In the opinion of management, the outcome of the foregoing proceedings is
not likely to have a material adverse effect on the consolidated financial
position or results of operations of the Company.
43
