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P A C I F I C I N N O V A T I O N S
P R O S P E C T U S M A Y 1, 1 9 9 9
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This Contract is not available in all Pacific Innovations is an individual flexible premium deferred variable annuity
states. This Prospectus is not an offer contract issued by Pacific Life Insurance Company.
in any state or jurisdiction where
we're not legally permitted to offer
the Contract. This Prospectus provides information you should know before buying a Contract. It's
accompanied by a current Prospectus for the Pacific Innovations Trust, the Trust
that provides the underlying Funds for the Variable Investment Options offered under
The Contract is described in detail in the Contract. Please read both Prospectuses carefully, and keep them for future
this Prospectus and its Statement of reference.
Additional Information (SAI). The
Pacific Innovations Trust is described
in its Prospectus and its SAI. No one Here's a list of all of the Investment Options available under your Contract:
has the right to describe the Contract
or the Pacific Innovations Trust any
differently than they have been VARIABLE INVESTMENT OPTIONS
described in these documents.
Money Market Mid-Cap Equity
You should be aware that the Securities Managed Bond Aggressive Growth
and Exchange Commission (SEC) has not
reviewed the Contract and does not Capital Income International
guarantee that the information in this
Prospectus is accurate or complete. Blue Chip
It's a criminal offense to say
otherwise. FIXED OPTION
Fixed
THIS CONTRACT IS NOT A DEPOSIT OR
OBLIGATION OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK. IT'S NOT You'll find more information about the Contract and Separate Account A in the SAI
FEDERALLY INSURED BY THE FEDERAL dated May 1, 1999. The SAI has been filed with the SEC and is considered to be part
DEPOSIT INSURANCE CORPORATION, THE of this Prospectus because it's incorporated by reference. You'll find a table of
FEDERAL RESERVE BOARD, OR ANY OTHER contents for the SAI on page 40 of this Prospectus. You can get a copy of the SAI
GOVERNMENT AGENCY. INVESTMENT IN A without charge by calling or writing to Pacific Life. You can also visit the SEC's
CONTRACT INVOLVES RISK, INCLUDING website at www.sec.gov, which contains the SAI, material incorporated into this
POSSIBLE LOSS OF PRINCIPAL. Prospectus by reference, and other information about registrants that file
electronically with the SEC.
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Y O U R G U I D E T O T H I S P R O S P E C T U S
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AN OVERVIEW OF PACIFIC INNOVATIONS 3
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YOUR INVESTMENT OPTIONS 9
Your Variable Investment Options 9
Your Fixed Option 9
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PURCHASING YOUR CONTRACT 10
How to Apply for Your Contract 10
Making Your Purchase Payments 10
- ---------------------------------------------------------
HOW YOUR PAYMENTS ARE ALLOCATED 10
Choosing Your Investment Options 10
Investing in Variable Investment Options 11
When Your Investment is Effective 11
Transfers 11
- ---------------------------------------------------------
CHARGES, FEES AND DEDUCTIONS 12
Withdrawal Charge 12
Premium Taxes 14
Annual Fee 14
Waivers and Reduced Charges 14
Mortality and Expense Risk Charge 14
Administrative Fee 15
Expenses of the Trust 15
- ---------------------------------------------------------
RETIREMENT BENEFITS AND OTHER PAYOUTS 15
Selecting Your Annuitant 15
Annuitization 15
Choosing Your Annuity Date ("Annuity Start Date") 16
Default Annuity Date and Options 16
Choosing Your Annuity Option 17
Your Annuity Payments 18
Death Benefits 18
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WITHDRAWALS 20
Optional Withdrawals 20
Tax Consequences of Withdrawals 22
Right to Cancel 22
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PACIFIC LIFE AND THE SEPARATE ACCOUNT 22
Pacific Life 22
Separate Account B 23
Financial Highlights 24
FEDERAL TAX STATUS 25
Taxes Payable by Contract Owners: General Rules 25
Qualified Contracts 26
Loans 28
Withholding 30
Impact of Federal Income Taxes 30
Taxes on Pacific Life 30
- ---------------------------------------------------------
ADDITIONAL INFORMATION 31
Performance Information 31
Voting Rights 31
Changes to Your Contract 31
Changes to All Contracts 32
Inquiries and Submitting Forms and Requests 33
Telephone Transactions 33
Timing of Payments and Transactions 34
Confirmations, Statements and Other Reports to
Contract Owners 34
Replacement of Life Insurance or Annuities 34
Sales Commissions 34
Preparation for the Year 2000 35
Financial Statements 35
Legal Matters 35
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THE GENERAL ACCOUNT 36
General Information 36
Guarantee Terms 36
Withdrawals and Transfers 36
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TERMS USED IN THIS PROSPECTUS 38
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CONTENTS OF THE STATEMENT OF ADDITIONAL INFORMATION 40
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APPENDIX A: STATE LAW VARIATIONS 41
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WHERE TO GO FOR MORE INFORMATION BACK COVER
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A N O V E R V I E W O F P A C I F I C I N N O V A T I O N S
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This overview tells you some key things you should know about your Contract. It's
designed as a summary only -- please read this Prospectus, your Contract, and the
Statement of Additional Information for more detailed information.
Some states have different rules about how annuity contracts are described or
administered. The terms of your Contract, or of any endorsement or supplement,
prevail over what's in this Prospectus.
In this Prospectus, you and your mean the Contract Owner or Policyholder. Pacific
Life, we, us and our refer to Pacific Life Insurance Company. Contract means a
Pacific Innovations variable annuity contract, unless we state otherwise.
PACIFIC INNOVATIONS BASICS Pacific Innovations is an annuity contract between you and Pacific Life Insurance
Company.
An annuity contract may be appropriate
if you're looking for retirement income This Contract is designed for long-term financial planning. It allows you to invest
or you want to meet other long-term money on a tax-deferred basis for retirement or other goals, and to receive income
financial objectives. in a variety of ways, including a series of income payments for life or for a
specified period of years.
This Contract may not be the right one
for you, however, if you need to Non-Qualified and Qualified Contracts are available. You buy a Non-Qualified
withdraw money for short-term needs, Contract with "after-tax" dollars. You buy a Qualified Contract under a qualified
because withdrawal charges and tax retirement or pension plan, or an individual retirement annuity or account (IRA), or
penalties for early withdrawal may form thereof.
apply.
Pacific Innovations is a variable annuity, which means that the value of your
You should consider the Contract's Contract fluctuates depending on the performance of the Investment Options you
investment and income benefits, as well choose. The Contract allows you to choose how often you make Purchase Payments and
as its costs. how much you add each time. The Contract provides a death benefit if the first Owner
or last Annuitant dies during the accumulation phase.
YOUR RIGHT TO CANCEL
During the right to cancel period, you have the right to cancel your Contract and
return it to us or to your registered representative for a refund. The amount
refunded may be more or less than the Purchase Payments you've made, depending on
the state where you signed your application and the kind of Contract you buy. If you
signed your application in a state that requires us to refund Purchase Payments,
we'll hold any Purchase Payments allocated to the Variable Investment Options in the
Money Market Investment Option until the Right to Cancel Transfer Date.
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A N O V E R V I E W O F P A C I F I C I N N O V A T I O N S
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THE ACCUMULATION PHASE During the accumulation phase, you can put money in your Contract by making Purchase
Payments, and choose Investment Options to allocate them to. You can also take money
The Investment Options you choose and out of your Contract by making a withdrawal. The accumulation phase begins on your
how they perform will affect the value Contract Date and continues until your Annuity Date.
of your Contract during the
accumulation phase, as well as the PURCHASE PAYMENTS
amount of your annuity payments during Your initial Purchase Payment must be at least $5,000 for a Non-Qualified Contract
the income phase if you choose a and at least $2,000 for a Qualified Contract. Additional Purchase Payments must be
variable annuitization payout. at least $100 for a Non-Qualified Contract and $50 for a Qualified Contract.
You can ask your registered INVESTMENT OPTIONS
representative to help you choose the You can choose from seven Variable Investment Options (also called Subaccounts),
right Investment Options for your goals each of which invests in a corresponding Fund of the Pacific Innovations Trust. Bank
and risk tolerance. of America National Trust and Savings Association (Bank of America) is the
investment adviser for the Pacific Innovations Trust. Bank of America oversees the
You'll find more about the Investment management of all of the Trust's Funds and manages five of the Funds directly. Bank
Options starting on page 9. of America has retained other asset managers to manage two of the Funds. The value
of each Fund will fluctuate with the value of the investments it holds, and returns
are not guaranteed.
You can also choose the Fixed Option which earns a Guaranteed Interest Rate of at
least 3% annually.
We allocate your Purchase Payments to the Investment Options you choose. The value
of your Contract will fluctuate during the accumulation phase depending on the
Investment Options you've chosen. You bear the investment risk of any Variable
Investment Options you choose.
You'll find more about transfers TRANSFERRING AMONG INVESTMENT OPTIONS
starting on page 11. You can transfer among Investment Options any time until your Annuity Date without
paying any current income tax. You can also make automatic transfers by enrolling in
our dollar cost averaging, portfolio rebalancing or earnings sweep programs. Some
restrictions apply to transfers to and from the Fixed Option.
You'll find more about withdrawals WITHDRAWALS
starting on page 20. You can make full and partial withdrawals to supplement your income or for other
purposes. You can withdraw a certain amount each year without paying a withdrawal
charge, but you may pay a withdrawal charge if you withdraw Purchase Payments that
are less than six years old. Some restrictions apply to making withdrawals from the
Fixed Option.
In general, you may have to pay tax on withdrawals or other distributions from your
Contract. If you're under age 59 1/2, a 10% federal penalty tax may also apply to
withdrawals.
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A N O V E R V I E W O F P A C I F I C I N N O V A T I O N S
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THE INCOME PHASE The income phase of your Contract begins on your Annuity Date. Generally, you can
choose to surrender your Contract and receive a single payment or you can annuitize
You'll find more about annuitization your Contract and receive a series of income payments.
starting on page 15.
You can choose fixed or variable annuity payments, or a combination of both, for
life or for a specified period of years. You can choose monthly, quarterly,
semiannual or annual payments. We'll make the payments to your designated payee.
If you choose variable annuity payments, the amount of the payments will fluctuate
depending on the performance of the Variable Investment Options you choose. After
your Annuity Date, if you choose variable annuity payments you can exchange your
Subaccount Annuity Units among the Variable Investment Options up to four times in
any 12-month period.
THE DEATH BENEFIT The Contract provides a death benefit if the first Owner or last surviving Annuitant
dies during the accumulation phase. Death benefit proceeds are payable when we
You'll find more about the death receive proof of death and payment instructions. Who we pay a death benefit to, and
benefit starting on page 18. how we calculate the amount of the death benefit depend on who dies first and the
type of Contract you own.
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A N O V E R V I E W O F P A C I F I C I N N O V A T I O N S
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This section of the overview explains the fees and expenses associated with your
Pacific Innovations Contract.
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For information about how Separate - CONTRACT EXPENSES are expenses that we deduct from your Contract. These expenses are
Account B and Fund expenses affect fixed under the terms of your Contract. Premium taxes or other taxes may also apply
accumulation units, see Financial to your Contract. We generally charge premium taxes when you annuitize your
Highlights on page 24. Contract, but there may be other times when we charge them to your Contract instead.
Please see your Contract for details.
- SEPARATE ACCOUNT B ANNUAL EXPENSES are expenses that we deduct from the assets of
each Variable Investment Option. They are guaranteed not to increase under the terms
of your Contract.
- FEES AND EXPENSES PAID BY THE PACIFIC INNOVATIONS TRUST affect you indirectly if you
choose a Variable Investment Option because they reduce Fund returns. They can vary
from year to year. They are not fixed and are not part of the terms of your
Contract.
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CONTRACT EXPENSES Sales charge on Purchase Payments none
Maximum withdrawal charge, as a percentage of Purchase
Payments 7.0%(1)
Withdrawal transaction fee none(2)
Transfer fee none(3)
Annual Fee $30.00(4)
SEPARATE ACCOUNT B ANNUAL EXPENSES Mortality and Expense Risk Charge 1.25%(5)
(as a percentage of the average daily Administrative Fee 0.15%(5)
Account Value) -----
Total Separate Account B Annual Expenses 1.40%
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(1) The withdrawal charge may not apply or may be reduced under certain circumstances.
See WITHDRAWALS, and CHARGES, FEES AND DEDUCTIONS.
(2) In the future, we may charge a fee of up to $15 for any withdrawal over 15 that you
make in a Contract Year. See WITHDRAWALS -- OPTIONAL WITHDRAWALS.
(3) In the future, we may charge a fee of up to $15 for any transfer over 15 that you
make in a Contract Year. See HOW YOUR PAYMENTS ARE ALLOCATED -- TRANSFERS.
(4) We deduct the Annual Fee on each Contract Anniversary up to your Annuity Date and
when you make a full withdrawal if the Contract Value on these days is less than
$50,000 after deducting any outstanding loan and interest (your Net Contract Value).
See CHARGES, FEES AND DEDUCTIONS.
(5) This is an annual rate. The daily rate is calculated by dividing the annual rate by
365.
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A N O V E R V I E W O F P A C I F I C I N N O V A T I O N S
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FEES AND EXPENSES PAID BY THE PACIFIC The Pacific Innovations Trust pays advisory fees and other expenses. These are
INNOVATIONS TRUST deducted from the assets of the Trust's Funds and may vary from year to year. They
(as a percentage of each Fund's average are not fixed and are not part of the terms of your Contract. If you choose a
daily net assets, after expense Variable Investment Option, these fees and expenses affect you indirectly because
reimbursements) they reduce Fund returns.
You'll find more about the Pacific MANAGEMENT FEE
Innovations Trust starting on page 9, Bank of America is the investment adviser to the Trust. The Trust pays a management
and in the Trust's Prospectus, which fee to Bank of America for these services. The table below shows the management fee
accompanies this Prospectus. as an annual percentage of each Fund's average daily net assets.
OTHER EXPENSES
The table also shows expenses the Trust paid in 1998, as an annual percentage of
each Fund's average daily net assets. To help limit Trust expenses, Pacific Life and
Bank of America have agreed to waive all or part of their fees for services provided
to the Trust, or otherwise reimburse each Fund for expenses that exceed the total
expenses listed in the table. Pacific Life and Bank of America do this voluntarily,
and may discontinue these waivers and reimbursements at any time.
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FUND MANAGEMENT FEE OTHER EXPENSES TOTAL EXPENSES
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Money Market(1) 0.05% 0.55% 0.60%
Managed Bond(1) 0.11% 0.64% 0.75%
Capital Income(1) 0.19% 0.68% 0.87%
Blue Chip(1) 0.20% 0.74% 0.94%
Mid-Cap Equity(1) 0.19% 0.75% 0.94%
Aggressive Growth(1) 0.15% 0.87% 1.02%
International(1) 0.02% 1.22% 1.24%
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(1) Actual total expenses last year, before any waivers and reimbursements, were 1.37%
for Money Market Fund, 1.20% for Managed Bond Fund, 1.30% for Capital Income Fund,
1.40% for Blue Chip Fund, 1.43% for Mid-Cap Equity Fund, 1.72% for Aggressive Growth
Fund, and 3.57% for International Fund.
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A N O V E R V I E W O F P A C I F I C I N N O V A T I O N S
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EXAMPLES The following table shows the expenses you would pay on each $1,000 you invested, if
at the end of each period, you: annuitized your Contract, surrendered your Contract
and withdrew the Contract Value, or did not annuitize or surrender, but left the
money in your Contract.
These examples assume the following:
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- the Contract Value starts at $35,000
- the Investment Options have an annual return of 5%
- the Annual Fee is deducted for Contract Values less than $50,000, after deducting
any outstanding loan and interest
- no Annual Fee is deducted for annuitized amounts or Contract Values of $50,000 or
more
THESE EXAMPLES DO NOT SHOW PAST OR FUTURE EXPENSES. YOUR ACTUAL EXPENSES IN ANY YEAR
MAY BE MORE OR LESS THAN THOSE SHOWN HERE.
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EXPENSES IF YOU EXPENSES IF YOU
ANNUITIZED YOUR SURRENDERED YOUR
CONTRACT ($) CONTRACT ($)
VARIABLE ACCOUNT 1 yr 3 yr 1 yr 3 yr
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Money Market $ 84.15 $ 65.21 $ 84.15 $ 110.21
Managed Bond 85.65 69.76 85.65 114.76
Capital Income 86.85 73.38 86.85 118.38
Blue Chip 87.56 75.49 87.56 120.49
Mid-Cap Equity 87.56 75.49 87.56 120.49
Aggressive Growth 88.46 78.19 88.46 123.19
International 90.55 84.47 90.55 129.47
<CAPTION>
EXPENSES IF YOU DID
NOT ANNUITIZE OR
SURRENDER, BUT LEFT
THE MONEY IN YOUR
CONTRACT ($)
VARIABLE ACCOUNT 1 yr 3 yr
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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
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YOUR INVESTMENT OPTIONS
You may choose among seven different Variable Investment Options and the Fixed
Option.
YOUR VARIABLE INVESTMENT OPTIONS
Each Variable Investment Option invests in a separate Fund of the Trust.
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.
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PRIMARY INVESTMENTS
FUND INVESTMENT OBJECTIVE (UNDER NORMAL CONDITIONS) MANAGER/SUBADVISER
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Money Market Liquidity and current income Short-term debt obligations issued Bank of America
consistent with preservation of or guaranteed by U.S. Government,
capital its agencies, authorities or
instrumentalities
- -----------------------------------------------------------------------------------------------------------------------------
Managed Bond Interest income and capital Investment grade, intermediate and Scudder Kemper Investments,
appreciation longer term bonds Inc.
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Capital Income Total investment return, comprised Convertible bonds and convertible Bank of America
of current income and capital preferred stocks
appreciation
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Blue Chip Long-term capital appreciation Blue chip stocks Bank of America
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Mid-Cap Equity Capital appreciation; income is a Stocks of companies with medium Bank of America
secondary consideration market capitalizations
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Aggressive Growth Maximum capital appreciation Common stocks and securities Bank of America
convertible into common stocks of
companies with smaller market
capitalizations
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International Long-term capital growth Foreign equity securities Wellington Management
Company, LLP
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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 two 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.
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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 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
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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. See ADDITIONAL INFORMATION--INQUIRIES AND
SUBMITTING FORMS AND REQUESTS.
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 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
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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.
Automatic Transfer Options
We offer three automatic transfer options: dollar cost averaging, portfolio
rebalancing and earnings sweep. There is no charge for these options, although
transfers under the dollar cost averaging and earnings sweep options are counted
towards your total transfers in a Contract Year.
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.
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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 are not considered a withdrawal of an amount from your Contract, so no
withdrawal charge is imposed at the time of transfer. See HOW YOUR PAYMENTS ARE
ALLOCATED--TRANSFERS and THE GENERAL ACCOUNT-- WITHDRAWALS AND TRANSFERS.
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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. These
credits will be added to an Eligible Person's Contract when we apply the
Purchase Payments. Eligible Persons and their immediate families also may
purchase a Contract with reduced minimum Purchase Payment requirements.
If you are an Eligible Person you will not keep any amounts credited if you
return your Contract during the Right to Cancel period as described under
WITHDRAWALS--RIGHT TO CANCEL.
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
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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 rate 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 rate 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 Trust's Prospectus and 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,
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 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 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, and any Annual Fee, to you in a single
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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.
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.
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If you have not specified an Annuity Option or do not instruct us otherwise, at
your Annuity Date your Net Contract Value, less any 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.
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.
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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 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.
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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.
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.
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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.
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
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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.
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.
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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 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 attributable to Purchase Payments. If you are an
Eligible Person and we credit additional amounts to your Contract as described
in CHARGES, FEES, AND DEDUCTIONS -- WAIVERS AND REDUCED CHARGES, if you return
your Contract during the Right to Cancel period you will not receive any amounts
that we add as a credit or any gains or losses on the amounts credited (but if
the credited amounts and gains exceed the withdrawal charge percentage on your
Contract, you will receive the amount of the excess). You will receive any
Contract fees and charges that we deducted from the credited amounts. We have
applied to the Securities and Exchange Commission for an exemptive order to
change the amount you would receive if you return your Contract during the Right
to Cancel period. We can not be sure that the SEC will grant this order, but if
it is granted, you would not receive any amounts that we add as a credit or
Contract fees and charges deducted from those amounts, but you would keep the
gains or losses on the credited amounts.
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 based in California. Along with our
subsidiaries and affiliates, our operations include life insurance, annuities,
pension and institutional products, group employee benefits, broker-dealer
operations and investment advisory services. As of the end of 1998, we had $89.6
billion of individual life insurance in force and total admitted assets of
approximately $37.6 billion. We have been ranked according to admitted assets as
of the 18th largest life insurance carrier in the nation based on December 31,
1998 assets. The Pacific Life family of companies has total assets and funds
under management of $290 billion as of December 31, 1998. We are authorized to
conduct life insurance and annuity business in the District of Columbia and all
states except New York. Our principal office is 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
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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 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.
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 the Prospectus for the
Trust.
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FINANCIAL HIGHLIGHTS
The table below is designed to help you understand how the Variable Investment
Options have performed. It shows the value of a Subaccount Unit at the beginning
and end of each period, as well as the number of Subaccount Units at the end of
each period. A Subaccount Unit is also called an Accumulation Unit.
This information in the table for the period ended December 31, 1998 is included
in the financial statements of Separate Account B, which have been audited by
Deloitte & Touche, LLP, independent auditors. You should read the table in
conjunction with the financial statements for Separate Account B, which are
included in its annual report dated as of December 31, 1998.
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
MONEY MARKET(1)
Subaccount Unit Value at beginning of period $10.30 $10.00
Subaccount Unit Value at end of period $10.68 $10.30
Number of Subaccount Units outstanding at end of period 190,268 144,343
- -----------------------------------------------------------------------------------------
MANAGED BOND(1)
Subaccount Unit Value at beginning of period $10.53 $10.00
Subaccount Unit Value at end of period $11.10 $10.53
Number of Subaccount Units outstanding at end of period 1,149,484 610,512
- -----------------------------------------------------------------------------------------
CAPITAL INCOME(1)
Subaccount Unit Value at beginning of period $11.34 $10.00
Subaccount Unit Value at end of period $11.97 $11.34
Number of Subaccount Units outstanding at end of period 1,661,536 1,052,328
- -----------------------------------------------------------------------------------------
BLUE CHIP(1)
Subaccount Unit Value at beginning of period $12.18 $10.00
Subaccount Unit Value at end of period $15.28 $12.18
Number of Subaccount Units outstanding at end of period 1,815,018 1,127,859
- -----------------------------------------------------------------------------------------
MID-CAP EQUITY(1)
Subaccount Unit Value at beginning of period $12.63 $10.00
Subaccount Unit Value at end of period $14.60 $12.63
Number of Subaccount Units outstanding at end of period 616,679 376,936
- -----------------------------------------------------------------------------------------
AGGRESSIVE GROWTH(1)
Subaccount Unit Value at beginning of period $11.63 $10.00
Subaccount Unit Value at end of period $11.26 $11.63
Number of Subaccount Units outstanding at end of period 467,582 303,100
- -----------------------------------------------------------------------------------------
INTERNATIONAL(1)
Subaccount Unit Value at beginning of period $9.94 $10.00
Subaccount Unit Value at end of period $10.94 $9.94
Number of Subaccount Units outstanding at end of period 449,095 401,840
- -----------------------------------------------------------------------------------------
</TABLE>
(1) This Subaccount began operations on March 1, 1997.
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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 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 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.
Multiple Contracts
All Non-Qualified contracts that are issued by us, or our affiliates, to the
same Owner during any calendar year are treated as one contract for purposes of
determining the amount includible in gross income under Code Section 72(e).
Further, the Treasury Department has specific authority to issue regulations
that prevent the avoidance of Section 72(e) through the serial purchase of
contracts or otherwise.
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.
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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.
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.
Any amount payable upon the Contract Owner's death, whether before or after the
Annuity Date, will be included in the estate of the Contract Owner for federal
estate tax purposes. 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.
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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.
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 IRAs
- --------------
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 became 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.
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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.
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. There is a
loan administration fee of up to $500, unless state law requires otherwise. As
of the date of this Prospectus, we currently waive this fee.
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.
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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.
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.
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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 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.
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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.
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. We
may vote on any matter voted on at Trust shareholders' meetings. However, our
interpretation of applicable law requires us to vote the number of shares
attributable to your Variable Account Value ("your voting interest") in
accordance with your directions.
We will pass 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, we will
vote such shares in the same proportion as the total votes cast for all of our
separate accounts, including Separate Account B. We will vote shares of any Fund
held by our non-insurance affiliates in the same proportion as the total votes
for all separate accounts of ours and our insurance affiliates.
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.
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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.
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 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
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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 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
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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
Pacific Life long ago recognized the challenges associated with the Year 2000
date change. This change 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 began prior to 1995 to assess and plan for the potential
impact of the Year 2000. More recently, Pacific Life has been executing a
company-wide plan adopted during 1998 which called for correction or replacement
of remaining non-compliant systems by December 31, 1998.
We have successfully executed this project plan to date. Virtually all affected
systems were remediated and tested in time for use during 1998 year-end
processing cycles. Although it is not possible to certify that any system will
be completely free of Year 2000 problems, we have performed extensive testing to
identify and deal with such potential problems. Additionally, most of the
company's critical systems were subject to an independent third-party review
process which used sophisticated automated tools to identify Year 2000 related
bugs. The results have been very positive and we feel the company's internal
systems are positioned well for the date change in the century.
We plan to continue to test and re-test throughout 1999 and we will respond
promptly should any problems arise at any time thereafter.
We are continuing to work on contingency plans for critical business processes.
When appropriate, alternative methods and procedures are being developed to work
around unanticipated problems.
In addition to the above, we will continue to carefully evaluate responses from
vendors and significant business partners regarding the compliance of their
critical business processes and products. Although ultimately Pacific Life
cannot be responsible for the Year 2000 compliance efforts of these outside
entities, we will take appropriate steps wherever possible to develop
contingency plans to address vendors and partners deemed non-compliant.
Expenses to make our systems Year 2000 compliant are currently estimated to
range from $12 million to $15 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 projects,
although there can be no assurance.
These Year 2000 related statements are designated as "Year 2000 Readiness
Disclosure" pursuant to the Year 2000 Information Readiness Disclosure Act,
enacted October 19, 1998.
FINANCIAL STATEMENTS
Audited Financial Statements of Separate Account B as of December 31, 1998 are
incorporated by reference in the Statement of Additional Information from the
Annual Report of Separate Account B dated December 31, 1998. Pacific Life's
audited consolidated financial statements as of December 31, 1998 and 1997 and
for the three years ended December 31, 1998 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.
Legal matters relating to the Federal securities and Federal income tax laws
have been passed upon by Dechert Price & Rhoads, Washington, D.C.
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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.
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
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<PAGE> 37
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.
37
<PAGE> 38
T E R M S U S E D I N T H I S P R O S P E C T U S
Some of the terms we've used in this Prospectus may be new to you. We've
identified them in the Prospectus by capitalizing the first letter of each word.
You'll find an explanation of what they mean below.
If you have any questions, please ask your registered representative or call us
at 1-800-722-5558.
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 our Annuities administrative
offices are open. The New York Stock Exchange and our Annuities administrative
offices are closed on weekends and on the following holidays: New Year's Day,
Martin Luther King, Jr. Day, President's Day, Good Friday, Memorial Day, July
Fourth, Labor Day, Thanksgiving Day and Christmas Day. In this Prospectus, "day"
or "date" means Business Day unless otherwise specified. 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.
CODE - The Internal Revenue Code of 1986, as amended.
CONTINGENT ANNUITANT - A person, if named 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 - A person, if named 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.
CONTRACT OWNER (ALSO CALLED A "POLICYHOLDER" OR "CONTRACTHOLDER") - 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 the Guaranteed Interest 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.
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T E R M S U S E D I N T H I S P R O S P E C T U S
INVESTMENT OPTION - A Subaccount 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 ("PREMIUM 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 or account ("IRA"), or form thereof, 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,
as amended (the "1940 Act").
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. Fluctuations 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 at or about 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 (also called a Variable Account).
39
<PAGE> 40
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........................... 3
Tax Deferred Accumulation.............................. 4
DISTRIBUTION OF THE CONTRACTS............................... 6
Pacific Mutual Distributors, Inc....................... 6
THE CONTRACTS AND THE SEPARATE ACCOUNT...................... 6
Calculating Subaccount Unit Values..................... 6
Variable Annuity Payment Amounts....................... 7
Corresponding Dates.................................... 9
Age and Sex of Annuitant............................... 9
Systematic Transfer Programs........................... 9
Pre-Authorized Withdrawals............................. 11
Death Benefit.......................................... 12
Joint Annuitants on Qualified Contracts................ 12
1035 Exchanges......................................... 12
Safekeeping of Assets.................................. 13
Dividends.............................................. 13
Waivers and Reduced Charges............................ 13
FINANCIAL STATEMENTS........................................ 13
</TABLE>
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APPENDIX A:
STATE LAW VARIATIONS
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.
There may be extended Right to Cancel periods in some states for replacement
business. Please consult with your registered representative if you have any
questions regarding your state's Right to Cancel period.
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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(This page intentionally left blank)
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To receive a current copy of the Pacific Innovations SAI (Form No.
317-9A) without charge, complete the following and send it to:
Pacific Life Insurance Company
Variable Annuities
Post Office Box 7187
Pasadena, California 91109-7187
Name _______________________________
Address ____________________________
City _______________________________
State ___________ Zip _____________
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P A C I F I C I N N O V A T I O N S
W H E R E T O G O F O R M O R E I N F O R M A T I O N
<TABLE>
<S> <C>
The Pacific Innovations variable You'll find more information about the Pacific Innovations variable annuity contract
annuity Contract is underwritten by and Separate Account B in the Statement of Additional Information (SAI) dated May 1, 1999.
Pacific Life Insurance Company, 700
Newport Center Drive, P.O. Box 9000, The SAI has been filed with the SEC and is considered to be part of this Prospectus
Newport Beach, California 92660. because it's incorporated by reference. You'll find the table of contents for the
SAI on page 40 of this Prospectus.
If you have any questions about the
Contract, please ask your registered You can get a copy of the SAI by calling or writing to us, or by contacting the SEC.
representative or contact us. The SEC may charge you a fee for this information.
HOW TO CONTACT US CALL OR WRITE TO US AT:
Pacific Life Insurance Company
Variable Annuities Department
P.O. Box 7187
Pasadena, California 91109-7187
1-800-722-5558
6 a.m. through 5 p.m. Pacific time
SEND PURCHASE PAYMENTS, OTHER PAYMENTS AND APPLICATION FORMS:
By mail
Pacific Life Insurance Company
P.O. Box 100060
Pasadena, California 91189-0060
By overnight delivery service
Pacific Life Insurance Company
c/o FCNPC
1111 South Arroyo Parkway, Suite 150
Pasadena, California 91105
HOW TO CONTACT THE SEC Public Reference Section of the SEC
Washington, D.C. 20549-6009
1-800-SEC-0330
Internet: www.sec.gov
</TABLE>
<PAGE> 45
STATEMENT OF ADDITIONAL INFORMATION
MAY 1, 1999
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, 1999, 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........................... 3
Tax Deferred Accumulation.............................. 4
DISTRIBUTION OF THE CONTRACTS............................... 6
Pacific Mutual Distributors, Inc....................... 6
THE CONTRACTS AND THE SEPARATE ACCOUNT...................... 6
Calculating Subaccount Unit Values..................... 6
Variable Annuity Payment Amounts....................... 7
Corresponding Dates.................................... 9
Age and Sex of Annuitant............................... 9
Systematic Transfer Programs........................... 9
Pre-Authorized Withdrawals............................. 11
Death Benefit.......................................... 12
Joint Annuitants on Qualified Contracts................ 12
1035 Exchanges......................................... 12
Safekeeping of Assets.................................. 13
Dividends.............................................. 13
Waivers and Reduced Charges............................ 13
FINANCIAL STATEMENTS........................................ 13
</TABLE>
i
<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, 1998, the Money Market Subaccount current yield was
1.14% and the effective yield was 1.14%. 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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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. 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+.
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, 1998. The table is based on a
3
<PAGE> 50
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 PERIODS ENDING DECEMBER 31, 1998
ALL NUMBERS ARE EXPRESSED AS A PERCENTAGE
<TABLE>
<CAPTION>
1 YEAR SINCE INCEPTION*
-------------- ----------------
SUBACCOUNTS AV FWV AV FWV
----------- ----- ----- ------ ------
<S> <C> <C> <C> <C>
Money Market................ 3.53% (2.77)% 3.57% 0.64%
Managed Bond................ 5.32 (0.98) 5.82 2.94
Capital Income.............. 5.49 (0.81) 10.25 7.47
Blue Chip................... 25.35 19.05 25.90 23.46
Mid-Cap Equity.............. 15.47 9.17 22.79 20.30
Aggressive Growth........... (3.23) (9.53) 6.64 3.78
International............... 10.00 3.70 4.97 2.07
</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 ordinary income 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 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
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<PAGE> 51
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 assets and
taxpayers from that illustrated and withdrawals by and distributions to Contract
Owners who have not reached age 59 1/2 may be subject to a tax penalty of 10%.
POWER OF TAX DEFERRAL
$10,000 investment at annual rates of return of 0%, 4% and 8%, taxed @ 36%
[TAX DEFERRAL GRAPH]
<TABLE>
<CAPTION>
TAXABLE TAX-DEFERRED
INVESTMENT INVESTMENT
---------- ------------
<S> <C> <C>
10 years
0%........................................................ $10,000.00 $10,000.00
4%........................................................ $12,875.97 $13,073.56
8%........................................................ $16,476.07 $17,417.12
20 years
0%........................................................ $10,000.00 $10,000.00
4%........................................................ $16,579.07 $17,623.19
8%........................................................ $27,146.07 $33,430.13
30 years
0%........................................................ $10,000.00 $10,000.00
4%........................................................ $21,347.17 $24,357.74
8%........................................................ $44,726.05 $68,001.00
</TABLE>
5
<PAGE> 52
DISTRIBUTION OF THE CONTRACTS
PACIFIC MUTUAL DISTRIBUTORS, INC.
Pacific Mutual Distributors, Inc. ("PMD"), a subsidiary of ours, acts as
the principal underwriter ("distributor") of the Contracts and offers the
Contracts on a continuous basis. PMD is registered as a broker-dealer with the
SEC and is a member of the National Association of Securities Dealers ("NASD").
The aggregate amount of underwriting commissions paid to PMD for 1998 and
1997, respectively, with regard to this Contract were $1,798,940 and $2,649,979,
of which $0 was retained. We and PMD enter into selling agreements with
broker-dealers whose registered representatives are authorized by state
insurance departments to sell the Contracts.
THE CONTRACTS AND THE SEPARATE ACCOUNT
CALCULATING SUBACCOUNT UNIT VALUES
The Unit Value of the Subaccount Units in each Variable Investment Option
is computed at or about 4:00 p.m. Eastern time on 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 / 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 equal to 1.25% annually
and the Administrative Charge at a rate equal to 0.15%
annually (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.
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<PAGE> 53
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 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.
You may choose any other Annuity Option Table that assumes a different rate
of return which we offer at the time your Annuity Option is effective.
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.
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<PAGE> 54
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 an annual
rate of 1.25% and the Administrative Fee at an annual rate of 0.15%. 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.
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
8
<PAGE> 55
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.
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
9
<PAGE> 56
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.
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
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<PAGE> 57
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 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.
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<PAGE> 58
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.
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"), and
you change your marital status after your Contract Date, you may be permitted to
add a Joint Annuitant on your Annuity Date and to change your Joint Annuitant.
Generally speaking, you may be permitted to add a new spouse as a Joint
Annuitant, and you may be permitted to remove a Joint Annuitant who is no longer
your spouse. 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
12
<PAGE> 59
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.
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, 1998
and for the two years then ended are incorporated by reference in this SAI from
the Annual Report of the Separate Account dated as of December 31, 1998. Pacific
Life's audited consolidated financial statements as of December 31, 1998 and
1997 and for the three years ended December 31, 1998 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,
1998 and 1997 and for the three years ended December 31, 1998 have been audited
by Deloitte & Touche LLP, independent auditors as stated in their report
appearing herein.
13
<PAGE> 60
INDEPENDENT AUDITORS' REPORT
Pacific Life Insurance Company and Subsidiaries:
We have audited the accompanying consolidated statements of financial
condition of Pacific Life Insurance Company and Subsidiaries (the
"Company") as of December 31, 1998 and 1997, 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, 1998. 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, 1998 and 1997, and the results
of their operations and their cash flows for each of the three years in
the period ended December 31, 1998 in conformity with generally accepted
accounting principles.
DELOITTE & TOUCHE LLP
Costa Mesa, California
February 22, 1999
14
<PAGE> 61
Pacific Life Insurance Company and Subsidiaries
C O N S O L I D A T E D S T A T E M E N T S
O F F I N A N C I A L C O N D I T I O N
<TABLE>
<CAPTION>
December 31,
1998 1997
- ------------------------------------------------------------------------------------------------
(In Millions)
<S> <C> <C>
ASSETS
Investments:
Securities available for sale at estimated fair value:
Fixed maturity securities $ 13,617.0 $ 13,938.5
Equity securities 547.5 346.4
Mortgage loans 2,788.7 1,922.1
Real estate 172.7 192.1
Policy loans 3,901.2 3,769.2
Short-term investments 99.9 83.8
Other investments 948.0 432.4
- ------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS 22,075.0 20,684.5
Cash and cash equivalents 150.1 110.4
Deferred policy acquisition costs 889.7 716.9
Accrued investment income 252.3 255.4
Other assets 672.8 636.5
Separate account assets 15,844.0 11,605.1
- ------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 39,883.9 $ 34,008.8
================================================================================================
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities:
Universal life, annuity and other investment contract deposits $ 17,973.0 $ 16,644.5
Future policy benefits 2,131.6 2,133.8
Short-term and long-term debt 445.1 253.6
Other liabilities 1,162.2 1,224.5
Separate account liabilities 15,844.0 11,605.1
- ------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 37,555.9 31,861.5
- ------------------------------------------------------------------------------------------------
Commitments and contingencies
Stockholder's Equity:
Common stock - $50 par value; 600,000 shares authorized,
issued and outstanding 30.0 30.0
Paid-in capital 126.2 120.1
Retained earnings 1,663.5 1,422.0
Accumulated other comprehensive income -
Unrealized gain on securities available for sale, net 508.3 575.2
- ------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDER'S EQUITY 2,328.0 2,147.3
- ------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $ 39,883.9 $ 34,008.8
================================================================================================
</TABLE>
See Notes to Consolidated Financial Statements
15
<PAGE> 62
Pacific Life Insurance Company and Subsidiaries
C O N S O L I D A T E D S T A T E M E N T S
O F O P E R A T I O N S
<TABLE>
<CAPTION>
Years Ended December 31,
1998 1997 1996
- ----------------------------------------------------------------------------------------------------------
(In Millions)
<S> <C> <C> <C>
REVENUES
Policy fees from universal life, annuity and other investment
contract deposits $ 525.3 $ 431.2 $ 348.6
Insurance premiums 514.7 504.3 465.4
Net investment income 1,293.8 1,225.3 1,087.3
Net realized capital gains 38.7 85.3 44.0
Commission revenue 220.1 146.6 79.6
Other income 216.6 181.7 123.1
- ----------------------------------------------------------------------------------------------------------
TOTAL REVENUES 2,809.2 2,574.4 2,148.0
- ----------------------------------------------------------------------------------------------------------
BENEFITS AND EXPENSES
Interest credited to universal life, annuity and other investment
contract deposits 880.8 797.8 665.0
Policy benefits paid or provided 719.5 675.7 652.9
Commission expenses 386.1 303.7 233.6
Operating expenses 467.8 507.7 316.2
- ----------------------------------------------------------------------------------------------------------
TOTAL BENEFITS AND EXPENSES 2,454.2 2,284.9 1,867.7
- ----------------------------------------------------------------------------------------------------------
INCOME BEFORE PROVISION FOR INCOME TAXES 355.0 289.5 280.3
Provision for income taxes 113.5 113.5 113.7
- ----------------------------------------------------------------------------------------------------------
NET INCOME $ 241.5 $ 176.0 $ 166.6
==========================================================================================================
</TABLE>
See Notes to Consolidated Financial Statements
16
<PAGE> 63
Pacific Life Insurance Company and Subsidiaries
C O N S O L I D A T E D S T A T E M E N T S
O F S T O C K H O L D E R' S E Q U I T Y
<TABLE>
<CAPTION>
Accumulated
Other
Common Stock Paid-in Retained Comprehensive
Shares Amount Capital Earnings Income Total
- ---------------------------------------------------------------------------------------------------------------------------
(In Millions)
<S> <C> <C> <C> <C> <C> <C>
BALANCES,
JANUARY 1, 1996 $1,151.4 $ 482.0 $1,633.4
Comprehensive income:
Net income 166.6 166.6
Change in unrealized gain on
securities available for sale, net (102.8) (102.8)
--------
Total comprehensive income 63.8
- ---------------------------------------------------------------------------------------------------------------------------
BALANCES,
DECEMBER 31, 1996 1,318.0 379.2 1,697.2
Comprehensive income:
Net income 176.0 176.0
Change in unrealized gain on
securities available for sale, net 196.0 196.0
--------
Total comprehensive income 372.0
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
Comprehensive income:
Net income 241.5 241.5
Change in unrealized gain on
securities available for sale, net (66.9) (66.9)
--------
Total comprehensive income 174.6
Issuance of partnership units by affiliate 6.1 6.1
- ---------------------------------------------------------------------------------------------------------------------------
BALANCES,
DECEMBER 31, 1998 0.6 $ 30.0 $ 126.2 $1,663.5 $ 508.3 $2,328.0
===========================================================================================================================
</TABLE>
See Notes to Consolidated Financial Statements
17
<PAGE> 64
Pacific Life Insurance Company and Subsidiaries
C O N S O L I D A T E D S T AT E M E N T S
O F C A S H F L O W S
<TABLE>
<CAPTION>
Years Ended December 31,
1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------------
(In Millions)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 241.5 $ 176.0 $ 166.6
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization on fixed maturities (39.4) (26.6) (45.2)
Depreciation and other amortization 26.0 38.3 43.8
Deferred income taxes (20.6) (14.4) (49.8)
Net realized capital gains (38.7) (85.3) (44.0)
Net change in deferred policy acquisition costs (172.8) (185.4) (140.4)
Interest credited to universal life, annuity and other
investment contract deposits 880.8 797.8 665.0
Change in accrued investment income 3.1 (52.9) (3.7)
Change in future policy benefits (2.2) (372.7) 62.3
Change in other assets and liabilities 99.4 577.4 158.1
- ----------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 977.1 852.2 812.7
- ----------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Securities available for sale:
Purchases (4,302.3) (6,272.3) (4,525.0)
Sales 2,201.9 2,224.1 2,511.0
Maturities and repayments 2,196.1 2,394.6 1,184.7
Repayments of mortgage loans 334.9 179.3 220.4
Proceeds from sales of mortgage loans and real estate 43.3 104.4 14.5
Purchases of mortgage loans and real estate (1,246.3) (643.7) (414.3)
Distributions from partnerships 119.5 91.6 78.8
Change in policy loans (132.0) (637.4) (338.5)
Change in short-term investments (16.1) (17.7) 37.2
Other investing activity, net (564.2) 43.5 (144.5)
- ----------------------------------------------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (1,365.2) (2,533.6) (1,375.7)
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
(Continued)
See Notes to Consolidated Financial Statements
18
<PAGE> 65
Pacific Life Insurance Company and Subsidiaries
C O N S O L I D A T E D S T A T E M E N T S O F C A S H F L O W S
<TABLE>
<CAPTION>
Years Ended December 31,
(Continued) 1998 1997 1996
- -------------------------------------------------------------------------------------------------------
(In Millions)
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Policyholder account balances:
Deposits $4,007.0 $4,373.6 $2,105.0
Withdrawals (3,770.7) (2,667.3) (1,756.6)
Net change in short-term debt 191.5 8.5 42.5
Repayment of long-term debt (25.0) (5.0)
Initial capitalization of Pacific Mutual Holding Company (2.0)
Dividend paid to parent (5.0)
- -------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 427.8 1,682.8 385.9
- -------------------------------------------------------------------------------------------------------
Net change in cash and cash equivalents 39.7 1.4 (177.1)
Cash and cash equivalents, beginning of year 110.4 109.0 286.1
- -------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 150.1 $ 110.4 $ 109.0
=======================================================================================================
SUPPLEMENTAL SCHEDULE OF INVESTING AND FINANCING ACTIVITIES
In connection with the acquisition of an insurance block of
business in 1997, as discussed in Note 5, the
following assets and liabilities were assumed:
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
========
=======================================================================================================
SUPPLEMENTAL SCHEDULE OF NON CASH FINANCING ACTIVITIES
As a result of the Conversion in 1997, 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 to paid-in capital
=======================================================================================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Income taxes paid $ 127.9 $ 153.0 $ 189.6
Interest paid $ 24.0 $ 26.1 $ 27.3
=======================================================================================================
</TABLE>
See Notes to Consolidated Financial Statements
19
<PAGE> 66
Pacific Life Insurance Company and Subsidiaries
N O T E S T O C O N S O L I D A T E D
F I N A N C I A L S T A T E M E N T S
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 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 and
institutional products, group employee benefits, broker-dealer operations
and investment management and advisory services. Pacific Life's 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, broker-dealer operations
and 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 wholly-owned noninsurance subsidiaries, Pacific
Asset Management LLC ("PAM"), Pacific Mutual Distributors, Inc. ("PMD"),
Pacific Mutual Realty Finance, Inc. and Pacific Mezzanine Associates,
L.L.C. (50% owned). 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.
20
<PAGE> 67
Pacific Life Insurance Company and Subsidiaries
N O T E S T O C O N S O L I D A T E D
F I N A N C I A L S T A T E M E N T S
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NEW ACCOUNTING PRONOUNCEMENTS
During 1998, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 130, "Reporting Comprehensive Income," SFAS No.
131, "Disclosures about Segments of an Enterprise and Related
Information," and SFAS No. 132, "Employers' Disclosures about Pensions and
Other Postretirement Benefits." SFAS No. 130 established standards for the
reporting and display of comprehensive income and its components in
financial statements (Note 11). SFAS No. 131 established standards for the
way information about operating segments is reported in financial
statements. It also established standards for related disclosures about
products and services, geographic areas and major customers (Note 13).
SFAS No. 132 standardized disclosure requirements for employers' pensions
and other retiree benefits (Note 14). Adoption of these accounting
standards did not have a significant impact on the consolidated financial
position or results of operations of the Company.
On January 1, 1998, the Company adopted the American Institute of
Certified Public Accountants ("AICPA") Statement of Position ("SOP") 97-3,
"Accounting by Insurance and Other Enterprises for Insurance-Related
Assessments." SOP 97-3 provides guidance on when a liability should be
recognized for guaranty fund and other assessments and how to measure the
liability. Adoption of this accounting standard did not have a significant
impact on the consolidated financial position or results of operations of
the Company.
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities." SFAS
No. 133 is effective for fiscal years beginning after June 15, 1999. SFAS
No. 133 establishes accounting and reporting standards for derivative
instruments and hedging activities. The Company currently plans to adopt
SFAS No. 133 on January 1, 2000. The impact on the consolidated financial
position or results of operations of the Company due to the adoption of
this statement has not yet been determined.
In March 1998, the AICPA issued SOP 98-1, "Accounting for the Cost of
Computer Software Developed or Obtained for Internal Use." SOP 98-1
requires that certain costs incurred in developing internal use computer
software be capitalized. The Company currently plans to adopt SOP 98-1 on
January 1, 1999. The adoption is not expected to have a significant impact
on the consolidated financial position or results of operations of the
Company.
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 on
the accompanying consolidated statements of operations.
Realized gains and losses on investment transactions are determined on a
specific identification basis and are included in net realized capital
gains on the accompanying consolidated statements of operations.
21
<PAGE> 68
Pacific Life Insurance Company and Subsidiaries
N O T E S T O C O N S O L I D A T E D
F I N A N C I A L S T A T E M E N T S
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 on the accompanying consolidated statements of financial condition,
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 included in net
realized capital gains on the accompanying consolidated statements of
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% as of December 31,
1997. During 1998, the Company increased its investment in PIMCO Advisors
to reflect its pro rata share of the increase to PIMCO Advisors partners'
capital due to the issuance of additional partnership units. For the year
ended December 31, 1998, there was a direct increase to the Company's
stockholder's equity of $6.1 million. During 1998, the Company also
acquired the beneficial ownership of additional partnership units which
increased its ownership to 33% as of December 31, 1998. Deferred taxes
resulting from these transactions have been included in the accompanying
consolidated financial statements. The Company's investment in PIMCO
Advisors, 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.
22
<PAGE> 69
Pacific Life Insurance Company and Subsidiaries
N O T E S T O C O N S O L I D A T E D
F I N A N C I A L S T A T E M E N T S
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 recognized, using assumptions consistent
with those used in computing policy reserves. For the years ended December
31, 1998, 1997 and 1996, net amortization of deferred policy acquisition
costs included in commission expenses amounted to $73.0 million, $50.2
million and $42.6 million, respectively, and included in operating
expenses amounted to $33.5 million, $29.4 million and $27.4 million,
respectively, on the accompanying consolidated statements of operations.
PRESENT VALUE OF FUTURE PROFITS
In connection with the rehabilitation of First Capital Life Insurance
Company ("FCL" Note 4), an asset was established which represented the
present value of estimated future profits of the acquired business. The
future profits were discounted to provide an appropriate rate of return
and were amortized over the rehabilitation plan period. Amortization for
the years ended December 31, 1997 and 1996 amounted to $16.1 million and
$24.2 million, respectively, and is included in commission expenses on 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 1998,
1997 and 1996.
FUTURE POLICY BENEFITS
Life insurance reserves are valued using the net level premium method.
Interest rate assumptions ranged from 4.5% to 9.3% for 1998, 1997 and
1996. 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. Dividends to policyholders
are included in policy benefits paid or provided on the accompanying
consolidated statements of operations.
Dividends are accrued 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,
1998 and 1997, participating experience rated policies paying dividends
represented approximately 1% of direct written life insurance in force.
23
<PAGE> 70
Pacific Life Insurance Company and Subsidiaries
N O T E S T O C O N S O L I D A T E D
F I N A N C I A L S T A T E M E N T S
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REVENUES AND EXPENSES
Insurance premiums are recognized as revenue when due. Benefits and
expenses, other than deferred policy acquisition costs, are recognized
when incurred.
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 the trade date.
DEPRECIATION AND AMORTIZATION
Depreciation of investment real estate is computed on the straight-line
method over the estimated useful lives which range from 5 to 30 years.
Certain other assets are depreciated or amortized on the straight-line
method over 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. Prior to
1998, Pacific Life was subject to an equity tax calculated by a prescribed
formula that incorporated a differential earnings rate between stock and
mutual life insurance companies. In December 1998, the Internal Revenue
Service released Revenue Ruling 99-3 which exempts Pacific Life from this
tax for taxable years beginning in 1998. 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 has 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.
24
<PAGE> 71
Pacific Life Insurance Company and Subsidiaries
N O T E S T O C O N S O L I D A T E D
F I N A N C I A L S T A T E M E N T S
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
BUSINESS RISKS
The Company operates in a business environment which is subject to various
risks and uncertainties. Such risks and uncertainties include, but are not
limited to, 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. Additionally, the Company includes contractual
provisions limiting withdrawal rights for certain of its products. A
substantial portion of the Company's liabilities are not subject to
surrender or can be surrendered only after deduction of a surrender charge
or a market value adjustment.
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 approval procedures, limits and ongoing monitoring. Real estate and
mortgage loan investment risks are limited by diversification of
geographic location and property type. Management does not believe that
significant concentrations of credit risk 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. The Company manages this risk through credit approvals and
limits on exposure to any specific counterparty. 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, cases might be decided or future legislation
might be enacted, or if decided or enacted, whether such cases or
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 1998
financial statement presentation.
25
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Pacific Life Insurance Company and Subsidiaries
N O T E S T O C O N S O L I D A T E D
F I N A N C I A L S T A T E M E N T S
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 on the accompanying consolidated financial
statements:
<TABLE>
<CAPTION>
December 31,
1998 1997
------------------------
(In Millions)
<S> <C> <C>
Statutory capital and surplus $ 1,157.4 $ 944.8
Deferred policy acquisition costs 908.0 730.7
Unrealized gain on securities available for sale, net 508.3 575.2
Deferred income tax 307.1 289.2
Asset valuation reserve 298.7 252.4
Non admitted assets 40.4 25.2
Subsidiary equity 26.5 60.4
Surplus notes (149.6) (149.6)
Insurance and annuity reserves (654.4) (511.5)
Other (114.4) (69.5)
------------------------
Stockholder's equity as reported herein $ 2,328.0 $ 2,147.3
========================
</TABLE>
<TABLE>
<CAPTION>
Years Ended December 31,
1998 1997 1996
--------------------------------
(In Millions)
<S> <C> <C> <C>
Statutory net income $ 187.6 $ 121.5 $ 113.1
Deferred policy acquisition costs 177.3 160.4 111.2
Interest maintenance reserve 24.1 7.6 3.8
Deferred income tax 17.9 41.2 70.9
Net realized gain (loss) on trading securities 9.2 (5.8) (11.6)
Earnings of subsidiaries (32.8) (40.6) (33.0)
Insurance and annuity reserves (145.1) (107.0) (91.3)
Other 3.3 (1.3) 3.5
-------- -------- --------
Net income as reported herein $ 241.5 $ 176.0 $ 166.6
======== ======== ========
</TABLE>
26
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Pacific Life Insurance Company and Subsidiaries
N O T E S T O C O N S O L I D A T E D
F I N A N C I A L S T A T E M E N T S
2. STATUTORY RESULTS (CONTINUED)
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, 1998 and 1997,
Pacific Life and PM Group exceeded the minimum risk-based capital
requirements.
CODIFICATION
In March 1998, the NAIC adopted the Codification of Statutory Accounting
Principles ("Codification"). The Codification, which is intended to
standardize regulatory accounting and reporting for the insurance
industry, is proposed to be effective January 1, 2001. However, statutory
accounting principles will continue to be established by individual state
laws and permitted practices and it is uncertain when, or if, the states
of California and Arizona will require adoption of Codification for the
preparation of statutory financial statements. The Company has not
finalized the quantification of the effects of Codification on its
statutory financial statements.
DIVIDEND RESTRICTIONS
Dividend payments by Pacific Life to its parent in any 12-month period
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 1998
statutory results, Pacific Life could pay approximately $240.9 million in
dividends in 1999 without prior approval. No dividends were paid during
1998.
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. PM Group received approval to pay
dividends of $14 million and $25 million for the years ended December 31,
1997 and 1996 of which $8 million and $18 million, respectively, were
considered extraordinary. No dividends were paid during 1998.
PERMITTED PRACTICE
As discussed in Note 1, the Company beneficially owns approximately 33% of
the outstanding General and Limited Partner units in PIMCO Advisors L.P.
as of December 31, 1998. Net cash distributions received on these units
are recorded as income as permitted by the Insurance Department of the
State of California for statutory accounting purposes.
27
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Pacific Life Insurance Company and Subsidiaries
N O T E S T O C O N S O L I D A T E D
F I N A N C I A L S T A T E M E N T S
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 had
an experience based dividend scale for 1997. The Closed Block was 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 $311.6 million and $316.2 million and total
liabilities of $352.8 million and $356.0 million for the Closed Block are
included in other assets and other liabilities, respectively, on the
accompanying consolidated statements of financial condition as of December
31, 1998 and 1997, respectively. The contribution to income from the
Closed Block of $5.1 million and $5.7 million, consisting of net revenues
and expenses generated by the Closed Block, is included in other income on
the accompanying consolidated statements of operations for the years ended
December 31, 1998 and 1997, respectively.
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 BLOCKS 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
("Confederation Life"), 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.
The remaining cost of acquiring this business, representing the amount
equal to the excess of the estimated fair value of the reserves assumed
over the estimated fair value of the assets acquired, amounted to $36.5
million and $43.4 million as of December 31, 1998 and 1997, respectively,
and is included in deferred policy acquisition costs on the accompanying
consolidated statements of financial condition. Amortization of this asset
for the years ended December 31, 1998 and 1997 was $7.7 million and $0.9
million, respectively, and is included in commission expenses on the
accompanying consolidated statements of operations.
In January 1999, Pacific Life signed a definitive agreement to acquire a
payout annuity block of business from Confederation Life. This block of
business consists of approximately 18,000 policies, having reserves
amounting to approximately $2.0 billion. The transaction is subject to
various regulatory and Court approvals and is anticipated to close during
1999.
28
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Pacific Life Insurance Company and Subsidiaries
N O T E S T O C O N S O L I D A T E D
F I N A N C I A L S T A T E M E N T S
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
--------- --------- --------- ---------
(In Millions)
<S> <C> <C> <C> <C>
Securities Available for Sale:
------------------------------
As of December 31, 1998:
U.S. Treasury securities and obligations of
U.S. government authorities and agencies $ 94.0 $ 24.9 $ 118.9
Obligations of states, political subdivisions
and foreign governments 726.0 118.0 $ 16.1 827.9
Corporate securities 7,766.0 438.0 122.4 8,081.6
Mortgage-backed and asset-backed securities 4,391.7 139.6 52.9 4,478.4
Redeemable preferred stock 104.0 11.3 5.1 110.2
---------------------------------------------------
Total fixed maturity securities $13,081.7 $ 731.8 $ 196.5 $13,617.0
===================================================
Total equity securities $ 364.4 $ 202.6 $ 19.5 $ 547.5
===================================================
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 7,658.6 594.3 72.7 8,180.2
Mortgage-backed and asset-backed securities 4,597.2 147.1 15.5 4,728.8
Redeemable preferred stock 102.3 10.3 2.6 110.0
---------------------------------------------------
Total fixed maturity securities $13,173.7 $ 858.6 $ 93.8 $13,938.5
===================================================
Total equity securities $ 226.4 $ 122.5 $ 2.5 $ 346.4
===================================================
</TABLE>
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Pacific Life Insurance Company and Subsidiaries
N O T E S T O C O N S O L I D A T E D
F I N A N C I A L S T A T E M E N T S
6. INVESTMENT IN FIXED MATURITY AND EQUITY SECURITIES (CONTINUED)
The amortized cost and estimated fair value of fixed maturity securities
as of December 31, 1998, 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
Cost Fair Value
-----------------------
(In Millions)
<S> <C> <C>
Securities Available for Sale:
------------------------------
Due in one year or less $ 479.8 $ 482.6
Due after one year through five years 3,131.7 3,236.6
Due after five years through ten years 2,923.1 3,033.4
Due after ten years 2,155.4 2,386.0
-----------------------
8,690.0 9,138.6
Mortgage-backed and asset-backed securities 4,391.7 4,478.4
-----------------------
Total $13,081.7 $13,617.0
=======================
</TABLE>
Gross gains of $110.6 million, $69.1 million and $89.3 million and gross
losses of $35.9 million, $32.9 million and $29.9 million on securities
available for sale were realized during 1998, 1997 and 1996, respectively.
Major categories of investment income are summarized as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
1998 1997 1996
----------------------------------
(In Millions)
<S> <C> <C> <C>
Fixed maturity securities $ 915.9 $ 925.4 $ 820.7
Equity securities 17.5 12.8 17.8
Mortgage loans 174.6 129.5 109.4
Real estate 38.1 53.6 51.3
Policy loans 154.5 137.1 113.0
Other 100.2 75.5 82.6
----------------------------------
Gross investment income 1,400.8 1,333.9 1,194.8
Investment expense 107.0 108.6 107.5
----------------------------------
Net investment income $1,293.8 $1,225.3 $1,087.3
==================================
</TABLE>
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Pacific Life Insurance Company and Subsidiaries
N O T E S T O C O N S O L I D A T E D
F I N A N C I A L S T A T E M E N T S
6. INVESTMENT IN FIXED MATURITY AND EQUITY SECURITIES (CONTINUED)
The change in gross unrealized gain on investments in available for sale
and trading securities is as follows:
<TABLE>
<CAPTION>
December 31,
1998 1997 1996
-------------------------------
(In Millions)
<S> <C> <C> <C>
Available for sale securities:
Fixed maturity ($229.5) $223.5 ($168.6)
Equity 63.1 85.7 6.3
-------------------------------
Total ($166.4) $309.2 ($162.3)
===============================
Trading securities:
Fixed maturity ($2.5) ($1.1) ($0.5)
Equity 0.2
-------------------------------
Total ($2.5) ($1.1) ($0.3)
===============================
</TABLE>
As of December 31, 1998 and 1997, investments in fixed maturity securities
with a carrying value of $13.0 million and $14.4 million, respectively,
were on deposit with state insurance departments to satisfy regulatory
requirements.
No investment, aggregated by issuer, exceeded 10% of total stockholder's
equity as of December 31, 1998.
31
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Pacific Life Insurance Company and Subsidiaries
N O T E S T O C O N S O L I D A T E D
F I N A N C I A L S T A T E M E N T S
7. FINANCIAL INSTRUMENTS
The estimated fair values of the Company's financial instruments are as
follows:
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1997
----------------------- -----------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
===================================================
(In Millions)
<S> <C> <C> <C> <C>
Assets:
Fixed maturity and equity securities (Note 6) $14,164.5 $14,164.5 $14,284.9 $14,284.9
Mortgage loans 2,788.7 2,911.2 1,922.1 1,990.9
Policy loans 3,901.2 3,901.2 3,769.2 3,769.2
Cash and cash equivalents 150.1 150.1 110.4 110.4
Derivative financial instruments:
Interest rate floors, caps, options and swaptions 67.9 67.9 22.9 22.9
Interest rate swap contracts 0.5 0.5
Foreign currency derivatives 108.2 108.2 4.1 4.1
Liabilities:
Guaranteed interest contracts 5,665.3 5,751.0 3,982.0 4,035.7
Deposit liabilities 599.9 626.7 733.5 737.4
Annuity liabilities 1,448.0 1,430.1 1,883.5 1,872.6
Short-term debt 295.5 295.5 104.0 104.0
Surplus notes 149.6 176.0 149.6 164.7
Derivative financial instruments:
Options written 1.6 1.6
Interest rate swap contracts 23.3 23.3
Asset swap contracts 3.6 3.6 12.6 12.6
Credit default and total return swaps 9.1 9.1 4.0 4.0
</TABLE>
The following methods and assumptions were used to estimate the fair value
of these financial instruments as of December 31, 1998 and 1997:
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.
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Pacific Life Insurance Company and Subsidiaries
N O T E S T O C O N S O L I D A T E D
F I N A N C I A L S T A T E M E N T S
7. FINANCIAL INSTRUMENTS (CONTINUED)
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 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 at that time. 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.
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
-------------------------------------------------------------
(In Millions)
<S> <C> <C> <C> <C>
December 31, 1998:
------------------
Interest rate floors, caps, options
and swaptions $ 2,730.0 $ 160.6 $ 237.6 $ 2,653.0
Interest rate swap contracts 2,026.1 960.8 378.3 2,608.6
Asset swap contracts 67.4 30.3 34.5 63.2
Credit default and total return swaps 288.5 771.5 410.4 649.6
Financial futures contracts 214.1 4,108.4 3,713.6 608.9
Foreign currency derivatives 207.0 959.4 35.2 1,131.2
December 31, 1997:
------------------
Interest rate floors, 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 default 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
</TABLE>
33
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Pacific Life Insurance Company and Subsidiaries
N O T E S T O C O N S O L I D A T E D
F I N A N C I A L S T A T E M E N T S
7. FINANCIAL INSTRUMENTS (CONTINUED)
Interest Rate Floors, Caps, Options and Swaptions
-------------------------------------------------
The Company uses interest rate floors, caps, options and swaptions to
hedge against fluctuations in interest rates and to take positions in its
total return portfolios. Interest rate floor agreements entitle the
Company to receive the difference when the current rate of the underlying
index is below the strike rate. Interest rate cap agreements entitle the
Company to receive the difference when the current rate of the underlying
index is above the strike rate. 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. Floors, caps and
options are reported as assets and options written are reported as
liabilities in the accompanying 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 in the accompanying
consolidated statements of operations over the term of the agreement.
Interest rate floors and caps, options and swaptions mature during the
years 1999 through 2017.
Interest Rate Swap Contracts
----------------------------
The Company uses interest rate swaps to manage interest rate risk and to
take positions in its total return portfolios. 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 the years 1999
through 2021.
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 fixed income
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 the years 2000
through 2005.
Credit Default and Total Return Swaps
-------------------------------------
The Company uses credit default and total return swaps to take advantage
of market opportunities. Credit default swaps involve the receipt of fixed
rate payments in exchange for assuming potential credit exposure 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 default and total return swaps mature during the
years 1999 through 2028.
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Pacific Life Insurance Company and Subsidiaries
N O T E S T O C O N S O L I D A T E D
F I N A N C I A L S T A T E M E N T S
7. FINANCIAL INSTRUMENTS (CONTINUED)
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 by delivery of the financial instrument.
Price changes on futures are settled daily through the required 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 losses and gains, respectively, on the related
foreign currency denominated 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 the years 1999 through 2013.
GUARANTEED INTEREST CONTRACTS AND DEPOSIT LIABILITIES
The estimated fair value of fixed maturity guaranteed interest contracts
is 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.
SHORT-TERM DEBT
The carrying amount of short-term debt is a reasonable estimate of its
fair value because the interest rates are variable and based on current
market values.
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 401(k) plans totaling $1.6
billion as of December 31, 1998, pursuant to the terms of which the 401(k)
plan 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.
35
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Pacific Life Insurance Company and Subsidiaries
N O T E S T O C O N S O L I D A T E D
F I N A N C I A L S T A T E M E N T S
8. UNIVERSAL LIFE, ANNUITY AND OTHER INVESTMENT CONTRACT DEPOSITS
The detail of universal life, annuity and other investment contract
deposit liabilities is as follows:
<TABLE>
<CAPTION>
December 31,
1998 1997
---------------------------
(In Millions)
<S> <C> <C>
Universal life $10,218.0 $10,012.0
Annuity 1,429.0 1,817.4
Other investment contract deposits 6,326.0 4,815.1
---------------------------
$17,973.0 $16,644.5
===========================
</TABLE>
The detail of universal life, annuity and other investment contract
deposits policy fees and interest credited net of reinsurance ceded is as
follows:
<TABLE>
<CAPTION>
Years Ended December 31,
1998 1997 1996
------------------------------------
(In Millions)
<S> <C> <C> <C>
Policy fees:
Universal life $439.9 $377.5 $318.4
Annuity 82.1 50.3 26.6
Other investment contract deposits 3.3 3.4 3.6
------------------------------------
Total policy fees $525.3 $431.2 $348.6
====================================
Interest credited:
Universal life $440.8 $368.2 $284.3
Annuity 79.8 116.8 138.7
Other investment contract deposits 360.2 312.8 242.0
------------------------------------
Total interest credited $880.8 $797.8 $665.0
====================================
</TABLE>
9. SHORT-TERM AND LONG-TERM DEBT
Pacific Life borrows for short-term needs by issuing commercial paper.
Principal of $234.9 million and interest payable of $0.6 million was
outstanding as of December 31, 1998, bearing an average interest rate of
5.22%, and was repaid in January 1999. There was no commercial paper debt
outstanding as of December 31, 1997. Pacific Life has a revolving credit
facility available of $350 million as of December 31, 1998 and 1997. There
was no debt outstanding under the revolving credit facility as of December
31, 1998 and 1997.
PAM had bank borrowings outstanding of $60 million and $104 million as of
December 31, 1998 and 1997, respectively. The interest rate averaged 5.8%,
5.8% and 5.6% for the years ended December 31, 1998, 1997 and 1996,
respectively. Outstanding debt is due and payable in 1999 and subject to
renewal. The borrowing limit for PAM as of December 31, 1998 and 1997 was
$200 million.
36
<PAGE> 83
Pacific Life Insurance Company and Subsidiaries
N O T E S T O C O N S O L I D A T E D
F I N A N C I A L S T A T E M E N T S
9. SHORT-TERM AND LONG-TERM DEBT (CONTINUED)
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, 1998,
1997 and 1996 and is included in net investment income on the accompanying
consolidated statements of operations.
10. INCOME TAXES
The Company accounts for income taxes using the liability method. 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 tax law is enacted. Recording the effects of a 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,
1998 1997 1996
--------------------------------------
(In Millions)
<S> <C> <C> <C>
Current $134.1 $127.9 $163.5
Deferred (20.6) (14.4) (49.8)
--------------------------------------
$113.5 $113.5 $113.7
======================================
</TABLE>
The sources of the Company's provision for deferred taxes are as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
1998 1997 1996
-------------------------------------
(In Millions)
<S> <C> <C> <C>
Non deductible reserves $28.2 ($27.6) ($6.4)
Duration hedging 20.8 (2.6) (14.9)
Partnership income 20.8
Deferred policy acquisition costs (12.6) (18.0) 2.1
Investment valuation (24.5) 3.9 (7.3)
Policyholder reserves (29.5) 20.1 (28.5)
Other (2.6) 9.8 5.2
-------------------------------------
Deferred taxes from operations 0.6 (14.4) (49.8)
Release of subsidiary deferred taxes (21.2)
-------------------------------------
Deferred tax provision ($20.6) ($14.4) ($49.8)
=====================================
</TABLE>
37
<PAGE> 84
Pacific Life Insurance Company and Subsidiaries
N O T E S T O C O N S O L I D A T E D
F I N A N C I A L S T A T E M E N T S
10. INCOME TAXES (CONTINUED)
The Company's acquisition of a controlling interest in a subsidiary
allowed such subsidiary to be included in PMHC's consolidated income tax
return. That inclusion resulted in the release of certain deferred taxes.
A reconciliation of the provision for income taxes based on the prevailing
corporate statutory tax rate to the provision reflected in the
consolidated financial statements is as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
1998 1997 1996
------------------------------
(In Millions)
<S> <C> <C> <C>
Income taxes at the statutory rate $124.2 $101.3 $ 98.1
Equity tax (5.0) 5.0 16.3
Amortization of intangibles on equity
method investments 4.3 7.6 6.5
Non-taxable investment income (3.6) (2.6) (2.1)
Other (6.4) 2.2 (5.1)
------------------------------
Provision for income taxes $113.5 $113.5 $113.7
==============================
</TABLE>
The net deferred tax liability is comprised of the following tax effected
temporary differences:
<TABLE>
<CAPTION>
December 31,
1998 1997
--------------------
(In Millions)
<S> <C> <C>
Policyholder reserves $ 254.3 $ 224.8
Investment valuation 44.7 20.2
Deferred compensation 33.7 25.9
Dividends 7.6 7.7
Non deductible reserves 5.9 34.1
Depreciation (2.4) (2.5)
Duration hedging (8.5) 12.3
Deferred policy acquisition costs (13.3) (25.9)
Partnership income (20.8)
Other (1.4) 3.8
--------------------
Deferred taxes from operations 299.8 300.4
Deferred taxes assumed in acquisition of subsidiary 4.8
Issuance of partnership units by affiliate (74.9) (47.9)
Unrealized gain on securities available for sale (272.3) (307.8)
--------------------
Net deferred tax liability ($42.6) ($55.3)
====================
</TABLE>
38
<PAGE> 85
Pacific Life Insurance Company and Subsidiaries
N O T E S T O C O N S O L I D A T E D
F I N A N C I A L S T A T E M E N T S
11. COMPREHENSIVE INCOME
The Company displays comprehensive income and its components in the
accompanying consolidated statements of stockholder's equity and the note
herein. The Company's only component of other comprehensive income,
unrealized gain (loss) on securities available for sale, is shown net of
reclassification adjustments, as defined by SFAS No. 130, and net of
income tax in the accompanying consolidated statements of stockholder's
equity. The disclosure of the gross components of other comprehensive
income is as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
1998 1997 1996
-------------------------------
(In Millions)
<S> <C> <C> <C>
Calculation of Holding Gain (Loss):
-----------------------------------
Gross holding gain (loss) on securities
available for sale ($13.4) $338.2 ($75.7)
Tax (expense) benefit 4.5 (117.1) 26.5
-------------------------------
Holding gain (loss) on securities available
for sale, net of tax ($8.9) $221.1 ($49.2)
===============================
Calculation of Reclassification Adjustment:
-------------------------------------------
Realized gain on sale of securities
available for sale $ 89.3 $ 38.9 $ 82.6
Tax expense (31.3) (13.8) (29.0)
-------------------------------
Reclassification adjustment, net of tax $ 58.0 $ 25.1 $ 53.6
===============================
Amounts Reported in Other Comprehensive Income:
-----------------------------------------------
Holding gain (loss) on securities available
for sale, net of tax ($8.9) $221.1 ($49.2)
Less reclassification adjustment, net of tax 58.0 25.1 53.6
-------------------------------
Net unrealized gain (loss) recognized in
other comprehensive income ($66.9) $196.0 ($102.8)
===============================
</TABLE>
39
<PAGE> 86
Pacific Life Insurance Company and Subsidiaries
N O T E S T O C O N S O L I D A T E D
F I N A N C I A L S T A T E M E N T S
12. REINSURANCE
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. 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. 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,
1998 1997
------ ------
(In Millions)
<S> <C> <C>
Reinsured universal life deposits ($46.0) ($39.6)
Future policy benefits 108.9 92.2
Unpaid claims 12.5 14.0
Paid claims 24.3 10.2
</TABLE>
As of December 31, 1998, 79% 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,
1998 1997 1996
-------- -------- --------
(In Millions)
<S> <C> <C> <C>
Ceded reinsurance netted against insurance premiums $ 82.7 $ 70.7 $ 44.3
Assumed reinsurance included in insurance premiums 17.2 18.1 17.8
Ceded reinsurance netted against policy fees 65.0 77.5 71.0
Ceded reinsurance netted against net investment income 203.3 204.9 192.5
Ceded reinsurance netted against interest credited 162.8 165.8 155.2
Ceded reinsurance netted against policy benefits 121.3 93.4 56.7
Assumed reinsurance included in policy benefits 17.7 12.7 9.9
</TABLE>
40
<PAGE> 87
Pacific Life Insurance Company and Subsidiaries
N O T E S T O C O N S O L I D A T E D
F I N A N C I A L S T A T E M E N T S
13. SEGMENT INFORMATION
The Company's six operating segments are Individual Insurance,
Institutional Products Group, Annuities, Group Employee Benefits,
Broker-Dealers and Investment Management. These segments have been
identified based on differences in products and services offered. All
other activity is included in Corporate and Other.
The Individual Insurance segment offers universal life, variable universal
life and other life insurance products to individuals, small businesses
and corporations through a network of distribution channels that include
branch offices, marketing organizations, national accounts and a national
producer group. The Institutional Products Group segment offers investment
and annuity products to pension fund sponsors and other institutional
investors primarily through its home office marketing team. The Annuities
segment offers variable and fixed annuities to individuals, small
businesses and qualified plans through financial institutions, National
Association of Securities Dealers ("NASD") firms, and regional and
national wirehouses.
The Group Employee Benefits segment offers group life, health and dental
insurance, and stop loss insurance products to corporate, government and
labor-management-negotiated plans. The group life, health and dental
insurance is distributed through a network of sales offices and the stop
loss insurance is distributed through a network of third party
administrators. The Broker-Dealers segment includes five NASD registered
firms that provide securities and affiliated insurance brokerage services
and investment advisory services through more than 3,100 registered
representatives. The Investment Management segment is primarily comprised
of the Company's investment in PIMCO Advisors (Note 1). PIMCO Advisors
offers a diversified range of investment products through separately
managed accounts, and institutional, retail and offshore funds.
Corporate and Other primarily includes investment income, expenses and
assets not attributable to the major segments and the operations of the
Company's reinsurance subsidiary located in the United Kingdom. Corporate
and Other also includes the elimination of intersegment revenues, expenses
and assets.
The Company uses the same accounting policies and procedures to measure
segment income and assets as it uses to measure its consolidated net
income and assets. Net investment income and capital gains are allocated
based on invested assets purchased and held as is required for transacting
the business of that segment. Overhead expenses are allocated based on
services provided. Interest expense is allocated based on the short-term
borrowing needs of the segment and is included in net investment income.
The income tax provision is allocated based on each segment's actual tax
liability.
Intersegment revenues include commissions paid by the Individual Insurance
segment and the Annuities segment for variable product sales to the
Broker-Dealers segment. Investment Management segment assets have been
reduced by an intersegment note payable of $110 million as of December 31,
1998. The related intersegment note receivable is included in Corporate
and Other segment assets.
The Company generates substantially all of its revenues and income from
customers located in the United States. Additionally, substantially all of
the Company's assets are located in the United States.
Depreciation expense and capital expenditures are not material and have
not been reported herein. The Company's significant non cash item is
interest credited to universal life, annuity and other investment contract
deposits and is disclosed herein.
41
<PAGE> 88
Pacific Life Insurance Company and Subsidiaries
N O T E S T O C O N S O L I D A T E D
F I N A N C I A L S T A T E M E N T S
13. SEGMENT INFORMATION (CONTINUED)
Financial information for each of the business segments is as follows:
<TABLE>
<CAPTION>
Institutional Group
Individual Products Employee Broker- Investment Corporate
Insurance Group Annuities Benefits Dealers Management and Other Total
----------------------------------------------------------------------------------------
(In Millions)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
External customers and other revenue
December 31, 1998 $ 414.6 $ 43.3 $ 124.0 $ 521.2 $ 236.1 $ 17.1 $ 17.4 $1,373.7
December 31, 1997 379.2 61.6 83.3 480.6 154.0 21.8 3.2 1,183.7
December 31, 1996 335.4 36.8 41.4 431.7 82.2 22.2 5.7 955.4
Intersegment revenues
December 31, 1998 185.3 (185.3) --
December 31, 1997 143.3 (143.3) --
December 31, 1996 98.0 (98.0) --
Net investment income
December 31, 1998 565.7 565.5 88.6 23.1 0.9 8.0 42.0 1,293.8
December 31, 1997 485.2 509.6 149.4 24.9 0.8 6.2 49.2 1,225.3
December 31, 1996 404.1 465.5 149.6 21.9 0.8 4.8 40.6 1,087.3
Net realized capital gains (losses)
December 31, 1998 3.4 (13.6) 4.6 1.7 4.0 38.6 38.7
December 31, 1997 9.8 12.8 0.6 2.0 20.8 39.3 85.3
December 31, 1996 5.7 5.0 (4.5) 2.3 1.1 34.4 44.0
Net income of equity method investees
December 31, 1998 103.0 103.0
December 31, 1997 80.1 80.1
December 31, 1996 61.3 61.3
Total revenues
December 31, 1998 983.7 595.2 217.2 546.0 422.3 132.1 (87.3) 2,809.2
December 31, 1997 874.2 584.0 233.3 507.5 298.1 128.9 (51.6) 2,574.4
December 31, 1996 745.2 507.3 186.5 455.9 181.0 89.4 (17.3) 2,148.0
</TABLE>
42
<PAGE> 89
Pacific Life Insurance Company and Subsidiaries
N O T E S T O C O N S O L I D A T E D
F I N A N C I A L S T A T E M E N T S
13. SEGMENT INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
Institutional Group
Individual Products Employee Broker- Investment Corporate
Insurance Group Annuities Benefits Dealers Management and Other Total
-------------------------------------------------------------------------------------------
(In Millions)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Segment profit (loss) before
income tax provision
December 31, 1998 $ 151.1 $ 74.6 $ 34.1 $10.3 $9.9 $60.1 $ 14.9 $ 355.0
December 31, 1997 132.4 98.3 23.5 28.8 6.4 24.6 (24.5) 289.5
December 31, 1996 109.3 80.7 (16.5) 26.3 4.3 34.1 42.1 280.3
Income tax provision (benefit)
December 31, 1998 52.6 21.2 11.3 2.9 4.5 2.1 18.9 113.5
December 31, 1997 55.8 33.9 9.4 9.1 2.7 10.1 (7.5) 113.5
December 31, 1996 44.8 27.5 (0.4) 6.2 1.8 21.5 12.3 113.7
Segment net income (loss)
December 31, 1998 98.5 53.4 22.8 7.4 5.4 58.0 (4.0) 241.5
December 31, 1997 76.6 64.4 14.1 19.7 3.7 14.5 (17.0) 176.0
December 31, 1996 64.5 53.2 (16.1) 20.1 2.5 12.6 29.8 166.6
Interest credited on universal
life, annuity and other
investment contract deposits
December 31, 1998 449.6 354.1 71.0 6.1 880.8
December 31, 1997 378.8 299.8 106.2 13.0 797.8
December 31, 1996 290.3 232.9 132.8 9.0 665.0
Segment assets
As of December 31, 1998 14,578.2 15,221.0 8,384.2 361.1 55.8 267.3 1,016.3 39,883.9
As of December 31, 1997 13,426.7 12,241.7 6,310.8 368.6 52.4 305.4 1,303.2 34,008.8
</TABLE>
43
<PAGE> 90
Pacific Life Insurance Company and Subsidiaries
N O T E S T O C O N S O L I D A T E D
F I N A N C I A L S T A T E M E N T S
14. 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 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 mutual funds managed by an
affiliate of Pacific Life.
Components of net periodic pension cost are as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
1998 1997 1996
---------------------------
(In Millions)
<S> <C> <C> <C>
Service cost - benefits earned during the year $ 4.0 $ 3.6 $ 3.7
Interest cost on projected benefit obligation 10.9 10.4 9.8
Expected return on plan assets (15.0) (12.8) (11.2)
Amortization of net obligations and prior service cost (1.4) (1.4) (1.4)
---------------------------
Net periodic pension cost (benefit) ($1.5) ($0.2) $ 0.9
===========================
</TABLE>
44
<PAGE> 91
Pacific Life Insurance Company and Subsidiaries
N O T E S T O C O N S O L I D A T E D
F I N A N C I A L S T A T E M E N T S
14. PENSION PLANS, POSTRETIREMENT BENEFITS AND OTHER PLANS (CONTINUED)
The following tables set forth the pension plans' reconciliation of
benefit obligation, plan assets and funded status for the years ended:
<TABLE>
<CAPTION>
December 31,
1998 1997
------------------
(In Millions)
<S> <C> <C>
Change in Benefit Obligation:
-----------------------------
Benefit obligation, beginning of year $157.9 $140.9
Service cost 4.0 3.6
Interest cost 10.9 10.4
Plan expense (0.3) (0.2)
Actuarial loss 11.9 10.1
Benefits paid (6.6) (6.9)
------------------
Benefit obligation, end of year $177.8 $157.9
==================
Change in Plan Assets:
----------------------
Fair value of plan assets, beginning of year $180.3 $154.2
Actual return on plan assets 21.9 33.2
Plan expense (0.3) (0.2)
Benefits paid (6.6) (6.9)
------------------
Fair value of plan assets, end of year $195.3 $180.3
==================
Funded Status Reconciliation:
-----------------------------
Funded status $ 17.5 $ 22.4
Unrecognized transition asset (3.6) (4.8)
Unrecognized prior service cost (1.0) (1.2)
Unrecognized actuarial gain (9.7) (14.7)
------------------
Prepaid pension cost $ 3.2 $ 1.7
==================
</TABLE>
45
<PAGE> 92
Pacific Life Insurance Company and Subsidiaries
N O T E S T O C O N S O L I D A T E D
F I N A N C I A L S T A T E M E N T S
14. PENSION PLANS, POSTRETIREMENT BENEFITS AND OTHER PLANS (CONTINUED)
In determining the actuarial present value of the projected benefit
obligation as of December 31, 1998 and 1997, the weighted average discount
rate used was 6.5% and 7.0%, respectively, and the rate of increase in
future compensation levels was 5.0% and 5.5%, respectively. The expected
long-term rate of return on plan assets was 8.5% in 1998 and 1997.
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.
POSTRETIREMENT BENEFITS
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 net periodic postretirement benefit cost for the years ended December
31, 1998, 1997 and 1996 is $0.7 million, $0.8 million and $1.4 million,
respectively. As of December 31, 1998 and 1997, the accumulated benefit
obligation is $19.3 million and $20.0 million, respectively. The fair
value of the plan assets as of December 31, 1998 and 1997 is zero. The
amount of accrued benefit cost included in other liabilities on the
accompanying consolidated statements of financial condition is $25.3
million and $26.0 million as of December 31, 1998 and 1997, respectively.
The Plans include both indemnity and HMO coverage. The assumed health care
cost trend rate used in measuring the accumulated benefit obligation for
indemnity coverage was 8% and 9% for 1998 and 1997, respectively, and is
assumed to decrease gradually to 3.5% in 2003 and remain at that level
thereafter. The assumed health care cost trend rate used in measuring the
accumulated benefit obligation for HMO coverage was 7% and 8% for 1998 and
1997, respectively, and is assumed to decrease gradually to 3% 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, 1998 would be increased by 8.0%, and the aggregate of the
service and interest cost components of the net periodic benefit cost
would increase by 7.5%. If the health care cost trend rate assumptions
were decreased by 1%, the accumulated postretirement benefit obligation as
of December 31, 1998 would be decreased by 6.8%, and the aggregate of the
service and interest cost components of the net periodic benefit cost
would decrease by 6.5%.
The discount rate used in determining the accumulated postretirement
benefit obligation is 6.5% and 7.0% for 1998 and 1997, respectively.
46
<PAGE> 93
Pacific Life Insurance Company and Subsidiaries
N O T E S T O C O N S O L I D A T E D
F I N A N C I A L S T A T E M E N T S
14. PENSION PLANS, POSTRETIREMENT BENEFITS AND OTHER PLANS (CONTINUED)
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 6% of eligible employee
compensation and restricted the matched investment to an Employee Stock
Ownership 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.
15. 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 $42.1 million, $27.5 million and $14.3 million for the years
ended December 31, 1998, 1997 and 1996, respectively. In addition, Pacific
Life provides certain support services to the Pacific Select Fund for an
administration fee which is based on an allocation of actual costs. Such
administration fees amounted to $232,000, $165,000 and $108,000 for the
years ended December 31, 1998, 1997 and 1996, respectively.
PIMCO Advisors provides investment advisory services to the Company for
which the fees amounted to $16.9 million, $11.4 million and $6.2 million
for the years ended December 31, 1998, 1997 and 1996, 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 $40.3 million and
$46.5 million as of December 31, 1998 and 1997, 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, $1.2 million and $1.4 million for the years ended
December 31, 1998, 1997 and 1996, respectively.
47
<PAGE> 94
Pacific Life Insurance Company and Subsidiaries
N O T E S T O C O N S O L I D A T E D
F I N A N C I A L S T A T E M E N T S
16. 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.
For the years ended December 31, 1998, 1997 and 1996, approximately $49.4
million, $85.8 million and $35.3 million, respectively, is included in
operating expenses on the accompanying 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.
17. COMMITMENTS
The Company has outstanding commitments to make investments primarily in
fixed maturities, mortgage loans, limited partnerships and other
investments as follows (In Millions):
<TABLE>
<CAPTION>
Years Ending December 31:
-------------------------
<S> <C>
1999 $172.7
2000-2003 202.1
2004 and thereafter 55.9
------
Total $430.7
======
</TABLE>
The Company leases office facilities under various non-cancelable
operating leases. Aggregate minimum future commitments as of December 31,
1998 through the term of the leases are approximately $37.5 million.
18. LITIGATION
The Company was named in civil litigation proceedings similar to other
litigation brought against many life insurers alleging misconduct in the
sale of products, sometimes referred to as market conduct litigation. The
class of plaintiffs included, with some exceptions, all persons who owned,
as of December 31, 1997 (or as of the date of policy termination, if
earlier), individual whole life, universal life or variable life insurance
policies sold by the Company on or after January 1, 1982. The Company has
settled this litigation pursuant to a final settlement agreement approved
by the Court in November 1998. The settlement agreement is currently being
implemented. The cost of the settlement has been included in the
accompanying consolidated statements of operations during the three years
ended December 31, 1998.
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.
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