<PAGE> 1
1998 ANNUAL REPORTS
PACIFIC INNOVATIONS TRUST
SEPARATE ACCOUNT B OF
PACIFIC LIFE INSURANCE COMPANY
[LOGO]
PACIFIC LIFE
Pacific Life Insurance Company
is the issuer of Pacific Innovations variable annuity
----------------
Not FDIC Insured
----------------
<PAGE> 2
-----------------------------------
SEPARATE ACCOUNT B
OF PACIFIC LIFE INSURANCE COMPANY
-----------------------------------
1998 ANNUAL REPORT
<PAGE> 3
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Pacific Life Insurance Company
We have audited the accompanying statement of assets and liabilities of
Separate Account B (comprised of the Money Market, Managed Bond, Capital Income,
Blue Chip, Mid-Cap Equity, Aggressive Growth and International Variable
Accounts) as of December 31, 1998 and the related statement of operations for
the year then ended and statement of changes in net assets for the year ended
December 31, 1998 and for the period from commencement of operations through
December 31, 1997. These financial statements are the responsibility of the
Separate Account's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of each of the respective Variable Accounts
constituting Separate Account B as of December 31, 1998 and the results of their
operations for the year then ended and the changes in their net assets for the
year ended December 31, 1998 and for the period from commencement of operations
through December 31, 1997, in conformity with generally accepted accounting
principles.
DELOITTE & TOUCHE LLP
Costa Mesa, California
February 23, 1999
B-1
<PAGE> 4
SEPARATE ACCOUNT B
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1998
<TABLE>
<CAPTION>
MONEY MANAGED CAPITAL BLUE MID-CAP AGGRESSIVE INTER-
MARKET BOND INCOME CHIP EQUITY GROWTH NATIONAL
VARIABLE VARIABLE VARIABLE VARIABLE VARIABLE VARIABLE VARIABLE
ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT
---------- ----------- ----------- ----------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Investments:
Money Market Fund (2,031,421 shares;
cost $2,031,421) .................... $2,031,421
Managed Bond Fund (1,244,146 shares;
cost $12,635,445) ................... $12,764,942
Capital Income Fund (1,728,511 shares;
cost $19,441,065) ................... $19,895,161
Blue Chip Fund (1,808,242 shares;
cost $22,327,949) ................... $27,738,437
Mid-Cap Equity Fund (612,733 shares;
cost $7,479,517) .................... $9,001,054
Aggressive Growth Fund (500,630 shares;
cost $5,451,119) .................... $5,266,632
International Fund (504,695 shares;
cost $5,350,153) .................... $5,460,800
Receivables:
Due from Pacific Life
Insurance Company .................. 32,159 9,470 28,304 26,042
Fund shares redeemed .................. 307,711 91,339 8,191
---------- ----------- ----------- ----------- ---------- ---------- ----------
Total Assets ............................. 2,339,132 12,797,101 19,904,631 27,829,776 9,009,245 5,294,936 5,486,842
---------- ----------- ----------- ----------- ---------- ---------- ----------
LIABILITIES
Payables:
Due to Pacific Life Insurance Company . 307,711 91,339 8,191
Fund shares purchased ................. 32,159 9,470 28,304 26,042
Other Liabilities...................... 191 708 1,124 1,484 528 301 298
---------- ----------- ----------- ----------- ---------- ---------- ----------
Total Liabilities ........................ 307,902 32,867 10,594 92,823 8,719 28,605 26,340
---------- ----------- ----------- ----------- ---------- ---------- ----------
NET ASSETS ............................... $2,031,230 $12,764,234 $19,894,037 $27,736,953 $9,000,526 $5,266,331 $5,460,502
========== =========== =========== =========== ========== ========== ==========
</TABLE>
See Notes to Financial Statements
B-2
<PAGE> 5
SEPARATE ACCOUNT B
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
MONEY MANAGED CAPITAL BLUE MID-CAP AGGRESSIVE INTER-
MARKET BOND INCOME CHIP EQUITY GROWTH NATIONAL
VARIABLE VARIABLE VARIABLE VARIABLE VARIABLE VARIABLE VARIABLE
ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT
---------- ----------- ----------- ----------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME
Dividends ............................. $ 70,964 $566,789 $555,883 $ 392,172 $ 74,697 $ 48,627
EXPENSES
Mortality and expense risk fee and
administrative fee .................. 20,196 139,302 224,097 293,964 94,166 $ 63,923 68,880
---------- ----------- ----------- ----------- ---------- ---------- ----------
Net Investment Income (Loss) ............. 50,768 427,487 331,786 98,208 (19,469) (63,923) (20,253)
---------- ----------- ----------- ----------- ---------- ---------- ----------
NET REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS
Net realized loss from
security transactions ............... (9,623) (93,496) (107,879) (71,415) (165,051) (78,491)
Net unrealized appreciation
on investments ...................... 98,524 648,802 4,781,389 1,236,645 22,558 475,133
---------- ----------- ----------- ----------- ---------- ---------- ----------
Net Realized and Unrealized Gain
(Loss) on Investments ................. 88,901 555,306 4,673,510 1,165,230 (142,493) 396,642
---------- ----------- ----------- ----------- ---------- ---------- ----------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS ............. $ 50,768 $ 516,388 $ 887,092 $ 4,771,718 $1,145,761 $ (206,416) $ 376,389
========== =========== =========== =========== ========== ========== ==========
</TABLE>
See Notes to Financial Statements
B-3
<PAGE> 6
SEPARATE ACCOUNT B
STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
MONEY MANAGED CAPITAL BLUE MID-CAP AGGRESSIVE INTER-
MARKET BOND INCOME CHIP EQUITY GROWTH NATIONAL
VARIABLE VARIABLE VARIABLE VARIABLE VARIABLE VARIABLE VARIABLE
ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT
---------- ----------- ----------- ----------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
FROM OPERATIONS
Net investment income (loss) .......... $ 50,768 $ 427,487 $ 331,786 $ 98,208 $ (19,469) $ (63,923) $ (20,253)
Net realized loss from security
transactions ........................ (9,623) (93,496) (107,879) (71,415) (165,051) (78,491)
Net unrealized appreciation
on investments ...................... 98,524 648,802 4,781,389 1,236,645 22,558 475,133
---------- ----------- ----------- ----------- ---------- ---------- ----------
Net Increase (Decrease) in Net Assets
Resulting from Operations ............. 50,768 516,388 887,092 4,771,718 1,145,761 (206,416) 376,389
---------- ----------- ----------- ----------- ---------- ---------- ----------
INCREASE (DECREASE) IN NET ASSETS FROM
CAPITAL UNIT TRANSACTIONS
Transfer of net premiums .............. 3,043,107 4,357,974 7,644,172 9,763,955 2,995,500 1,702,212 1,136,951
Transfers--policy charges
and deductions ...................... (1,411) (235,580) (402,921) (528,336) (117,566) (48,805) (32,116)
Transfers in (from other variable
accounts) ........................... 1,521,239 3,055,492 1,894,356 2,872,605 1,089,142 916,084 858,336
Transfers out (to other variable
accounts) ........................... (3,489,527) (903,363) (1,269,659) (1,947,538) (542,402) (425,040) (652,643)
Transfers--other ...................... (580,062) (458,397) (793,647) (936,032) (330,919) (196,158) (220,224)
---------- ----------- ----------- ----------- ---------- ---------- ----------
Net Increase in Net Assets Derived from
Policy Transactions ................... 493,346 5,816,126 7,072,301 9,224,654 3,093,755 1,948,293 1,090,304
---------- ----------- ----------- ----------- ---------- ---------- ----------
NET INCREASE IN NET ASSETS ............... 544,114 6,332,514 7,959,393 13,996,372 4,239,516 1,741,877 1,466,693
---------- ----------- ----------- ----------- ---------- ---------- ----------
NET ASSETS
Beginning of Year ..................... 1,487,116 6,431,720 11,934,644 13,740,581 4,761,010 3,524,454 3,993,809
---------- ----------- ----------- ----------- ---------- ---------- ----------
End of Year ........................... $2,031,230 $12,764,234 $19,894,037 $27,736,953 $9,000,526 $5,266,331 $5,460,502
========== =========== =========== =========== ========== ========== ==========
</TABLE>
See Notes to Financial Statements
B-4
<PAGE> 7
SEPARATE ACCOUNT B
STATEMENT OF CHANGES IN NET ASSETS
FOR THE PERIOD ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
MONEY MANAGED CAPITAL BLUE MID-CAP AGGRESSIVE INTER-
MARKET BOND INCOME CHIP EQUITY GROWTH NATIONAL
VARIABLE VARIABLE VARIABLE VARIABLE VARIABLE VARIABLE VARIABLE
ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT
---------- ----------- ----------- ----------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
FROM OPERATIONS
Net investment income ................. $ 22,276 $ 97,636 $ 359,152 $ 33,396 $ 24,082 $ 264,446 $ 87,571
Net realized loss from security
transactions ........................ (92) (458) (68) (141) (413) (795)
Net unrealized appreciation
(depreciation) on investments ....... 30,973 (194,706) 629,099 284,892 (207,045) (364,486)
---------- ----------- ----------- ----------- ---------- ---------- ----------
Net Increase (Decrease) in Net Assets
Resulting from Operations ............. 22,276 128,517 163,988 662,427 308,833 56,988 (277,710)
---------- ----------- ----------- ----------- ---------- ---------- ----------
INCREASE (DECREASE) IN NET ASSETS FROM
CAPITAL UNIT TRANSACTIONS
Transfer of net premiums .............. 6,098,467 5,482,090 10,402,860 11,568,658 3,734,236 3,029,927 3,594,962
Transfers--policy charges and
deductions .......................... (16,341) (588) (16,115) (11,481) (14,274) (11,378)
Transfers in (from other variable
accounts) ........................... 17,139 900,596 1,442,301 1,662,246 778,377 495,238 729,833
Transfers out (to other variable
accounts) ........................... (4,637,671) (38,100) (28,871) (88,249) (28,379) (24,485) (22,892)
Transfers--other ...................... (13,095) (25,042) (45,046) (48,386) (20,576) (18,940) (19,006)
---------- ----------- ----------- ----------- ---------- ---------- ----------
Net Increase in Net Assets Derived from
Policy Transactions ................... 1,464,840 6,303,203 11,770,656 13,078,154 4,452,177 3,467,466 4,271,519
---------- ----------- ----------- ----------- ---------- ---------- ----------
NET INCREASE IN NET ASSETS ............... 1,487,116 6,431,720 11,934,644 13,740,581 4,761,010 3,524,454 3,993,809
---------- ----------- ----------- ----------- ---------- ---------- ----------
NET ASSETS
Beginning of Period ...................
---------- ----------- ----------- ----------- ---------- ---------- ----------
End of Period ......................... $1,487,116 $ 6,431,720 $11,934,644 $13,740,581 $4,761,010 $3,524,454 $3,993,809
========== =========== =========== =========== ========== ========== ==========
</TABLE>
See Notes to Financial Statements
B-5
<PAGE> 8
SEPARATE ACCOUNT B
NOTES TO FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
The Separate Account B (the "Separate Account") is registered as a unit
investment trust under the Investment Company Act of 1940, as amended, and
during 1998 was comprised of seven subaccounts called Variable Accounts: the
Money Market Variable Account, the Managed Bond Variable Account, the Capital
Income Variable Account, the Blue Chip Variable Account, the Mid-Cap Equity
Variable Account, the Aggressive Growth Variable Account and the International
Variable Account. The assets in each Variable Account are invested in shares of
the corresponding Funds of Pacific Innovations Trust (the "Trust"), each of
which pursues different investment objectives and policies. The financial
statements of the Trust, including the schedules of portfolio investments, are
included elsewhere in this report and should be read in conjunction with the
Separate Account's financial statements.
The Separate Account was established by Pacific Life Insurance Company
(formerly named Pacific Mutual Life Insurance Company - see Note 1 to Financial
Statements of the Trust on A-47) on September 25, 1996 and commenced operations
on March 1, 1997. Under applicable insurance law, the assets and liabilities of
the Separate Account are clearly identified and distinguished from the other
assets and liabilities of Pacific Life. The assets of the Separate Account will
not be charged with any liabilities arising out of any other business conducted
by Pacific Life, but the obligations of the Separate Account, including benefits
related to variable annuities, are obligations of Pacific Life.
The Separate Account held by Pacific Life represents funds from individual
flexible premium variable accumulation deferred annuity contracts (the
"Contract").
The preparation of the accompanying financial statements 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
income and expenses during the reporting period. Actual results could differ
from those estimates.
A. Valuation of Investments
Investments in shares of the Trust are valued at the reported net asset
values of the respective Funds. Valuation of securities held by the Trust is
discussed in the notes to its financial statements.
B. Security Transactions
Transactions are recorded on the trade date. Realized gains and losses on
sales of investments are determined on the basis of identified cost.
C. Federal Income Taxes
The operations of the Separate Account will be reported on the Federal income
tax return of Pacific Life, which is taxed as a life insurance company under the
provisions of the Tax Reform Act of 1986. Under current tax law, no Federal
income taxes are expected to be paid by Pacific Life with respect to the
operations of the Separate Account.
2. DIVIDENDS
During 1998, the Trust declared dividends for each Fund except for the
Aggressive Growth Fund. The amounts accrued by the Separate Account for its
share of the dividends were reinvested in additional full and fractional shares
of the related Fund.
3. CHARGES AND EXPENSES
Pacific Life charges the Separate Account daily for mortality and expense
risks assumed and administrative costs incurred in operating the Separate
Account and issuing and administering the Contracts at an annual rate of 1.25%
and 0.15%, respectively, of the average daily net assets of each Variable
Account. Under the Contracts, Pacific Life makes certain deductions from the net
assets of each Variable Account for contract maintenance, any state premium
taxes, and any surrender charges. The operating expenses of the Separate Account
are paid by Pacific Life.
4. RELATED PARTY AGREEMENT
Pacific Mutual Distributors, Inc., a wholly-owned subsidiary of Pacific Life,
is the principal underwriter of variable annuity contracts funded by interests
in the Separate Account, and is compensated by Pacific Life.
B-6
<PAGE> 9
SEPARATE ACCOUNT B
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. SELECTED ACCUMULATION UNIT** INFORMATION
Selected accumulation unit information for the year ended December 31, 1998
were as follows:
<TABLE>
<CAPTION>
Accumulation Unit Value Number of
------------------------- Units
At Beginning At End of Outstanding At
Variable Accounts of Period Period End of Period
-----------------------------------------------------------------------------------
<S> <C> <C> <C>
Money Market $10.30 $10.68 190,268
-----------------------------------------------------------------------------------
Managed Bond $10.53 $11.10 1,149,484
-----------------------------------------------------------------------------------
Capital Income $11.34 $11.97 1,661,536
-----------------------------------------------------------------------------------
Blue Chip $12.18 $15.28 1,815,018
-----------------------------------------------------------------------------------
Mid-Cap Equity $12.63 $14.60 616,679
-----------------------------------------------------------------------------------
Aggressive Growth $11.63 $11.26 467,582
-----------------------------------------------------------------------------------
International $ 9.94 $10.94 499,095
-----------------------------------------------------------------------------------
</TABLE>
** Accumulation Unit: unit of measure used to calculate the value
of a Contract Owner's interest in a Variable Account during
the Accumulation Period.
6. SEPARATE ACCOUNT'S COST OF INVESTMENTS IN THE TRUST SHARES
The investment in the Trust shares are carried at identified cost, which
represents the amount available for investment (including reinvested
distributions of net investment income and realized gains) in such shares
after deduction of mortality and expense risk and administrative charges
(M&E). The cost and market value of total Separate Account's investments in
the Trust as of December 31, 1998 were as follows:
<TABLE>
<CAPTION>
VARIABLE ACCOUNTS
--------------------------------------------------------------
MONEY MANAGED CAPITAL BLUE
MARKET BOND INCOME CHIP
--------------------------------------------------------------
<S> <C> <C> <C> <C>
Total cost of investments at beginning of year $1,487,250 $6,401,108 $12,130,005 $13,112,211
Add: Total net proceeds from policy and M&E transactions 4,092,860 6,609,440 8,036,995 10,719,034
Reinvested distributions from the Trust
(a) Net investment income 70,964 551,971 555,883 151,860
(b) Net realized gain 14,818 240,312
--------------------------------------------------------------
Sub-Total 5,651,074 13,577,337 20,722,883 24,223,417
Less: Cost of investments disposed during the year 3,619,653 941,892 1,281,818 1,895,468
--------------------------------------------------------------
Total cost of investments at end of year 2,031,421 12,635,445 19,441,065 22,327,949
Add: Unrealized appreciation - 129,497 454,096 5,410,488
--------------------------------------------------------------
Total market value of investments at end of year $2,031,421 $12,764,942 $19,895,161 $27,738,437
--------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
MID-CAP AGGRESSIVE INTER-
EQUITY GROWTH NATIONAL
-----------------------------------------------
<S> <C> <C> <C>
Total cost of investments at beginning of year $4,476,390 $3,731,685 $4,358,502
Add: Total net proceeds from policy and M&E transactions 3,642,085 2,373,143 1,648,854
Reinvested distributions from the Trust
(a) Net investment income 27,713 48,627
(b) Net realized gain 46,984
----------------------------------------------------
Sub-Total 8,193,172 6,104,828 6,055,983
Less: Cost of investments disposed during the year 713,655 653,709 705,830
----------------------------------------------------
Total cost of investments at end of year 7,479,517 5,451,119 5,350,153
Add: Unrealized appreciation (depreciation) 1,521,537 (184,487) 110,647
----------------------------------------------------
Total market value of investments at end of year $9,001,054 $5,266,632 $5,460,800
----------------------------------------------------
</TABLE>
B-7
