<PAGE>
[GRAPHIC OMITTED] PENN MUTUAL
A BETTER WAY OF LIFE
PROSPECTUS
PENN MUTUAL VARIABLE ANNUITY ACCOUNT III
MAY 1, 1999
DIVERSIFIER II
A Flexible Premium Variable and Fixed Annuity
PENN SERIES FUNDS, INC.
May 1, 1999
INVESTMENT ADVISERS:
T. Rowe Price Associates, Inc.
OpCap Advisors
Independence Capital Management, Inc.
Vontobel USA, Inc.
RS Investment Management, Inc.
AMERICAN CENTURY VARIABLE PORTFOLIOS, INC.
May 1, 1999
INVESTMENT ADVISER:
American Century Investment Management, Inc.
NEUBERGER BERMAN
ADVISERS MANAGEMENT TRUST
May 1, 1999
INVESTMENT ADVISER:
Neuberger Berman Management Incorporated
FIDELITY INVESTMENTS'
VARIABLE INSURANCE PRODUCTS FUND
VARIABLE INSURANCE PRODUCTS FUND II
April 30, 1999
INVESTMENT ADVISER:
Fidelity Management & Research Company
MORGAN STANLEY DEAN WITTER UNIVERSAL FUNDS
May 1, 1999
INVESTMENT ADVISER:
Morgan Stanley Dean Witter Investment Management
<PAGE>
[GRAPHIC OMITTED] PENN MUTUAL
A BETTER WAY OF LIFE
THE PENN MUTUAL
LIFE INSURANCE COMPANY
Philadelphia, PA 19172
EB1474 5/99
<PAGE>
The Penn Mutual Life Insurance Company
Philadelphia, PA 19172
- --------------------------------------------------------------------------------
MAY 1, 1999
DIVERSIFIER II
- --------------------------------------------------------------------------------
PROFILE OF PENN MUTUAL VARIABLE ANNUITY ACCOUNT III
---------------------------------------------------
This profile is a summary of some of the more important points that you
should consider and know before purchasing the Contracts. The Contracts are more
fully described in the prospectus which accompanies this Profile. Please read
the prospectus carefully.
- --------------------------------------------------------------------------------
1. THE ANNUITY CONTRACTS
- --------------------------------------------------------------------------------
The Contracts offered in this prospectus are a combination variable and fixed
annuity contract ("Variable/Fixed Contract") and a variable annuity contract
("Variable Contract") between you, the owner, and The Penn Mutual Life Insurance
Company. The Contracts provide a means for you to invest in one or more of the
available Funds listed in Section 4, or one or more of the fixed interest
accounts guaranteed and funded by Penn Mutual through its general account.
You determine (1) the amount and frequency of payments to make, (2) which
Funds will be used, (3) transfers between the Funds, (4) the type of annuity to
be paid after the accumulation period, (5) the beneficiary to whom death
benefits are to be paid, and (6) the amount and frequency of withdrawals.
2. ANNUITY PAYMENTS
- --------------------------------------------------------------------------------
You may choose (1) an annuity for a specified number of years, (2) a life
annuity, (3) a life annuity with payments guaranteed for 10 or 20 years, (4) a
joint and survivor life annuity or (5) another form of an annuity that we may
agree upon. You may select any one of these as a variable annuity, a fixed
annuity, or a combination of both.
3. PURCHASE
- --------------------------------------------------------------------------------
Variable/Fixed Contract Variable contract
Minimum Minimum Minimum Minimum
Initial Subsequent Initial Subsequent
Payment Payment Payment Payment
-------------------------------------------------------
Qualified Plan $250 $50 $250 $40
Non-Qualified Plan $2,500 $300 $1,500 $300
- --------------------------------------------------------------------------------
4. INVESTMENT OPTIONS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C> <C>
INDEPENDENCE CAPITAL ICMI/ ROBERTSON STEPHENS FIDELITY INVESTMENTS
Management, Inc. Emerging Growth Fund VIP Equity Income Portfolio
Growth Equity Fund VIP Growth Portfolio
Quality Bond Fund T. ROWE PRICE ASSOCIATES, INC. VIP II Asset Manager Portfolio
Money Market Fund Flexibly Managed Fund VIP II Index 500 Portfolio
High Yield Bond Fund
OPCAP ADVISORS VONTOBEL USA, INC.
Value Equity Fund AMERICAN CENTURY INVESTMENT MANAGEMENT, INC International Equity Fund
Small Capitalization Fund VP Capital Appreciation portfolio
MORGAN STANLEY DEAN WITTER NEUBERGER BERMAN MANAGEMENT
INVESTMENT MANAGEMENT INCORPORATED
Emerging Markets Equity (Int'l) Portfolio AMT Limited Maturity Bond Portfolio
AMT Balanced Portfolio
AMT Partners Portfolio
</TABLE>
2
<PAGE>
5. EXPENSES
- --------------------------------------------------------------------------------
Each year we deduct a contract administration charge of $30. We deduct a
daily expense risk charge equal to an annual rate of 0.5% of the daily net asset
value of the Separate Account. In addition, we deduct a daily mortality risk
charge equal to an annual rate of 0.75% of the daily net asset value of the
Separate Account. There are also expenses deducted from the underlying Funds,
ranging from 0.28% to 1.75% of the Fund's average daily value.
A contingent deferred sales charge may be deducted if you make a full or
partial withdrawal. For the Variable/Fixed Contract, the deferred sales charge
will equal:
<TABLE>
<CAPTION>
No Purchase Payments After 1st Contract Year Purchase Payments After 1st Contract Year
- ---------------------------------------------- -------------------------------------------
<S> <C> <C> <C>
Withdrawal During Deferred Sales Charge Deferred Sales Charge
Contract Year as a Percentage of Withdrawal During as a Percentage of
Amount Withdrawn Contract Year Amount Withdrawn
- ---------------------------------------------- -------------------------------------------
1 7.0% 1 7.0%
2 6.0% 2 6.0%
3 5.0% 3 5.0%
4 4.0% 4 4.0%
5 3.0% 5 3.5%
6 2.0% 6 3.0%
7 1.0% 7 2.5%
8 and later No Charge 8 2.0%
9 1.5%
10 1.0%
11 and later No Charge
- ---------------------------------------------- -------------------------------------------
</TABLE>
For the Variable Contract, the contingent deferred sales charge will be the
lesser of (a) 5% of the purchase payments made for the past seven years or (b)
5% of the amount withdrawn. Under no circumstances will the charge ever exceed
5% of the total purchase payments. Further, no charge will be made under the
Variable Contract on that portion of the first withdrawal in the eighth, ninth
and tenth contract years that does not exceed the following percentages of the
Contract Value:
Contract Year Percentage
Eighth 25%
Ninth 50%
Tenth 75%
The following chart is designed to help you understand the charges in your
Contract. The column "Total Annual Charges" shows the annual percentage charge
for contract administration (which is represented as .05%), insurance charges
and investment charges. The next columns show you two examples of the charges,
in dollars, you would pay under your Contract. The examples assume that you
invested $1,000 in a Contract which earns 5% annually and that you withdraw your
money at the end of the applicable period. The premium tax is assumed to be 0%
in both examples.
3
<PAGE>
<TABLE>
<CAPTION>
Examples:
Total Annual
Expenses at
End of:
Total Total (Variable
Annual Annual Total /Fixed (Variable
Insurance Portfolio Annual Contract) Contract)
Fund Charges Charges Charges 1 Year 1 Year 10 Years
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Growth Equity 1.30% 0.76% 2.06% $86 $240
Value Equity 1.30% 0.76% 2.06% 86 240
Flexibly Managed 1.30% 0.76% 2.06% 86 247
Small Capitalization 1.30% 0.82% 2.12% 90 280
Emerging Growth 1.30% 1.15% 2.45% 86 240
International Equity 1.30% 1.08% 2.38% 89 273
Quality Bond 1.30% 0.77% 2.07% 86 242
High Yield Bond 1.30% 0.82% 2.12% 86 247
Money Market 1.30% 0.72% 2.02% 86 236
VP Capital Appreciation 1.30% 1.00% 2.30% 86 240
AMT Limited Maturity Bond 1.30% 0.76% 2.06% 88 268
AMT Balanced 1.30% 1.03% 2.33% 85 230
AMT Partners 1.30% 0.84% 2.14% 87 249
VIP Equity Income 1.30% 0.57% 1.87% 84 220
VIP Growth 1.30% 0.66% 1.96% 85 230
VIP II Asset Manager 1.30% 0.63% 1.93% 85 227
VIP II Index 500 1.30% 0.28% 1.58% 81 189
Emerging Markets Equity 1.30% 1.75% 3.05% 95 338
- ---------------------------------------------------------------------------------------------
</TABLE>
6. TAXES
- --------------------------------------------------------------------------------
Your earnings are not taxed until you take them out. If you take money out,
earnings come out first and are taxed as income. If you are younger than 59 1/2
when you take money out, you may be charged a 10% federal tax penalty on the
earnings. Payments during the income phase are considered partly a return of
your original investment. That part of each payment is not taxable as income.
7. WITHDRAWALS
- --------------------------------------------------------------------------------
You may withdraw all or part of your money at any time during the
accumulation phase. Once in each contract year on or after the last day of the
first contract year you may withdraw up to 10% of the Contract Value (determined
as of the date of withdrawal) free of the contingent deferred sales charge. A
premature withdrawal charge may be deducted from the money earned on the fixed
interest accounts if you take the money prior to maturity.
8. PERFORMANCE
- --------------------------------------------------------------------------------
The value of the Contract will fluctuate depending upon the investment
performance of the Fund(s) you choose. The following chart shows total returns
for each Fund for the time periods shown. These numbers reflect the insurance
company charges and the investment charges of the Fund, but do not reflect any
withdrawal charges, which would reduce the performance if they were applied.
Past performance is no guarantee of future results.
<PAGE>
9. DEATH BENEFIT
- --------------------------------------------------------------------------------
If you die prior to the Annuity Date we will pay the beneficiary the greatest
of (1) the sum of all purchase payments, adjusted for withdrawals and contract
transfers, (2) the Contract Value for the period that proof of death is received
or (3) the sum of the Fixed Account Value (if any) on the date of death and the
Variable Account Value as of the contract date or, if later, the most recent
seven-year contract anniversary occurring prior to the Contract Owner's 81st
birthday, adjusted for subsequent purchase payments and adjusted for withdrawals
and contract transfers.
If you die after the Annuity Date, the beneficiary may elect to have the
payments continue for the specified or guaranteed period of to receive in lump
sum the present value of the remaining payments.
<TABLE>
<CAPTION>
CALENDAR YEAR
Fund 1998 1997 1996 1995 1994 1993 1992 1991 1990 1989
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Independence Capital
Growth Equity 39.91% 25.13% 18.22% 24.83% -9.32% 10.96% 4.55% 33.02% -12.30% 29.60%
Quality Bond 8.80 6.67 2.82 18.64 -6.49 10.25 5.22 14.15 6.62 11.28
OpCap Advisors
Value Equity 8.23 23.38 23.58 35.73 1.61 5.69 13.38 26.08 -9.30 11.44
Small Capitalization -10.29 21.49 18.25 n/a n/a n/a n/a n/a n/a n/a
T. Rowe Price
Flexibly Managed 4.77 14.15 14.85 20.70 2.77 14.28 8.12 20.08 -2.16 19.50
High Yield Bond 3.49 14.33 12.43 14.95 -8.51 18.26 14.33 35.17 -10.03 -1.92
ICMI/ Robertson Stephens
Emerging Growth 34.02 n/a n/a n/a n/a n/a n/a n/a n/a n/a
Vontobel
International Equity 17.37 9.00 15.37 12.36 -7.51 36.40 n/a n/a n/a n/a
American Century
VP Capital Appreciation -3.37 -4.48 -5.54 29.46 -2.41 8.94 -2.58 40.09 -2.53 27.19
Neuberger Berman
AMT Limited Maturity Bond 3.09 5.41 3.00 9.56 -1.40 5.30 3.86 9.96 6.98 9.39
AMT Balanced 10.78 17.96 5.54 22.22 -4.57 5.13 6.70 21.14 0.67 n/a
AMT Partners 2.91 29.77 28.45 35.30 n/a n/a n/a n/a n/a n/a
Fidelity Investments
VIP Equity Income 10.24 26.51 12.84 32.56 5.14 16.80 15.41 29.80 -16.35 15.88
VIP Growth 37.76 21.93 13.26 33.68 -1.26 17.87 7.94 43.69 -12.85 29.87
VIP II Asset Manager 13.62 19.15 13.17 15.49 -7.26 19.71 10.30 21.03 5.39 n/a
VIP II Index 500 26.73 31.32 21.65 36.01 .017 8.79 n/a n/a n/a n/a
Morgan Stanley
Emerging Markets Equity -25.12 -0.95 n/a n/a n/a n/a n/a n/a n/a n/a
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
10. OTHER INFORMATION
- --------------------------------------------------------------------------------
FREE LOOK. If you cancel your Contract within 10 days after receiving it (or
whatever period is required in your state), we will send your money back without
assessing a withdrawal charge. You will receive whatever your Contract is worth
on the day we receive your request. This may be more or less than your original
payment.
NO PROBATE. In most cases, when you die, the person you choose as your
beneficiary will receive the death benefit without going through probate.
SYSTEMATIC WITHDRAWALS. You can arrange to have up to 10% of your contract value
automatically sent to you on a modal basis while your Contract is still in the
accumulation phase. Of course, you'll have to pay taxes on money you receive.
DOLLAR COST AVERAGING. You can arrange to have a regular amount of money
automatically invested in the Funds monthly or quarterly, theoretically giving
you a lower average cost per unit over time than a single one time purchase.
AUTOMATIC ASSET REBALANCING. You can elect to have your investments
automatically rebalanced on a quarterly basis to maintain a specified percentage
allocation among your selected Funds.
11. INQUIRIES
- --------------------------------------------------------------------------------
If you need more information, please contact us at:
The Penn Mutual Life Insurance Company
Customer Service Group
Philadelphia, PA 19172
1-800-523-0650
<PAGE>
- --------------------------------------------------------------------------------
PROSPECTUS -- MAY 1, 1999
INDIVIDUAL ANNUITY CONTRACTS WITH VARIABLE BENEFIT PROVISIONS --
FLEXIBLE PURCHASE PAYMENTS
- --------------------------------------------------------------------------------
DIVERSIFIER II
PENN MUTUAL VARIABLE ANNUITY ACCOUNT III
THE PENN MUTUAL LIFE INSURANCE COMPANY
PHILADELPHIA, PENNSYLVANIA 19172 o TELEPHONE (800) 523-0650
- --------------------------------------------------------------------------------
This Prospectus describes two annuity contracts ("Contracts") offered by the
Penn Mutual Life Insurance Company ("Penn Mutual"). Please read it carefully and
save it for future reference.
Each Contract is an agreement between you and Penn Mutual. One Contract is an
individual fixed and variable annuity contract. The other is a variable annuity
contract that is available only if you own a companion fixed annuity contract
issued by us.
Under either Contract, you agree to make one or more payments to us and we agree
to pay annuity and other benefits at a future date. The Contract
o has a variable component, which means that your Variable Account Value and any
variable payout will be based upon investment experience.
o is tax-deferred, which means that you will not pay taxes until we begin to
make annuity payments to you or you take money out.
o allows you to choose to receive your annuity payments over different periods
of time.
Under either Contract, you direct us to invest your payments in one or more of
the following Funds through Penn Mutual Variable Annuity Account III (the
"Separate Account").
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C>
PENN SERIES FUNDS, INC. MANAGER
Growth Equity Fund Independence Capital Management, Inc.
Value Equity Fund OpCap Advisors
Small Capitalization Fund OpCap Advisors
Emerging Growth Fund RS Investment Management, Inc.
Flexibly Managed Fund T. Rowe Price Associates, Inc.
International Equity Fund Vontobel USA, Inc.
Quality Bond Fund Independence Capital Management, Inc.
High Yield Bond Fund T. Rowe Price Associates, Inc.
Money Market Fund Independence Capital Management, Inc.
- ---------------------------------------------------------------------------------------------------------------------
AMERICAN CENTURY VARIABLE PORTFOLIOS, INC. MANAGER
Capital Appreciation Portfolio American Century Investment Management, Inc.
- ---------------------------------------------------------------------------------------------------------------------
NEUBERGER BERMAN ADVISERS MANAGEMENT TRUST MANAGER
Balanced Portfolio Neuberger Berman Management Incorporated
Limited Maturity Bond Portfolio Neuberger Berman Management Incorporated
Partners Fund Portfolio Neuberger Berman Management Incorporated
- ---------------------------------------------------------------------------------------------------------------------
FIDELITY INVESTMENTS' VARIABLE INSURANCE PRODUCTS FUND MANAGER
Equity-Income Portfolio Fidelity Management and Research Company
Growth Portfolio Fidelity Management and Research Company
- ---------------------------------------------------------------------------------------------------------------------
FIDELITY INVESTMENTS' VARIABLE INSURANCE PRODUCTS FUND II MANAGER
Asset Manager Portfolio Fidelity Management and Research Company
Index 500 Portfolio Fidelity Management and Research Company
- ---------------------------------------------------------------------------------------------------------------------
MORGAN STANLEY DEAN WITTER UNIVERSAL FUNDS, INC. MANAGER
Emerging Markets Equity (International) Portfolio Morgan Stanley Dean Witter Investment Management Inc.
</TABLE>
A PROSPECTUS FOR EACH OF THESE FUNDS ACCOMPANIES THIS PROSPECTUS.
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED THESE
SECURITIES OR DETERMINED WHETHER THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. IT IS
A CRIME FOR ANYONE TO TELL YOU OTHERWISE.
<PAGE>
The combination variable and fixed annuity contract has a fixed component that
allows you to allocate purchase payments and to transfer money to one or more of
our Fixed Interest Accounts. Your Fixed Account Value and any fixed payout will
be based on purchase payments accumulated with interest at a rate of not less
than 4%. The variable contract allows you to transfer money to your companion
fixed annuity contract.
THE CONTRACTS ARE NOT SUITABLE FOR SHORT-TERM INVESTMENT. YOU MAY PAY A DEFERRED
SALES CHARGE ON EARLY WITHDRAWALS. IF YOU WITHDRAW MONEY BEFORE AGE 59 1/2, YOU
MAY PAY A 10% ADDITIONAL INCOME TAX. YOUR CONTRACT IS NOT A BANK DEPOSIT AND IS
NOT FEDERALLY INSURED.
YOU MAY RETURN YOUR CONTRACT WITHIN TEN DAYS OF RECEIPT FOR A FULL REFUND OF THE
CONTRACT VALUE (OR PURCHASE PAYMENTS, IF REQUIRED BY LAW). LONGER FREE LOOK
PERIODS APPLY IN SOME STATES.
You may obtain a Statement of Additional Information from us free of charge by
writing The Penn Mutual Life Insurance Company, Customer Service Group,
Philadelphia, PA 19172. Or, you can call us toll-free at 1-800-523-0650. The
Statement of Additional Information contains more information about the
Contract. It is filed with the Securities and Exchange Commission and we
incorporate it by reference into this Prospectus. The table of contents of the
Statement of Additional Information is at the end of this Prospectus.
The Securities and Exchange Commission maintains a Web site (http://www.sec.gov)
that contains this Prospectus, the Statement of Additional Information, material
incorporated by reference, and other information regarding registrants that file
electronically with the Commission.
2
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
PROSPECTUS CONTENTS
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C>
GLOSSARY 4
- ---------------------------------------------------------------------------------------------------------------------------
EXPENSES 5
- ---------------------------------------------------------------------------------------------------------------------------
EXAMPLES OF FEES AND EXPENSES 7
- ---------------------------------------------------------------------------------------------------------------------------
CONDENSED FINANCIAL INFORMATION 9
- ---------------------------------------------------------------------------------------------------------------------------
THE PENN MUTUAL LIFE INSURANCE COMPANY 15
- ---------------------------------------------------------------------------------------------------------------------------
YEAR 2000 15
- ---------------------------------------------------------------------------------------------------------------------------
THE SEPARATE ACCOUNT 15
Accumulation Units 15
Voting Instructions 16
Investment Options in the Separate Account 16
Penn Series Funds, Inc. 16
American Century Variable Portfolios, Inc. 17
Neuberger Berman Advisers Management Trust 17
Fidelity Investments' Variable Insurance Products Fund 17
Fidelity Investments' Variable Insurance Products Fund II 17
Morgan Stanley Dean Witter Universal Funds, Inc. 17
- ---------------------------------------------------------------------------------------------------------------------------
THE FIXED INTEREST ACCOUNTS 18
- ---------------------------------------------------------------------------------------------------------------------------
THE CONTRACT 18
How Do I Purchase a Contract? 19
What Types of Annuity Payments May I Choose? 19
Variable Annuity Payments 19
Fixed Annuity Payments Under a Variable/Fixed Contract 19
Other Information 19
What Are the Death Benefits Under My Contract? 20
Contracts Sold in Texas 20
May I Transfer Money Among Subaccounts and the Fixed Interest Accounts? 21
Variable/Fixed Contracts 21
Variable Contract 21
Dollar Cost Averaging 21
Automatic Rebalancing 21
Additional Information 21
May I Withdraw Any of My Money? 21
403(b) Withdrawals 22
Deferment of Payments and Transfers 22
What Charges Do I Pay? 22
Administration Charges 22
Mortality and Expense Risk Charge 22
Contingent Deferred Sales Charge 23
Variable/Fixed Contract 23
Variable Contract 24
Other Information 24
Premium Taxes 24
- ---------------------------------------------------------------------------------------------------------------------------
PERFORMANCE INFORMATION 24
- ---------------------------------------------------------------------------------------------------------------------------
MORE INFORMATION ABOUT THE FIXED INTEREST ACCOUNTS 25
General Information 25
Loans Under Section 403(b) Contracts 25
- ---------------------------------------------------------------------------------------------------------------------------
FEDERAL INCOME TAX CONSIDERATIONS 26
Withdrawals and Death Benefits 26
Annuity Payments 26
Early Withdrawals 26
Transfers 26
Separate Account Diversification 26
Qualified Plans 27
- ---------------------------------------------------------------------------------------------------------------------------
FINANCIAL STATEMENTS 27
- ---------------------------------------------------------------------------------------------------------------------------
STATEMENT OF ADDITIONAL INFORMATION CONTENTS 28
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
3
<PAGE>
- --------------------------------------------------------------------------------
GLOSSARY
ACCUMULATION PERIOD: A period that begins with your first purchase payment and
ends on the Annuity Date.
ACCUMULATION UNIT: If you own a Variable/Fixed Contract, this is a unit of
measure used to compute the Variable Account Value under the Contract prior to
the Annuity Date. If you own a Variable Contract, this is a unit of measure used
to compute Contract Value prior to the Annuity Date.
ADMINISTRATIVE OFFICE: A reference to our administrative office means The Penn
Mutual Life Insurance Company, Administrative Office, 600 Dresher Road, Horsham,
Pennsylvania 19044.
ANNUITANT: The person during whose life annuity payments are made.
ANNUITY DATE: The date on which annuity payments start.
ANNUITY PAYOUT PERIOD: The period of time, starting on the Annuity Date, during
which we make annuity payments.
ANNUITY UNIT: A unit of measure used to calculate the amount of each variable
annuity payment.
BENEFICIARY: The person(s) named by the Contract Owner to receive the death
benefit payable upon the death of the Contract Owner or Annuitant.
CONTRACT: The combination variable and fixed annuity contract or the variable
annuity contract described in this Prospectus.
CONTRACT OWNER: The person named in the Contract as the Contract Owner.
CONTRACT VALUE: If you own a Variable/Fixed Contract, this is the sum of the
Variable Account Value and the Fixed Interest Account Value. If you own a
Variable Contract, this is the Variable Account Value.
FIXED INTEREST ACCOUNT VALUE: The value of amounts held under the Variable/Fixed
Contract in all Fixed Interest Accounts.
SEPARATE ACCOUNT: Penn Mutual Variable Annuity Account III, a separate account
of The Penn Mutual Life Insurance Company, that is registered as a unit
investment trust under the Investment Company Act of 1940.
VARIABLE ACCOUNT VALUE: The value of amounts held under the Contract in all
subaccounts of the Separate Account.
VALUATION PERIOD: The period from one valuation of Separate Account assets to
the next. Valuation is performed on each day the New York Stock Exchange is open
for trading.
VARIABLE CONTRACT: The variable annuity contract described in this Prospectus.
VARIABLE/FIXED CONTRACT: The combination variable and fixed annuity contract
described in this Prospectus.
WE OR US: "we" or "us" means The Penn Mutual Life Insurance Company, also
referred to in this Prospectus as Penn Mutual.
YOU: "you" means the Contract Owner or prospective Contract Owner.
4
<PAGE>
- --------------------------------------------------------------------------------
EXPENSES
CONTRACT OWNER TRANSACTION EXPENSES
Sales Load Imposed on Purchase Payments ................................ None
Maximum Contingent Deferred Sales Charge
Variable/Fixed Contract ........................................... 7%*
Variable Contract ................................................. 5%**
Transfer Fee ........................................................... None
MAXIMUM ANNUAL CONTRACT ADMINISTRATION CHARGE .......................... $30
SEPARATE ACCOUNT ANNUAL EXPENSES (AS A PERCENTAGE OF VARIABLE
ACCOUNT VALUE)
Mortality and Expense Risk Charge ...................................... 1.25%
Account Fees and Expenses .............................................. None
Total Separate Account Annual Expenses ................................. 1.25%
- --------------------
* YOU PAY THIS CHARGE AS A PERCENTAGE OF THE AMOUNT THAT YOU WITHDRAW. THIS
CHARGE WILL NEVER BE MORE THAN 8 1/2% of PURCHASE PAYMENTS THAT YOU ALLOCATE
TO THE SEPARATE ACCOUNT. AFTER YOUR FIRST CONTRACT YEAR, YOU WILL NOT PAY
THIS CHARGE ON YOUR FIRST WITHDRAWAL IN A CONTRACT YEAR UNLESS IT EXCEEDS
10% OF YOUR CONTRACT VALUE. SEE WHAT CHARGES DO I PAY? IN THIS PROSPECTUS.
** YOU PAY THIS CHARGE AS A PERCENTAGE OF THE AMOUNT THAT YOU WITHDRAW, OR AS A
PERCENTAGE OF THE TOTAL PURCHASE PAYMENTS THAT YOU MADE WITHIN SEVEN YEARS
OF THE WITHDRAWAL, WHICHEVER IS LESS. YOU WILL NOT PAY THIS CHARGE ON THAT
PORTION OF THE FIRST WITHDRAWAL THAT YOU MAKE IN A CONTRACT YEAR THAT DOES
NOT EXCEED 10% OF THE PURCHASE PAYMENTS THAT YOU MADE ONE YEAR OR MORE PRIOR
TO THE WITHDRAWAL. SEE WHAT CHARGES DO I PAY? IN THIS PROSPECTUS.
- --------------------------------------------------------------------------------
PENN SERIES FUNDS, INC. (A)
UNDERLYING FUND ANNUAL EXPENSES (AS A % OF PORTFOLIO AVERAGE NET ASSETS)
<TABLE>
<CAPTION>
MANAGEMENT ADMINISTRATIVE TOTAL
FEES AND CORPORATE ACCOUNTING OTHER FUND
(AFTER WAIVER) SERVICE FEES FEES EXPENSES EXPENSES
-------------- ------------- ---------- -------- --------
<S> <C> <C> <C> <C> <C>
Growth Equity ........ 0.45% 0.15% 0.07% 0.09% 0.76%
Value Equity ......... 0.50% 0.15% 0.06% 0.05% 0.76%
Small Capitalization . 0.50% 0.15% 0.08% 0.09% 0.82%
Emerging Growth (b) .. 0.80% 0.15% 0.10% 0.10% 1.15%
Flexibly Managed ..... 0.50% 0.15% 0.05% 0.06% 0.76%
International Equity . 0.75% 0.15% 0.08% 0.10% 1.08%
Quality Bond ......... 0.45% 0.15% 0.08% 0.09% 0.77%
High Yield Bond ...... 0.50% 0.15% 0.08% 0.09% 0.82%
Money Market ......... 0.40% 0.15% 0.08% 0.09% 0.72%
</TABLE>
- ----------------
(A) THESE EXPENSES ARE FOR THE LAST FISCAL YEAR.
(B) THE TOTAL EXPENSES OF THE EMERGING GROWTH FUND WOULD HAVE BEEN 1.21% IF THE
INVESTMENT ADVISER AND ADMINISTRATOR OF THAT FUND HAD NOT WAIVED PART OF
THEIR FEES.
- --------------------------------------------------------------------------------
AMERICAN CENTURY VARIABLE PORTFOLIOS, INC.
UNDERLYING FUND ANNUAL EXPENSES (AS A % OF PORTFOLIO AVERAGE NET ASSETS)
MANAGEMENT OTHER TOTAL FUND
FEES 12B-1 FEES EXPENSES EXPENSES
---------- ---------- -------- ----------
Capital Appreciation .... 1.00% None None 1.00%
5
<PAGE>
- --------------------------------------------------------------------------------
NEUBERGER BERMAN ADVISERS MANAGEMENT TRUST (A)
UNDERLYING FUND ANNUAL EXPENSES (AS A % OF PORTFOLIO AVERAGE NET ASSETS)
MANAGEMENT,
ADVISORY AND
ADMINISTRATION OTHER TOTAL FUND
FEES EXPENSES EXPENSES
-------------- -------- ----------
Limited Maturity Bond ...... 0.65% 0.11% 0.76%
Balanced ................... 0.85% 0.18% 1.03%
Partners Fund .............. 0.80% 0.04% 0.84%
- --------------
(A) NEUBERGER BERMAN ADVISERS MANAGEMENT TRUST (THE "TRUST") IS DIVIDED INTO
PORTFOLIOS ("PORTFOLIOS"). EACH PORTFOLIO INVESTS IN A CORRESPONDING SERIES
("SERIES") OF THE TRUST. THIS TABLE SHOWS THE CURRENT EXPENSES PAID BY EACH
PORTFOLIO AND THE PORTFOLIO'S SHARE OF THE CURRENT EXPENSES OF ITS SERIES.
SEE "EXPENSES" IN THE TRUST'S PROSPECTUS.
- --------------------------------------------------------------------------------
FIDELITY INVESTMENTS' VARIABLE INSURANCE PRODUCTS FUND (A)
UNDERLYING FUND ANNUAL EXPENSES (AS A % OF PORTFOLIO AVERAGE NET ASSETS)
MANAGEMENT OTHER TOTAL FUND
FEE EXPENSES EXPENSES
---------- -------- ----------
Equity-Income ... 0.50% 0.07% 0.57%
Growth .......... 0.60% 0.06% 0.66%
- -----------------
(A) THESE EXPENSES ARE FOR THE LAST FISCAL YEAR. SOME OF THE BROKERAGE
COMMISSIONS PAID BY THE FUND REDUCED THE EXPENSES SHOWN IN THIS TABLE.
WITHOUT THIS REDUCTION, TOTAL EXPENSES WOULD HAVE BEEN 0.58% FOR THE EQUITY
INCOME PORTFOLIO AND 0.68% FOR THE GROWTH PORTFOLIO.
- --------------------------------------------------------------------------------
FIDELITY INVESTMENTS' VARIABLE INSURANCE PRODUCTS FUND II
UNDERLYING FUND ANNUAL EXPENSES (AS A % OF PORTFOLIO AVERAGE NET ASSETS)
MANAGEMENT FEE OTHER TOTAL FUND
(AFTERWAIVER) EXPENSES EXPENSES
-------------- -------- ----------
Asset Manager (a) .... 0.55% 0.08% 0.63%
Index 500 (b) ........ 0.24% 0.04% 0.28%
- -----------------
(A) THE EXPENSES PRESENTED ARE FOR THE LAST FISCAL YEAR. SOME OF THE BROKERAGE
COMMISSIONS PAID BY THE FUND REDUCED THE EXPENSES SHOWN IN THIS TABLE.
WITHOUT THIS REDUCTION, TOTAL EXPENSES WOULD HAVE BEEN 0.64% FOR THE ASSET
MANAGER PORTFOLIO.
(B) THESE EXPENSES ARE FOR THE LAST FISCAL YEAR. IF THE FUND'S INVESTMENT
ADVISER HAD NOT VOLUNTARILY WAIVED PART OF ITS FEE, TOTAL EXPENSES WOULD
HAVE BEEN 0.35% FOR THE INDEX 500 PORTFOLIO.
- --------------------------------------------------------------------------------
MORGAN STANLEY DEAN WITTER UNIVERSAL FUNDS, INC.
UNDERLYING FUND ANNUAL EXPENSES (AS A % OF PORTFOLIO AVERAGE NET ASSETS)
MANAGEMENT OTHER TOTAL FUND
FEE EXPENSES EXPENSES
---------- -------- ----------
Emerging Markets Equity
(International) .......... 1.25% 0.50% 1.75%
- --------------------------------------------------------------------------------
Please review these tables carefully. They show the expenses that you pay
directly and indirectly when you purchase a Contract. Your expenses include
Contract expenses and the expenses of the Funds that you select. See the
prospectuses of Penn Series Funds, Inc., American Century Variable Portfolios,
Inc., Neuberger Berman Advisers Management Trust, Fidelity Investments' Variable
Insurance Products Fund, Fidelity Investments' Variable Insurance Products Fund
II and Morgan Stanley Dean Witter Universal Funds, Inc. for additional
information on Fund expenses.
You also may pay premium taxes. These tables and the examples that follow
do not show the effect of premium taxes. SEE WHAT CHARGES DO I PAY? in this
Prospectus.
6
<PAGE>
- --------------------------------------------------------------------------------
EXAMPLES OF FEES AND EXPENSES
The following examples show the total expenses that you would pay on each
$1,000 invested.
If you own a Variable/Fixed Contract and make purchase payments only during
the first Contract year, you would pay the following expenses on each $1,000
invested (assuming a 5% annual return) if you surrender your Contract after the
number of years shown:
<TABLE>
<CAPTION>
ONE THREE FIVE TEN
YEAR YEARS YEARS YEARS
---- ----- ----- -----
<S> <C> <C> <C> <C>
Penn Series Growth Equity Fund ...................... $86 $114 $143 $240
Penn Series Value Equity Fund ....................... $86 $114 $143 $240
Penn Series Small Capitalization Fund ............... $86 $116 $146 $247
Penn Series Emerging Growth Fund .................... $90 $125 $162 $280
Penn Series Flexibly Managed Fund ................... $86 $114 $143 $240
Penn Series International Equity Fund ............... $89 $123 $158 $273
Penn Series Quality Bond Fund ....................... $86 $114 $143 $242
Penn Series High Yield Bond Fund .................... $86 $116 $146 $247
Penn Series Money Market Fund ....................... $86 $113 $141 $236
American Century Capital Appreciation Portfolio ..... $86 $114 $143 $240
Neuberger Berman Limited Maturity Bond Portfolio .... $88 $122 $156 $268
Neuberger Berman Balanced Portfolio ................. $85 $111 $138 $230
Neuberger Berman Partners Fund Portfolio ............ $87 $116 $147 $249
Fidelity's Equity Income Portfolio .................. $84 $108 $133 $220
Fidelity's Growth Portfolio ......................... $85 $111 $138 $230
Fidelity's Asset Manager Portfolio .................. $85 $110 $136 $227
Fidelity's Index 500 ................................ $81 $100 $118 $189
Morgan Stanley Dean Witter Emerging Markets Equity
(International) Portfolio ......................... $95 $142 $190 $338
</TABLE>
- --------------------------------------------------------------------------------
EXAMPLE
If you own a Variable/Fixed Contract and make purchase payments after the
first Contract year, you would pay the following expenses on each $1,000
invested (assuming a 5% annual return) if you surrender your Contract after the
number of years shown:
<TABLE>
<CAPTION>
ONE THREE FIVE TEN
YEAR YEARS YEARS YEARS
---- ----- ----- -----
<S> <C> <C> <C> <C>
Penn Series Growth Equity Fund ...................... $86 $114 $148 $252
Penn Series Value Equity Fund ....................... $86 $114 $148 $252
Penn Series Small Capitalization Fund ............... $86 $116 $151 $259
Penn Series Emerging Growth Fund .................... $90 $125 $167 $292
Penn Series Flexibly Managed Fund ................... $86 $114 $148 $252
Penn Series International Equity Fund ............... $89 $123 $164 $285
Penn Series Quality Bond Fund ....................... $86 $114 $148 $254
Penn Series High Yield Bond Fund .................... $86 $116 $151 $259
Penn Series Money Market Fund ....................... $86 $113 $146 $248
American Century Capital Appreciation Portfolio ..... $86 $114 $148 $252
Neuberger Berman Limited Maturity Bond Portfolio .... $88 $122 $161 $280
Neuberger Berman Balanced Portfolio ................. $85 $111 $143 $242
Neuberger Berman Partners Fund Portfolio ............ $87 $116 $152 $261
Fidelity's Equity Income Portfolio .................. $84 $108 $138 $233
Fidelity's Growth Portfolio ......................... $85 $110 $141 $239
Fidelity's Asset Manager Portfolio .................. $85 $110 $141 $239
Fidelity's Index 500 ................................ $81 $100 $124 $201
Morgan Stanley Dean Witter Emerging Markets Equity
(International) Portfolio ......................... $95 $142 $195 $349
</TABLE>
7
<PAGE>
- --------------------------------------------------------------------------------
EXAMPLE
If you own a Variable Contract and surrender your contract after the number
of years shown, you would pay the following expenses on each $1,000 invested,
assuming a 5% annual return on assets:
<TABLE>
<CAPTION>
ONE THREE FIVE TEN
YEAR YEARS YEARS YEARS
---- ----- ----- -----
<S> <C> <C> <C> <C>
Penn Series Growth Equity Fund ...................... $67 $114 $161 $240
Penn Series Value Equity Fund ....................... $67 $114 $161 $240
Penn Series Small Capitalization Fund ............... $68 $116 $164 $247
Penn Series Emerging Growth Fund .................... $71 $126 $181 $280
Penn Series Flexibly Managed Fund ................... $67 $114 $161 $240
Penn Series International Equity Fund ............... $71 $124 $178 $273
Penn Series Quality Bond Fund ....................... $68 $115 $162 $242
Penn Series High Yield Bond Fund .................... $68 $116 $164 $247
Penn Series Money Market Fund ....................... $67 $113 $159 $236
American Century Capital Appreciation Portfolio ..... $70 $121 $174 $265
Neuberger Berman Limited Maturity Bond Portfolio .... $67 $114 $161 $240
Neuberger Berman Balanced Portfolio ................. $70 $122 $175 $268
Neuberger Berman Partners Fund Portfolio ............ $68 $117 $166 $249
Fidelity's Equity Income Portfolio .................. $66 $109 $152 $220
Fidelity's Growth Portfolio ......................... $67 $112 $156 $230
Fidelity's Asset Manager Portfolio .................. $66 $111 $155 $227
Fidelity's Index 500 ................................ $63 $100 $136 $189
Morgan Stanley Dean Witter Emerging Markets Equity
(International) Portfolio ......................... $77 $143 $211 $338
</TABLE>
- --------------------------------------------------------------------------------
EXAMPLE
If you own either a Variable/Fixed Contract or a Variable Contract and do
not surrender your Contract, or if you annuitize your Contract after the number
of years shown, you would pay the following expenses on each $1,000 invested,
assuming a 5% annual return on assets:
<TABLE>
<CAPTION>
ONE THREE FIVE TEN
YEAR YEARS YEARS YEARS
---- ----- ----- -----
<S> <C> <C> <C> <C>
Penn Series Growth Equity Fund ...................... $21 $65 $111 $240
Penn Series Value Equity Fund ....................... $21 $65 $111 $240
Penn Series Small Capitalization Fund ............... $22 $67 $114 $247
Penn Series Emerging Growth Fund .................... $25 $77 $131 $280
Penn Series Flexibly Managed Fund ................... $21 $65 $111 $240
Penn Series International Equity Fund ............... $24 $75 $128 $273
Penn Series Quality Bond Fund ....................... $21 $65 $112 $242
Penn Series High Yield Bond Fund .................... $22 $67 $114 $247
Penn Series Money Market Fund ....................... $21 $64 $109 $236
American Century Capital Appreciation Portfolio ..... $21 $65 $111 $240
Neuberger Berman Limited Maturity Bond Portfolio .... $24 $73 $125 $268
Neuberger Berman Balanced Portfolio ................. $20 $62 $106 $230
Neuberger Berman Partners Fund Portfolio ............ $22 $67 $116 $249
Fidelity's Equity Income Portfolio .................. $19 $59 $102 $220
Fidelity's Growth Portfolio ......................... $20 $61 $105 $227
Fidelity's Asset Manager Portfolio .................. $20 $61 $105 $227
Fidelity's Index 500 ................................ $16 $50 $86 $189
Morgan Stanley Dean Witter Emerging Markets Equity
(International) Portfolio ......................... $31 $95 $161 $338
</TABLE>
The examples are based upon Fund data for the fiscal year ended December
31, 1998.
THESE ARE ONLY EXAMPLES. YOUR EXPENSES MAY BE MORE OR LESS THAN WHAT IS
SHOWN.
8
<PAGE>
- --------------------------------------------------------------------------------
CONDENSED FINANCIAL INFORMATION
The following tables show Accumulation Unit values and the number of
Accumulation Units outstanding for each of the subaccounts of the Separate
Account for the specified periods. Please read these tables together with the
financial statements and the related notes included in the Statement of
Additional Information.
- --------------------------------------------------------------------------------
PENN SERIES GROWTH EQUITY FUND SUBACCOUNT (A)
VALUES OF AN ACCUMULATION UNIT OUTSTANDING THROUGHOUT EACH PERIOD FOR QUALIFIED
AND NONQUALIFIED RETIREMENT PLANS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------------------
1998 1997 1996 1995
---------------- ----------------- ---------------- ----------------
NON- NON- NON- NON-
QUAL QUAL QUAL QUAL QUAL QUAL QUAL QUAL
------- ------ ------ ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Accumulation Unit Value,
beginning of period .......... $48.256 $47.859 $38.550 $38.235 $32.596 $32.327 $26.102 $25.887
Accumulation Unit Value,
end of period ................ $67.515 $66.959 $48.256 $47.859 $38.550 $38.235 $32.596 $32.327
Number of Accumulation
Units outstanding,
end of period ................ 1,752,036 626,895 1,794,481 617,717 1,830,081 620,903 1,991,646 674,290
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------------------
1994 1993 1992 1991
---------------- ----------------- ---------------- ----------------
NON- NON- NON- NON-
QUAL QUAL QUAL QUAL QUAL QUAL QUAL QUAL
------- ------ ------ ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Accumulation Unit Value,
beginning of period .......... $28.766 $28.528 $25.906 $25.692 $24.756 $24.552 $18.605 $18.451
Accumulation Unit Value,
end of period ................ $26.102 $25.887 $28.766 $28.528 $25.906 $25.692 $24.756 $24.552
Number of Accumulation
Units outstanding,
end of period ................ 2,119,836 717,328 2,042,023 685,110 2,004,015 669,679 1,680,322 518,717
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------
1990 1989 1988
---------------- ----------------- ----------------
NON- NON- NON-
QUAL QUAL QUAL QUAL QUAL QUAL
------- ------ ------ ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Accumulation Unit Value,
beginning of period .......... $21.204 $21.029 $16.356 $16.221 $14.702 $14.581
Accumulation Unit Value,
end of period ................ $18.605 $18.451 $21.204 $21.029 $16.356 $16.221
Number of Accumulation
Units outstanding,
end of period ................ 1,470,210 439,287 1,284,583 333,486 1,309,408 360,185
</TABLE>
- ----------------
(A) GROWTH STOCK FUND SUBACCOUNT PRIOR TO NOVEMBER 1, 1992.
9
<PAGE>
- --------------------------------------------------------------------------------
PENN SERIES VALUE EQUITY FUND SUBACCOUNT (A)
VALUES OF AN ACCUMULATION UNIT OUTSTANDING THROUGHOUT EACH PERIOD
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994 1993 1992 1991 1990 1989
------- ------- ------- ------- ------- ------- ------- -------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Accumulation Unit Value,
beginning of period .. $38.038 $30.819 $24.928 $18.361 $18.062 $17.080 $15.058 $11.939 $13.157 $11.802
Accumulation Unit Value,
end of period ........ $41.167 $38.038 $30.819 $24.928 $18.361 $18.062 $17.080 $15.058 $11.939 $13.157
Number of Accumulation
Units outstanding,
end of period ...... 5,273,048 5,409,879 4,907,784 4,235,839 3,886,404 3,693,652 2,865,294 2,207,661 1,883,581 1,802,897
</TABLE>
- ---------------
(A) EQUITY INCOME FUND SUBACCOUNT PRIOR TO NOVEMBER 1, 1992.
- --------------------------------------------------------------------------------
PENN SERIES SMALL CAPITALIZATION FUND SUBACCOUNT
VALUES OF AN ACCUMULATION UNIT OUTSTANDING THROUGHOUT EACH PERIOD
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------
1998 1997 1996 1995(A)
---------- --------- ------- -------
<S> <C> <C> <C> <C>
Accumulation Unit Value, beginning of period .............. $16.051 $13.211 $11.171 $10.000
Accumulation Unit Value, end of period .................... $14.400 $16.051 $13.211 $11.171
Number of Accumulation Units outstanding, end of period ... $1,306,650 1,104,032 587,385 137,653
</TABLE>
- -----------------
(A) FOR THE PERIOD MAY 1, 1995 (DATE SUBACCOUNT WAS ESTABLISHED) THROUGH
DECEMBER 31, 1995.
- --------------------------------------------------------------------------------
PENN SERIES EMERGING GROWTH FUND SUBACCOUNT
VALUES OF AN ACCUMULATION UNIT OUTSTANDING THROUGHOUT EACH PERIOD
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1998 1997(A)
------- -------
<S> <C> <C>
Accumulation Unit Value, beginning of period .................. $13.806 $10.000
Accumulation Unit Value, end of period ........................ $18.503 $13.806
Number of Accumulation Units outstanding, end of period ....... 781,196 308,169
</TABLE>
- ----------------
(A) FOR THE PERIOD MAY 1, 1997 (DATE SUBACCOUNT WAS ESTABLISHED) THROUGH
DECEMBER 31, 1997.
- --------------------------------------------------------------------------------
PENN SERIES FLEXIBLY MANAGED FUND SUBACCOUNT (A)
VALUES OF AN ACCUMULATION UNIT OUTSTANDING THROUGHOUT EACH PERIOD
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994 1993 1992 1991 1990 1989
--------- --------- --------- --------- --------- --------- -------- -------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Accumulation Unit Value,
beginning of period .... $56.265 $49.262 $42.865 $35.496 $34.514 $30.179 $27.893 $23.215 $23.712 $19.832
Accumulation Unit Value,
end of period .......... $58.951 $56.265 $49.262 $42.865 $35.496 $34.514 $30.179 $27.893 $23.215 $23.712
Number of Accumulation
Units outstanding,
end of period .......... 5,766,014 5,974,993 5,711,843 4,946,240 4,198,305 3,143,601 2,327,829 1,664,751 1,237,347 1,129,858
</TABLE>
- -------------
(A) CAPITAL APPRECIATION FUND SUBACCOUNT PRIOR TO NOVEMBER 1, 1992.
10
<PAGE>
- --------------------------------------------------------------------------------
PENN SERIES INTERNATIONAL EQUITY FUND SUBACCOUNT
VALUES OF AN ACCUMULATION UNIT OUTSTANDING THROUGHOUT EACH PERIOD
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------------
1998 1997 1996 1995 1994 1993 1992(A)
-------- --------- --------- --------- --------- --------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Accumulation Unit Value,
beginning of period ............ $18.164 $16.659 $14.434 $12.843 $13.880 $10.175 $10.000
Accumulation Unit Value,
end of period .................. $21.320 $18.164 $16.659 $14.434 $12.843 $13.880 $10.175
Number of Accumulation Units
outstanding, end of period ..... 3,822,847 4,155,960 4,012,762 3,388,479 3,556,098 1,847,892 92,386
</TABLE>
- ----------------
(A) FOR THE PERIOD NOVEMBER 2, 1992 (DATE SUBACCOUNT WAS ESTABLISHED) THROUGH
DECEMBER 31, 1992.
- --------------------------------------------------------------------------------
PENN SERIES QUALITY BOND FUND SUBACCOUNT (A)
VALUES OF AN ACCUMULATION UNIT OUTSTANDING THROUGHOUT EACH PERIOD
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994 1993 1992 1991 1990 1989
--------- --------- --------- --------- --------- --------- ---------- --------- --------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Accumulation Unit Value,
beginning of period .... $20.260 $18.990 $18.465 $15.562 $16.639 $15.088 $14.336 $12.558 $11.776 $10.580
Accumulation Unit Value,
end of period .......... $22.043 $20.260 $18.990 $18.465 $15.562 $16.639 $15.088 $14.336 $12.558 $11.776
Number of Accumulation
Units outstanding,
end of period .......... 1,665,664 1,497,635 1,664,378 1,869,975 1,890,869 1,953,188 1,337,087 1,229,163 1,075,187 769,467
</TABLE>
- --------------
(A) FIXED INCOME FUND SUBACCOUNT PRIOR TO NOVEMBER 1, 1992.
- --------------------------------------------------------------------------------
PENN SERIES HIGH YIELD BOND FUND SUBACCOUNT
VALUES OF AN ACCUMULATION UNIT OUTSTANDING THROUGHOUT EACH PERIOD
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994 1993 1992 1991 1990 1989
--------- --------- --------- --------- --------- --------- ---------- --------- --------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Accumulation Unit Value,
beginning of period ..... $33.476 $29.276 $26.033 $22.644 $24.742 $20.918 $18.291 $13.534 $15.035 $15.325
Accumulation Unit Value,
end of period ........... $34.645 $33.476 $29.276 $26.033 $22.644 $24.742 $20.918 $18.291 $13.534 $15.035
Number of Accumulation
Units outstanding,
end of period ........... 1,308,094 1,261,904 1,185,318 1,194,944 1,264,890 1,257,271 705,414 594,530 613,408 817,147
</TABLE>
11
<PAGE>
- --------------------------------------------------------------------------------
PENN SERIES MONEY MARKET FUND SUBACCOUNT
VALUES OF AN ACCUMULATION UNIT OUTSTANDING THROUGHOUT EACH PERIOD
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994 1993 1992 1991 1990 1989
--------- --------- --------- --------- --------- --------- ---------- --------- --------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Accumulation Unit Value,
beginning of period .... $19.541 $18.817 $18.148 $17.416 $17.003 $16.791 $16.491 $15.732 $14.893 $13.844
Accumulation Unit Value,
end of period .......... $20.268 $19.541 $18.817 $18.148 $17.416 $17.003 $16.791 $16.491 $15.732 $14.893
Number of Accumulation
Units outstanding,
end of period .......... 1,449,199 1,120,603 1,192,388 1,062,385 825,274 658,620 698,584 769,958 965,117 753,052
</TABLE>
- --------------------------------------------------------------------------------
AMERICAN CENTURY CAPITAL APPRECIATION PORTFOLIO SUBACCOUNT (A)
VALUES OF AN ACCUMULATION UNIT OUTSTANDING THROUGHOUT EACH PERIOD
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------
1998 1997 1996 1995 1994 1993(B)
--------- --------- --------- --------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
Accumulation Unit Value,
beginning of period ................... $12.690 $13.282 $14.057 $10.857 $11.124 $10.000
Accumulation Unit Value,
end of period ......................... $12.262 $12.690 $13.282 $14.057 $10.857 $11.124
Number of Accumulation Units
outstanding, end of period ............ 1,153,673 1,567,237 2,183,381 2,157,888 1,791,799 716,404
</TABLE>
- ----------------
(A) TCI GROWTH PORTFOLIO SUBACCOUNT PRIOR TO MAY 1, 1997.
(B) FOR THE PERIOD MAY 1, 1993 (DATE SUBACCOUNT WAS ESTABLISHED) THROUGH
DECEMBER 31, 1993.
- --------------------------------------------------------------------------------
NEUBERGER BERMAN LIMITED MATURITY BOND PORTFOLIO SUBACCOUNT
VALUES OF AN ACCUMULATION UNIT OUTSTANDING THROUGHOUT EACH PERIOD
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------
1998 1997 1996 1995 1994 1993(A)
--------- --------- --------- --------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Accumulation Unit Value,
beginning of period .................. $11.943 $11.330 $ 10.999 $ 10.039 $10.181 $ 10.000
Accumulation Unit Value,
end of period ........................ $12.313 $11.943 $ 11.330 $ 10.999 $10.039 $ 10.181
Number of Accumulation Units
outstanding, end of period ............ 509,381 465,682 459,223 444,986 448,825 311,665
</TABLE>
- -----------------
(A) FOR THE PERIOD MAY 1, 1993 (DATE SUBACCOUNT WAS ESTABLISHED) THROUGH
DECEMBER 31, 1993.
12
<PAGE>
- --------------------------------------------------------------------------------
NEUBERGER BERMAN BALANCED PORTFOLIO SUBACCOUNT
VALUES OF AN ACCUMULATION UNIT OUTSTANDING THROUGHOUT EACH PERIOD
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------
1998 1997 1996 1995 1994 1993(A)
---- ---- ---- ---- ---- -------
<S> <C> <C> <C> <C> <C> <C>
Accumulation Unit Value,
beginning of period ......................... $15.551 $13.182 $12.488 $10.218 $10.706 $10.000
Accumulation Unit Value,
end of period ............................... $17.228 $15.551 $13.182 $12.488 $10.218 $10.706
Number of Accumulation Units outstanding,
end of period ............................... 1,488,257 1,466,154 1,535,496 1,468,254 1,223,496 621,326
</TABLE>
(A) FOR THE PERIOD MAY 1, 1993 (DATE SUBACCOUNT WAS ESTABLISHED) THROUGH
DECEMBER 31, 1993.
- --------------------------------------------------------------------------------
NEUBERGER BERMAN PARTNERS' FUND PORTFOLIO SUBACCOUNT
VALUES OF AN ACCUMULATION UNIT OUTSTANDING THROUGHOUT EACH PERIOD
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1998 1997(A)
---- -------
<S> <C> <C>
Accumulation Unit Value, beginning of period ................. $12.411 $10.000
Accumulation Unit Value, end of period ....................... $12.773 $12.411
Number of Accumulation Units outstanding, end of period ...... 1,716,964 665,382
</TABLE>
(A) FOR THE PERIOD MAY 1, 1997 (DATE SUBACCOUNT WAS ESTABLISHED) THROUGH
DECEMBER 31, 1997.
- --------------------------------------------------------------------------------
FIDELITY INVESTMENTS' EQUITY INCOME FUND SUBACCOUNT
VALUES OF AN ACCUMULATION UNIT OUTSTANDING THROUGHOUT EACH PERIOD
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------
1998 1997 1996 1995(A)
---- ---- ---- -------
<S> <C> <C> <C> <C>
Accumulation Unit Value, beginning of period ................ $17.021 $13.453 $ 11.920 $ 10.000
Accumulation Unit Value, end of period ...................... $18.764 $17.021 $ 13.453 $11.920
Number of Accumulation Units outstanding, end of period ..... 3,820,796 3,352,648 2,498,343 581,691
</TABLE>
(A) FOR THE PERIOD MAY 1, 1995 (DATE SUBACCOUNT WAS ESTABLISHED) THROUGH
DECEMBER 31, 1995.
- --------------------------------------------------------------------------------
FIDELITY INVESTMENTS' GROWTH FUND SUBACCOUNT
VALUES OF AN ACCUMULATION UNIT OUTSTANDING THROUGHOUT EACH PERIOD
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------
1998 1997 1996 1995(A)
---- ---- ---- -------
<S> <C> <C> <C> <C>
Accumulation Unit Value, beginning of period ........................ $17.073 $14.000 $12.359 $10.000
Accumulation Unit Value, end of period .............................. $23.519 $17.073 $14.000 $12.359
Number of Accumulation Units outstanding, end of period ............. 3,722,268 3,157,234 2,620,543 690,602
</TABLE>
(A) FOR THE PERIOD MAY 1, 1995 (DATE SUBACCOUNT WAS ESTABLISHED) THROUGH
DECEMBER 31, 1995.
13
<PAGE>
- --------------------------------------------------------------------------------
FIDELITY INVESTMENTS' ASSET MANAGER FUND SUBACCOUNT
VALUES OF AN ACCUMULATION UNIT OUTSTANDING THROUGHOUT EACH PERIOD
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------
1998 1997 1996 1995(A)
---- ---- ---- -------
<S> <C> <C> <C> <C>
Accumulation Unit Value, beginning of period $15.040 $12.623 $11.153 $10.000
Accumulation Unit Value, end of period $17.809 $15.040 $12.623 $11.153
Number of Accumulation Units outstanding, end of period 801,557 577.711 383,267 117,290
</TABLE>
(A) FOR THE PERIOD MAY 1, 1995 (DATE SUBACCOUNT WAS ESTABLISHED) THROUGH
DECEMBER 31, 1995.
- --------------------------------------------------------------------------------
FIDELITY INVESTMENTS' INDEX 500 FUND SUBACCOUNT
VALUES OF AN ACCUMULATION UNIT OUTSTANDING THROUGHOUT EACH PERIOD
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1998 1997(A)
---- -------
<S> <C> <C>
Accumulation Unit Value, beginning of period ............. $12.162 $10.000
Accumulation Unit Value, end of period ................... $15.414 $12.162
Number of Accumulation Units outstanding, end of period .. 2,350,293 703,585
</TABLE>
(A) FOR THE PERIOD MAY 1, 1997 (DATE SUBACCOUNT WAS ESTABLISHED) THROUGH
DECEMBER 31, 1997.
- --------------------------------------------------------------------------------
MORGAN STANLEY DEAN WITTER EMERGING MARKETS EQUITY (INTERNATIONAL) FUND
SUBACCOUNT
VALUES OF AN ACCUMULATION UNIT OUTSTANDING THROUGHOUT EACH PERIOD
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1998 1997(A)
---- -------
<S> <C> <C>
Accumulation Unit Value, beginning of period $8.975 $10.000
Accumulation Unit Value, end of period $6.720 $8.975
Number of Accumulation Units outstanding, end of period 406,393 248.001
</TABLE>
(A) FOR THE PERIOD MAY 1, 1997 (DATE SUBACCOUNT WAS ESTABLISHED) THROUGH
DECEMBER 31, 1997.
14
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THE PENN MUTUAL LIFE INSURANCE COMPANY
THE PENN MUTUAL LIFE INSURANCE COMPANY. Penn Mutual is a Pennsylvania
mutual life insurance company chartered in 1847. We are located at 600 Dresher
Road, Horsham, PA 19044. Our mailing address is Philadelphia, PA 19172. We issue
and are liable for all benefits and payments under the Contracts.
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YEAR 2000
The services we provide, as well as services provided by other companies,
organizations and governmental entities generally, depend on the smooth
functioning of computer systems. Many computer systems in use today cannot
recognize the Year 2000, and may return to 1900 or some other date after
December 31, 1999. If not corrected, these systems could fail or create
erroneous results. We began addressing the Year 2000 problem actively in 1996.
The effort involves assessing all of our computers, computer programs, and
related equipment, making necessary changes, and assuring that all systems
process dates correctly. We believe that we have designed and implemented an
efficient process for identifying what needs to be changed. Although we cannot
give assurance that we will have no Year 2000 problem, we expect our computer
systems to perform satisfactorily in the Year 2000.
Penn Mutual and the mutual funds that serve as investment options for the
Separate Account have relationships with investment advisers, broker-dealers,
transfer agents, custodians, and other service providers. We are contacting the
funds and their vendors and service providers to obtain reasonable assurances
that such service providers have taken appropriate measures to address the Year
2000 problem. Where practicable, we will assess and attempt to mitigate risks
that the organizations upon which we depend are not Year 2000 compliant. We
cannot, however, give assurance that failure of these firms to complete adequate
preparations in a timely manner will not have an adverse effect on the
Contracts.
The Year 2000 Information and Readiness Disclosure Act passed by Congress
in 1998 encourages businesses and other organizations to provide information
about the readiness of their computer systems. The Act also provides certain
protections to these organizations against potential liability for what they say
about their readiness. We specifically designate the information about our
readiness as readiness disclosure under the protections of the Act.
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THE SEPARATE ACCOUNT
Penn Mutual established PENN MUTUAL VARIABLE ANNUITY ACCOUNT III (the
"Separate Account") on April 13, 1982. The Separate Account is registered with
the Securities and Exchange Commission as a unit investment trust and is a
"separate account" within the meaning of the federal securities laws. The
Separate Account is divided into subaccounts that invest in shares of different
mutual funds.
o The income, gains and losses of Penn Mutual do not have any effect on
the income, gains or losses of the Separate Account or any subaccount.
o The Separate Account and its subaccounts are not responsible for the
liabilities of any other business of Penn Mutual.
The financial statements of the Separate Account for the year ended
December 31, 1998 are included in the statement of additional information
referred to on the cover page of this prospectus.
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ACCUMULATION UNITS
Your assets in the Separate Account are held as Accumulation Units of the
subaccounts that you select. We value Accumulation Units on each day the New
York Stock Exchange is open. When you invest in or transfer money to a
subaccount, you receive the Accumulation Unit price next computed after we
receive your purchase payment or transfer request at our administrative office.
In the case of the your first purchase payment, you receive the price next
computed after we accept your application to purchase a Contract.
The value of an Accumulation Unit is $10 when a subaccount begins
operation. The value of an Accumulation Unit may vary, and is determined by
multiplying its last computed value by the net investment factor for the
subaccount for the current valuation period. The net investment factor measures
(1) investment performance of Fund shares held in the subaccount, (2) any taxes
on income or gains from investments held in the subaccount and (3) the mortality
and expense risk charge at an annual rate of 1.25%.
15
<PAGE>
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VOTING INSTRUCTIONS
You have the right to tell us how to vote proxies for the Fund shares in
which your purchase payments are invested. If the law changes and permits us to
vote the Fund shares, we may do so.
If you are a Contract Owner, we determine the number of Fund shares that
you may vote by dividing your interest in a subaccount by the net asset value
per share of the Fund. If you are receiving annuity payments, we determine the
number of Fund shares that you may vote by dividing the reserve allocated to the
subaccount by the net asset value per share of the Fund. We change these
procedures whenever we are required to do so by law.
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INVESTMENT OPTIONS IN THE SEPARATE ACCOUNT
The Separate Account currently has subaccounts that invest in the following
Funds.
PENN SERIES FUNDS, INC.:
GROWTH EQUITY FUND -- seeks long term growth of capital and increase of
future income by investing primarily in common stocks of well established growth
companies;
VALUE EQUITY FUND -- seeks to maximize total return (capital appreciation
and income) primarily by investing in equity securities of companies believed to
be undervalued considering such factors as assets, earnings, growth potential
and cash flows;
SMALL CAPITALIZATION FUND -- seeks capital appreciation through investment
in a diversified portfolio of securities consisting primarily of equity
securities of companies with market capitalizations under $1 billion;
EMERGING GROWTH FUND -- seeks capital appreciation by investing primarily
in common stocks of emerging growth companies with above-average growth
prospects;
FLEXIBLY MANAGED FUND -- seeks to maximize total return (capital
appreciation and income) by investing in common stocks, other equity securities,
corporate debt securities, and/or short term reserves, in proportions considered
appropriate in light of the availability of attractively valued individual
securities and current and expected economic and market conditions;
INTERNATIONAL EQUITY FUND -- seeks to maximize capital appreciation by
investing in a carefully selected diversified portfolio consisting primarily of
equity securities. The investments will consist principally of equity securities
of European and Pacific Basin countries;
QUALITY BOND FUND -- seeks the highest income over the long term consistent
with the preservation of principal through investment primarily in marketable
investment grade debt securities;
HIGH YIELD BOND FUND -- seeks high current income by investing primarily in
a diversified portfolio of long term high-yield/high-risk fixed income
securities in the medium to lower quality ranges; capital appreciation is a
secondary objective; such securities, which are commonly referred to as "junk"
bonds, generally involve greater risks of loss of income and principal than
higher rated securities (see accompanying Penn Series prospectuses);
MONEY MARKET FUND -- seeks to preserve capital, maintain liquidity and
achieve the highest possible level of current income consistent with these
objectives, by investing in high quality money market instruments; an investment
in the Fund is neither insured nor guaranteed by the U.S. Government and there
can be no assurance that the fund will be able to maintain a stable net asset
value of $1.00 per share.
Independence Capital Management, Inc., Horsham, Pennsylvania is investment
adviser to each of the Funds. OpCap Advisors, New York, New York, is investment
sub-adviser to the Value Equity and Small Capitalization Funds. T. Rowe Price
Associates, Baltimore, Maryland, is investment sub-adviser to the Flexibly
Managed and High Yield Bond Funds. Vontobel USA, Inc., New York, New York, is
investment sub-adviser to the International Equity Fund. RS Investment
Management, Inc., San Francisco, California, is investment sub-adviser to the
Emerging Growth Fund.
16
<PAGE>
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AMERICAN CENTURY VARIABLE PORTFOLIOS, INC.:
CAPITAL APPRECIATION PORTFOLIO -- seeks capital growth by investing
primarily in common stocks believed to have better-than-average prospects for
appreciation. American Century Investment Management, Inc., Kansas City,
Missouri, is investment adviser to the Capital Appreciation Portfolio.
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NEUBERGER BERMAN ADVISERS MANAGEMENT TRUST:
LIMITED MATURITY BOND PORTFOLIO -- seeks highest current income consistent
with low risk to principal and liquidity, primarily by investing in a
diversified portfolio of limited maturity debt securities. A secondary objective
is capital appreciation.
BALANCED PORTFOLIO -- seeks long-term capital growth and reasonable current
income without undue risk to principal through investment of a portion of its
assets in common stock and a portion in debt securities.
PARTNERS FUND PORTFOLIO -- seeks capital growth by investing primarily in
common stocks of established companies, using the value oriented investment
approach. Neuberger Berman reserves the right to make changes in the investment
objective, but will notify shareholders thirty days in advance of any proposed
material change.
Neuberger Berman Management Incorporated, New York, New York, is investment
adviser to the Limited Maturity Bond Portfolio, the Balanced Portfolio and the
Partners Portfolio.
- --------------------------------------------------------------------------------
FIDELITY INVESTMENTS' VARIABLE INSURANCE PRODUCTS FUND:
EQUITY-INCOME PORTFOLIO -- seeks reasonable income by investing primarily
in income-producing equity securities. In choosing these securities, the fund
will also consider the potential for capital appreciation. The fund's goal is to
achieve a yield which exceeds the composite yield on the securities comprising
the Standard & Poor's 500 Composite Stock Price Index.
GROWTH PORTFOLIO -- seeks to achieve capital appreciation. The fund
normally purchases common stocks, although its investments are not restricted to
any one type of security. Capital appreciation may also be found in other types
of securities, including bonds and preferred stocks.
Fidelity Management & Research Company, Boston, Massachusetts, is
investment adviser to the Equity-Income Portfolio and the Growth Portfolio.
- --------------------------------------------------------------------------------
FIDELITY INVESTMENTS' VARIABLE INSURANCE PRODUCTS FUND II:
ASSET MANAGER PORTFOLIO -- seeks high total return with reduced risk over
the long-term by allocating its assets among domestic and foreign stocks, bonds
and short-term fixed income investments.
INDEX 500 PORTFOLIO -- seeks to match the total return of the S&P 500 while
keeping expenses low. The S&P 500 is an index of 500 common stocks, most of
which trade on the New York Stock Exchange.
Fidelity Management & Research Company, Boston, Massachusetts, is
investment adviser to the Asset Manager Portfolio and the Index 500 Portfolio.
- --------------------------------------------------------------------------------
MORGAN STANLEY DEAN WITTER UNIVERSAL FUNDS, INC.:
EMERGING MARKETS EQUITY (INTERNATIONAL) PORTFOLIO -- seeks long term
capital appreciation by investing primarily in equity securities of emerging
market country issuers. The Portfolio will focus on economies that are
developing strongly and in which the markets are becoming more sophisticated.
Morgan Stanley Dean Witter Investment Management Inc., New York, New York,
is investment adviser to the Emerging Markets Equity (International) Portfolio.
SHARES OF PENN SERIES ARE SOLD TO OTHER VARIABLE LIFE AND VARIABLE ANNUITY
SEPARATE ACCOUNTS OF PENN MUTUAL AND ITS SUBSIDIARY, THE PENN INSURANCE AND
ANNUITY COMPANY. SHARES OF AMERICAN CENTURY VARIABLE PORTFOLIOS, INC., NEUBERGER
BERMAN ADVISERS MANAGEMENT TRUST, FIDELITY INVESTMENTS' VARIABLE INSURANCE
PRODUCTS FUND AND VARIABLE INSURANCE PRODUCTS FUND II AND MORGAN STANLEY DEAN
WITTER UNIVERSAL FUNDS, INC. ARE OFFERED NOT ONLY TO VARIABLE ANNUITY AND
17
<PAGE>
VARIABLE LIFE SEPARATE ACCOUNTS OF PENN MUTUAL, BUT ALSO TO SUCH ACCOUNTS OF
OTHER INSURANCE COMPANIES UNAFFILIATED WITH PENN MUTUAL AND, IN THE CASE OF
NEUBERGER BERMAN ADVISERS MANAGEMENT TRUST AND MORGAN STANLEY DEAN WITTER
UNIVERSAL FUNDS, INC., DIRECTLY TO QUALIFIED PENSION AND RETIREMENT PLANS.
READ THE PROSPECTUSES OF THESE FUNDS BEFORE INVESTING.
- --------------------------------------------------------------------------------
THE FIXED INTEREST ACCOUNTS
The Fixed Interest Accounts are part of the Company's general investment
account. Interests in the Fixed Interest Accounts are not registered under the
Securities Act of 1933 and the general account is not registered as an
investment company under the Investment Company Act of 1940. This Prospectus
generally discusses only the variable portion of the Contract. The staff of the
Securities and Exchange Commission has not reviewed the disclosure in this
Prospectus relating to the Fixed Interest Accounts. Disclosure regarding the
Fixed Interest Accounts, however, may be subject to generally applicable
provisions of the federal securities laws relating to the accuracy and
completeness of statements made in this Prospectus. See MORE INFORMATION ABOUT
THE FIXED INTEREST ACCOUNTS.
- --------------------------------------------------------------------------------
THE CONTRACTS
The Contracts may be an attractive long-term investment vehicle for many
people. They allow you to allocate your purchase payment(s) and transfer amounts
to the Separate Account, and direct investment in one or more of the available
Funds of Penn Series Funds, Inc., American Century Variable Portfolios, Inc.,
Neuberger Berman Advisers Management Trust, Fidelity Investments' Variable
Insurance Products Fund, Fidelity Investments' Variable Insurance Products Fund
II and Morgan Stanley Dean Witter Universal Funds, Inc.
In addition, the Variable/Fixed Contract allows you to allocate your
purchase payment(s) and transfer amounts to one or more Fixed Interest Accounts.
The Variable Contract allows you transfer amounts from your Contract to one or
more Fixed Interest Accounts in a separate fixed annuity contract issued by Penn
Mutual. The Fixed Interest Accounts are funded and guaranteed by Penn Mutual
through its general account. See THE FIXED INTEREST ACCOUNTS and MORE
INFORMATION ABOUT THE FIXED INTEREST ACCOUNTS in this Prospectus.
You decide, within Contract limits,
o how often you make a purchase payment and how much you invest;
o the Funds and/or Fixed Interest Accounts in which your purchase
payments are invested;
o whether or not to transfer money among the available Funds and Fixed
Interest Accounts;
o the type of annuity that we pay and who receives it,
o the Beneficiary or Beneficiaries to whom we pay death benefits: and
o the amount and frequency of withdrawals from the Contract Value.
Your Contract has
o an Accumulation Period, during which you make one or more purchase
payments and we invest your payments as you tell us; and
o an Annuity Payout Period, during which we make annuity payments to
you. Your Payout Period begins on your Annuity Date.
We may amend your Contract at any time to comply with legal requirements.
State law may require us to obtain your approval for any Contract amendment. We
may, with approval of the Securities and Exchange Commission and the governing
state insurance department, substitute another mutual fund for any of the Funds
currently available.
You may contact us by writing The Penn Mutual Life Insurance Company,
Customer Service Group, Philadelphia, PA 19172. Or, you may call (800) 523-0650,
18
<PAGE>
HOW DO I PURCHASE A CONTRACT?
Our representative will assist you in completing an application and sending
it, together with a check for your first purchase payment, to our administrative
office. All subsequent purchase payments should be sent to the administrative
office. We usually accept an application to purchase a Contract within two
business days after we receive it. If you send us an incomplete application, we
will return your purchase payment to you within five business days unless you
ask us to keep it while you complete the application.
For Variable/Fixed Contracts issued in connection with qualified retirement
plans, the minimum first purchase payment is $250 and the minimum for each
subsequent purchase payment is $50. The minimum first purchase payment for
Variable/Fixed Contracts which are not issued in connection with qualified
retirement plans is $2,500 and the minimum for each subsequent purchase payment
is $300. The total purchase payments that you make on a Variable/Fixed Contract
may not exceed $1,000,000 in any calendar year without our consent.
For Variable Contracts issued in connection with retirement plans
qualifying for special tax treatment under the Internal Revenue Code, the
minimum first purchase payment is $250 and the minimum for each subsequent
purchase payment is $40. The minimum first purchase payment for Variable
Contracts that are not issued in connection with qualified retirement plans is
$1,500 and the minimum for each subsequent purchase payment is $300.
We may, in our discretion, reduce the minimum requirements for initial and
subsequent purchase payments under the Contracts.
The principal underwriter of the Contracts is Hornor, Townsend & Kent,
Inc., 600 Dresher Road, Horsham, PA 19044, a wholly-owned subsidiary of Penn
Mutual.
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WHAT TYPES OF ANNUITY PAYMENTS MAY I CHOOSE?
You may choose: (1) an annuity for a set number of years (5 to 25 years for
a Variable/Fixed Contract; 5 to 30 years for a Variable Contract), (2) a life
annuity, (3) a life annuity with payments guaranteed for 10 or 20 years, (4) a
joint and survivor life annuity or (5) any other form of annuity that we may
agree upon. You may choose a person other than yourself to be the Annuitant.
Your annuity payments will not start until you choose an annuity option.
You will pay a mortality and expense risk charge during both the
Accumulation Period and Annuity Payout Period under your Contract. We charge
this fee while you receive a variable annuity even though we may no longer bear
a mortality risk.
VARIABLE ANNUITY PAYMENTS. The size of your variable annuity payments will
vary depending upon the performance of the investment options that you choose
for the Annuity Payout Period. Your payments also will depend on factors such as
the size of your investment, the type of annuity you choose, the expected length
of the annuity period, and the annuity purchase rates and charges in your
Contract.
The variable annuity purchase rate assumes an annual net investment return
of 4%. If the annual net investment return during the annuity payout period is
greater than 4%, the amount of your payments will increase. If the annual net
investment return is less, the amount of your payments will decrease.
FIXED ANNUITY PAYMENTS UNDER A VARIABLE/FIXED CONTRACT. The size of your
fixed annuity payments will not change. The size of these payments is determined
by a number of factors, including the size of your investment, the form of
annuity chosen, the expected length of the annuity period.
OTHER INFORMATION. Unless you tell us otherwise, your annuity payments will
begin on the later of (1) the first day of the next month after the Annuitant's
85th birthday for contracts that are not issued under qualified retirement plans
and the first day of April following the year in which the Annuitant turns
70 1/2 for Contracts that are issued under qualified retirement plans.
You or your surviving Beneficiary may change the Annuity Date or your
annuity option by giving us written notice at our administrative office at least
30 days prior to the current Annuity Date. The Annuity Date under a
Variable/Fixed Contract may not be earlier than the first Contract anniversary.
19
<PAGE>
If the Contract Value of a Variable/Fixed Contract is less than $5,000, or
if the Contract Value of a Variable Contract is less than $2,000, we may pay you
in a lump sum. We usually make annuity payments on the first day of each month,
starting with the Annuity Date, but we will pay you quarterly, semiannually or
annually, if you prefer. If necessary, we will adjust the frequency of your
payments so that payments are at least $50 each. For information on the
treatment of annuity payments, see FEDERAL INCOME TAX CONSIDERATIONS in this
Prospectus.
- --------------------------------------------------------------------------------
WHAT ARE THE DEATH BENEFITS UNDER MY CONTRACT?
You may designate a Beneficiary in your application. If you fail to
designate a Beneficiary, your Beneficiary will be your estate. You may change
your Beneficiary at any time before the death of the Annuitant.
Variable/Fixed Contracts sold in most states provide that if the Annuitant
dies (or in some cases, you die and you are not the Annuitant) prior to the
Annuity Date, we will pay your Beneficiary the greatest of
o the sum of all purchase payments, adjusted for withdrawals and contract
transfers,
o the Contract Value for the valuation period in which proof of death and
any other required information needed to make payment is received in our
administrative office, or
o the Variable Account Value, as of the contract date or, if later, as of
the end of the most recent seven-year contract period occurring prior to
the Contract Owner's 81st birthday, adjusted for subsequent purchase
payments and adjusted for withdrawals and contract transfers, plus the
value of any Fixed Interest Accounts under your Contract.
Similarly, Variable Contracts sold in most states provide that if the
Annuitant dies (or, in some cases, if you die) prior to the Annuity Date, we
will pay your Beneficiary the greatest of
o the sum of all purchase payments, adjusted for withdrawals and contract
transfers,
o the Contract Value for the valuation period in which proof of death and
any other required information needed to make payment is received in our
administrative office, or
o the Contract Value, as of the contract date or, if later, as of the end
of the most recent seven-year contract period occurring prior to the
Contract Owner's 81st birthday, adjusted for subsequent purchase payments
and adjusted for withdrawals and contract transfers
CONTRACTS SOLD IN TEXAS. If the Annuitant dies (or, in some cases, if you
die) prior to the Annuity Date, we will pay the greater of
o the sum of all purchase payments, adjusted for withdrawals and contract
transfers, or
o the Contract Value for the valuation period in which proof of death and
any other required information needed to make payment is received at Penn
Mutual's service office. "Proof of death" in the foregoing means a death
certificate or other official document establishing death.
The death benefit may be paid in lump sum or in the form of annuity
payments. We normally will pay the death benefit in a lump sum within seven days
after we receive proof of the date of death and all required information. We
will delay payment of the lump sum upon request, but not for longer than five
years.
If the Beneficiary is not the spouse of the decedent, he or she may choose
an annuity option rather than a lump sum payment. If he or she selects an
annuity option, payments must begin within one year of the decedent's death.
Payments may not be made over a period longer than the Beneficiary's life or
life expectancy (whichever is longer).
If the Beneficiary is the spouse of the decedent, he or she may select any
annuity option that was available to the decedent or apply to become the
Contract Owner.
If the Annuitant dies on or after the Annuity Date and the annuity is for a
specified number of years or for life with payments guaranteed for 10 or 20
years, the Beneficiary may elect to have the payments continue for the specified
or guaranteed period or to receive in lump sum the present value of the
remaining payments.
For information on the tax treatment of death benefits, see FEDERAL INCOME
TAX CONSIDERATIONS in this Prospectus.
20
<PAGE>
MAY I TRANSFER MONEY AMONG SUBACCOUNTS AND THE FIXED INTEREST ACCOUNTS?
VARIABLE/FIXED CONTRACTS. You may transfer amounts from one subaccount of
the Separate Account to another subaccount of the Separate Account. Within
Contract limits, you also may transfer from the subaccounts of the Separate
Account to the Fixed Interest Accounts. You may transfer from a Fixed Interest
Account to subaccounts of the Separate Account or to another Fixed Interest
Account. You may make no more than two transfers per calendar month and no more
than twelve per calendar year. The minimum amount that you may transfer is $250
or the total amount held in the investment account, if less.
If you own a Variable/Fixed Contract as trustee under a qualified
retirement plan, you may transfer all or part of the Contract Value to another
annuity contract issued by us that you own under the same plan.
VARIABLE CONTRACT. You may transfer amounts from one subaccount of the
Separate Account to another, up to six times in a calendar year. The minimum
transfer for a Contract issued under a tax-qualified retirement plan is $250.
The minimum for all other Contracts is $1,000. If a partial transfer is made to
another Contract, the remaining Contract Value must be $250.
You may transfer all or part of your Contract Value to another contract
issued by us containing a reciprocal transfer provision, subject to the
following conditions. The owner, annuitant and beneficiary must be the same
under both contracts. No more than six such transfers may be made in a calendar
year and no transfer may be made after the thirtieth day before the Annuity
Date.
DOLLAR COST AVERAGING. Dollar cost averaging is a way to invest in which
securities are purchased at regular intervals in fixed dollar amounts so that
the cost of the securities gets averaged over time and possibly over market
cycles. If your Contract value is at least $10,000, you can have a fixed
percentage of your purchase payments transferred monthly or quarterly from one
account to other accounts to achieve dollar cost averaging ($50 minimum per
account.) These transfers may be made only from one of the following accounts:
Money Market Subaccount, Limited Maturity Bond Subaccount, Quality Bond
Subaccount, or the Fixed Holding Account. You may do this for 12 to 60 months,
or until you change your allocations or tell us to stop dollar cost averaging.
AUTOMATIC REBALANCING. Automatic Rebalancing is a way to transfer money
from those subaccounts that have increased in value to those subaccounts that
have decreased in value. Over time, this may help you to sell high and buy low,
although there can be no assurance of this. You may elect to have your
investments in subaccounts of the Separate Account automatically rebalanced. We
will transfer funds under your Contract on a quarterly (calendar) basis among
the subaccounts to maintain a specified percentage allocation among your
selected variable investment options.
Dollar cost averaging and automatic rebalancing may not be in effect at the
same time.
ADDITIONAL INFORMATION. Transfers will be based on values at the end of the
valuation period in which the transfer request is received at our administrative
office. You may transfer amounts to a Contract from another contract issued by
us to the extent permitted by the other contract. If you make a withdrawal from
a Contract that relates to money transferred from another contract with a
front-end sales load, we will not charge you a deferred sales charge on the
withdrawal.
A transfer request must be received at our administrative office and all
other administrative requirements for transfer must be met to make the transfer.
We reserve the right to lower the minimum transfer amount. Neither we nor the
Separate Account will be liable for following instructions communicated by
telephone that we reasonably believe to be genuine. We require certain personal
identifying information to process a request for transfer made over the
telephone.
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MAY I WITHDRAW ANY OF MY MONEY?
Prior to the earlier of the Annuity Date or the death of the Contract Owner
or Annuitant, you may withdraw all or part of your Contract Value. We base your
withdrawal request on your Contract Value next determined after we receive a
proper written request for withdrawal (and the Contract, in case of a full
withdrawal) at our administrative office. We normally will pay you within seven
days. You may pay tax when you make a withdrawal, including an additional 10%
tax under certain circumstances. See FEDERAL INCOME TAX CONSIDERATIONS in this
Prospectus.
o A partial withdrawal must be at least $250 and the remaining Contract
Value must be at least $250.
o After the Annuity Date, you choose an annuity for a set number of years,
you may withdraw the present value of your annuity.
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<PAGE>
o If you do not tell us otherwise, the withdrawal will be taken pro rata
from the variable subaccounts if you own a variable contract. If you own
a Variable/Fixed Contract, if you do not tell us otherwise, the
withdrawal will be taken first from the Fixed Holding Account. If the
withdrawal exhausts your Fixed Holding Account value, any remaining
withdrawal will be taken pro rata from the Variable Subaccounts. If the
withdrawal exhausts your Variable Account Value, then any remaining
withdrawal will be taken from a fixed interest account beginning with the
fixed interest account with the shortest interest period.
403(B) WITHDRAWALS. There are restrictions on withdrawals from Contracts
qualifying under Section 403(b) of the Code. Generally, withdrawals attributable
to purchase payments made after December 31, 1988 pursuant to a salary reduction
plan may be made only if the Contract Owner is over the age of 59 1/2, leaves
the employment of the employer, dies, or becomes disabled as defined in the
Code. Withdrawals (other than withdrawals attributable to income earned on
purchase payments) may also be possible in the case of hardship as defined in
the Code. The restrictions do not apply to transfers among subaccounts and may
also not apply to transfers to other investments qualifying under Section
403(b). For information on the tax treatment of withdrawals under Section 403(b)
Contracts, see FEDERAL INCOME TAX CONSIDERATIONS in this Prospectus.
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DEFERMENT OF PAYMENTS AND TRANSFERS
We reserve the right to defer a withdrawal, a transfer of Contract Value,
or annuity payments funded by the Separate Account if (a) the New York Stock
Exchange is closed (other than customary weekend and holiday closings); (b)
trading on the Exchange is restricted; (c) an emergency exists that makes it
impractical for us to dispose of securities held in the Separate Account or to
determine the value of its assets; or (d) the Securities and Exchange Commission
by order so permits for the protection of investors. Conditions described in (b)
and (c) will be decided by, or in accordance with rules of, the Commission.
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WHAT CHARGES DO I PAY?
The following discussion explains the Contract charges that you pay. You
also pay expenses indirectly to the Funds that you select as investment options
in the Separate Account. See the prospectuses of the Funds for information on
Fund expenses.
ADMINISTRATION CHARGES
These charges reimburse us for administering the Contracts and the Separate
Account
o We deduct from your Variable Account Value an annual contract
administration charge that is the lesser of $30 or 2% of your Variable
Account Value. We deduct this charge each year on the date specified in
the Contract (and on the date the Variable Account Value or Contract
Value is withdrawn in full if other than the date specified). To pay this
charge, we cancel Accumulation Units credited to your Contract, pro rata
among the subaccounts in which you invest.
MORTALITY AND EXPENSE RISK CHARGES
o We deduct from the net asset value of the Separate Account a daily
administration charge a daily expense risk charge equal to an annual rate
of 0.5% of the daily net asset value of the Separate Account. You pay
this charge to compensate us for the risk of guaranteeing not to increase
the annual contract administration charge to more than $30 regardless of
actual administrative costs.
o We deduct a daily mortality risk charge equal to an annual rate of 0.75%
of the daily net asset value of the Separate Account (prior to September
1, 1990 the charge was 0.80%). This charge is to compensate us for the
mortality-related guarantees (e.g. guarantees that the annuity factors
will never be decreased even if mortality experience is substantially
different than originally assumed) we make under your Contract.
You pay the mortality and expense risk charges during both the accumulation
and variable annuity payout phases of your Contract.
22
<PAGE>
CONTINGENT DEFERRED SALES CHARGE
This charge pays for our sales expenses. Sales expenses that are not
covered by the deferred sales charge are paid from our surplus, which may
include proceeds from the expense and mortality risk charges. You may pay this
charge if you make a full or partial withdrawal of the Contract Value or if you
withdraw the present value of your annuity payments. Purchase payments will be
treated as withdrawn on a first-in, first-out basis.
VARIABLE/FIXED CONTRACT
The following tables shows the schedule of the contingent deferred sales
charge that will apply to the withdrawal of a purchase payment, after allowing
for the free withdrawals described below.
First, if no purchase payments have been made after the first contract
year, the deferred sales charge will equal:
WITHDRAWAL DURING DEFERRED SALES CHARGE AS A
CONTRACT YEAR PERCENTAGE OF AMOUNT WITHDRAWN
- --------------------------------------------------------------------------------
1 7.0%
- --------------------------------------------------------------------------------
2 6.0%
- --------------------------------------------------------------------------------
3 5.0%
- --------------------------------------------------------------------------------
4 4.0%
- --------------------------------------------------------------------------------
5 3.0%
- --------------------------------------------------------------------------------
6 2.0%
- --------------------------------------------------------------------------------
7 1.0%
- --------------------------------------------------------------------------------
8 and later No Charge
- --------------------------------------------------------------------------------
Second, if purchase payments have been made in any contract year after the
first, the deferred sales charge will equal:
WITHDRAWAL DURING DEFERRED SALES CHARGE AS A
CONTRACT YEAR PERCENTAGE OF AMOUNT WITHDRAWN
- --------------------------------------------------------------------------------
1 7.0%
- --------------------------------------------------------------------------------
2 6.0%
- --------------------------------------------------------------------------------
3 5.0%
- --------------------------------------------------------------------------------
4 4.0%
- --------------------------------------------------------------------------------
5 3.5%
- --------------------------------------------------------------------------------
6 3.0%
- --------------------------------------------------------------------------------
7 2.5%
- --------------------------------------------------------------------------------
8 2.0%
- --------------------------------------------------------------------------------
9 1.5%
- --------------------------------------------------------------------------------
10 1.0%
- --------------------------------------------------------------------------------
11 and later No Charge
- --------------------------------------------------------------------------------
Once in each contract year on or after the last day of the first contract
year, you may withdraw 10% of the Contract Value (determined as of the date of
withdrawal) free of the contingent deferred sales charge. The 10% free
withdrawal may be taken either in one sum or, subject to meeting certain minimum
amounts, in a series of scheduled amounts during the contract year. The total
sum of the contingent deferred sales charges deducted from amounts withdrawn
from the Separate Account will never exceed 8 1/2% of the total of all purchase
payments credited to the Separate Account.
23
<PAGE>
VARIABLE CONTRACT
If the contingent deferred sales charge applies, it will equal the lesser
of (a) 5% of the sum of purchase payments made within seven years prior to the
date of withdrawal or (b) 5% of the amount withdrawn. Under no circumstances
will the charge ever exceed 5% of total purchase payments.
You will not pay a charge on that portion of the first withdrawal in a
contract year that does not exceed 10% of total purchase payments made one year
or more prior to the withdrawal. This 10% free withdrawal may be taken in either
one sum or, subject to certain minimum amounts, in a series of scheduled amounts
during the contract year. Further, no charge will be made under the Variable
Contract on that portion of the first withdrawal in the eighth, ninth and tenth
contract years that does not exceed the following percentages of the Contract
Value:
CONTRACT YEAR PERCENTAGE
- --------------------------------------------------------------------------------
Eighth 25%
- --------------------------------------------------------------------------------
Ninth 50%
- --------------------------------------------------------------------------------
Tenth 75%
- --------------------------------------------------------------------------------
No charge will be made on the first withdrawal in any contract year after
the tenth contract year.
OTHER INFORMATION
You may at any time withdraw all or any part of the Contract Value free
from the contingent deferred sales charge if (i) you (or Annuitant under a
qualified retirement plan) are disabled as defined in Section 72 (m) (7) of the
Internal Revenue Code and as applied under the Social Security Act, (ii) the
disability began after the Contract Date and (iii) the disability has continued
without interruption for four months.
The contingent deferred sales charge may be reduced on Contracts sold to a
trustee, employer or similar party pursuant to a retirement plan or to a group
of individuals, if such sales are expected to involve reduced sales expenses.
The amount of reduction will depend upon such factors as the size of the group,
any prior or existing relationship with the purchaser or group, the total amount
of purchase payments and other relevant factors that might tend to reduce
expenses incurred in connection with such sales. The reduction will not be
unfairly discriminatory to any Contract Owners.
PREMIUM TAXES
Some states and municipalities impose premium taxes on purchase payments
received by insurance companies. Generally, any premium taxes payable will be
deducted upon annuitization, although we reserve the right to deduct such taxes
when due in jurisdictions that impose such taxes on purchase payments.
Currently, state premium taxes on purchase payments range from 0% to 3.5%.
- --------------------------------------------------------------------------------
PERFORMANCE INFORMATION
We may advertise total return performance and annual changes in
accumulation unit values.
Information on total return performance will include average annual rates
of total return for one, five and ten year periods, or lesser periods depending
on how long Fund has been available through a subaccount of the Separate
Account. Average annual total return figures will show the average annual rates
of increase or decrease in investments in the subaccounts, assuming a
hypothetical $1,000 investment at the beginning of the period, withdrawal of the
investment at the end of the period, and the deduction of all applicable fund
and Contract charges. We also may show average annual rates of total return,
assuming investment at the inception date of the underlying Funds, other amounts
invested at the beginning of the period and no withdrawal at the end of the
period. Average annual total return figures that assume no withdrawals at the
end of the period will reflect all recurring charges, but will not reflect the
contingent deferred sales charge (if applicable, the contingent deferred sales
charge would reduce the amount that may be withdrawn under the Contracts).
24
<PAGE>
- --------------------------------------------------------------------------------
MORE INFORMATION ABOUT THE FIXED INTEREST ACCOUNTS
GENERAL INFORMATION
If you own a Variable/Fixed Contract you may allocate or transfer all or
part of the amount credited to your Contract to one or more of the following
fixed interest options in the Fixed Interest Account: (1) the Fixed Holding
Account; (2) the One Year Guaranteed Account; (3) the Three Year Guaranteed
Account; (4) the Five Year Guaranteed Account; and (5) the Seven Year Guaranteed
Account. The minimum amount for an allocation to the Fixed Holding Account is
$50; the minimum amount for an allocation to the One Year Guaranteed Account or
the Three Year Guaranteed Account is $250; and the minimum amount for an
allocation to the Five Year Guaranteed Account or the Seven Year Guaranteed
Account is $5,000. We periodically declare an effective annual interest rate
applicable to allocations to the various fixed interest options. For each amount
allocated to the Fixed Holding Account, interest will be credited at an
effective annual interest rate declared by us on the first day of each calendar
year. The declared rate of interest will apply through the end of the calendar
year in which an allocation is made to the Fixed Holding Account, at which time
a new rate will be declared by Penn Mutual. For each amount allocated to the One
Year Guaranteed Account, the Three Year Guaranteed Account, the Five Year
Guaranteed Account or the Seven Year Guaranteed Account, interest will be
credited at an annual effective interest rate declared by us each month. The
declared rate of interest will apply through the end of the twelve month,
thirty-six month, sixty month or eighty-four month period, as applicable, which
begins on the first day of the calendar month in which the allocation is made.
We guarantee an effective annual rate of interest on allocations to all fixed
interest options of not less than 4%. In addition, rates declared during the
first seven contract years for the One Year Guaranteed Account will not be less
than the 52 week Treasury Bill discount rate obtained from the most recent
regularly scheduled auction.
If you own a Variable/Fixed Contract you may transfer Fixed Account funds
to subaccounts of the Separate Account or to another fixed interest option
within the Fixed Account, subject to the conditions and limitations in the fixed
account provisions of the Contract. A premature withdrawal charge may be
deducted from the interest earned on any amount that is withdrawn from the Three
Year Guaranteed Account, the Five Year Guaranteed Account or the Seven Year
Guaranteed Account during the period for which an interest rate is guaranteed.
In no event will the premature withdrawal charge invade the Contract Owner's
principal investment in the applicable fixed interest option. In accordance with
state law, we may defer a withdrawal or transfer from the Fixed Account for up
to six months if we reasonably determine that investment conditions are such
that an orderly sale of assets in our general account is not feasible.
LOANS UNDER SECTION 403(B) CONTRACTS
If your Contract qualifies under Section 403(b) of the Code, and if state
law permits, you may be able to borrow against money that you have invested in a
Fixed Interest Account. Review your Contract loan endorsement or consult our
representative for a complete description of the terms of the loan privilege,
including minimum and maximum loan amounts, repayment terms, and restrictions on
prepayments.
When you borrow, an amount equal to your loan will be transferred, as
collateral, from your Separate Account subaccounts to an account in our general
account called the "Restricted Account." Amounts transferred to the Restricted
Account currently earn interest at a rate of 2 1/2 percentage points less than
the rate of interest that we charge you on the loan. On your Contract
Anniversary, the accrued interest in the Restricted Account will be transferred
to your Separate Account subaccounts in accordance with your current payment
allocation instructions.
Loan repayments are due quarterly. When you repay part of your loan, we
transfer an amount equal to the principal portion of the repayment from the
Restricted Account to the Fixed Holding Account subaccount. You may then
transfer amounts from the Fixed Holding Account subaccount to the other
investment options offered under the Contract.
If you are in default, we must report the default to the Internal Revenue
Service as a taxable distribution and, if you are then under age 59 1/2, as a
premature distribution that may be subject to a 10% penalty. We will repay the
loan by withdrawing the amount in default, plus interest and any applicable
contingent deferred sales charge, from your Separate Account subaccounts in
accordance with your Loan Request and Agreement. If Section 403(b) prevents us
from doing this, your outstanding loan balance will continue to accrue interest
and the amount due will be withdrawn when a withdrawal becomes permissible.
While a loan balance is outstanding, any withdrawal or death benefit proceeds
must first be used to pay the loan.
25
<PAGE>
Loans are subject to the terms of your Contract, your Section 403(b) plan
and the Code, and, in the case of plans subject to the Employee Retirement
Income Security Act of 1974, the ERISA regulations on plan loans, all of which
may impose restrictions. We reserve the right to suspend, modify or terminate
the availability of loans. Where there is a plan fiduciary, it is the
responsibility of the fiduciary to ensure that any Contract loans comply with
plan qualification requirements, including ERISA.
- --------------------------------------------------------------------------------
FEDERAL INCOME TAX CONSIDERATIONS
The following is a general summary of some federal income tax
considerations. It is based on the law in effect on the date of this Prospectus,
which may change, and does not address state or local tax laws. For further
information, you should consult qualified tax counsel.
You pay no federal income tax on increases in the value of your Contract
until money is distributed to you or your beneficiary as a withdrawal, death
benefit or an annuity payment.
WITHDRAWALS AND DEATH BENEFITS. You may pay tax on a withdrawal, and your
beneficiary may pay tax on a death benefit. The taxable portion of these
payments generally will be the amount by which the payment exceeds your cost.
Thus, you or your Beneficiary generally will have taxable income to the extent
that your Contract Value exceeds your purchase payments. Ordinary income tax
rates apply. If you designate a Beneficiary who is either 37 1/2 years younger
than you or your grandchild, you may obtain Generation Skipping Transfer Tax
treatment under Section 2601 of the Code.
ANNUITY PAYMENTS. The taxable portion of an annuity payment generally is
determined by a formula that establishes the ratio of the cost basis of the
Contract (as adjusted for any refund feature) to the expected return under the
Contract. The taxable portion, which is the amount of the annuity payment in
excess of the cost basis, is taxed at ordinary income tax rates.
Subject to certain exceptions, a Contract must be held by or on behalf of a
natural person in order to be treated as an annuity contract under federal
income tax law and to be accorded the tax treatment described in the preceding
paragraphs. If a contract is not treated as an annuity contract for federal
income tax purposes, the income on the Contract is treated as ordinary income
received or accrued by the Contract Owner during the taxable year.
EARLY WITHDRAWALS. An additional income tax of 10% may be imposed on the
taxable portion of an early withdrawal or distribution unless one of several
exceptions apply. Generally, there will be no additional income tax on
o early withdrawals that are part of a series of substantially equal
periodic payments (not less frequently than annually) made for life (or
life expectancy) of the taxpayer or the joint lives (or joint life
expectancies) of the taxpayer and a Beneficiary;
o withdrawals made on or after age 59 1/2;
o on distributions made after death;
o withdrawals attributable to total and permanent disability.
TRANSFERS. You may pay tax if you transfer your Contract to someone else.
If the transfer is for less than adequate consideration, the taxable portion
would be the Contract Value at the time of transfer over the investment in the
Contract at such time. This rule does not apply to transfers between spouses or
to transfers incident to a divorce.
SEPARATE ACCOUNT DIVERSIFICATION. Section 817(h) of the Code provides that
the investments of a separate account underlying a variable annuity contract
which is not purchased under a qualified retirement plan or certain other types
of plans (or the investments of a mutual fund, the shares of which are owned by
the variable annuity separate account) must be "adequately diversified" in order
for the Contract to be treated as an annuity contract for tax purposes. The
Treasury Department has issued regulations prescribing such diversification
requirements. The Separate Account, through each of the available funds of the
Penn Series Funds, Inc., American Century Variable Portfolios, Inc., Neuberger
Berman Advisers Management Trust, Fidelity Investments' Variable Insurance
Products Fund, Variable Insurance Products Fund II, and Morgan Stanley Dean
Witter Universal Funds, Inc. intends to comply with those requirements. The
requirements are briefly discussed in the accompanying prospectuses for the
underlying funds.
26
<PAGE>
The Treasury Department has indicated that in regulations or revenue
rulings under Section 817(d) (relating to the definition of a variable
contract), it will provide guidance on the extent to which Contract Owners may
direct their investments to particular subaccounts without being treated as
owners of the underlying shares. It is possible that when such regulations or
rulings are issued, the Contracts may need to be modified to comply with them.
QUALIFIED PLANS. The Contracts may be used in connection with certain
retirement plans that qualify for special tax treatment under the Code. The
plans include individual retirement annuities qualified under Section 408(b) of
the Code (referred to as IRAs), simplified employee pension plans qualified
under Section 408(k) of the Code, tax deferred annuities qualified under Section
403(b) of the Code, state and local government deferred compensation plans
qualified under Section 457 of the Code, pension or profit sharing plans for
self-employed individuals qualified under Section 401 of the Code (referred to
as H.R. 10 or Keogh plans) and corporate pension or profit sharing plans
qualified under Section 401 of the Code or annuity plans qualified under Section
403(a) of the Code. Special provisions are required in some Contracts for
qualification under the Code.
For some types of qualified retirement plans, there may be no cost basis in
the Contract. In this case, the total payments received may be taxable. Before
purchasing a contract under a qualified retirement plan, the tax law provisions
applicable to the particular plan should be considered.
Generally, under a nonqualified annuity or rollover individual retirement
annuity qualified under Section 408(b), unless the Contract Owner elects to the
contrary, any amounts that are received under the Contract that the Company
believes are includable in gross income for tax purposes will be subject to
mandatory withholding to meet federal income tax obligations. The same treatment
will apply to distributions from a Section 403(b) annuity that are payable as an
annuity for the life or life expectancy of one or more individuals, or for a
period of at least 10 years, or are required minimum distributions. Other
distributions from a qualified plan or a Section 403(b) annuity are subject to
mandatory withholding, unless an election is made to receive the distribution as
a direct rollover to another eligible retirement plan. Distributions from a
Section 457 deferred compensation plan are wages subject to general income tax
withholding requirements.
This general summary of federal income tax does not address every issue
that may affect you. You should consult qualified tax counsel.
- --------------------------------------------------------------------------------
FINANCIAL STATEMENTS
The consolidated financial statements of The Penn Mutual Life Insurance
Company and the financial statements of the Separate Account at December 31,
1998 and for the year then ended appear in the Statement of Additional
Information. The consolidated financial statements of Penn Mutual should be
considered only as bearing upon Penn Mutual's ability to meet its obligations
under the Contracts.
27
<PAGE>
New subaccounts of the Separate Account have been established under the
Contracts subsequent to December 31, 1998. No amounts were allocated to the
subaccounts as of December 31, 1998. There are, therefore, no unit values for
the subaccounts at December 31, 1998.
- --------------------------------------------------------------------------------
STATEMENT OF ADDITIONAL INFORMATION CONTENTS
- --------------------------------------------------------------------------------
VARIABLE ANNUITY PAYMENTS
First Variable Annuity Payments.......................................
Subsequent Variable Annuity Payments................................
Annuity Units.......................................................
Value of Annuity Units..............................................
Net Investment Factor...............................................
Assumed Interest Rate...............................................
Valuation Period....................................................
- --------------------------------------------------------------------------------
PERFORMANCE DATA...........................................................
Average Annual Total Return.........................................
Annual Changes in Accumulation Unit Values..........................
- --------------------------------------------------------------------------------
DISTRIBUTION OF CONTRACTS AND CERTIFICATES.................................
- --------------------------------------------------------------------------------
CUSTODIAN..................................................................
- --------------------------------------------------------------------------------
INDEPENDENT AUDITORS.......................................................
- --------------------------------------------------------------------------------
LEGAL MATTERS..............................................................
- --------------------------------------------------------------------------------
FINANCIAL STATEMENTS.......................................................
28
<PAGE>
Penn
Mutual
A better way of life
The Penn Mutual
Life Insurance Company
Philadelphia, PA 19172
EB1474 5/99
<PAGE>
- --------------------------------------------------------------------------------
PROSPECTUS -- May 1, 1999
Certificates Issued Under Group Variable and Fixed Annuity Contracts --
Flexible Purchase Payments
- --------------------------------------------------------------------------------
OPTIMIZER
PENN MUTUAL VARIABLE ANNUITY ACCOUNT III
THE PENN MUTUAL LIFE INSURANCE COMPANY
Philadelphia, PA 19172 o Telephone (800) 523-0650
- --------------------------------------------------------------------------------
This Prospectus describes a group variable and fixed annuity contract ("Penn
Mutual") offered by The Penn Mutual Life Insurance Company ("Penn Mutual").
Please read it carefully and save it for future reference.
- --------------------------------------------------------------------------------
The Contract is an agreement between the Contractholder and Penn Mutual. You, as
a participant in the Contract, agree to make one or more payments to us and we
agree to make annuity and other payments to you at a future date.
The Contract:
o has a variable component, which means that the Participant's Variable Account
Value and future payouts we make to you will vary based upon investment
experience;
o has a fixed component, which means that the Participant's Fixed Account Value
and future payouts we make to you will be fixed based on your purchase
payments plus interest credited at not less than 4%;
o is tax-deferred, which means that you will not pay federal income taxes until
we begin to make annuity payments to you or until you take money out, and
o allows you to receive annuity payments over different periods of time.
Under the variable component, you direct us to invest your payments in one or
more of the following Funds through Penn Mutual Variable Annuity Account III
(the "Separate Account").
- --------------------------------------------------------------------------------
Penn Series Funds, Inc. Manager
- --------------------------------------------------------------------------------
Growth Equity Fund Independence Capital Management, Inc.
Value Equity Fund OpCap Advisors
Flexibly Managed Fund T. Rowe Price Associates, Inc.
International Equity Fund Vontobel USA, Inc.
Quality Bond Fund Independence Capital Management, Inc.
High Yield Bond Fund T. Rowe Price Associates, Inc.
Money Market Fund Independence Capital Management, inc.
- --------------------------------------------------------------------------------
A Prospectus for the Penn Series Fund, Inc. accompanies this prospectus.
You also may direct us to invest in one or more of our Fixed Interest Accounts.
The Contract is not suitable for short-term investment. You may pay a deferred
sales charge of 5% on early withdrawals. If you withdraw money before age 59?,
you may pay a 10% additional income tax. The Contract is not a bank deposit and
is not federally insured.
You may return your Contract Certificate issued within ten days of receipt for a
full refund of the Contract Value (or purchase payments, if required by law).
Longer free look periods apply in some states.
You may obtain a Statement of Additional Information from us free of charge by
writing The Penn Mutual Life Insurance Company, Customer Service Group,
Philadelphia, PA 19172. Or, you can call us at (800) 523-0650. The Statement of
Additional Information contains more information about the Contract. It is filed
with the Securities and Exchange Commission and we incorporate it by reference
into this Prospectus. The table of contents of the Statement of Additional
Information is at the end of this Prospectus.
The Securities and Exchange Commission maintains a Web site (http://www.sec.gov)
that contains this Prospectus, the Statement of Additional Information, material
incorporated by reference, and other information regarding registrants that file
electronically with the Commission.
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED THESE
SECURITIES OR DETERMINED WHETHER THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. IT IS
A CRIME FOR ANYONE TO TELL YOU OTHERWISE.
<PAGE>
- ---------------------------------------------------------------------------
PROSPECTUS CONTENTS
- ---------------------------------------------------------------------------
SPECIAL TERMS............................................................ 3
- ---------------------------------------------------------------------------
EXPENSES ................................................................ 4
EXAMPLES OF FEES AND EXPENSES ........................................... 5
ACCUMULATION UNIT VALUES ................................................ 6
THE PENN MUTUAL LIFE INSURANCE COMPANY .................................. 9
YEAR 2000 ............................................................... 9
THE SEPARATE ACCOUNT .................................................... 9
Accumulation Units.................................................. 9
Voting Instructions.................................................10
Investment Options in the Separate Account......................... 10
Growth Equity Fund..............................................10
Value Equity Fund...............................................10
Flexibly Managed Fund...........................................10
International Equity Fund.......................................10
Quality Bond Fund...............................................10
High Yield Bond Fund............................................10
Money Market Fund...............................................10
- ---------------------------------------------------------------------------
THE FIXED INTEREST ACCOUNTS .............................................11
- ---------------------------------------------------------------------------
THE CONTRACT ............................................................11
How Do I Participate in a Contract?.................................12
What Type of Annuity Payments May I Choose?.........................12
Variable Annuity Payments.......................................12
Fixed Annuity Payments..........................................12
Other Information...............................................12
What Are the Death Benefits Under My Certificate?...................13
May I Transfer Money Among Subaccounts and the Fixed
Interest Accounts?.............................................13
May I Withdraw Any of My Money?.....................................13
403(b) Withdrawals..............................................14
Deferment of Payments and Transfers.................................14
What Charges Do I Pay?..............................................14
Administration Charges...................................................14
Mortality and Expense Risk Charges..............................14
Contingent Deferred Sales Charge................................14
- ---------------------------------------------------------------------------
PERFORMANCE INFORMATION .................................................15
- ---------------------------------------------------------------------------
MORE INFORMATION ABOUT THE FIXED INTEREST ACCOUNT .......................15
General Information.................................................15
Loans Under Section 403(b) Contracts................................16
- ---------------------------------------------------------------------------
FEDERAL INCOME TAX CONSIDERATIONS .......................................16
Withdrawals and Death Benefits......................................16
Annuity Payments....................................................17
Early Withdrawals...................................................17
Transfers...........................................................17
Separate Account Diversification....................................17
Qualified Plans.....................................................17
- ---------------------------------------------------------------------------
FINANCIAL STATEMENTS ....................................................18
STATEMENT OF ADDITIONAL INFORMATION CONTENTS ............................18
<PAGE>
- ---------------------------------------------------------------------------
SPECIAL TERMS
- ---------------------------------------------------------------------------
As used in this prospectus, the following terms have the indicated meaning:
Accumulation Unit: A unit of measure used to compute a Participant's
Variable Account Value prior to the Annuity Date.
Administrative Office: A reference to our administrative office means
The Penn Mutual Life Insurance Company, Administrative Office, 600
Dresher Road, Horsham, Pennsylvania 19044.
Annuity Date: The date on which annuity payments start.
Annuity Unit: A unit of measure used to compute a Participant's
variable annuity payment.
Certificate: A certificate issued under the Contract which sets the
Participant's interest in the Contract.
Contract: The group combination variable and fixed annuity contract
described in this prospectus.
Participant: A person on whose behalf purchase payments are made under
the Contract.
Participant's Fixed Account: An account established and maintained by
The Penn Mutual Life Insurance Company under the fixed account
provisions of the Contract.
Participant's Fixed Account Value: The sum of all amounts credited to a
Participant's Fixed Account, increased by interest credited and reduced
by amounts withdrawn from the Participant's Fixed Account.
Participant's Variable Account: An account established and maintained
under the Contract for a Participant.
Participant's Variable Account Value: The value of all Accumulation
Units credited to the Participant's Variable Account.
We: The Penn Mutual Life Insurance company.
You: The Participant
- --------------------------------------------------------------------------------
EXPENSES
- --------------------------------------------------------------------------------
Contract Owner Transaction Expenses
Sales Load Imposed on Purchase Payments None
Deferred Sales Load, as percentage of the amount withdrawn 5%*
Exchange Fee None
Annual Contract Administration Charge $30
Separate Account Annual Expenses (as a percentage of Average
Variable Account Value)
Mortality and Expense Risk Charge 1.25%
Account Fees and Expenses None
Total Separate Account Annual Expenses 1.25%
* The deferred sales charge will not be made on that portion of the first
withdrawal in an enrollment year that does not exceed specified percentages
of the sum of the Participant's Variable Account Value and the
Participant's Fixed Account Value.
See WHAT CHARGES DO I PAY? in this prospectus.
<PAGE>
- --------------------------------------------------------------------------------
Penn Series Funds, Inc.**
Underlying Fund Annual Expenses (as a % of portfolio avg. net assets)
<TABLE>
<CAPTION>
Administrative
Management and Corporate Total
Fees Services Fees Accounting Other Fund
(after waiver) (after waiver) Fees Expenses Expenses
-------------- -------------- ---- -------- --------
<S> <C> <C> <C> <C> <C>
Growth Equity 0.45% 0.15% 0.07% 0.09% 0.76%
Value Equity 0.50% 0.15% 0.06% 0.05% 0.76%
Flexibly Managed 0.50% 0.15% 0.05% 0.06% 0.76%
International Equity 0.75% 0.15% 0.08% 0.10% 1.08%
Quality Bond 0.45% 0.15% 0.08% 0.09% 0.77%
High Yield Bond 0.50% 0.15% 0.08% 0.09% 0.82%
Money Market 0.40% 0.15% 0.08% 0.09% 0.72%
</TABLE>
** These expenses are for the last fiscal year.
- --------------------------------------------------------------------------------
The purpose of this foregoing table is to assist Contract Owners in
understanding the various costs and expenses that a Contract Owner will bear
directly and indirectly. The table shows Contract expenses and underlying Fund
expenses. See the accompanying prospectus of Penn Series Funds, Inc. for
information on expenses.
Premium taxes may be applicable. See WHAT CHARGES DO I PAY? in this
prospectus.
<PAGE>
- --------------------------------------------------------------------------------
EXAMPLES OF FEES AND EXPENSES
EXAMPLE
If you own certificates and surrender your certificates at the end of the
applicable period, you would pay the following expenses on each $1,000 invested,
assuming 5% annual return on assets:
One Three Five Ten
Year Years Years Years
Penn Series Growth Equity Fund $67 $114 $163 $257
Penn Series Value Equity Fund $67 $114 $163 $257
Penn Series Flexibly Managed Fund $67 $114 $163 $257
Penn Series International Equity Fund $70 $123 $179 $289
Penn Series Quality Bond Fund $67 $114 $164 $258
Penn Series High Yield Bond Fund $68 $116 $166 $263
Penn Series Money Market Fund $67 $113 $162 $253
- --------------------------------------------------------------------------------
EXAMPLE
If you own certificates and do not surrender your certificates, or you
elect an annuity option at the end of the applicable time period, you would pay
the following expense on each $1,000 invested, assuming 5% annual return on
assets:
One Three Five Ten
Year Years Years Years
Penn Series Growth Equity Fund $21 $65 $111 $240
Penn Series Value Equity Fund $21 $65 $111 $240
Penn Series Flexibly Managed Fund $21 $65 $111 $240
Penn Series International Equity Fund $24 $75 $128 $273
Penn Series Quality Bond Fund $21 $65 $112 $242
Penn Series High Yield Bond Fund $22 $67 $114 $247
Penn Series Money Market Fund $21 $64 $109 $236
The examples are based upon data for the fiscal year ended December 31,
1998. Your expenses may be more or less than what is shown.
<PAGE>
- --------------------------------------------------------------------------------
ACCUMULATION UNIT VALUES
The following tables show Accumulation Unit values and the number of
Accumulation Units outstanding for each of the subaccounts of the Separate
Account for the specified periods. The financial data included in these tables
should be read in conjunction with the financial statements and the related
notes included in the Statement of Additional Information.
- --------------------------------------------------------------------------------
PENN SERIES GROWTH EQUITY FUND SUBACCOUNT (a)
Values of an Accumulation Unit Outstanding Throughout Each Period for Qualified
and Nonqualified Retirement Plans
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------------------------------------------
1998 1997 1996 1995
---------------------------------------------------------------------------------------
Non- Non- Non- Non-
Qual Qual Qual Qual Qual Qual Qual Qual
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Accumulation Unit Value,
beginning of period $48.256 $47.859 $38.550 $38.235 $32.596 $32.327 $26.102 $25.887
Accumulation Unit Value,
end of period $67.515 $66.959 $48.256 $47.859 $38.550 $38.235 $32.596 $32.327
Number of Accumulation
Units outstanding,
end of period 1,752,036 626,895 1,794,481 617,717 1,830,081 620,903 1,991,646 674,290
<CAPTION>
Year Ended December 31,
---------------------------------------------------------------------------------------
1994 1993 1992 1991
---------------------------------------------------------------------------------------
Non- Non- Non- Non-
Qual Qual Qual Qual Qual Qual Qual Qual
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Accumulation Unit Value,
beginning of period $28.766 $28.528 $25.906 $25.692 $24.756 $24.552 $18.605 $18.451
Accumulation Unit Value,
end of period $26.102 $25.887 $28.766 $28.528 $25.906 $25.692 $24.756 $24.552
Number of Accumulation
Units outstanding,
end of period 2,119,836 717,328 2,042,023 685,110 2,004,015 669,679 1,680,322 518,717
<CAPTION>
Year Ended December 31,
-----------------------------------------------------------------
1990 1989 1988
-----------------------------------------------------------------
Non- Non- Non-
Qual Qual Qual Qual Qual Qual
-----------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Accumulation Unit Value,
beginning of period $21.204 $21.029 $16.356 $16.221 $14.702 $14.581
Accumulation Unit Value,
end of period $18.605 $18.451 $21.204 $21.029 $16.356 $16.221
Number of Accumulation
Units outstanding,
end of period 1,470,210 439,287 1,284,583 333,486 1,309,408 360,185
</TABLE>
(a) Growth Stock Fund Subaccount prior to November 1, 1992.
<PAGE>
- --------------------------------------------------------------------------------
Penn Series Value Equity Fund Subaccount (a)
Values of an Accumulation Unit Outstanding Throughout Each Period
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994 1993 1992 1991 1990 1989
-----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Accumulation Unit Value,
beginning of period.. $38.038 $30.819 $24.928 $18.361 $18.062 $17.080 $15.058 $11.939 $13.157 $11.802
Accumulation Unit Value,
end of period........ $41.167 $38.038 $30.819 $24.928 $18.361 $18.062 $17.080 $15.058 $11.939 $13.157
Number of Accumulation
Units outstanding,
end of period........ 5,273,048 5,409,879 4,907,784 4,235,839 3,886,404 3,693,652 2,865,294 2,207,661 1,883,581 1,802,897
</TABLE>
(a) Equity Income Fund Subaccount prior to November 1, 1992.
- --------------------------------------------------------------------------------
Penn Series Flexibly Managed Fund Subaccount (a)
Values of an Accumulation Unit Outstanding Throughout Each Period
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994 1993 1992 1991 1990 1989
-----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Accumulation Unit Value,
beginning of period... $56.265 $49.262 $42.865 $35.496 $34.514 $30.179 $27.893 $23.215 $23.712 $19.832
Accumulation Unit Value,
end of period ........ $58.951 $56.265 $49.262 $42.865 $35.496 $34.514 $30.179 $27.893 $23.215 $23.712
Number of Accumulation
Units outstanding,
end of period......... 5,766,01 5,974,993 5,711,843 4,946,240 4,198,305 3,143,601 2,327,829 1,664,751 1,237,347 1,129,858
</TABLE>
(a) Capital Appreciation Fund Subaccount prior to November 1, 1992.
- --------------------------------------------------------------------------------
Penn Series International Equity Fund Subaccount
Values of an Accumulation Unit Outstanding Throughout Each Period
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------------------------------------
1998 1997 1996 1995 1994 1993 1992(a)
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Accumulation Unit Value,
beginning of period $18.164 $16.659 $14.434 $12.843 $13.880 $10.175 $10.000
Accumulation Unit Value,
end of period $21.320 $18.164 $16.659 $14.434 $12.843 $13.880 $10.175
Number of Accumulation Units
outstanding, end of period 3,822,847 4,155,960 4,012,762 3,388,479 3,556,098 1,847,892 92,386
</TABLE>
(a) For the period November 2, 1992 (date subaccount was established) through
December 31, 1992.
<PAGE>
- --------------------------------------------------------------------------------
Penn Series Quality Bond Fund Subaccount (a)
Values of an Accumulation Unit Outstanding Throughout Each Period
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994 1993 1992 1991 1990 1989
-----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Accumulation Unit Value,
beginning of period..... $20.260 $18.990 $18.465 $15.562 $16.639 $15.088 $14.336 $12.558 $11.776 $10.580
Accumulation Unit Value,
end of period .......... $22.043 $20.260 $18.990 $18.465 $15.562 $16.639 $15.088 $14.336 $12.558 $11.776
Number of Accumulation
Units outstanding,
end of period........... 1,665,664 1,497,635 1,664,378 1,869,975 1,890,869 1,953,188 1,337,087 1,229,163 1,075,187 769,467
</TABLE>
(a) Fixed Income Fund Subaccount prior to November 1, 1992.
- --------------------------------------------------------------------------------
Penn Series High Yield Bond Fund Subaccount
Values of an Accumulation Unit Outstanding Throughout Each Period
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994 1993 1992 1991 1990 1989
-----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Accumulation Unit Value,
beginning of period.. $33.476 $29.276 $26.033 $22.644 $24.742 $20.918 $18.291 $13.534 $15.035 $15.325
Accumulation Unit Value,
end of period ....... $34.645 $33.476 $29.276 $26.033 $22.644 $24.742 $20.918 $18.291 $13.534 $15.035
Number of Accumulation
Units outstanding,
end of period........ 1,308,094 1,261,904 1,185,318 1,194,944 1,264,890 1,257,271 705,414 594,530 613,408 817,147
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Penn Series Money Market Fund Subaccount
Values of an Accumulation Unit Outstanding Throughout Each Period
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994 1993 1992 1991 1990 1989
-----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Accumulation Unit Value,
beginning of period.. $19.541 $18.817 $18.148 $17.416 $17.003 $16.791 $16.491 $15.732 $14.893 $13.844
Accumulation Unit Value,
end of period ....... $20.268 $19.541 $18.817 $18.148 $17.416 $17.003 $16.791 $16.491 $15.732 $14.893
Number of Accumulation
Units outstanding,
end of period........ 1,449,199 1,120,603 1,192,388 1,062,385 825,274 658,620 698,584 769,958 965,117 753,052
</TABLE>
- --------------------------------------------------------------------------------
The financial statements of the Separate Account for the year ended
December 31, 1998 are included in the statement of additional information
referred to on the cover page of this prospectus.
<PAGE>
- --------------------------------------------------------------------------------
THE PENN MUTUAL LIFE INSURANCE COMPANY
- --------------------------------------------------------------------------------
The Penn Mutual Life Insurance Company ("Penn Mutual") is a Pennsylvania
mutual life insurance company. We were chartered in 1847 and have been
continuously engaged in the life insurance business since that date. Our home
office is located at The Penn Mutual Life Insurance Company, Philadelphia, PA
19172.
- --------------------------------------------------------------------------------
YEAR 2000
- --------------------------------------------------------------------------------
The services we provide, as well as services provided by other companies,
organizations and governmental entities generally, depend on the smooth
functioning of computer systems. Many computer systems in use today cannot
recognize the Year 2000, and may return to 1900 or some other date after
December 31, 1999. If not corrected, these systems could fail or create
erroneous results. We began addressing the Year 2000 problem actively in 1996.
The effort involves assessing all of our computers, computer programs, and
related equipment, making necessary changes, and assuring that all systems
process dates correctly. We believe that we have designed and implemented an
efficient process for identifying what needs to be changed. Although we cannot
give assurance that we will have no year 2000 problem, we expect our computer
systems to perform satisfactorily in the Year 2000.
Penn Mutual and the mutual funds that serve as investment options for the
Separate Account have relationships with investment advisers, broker-dealers,
transfer agents, custodians, and other service providers. We are contacting the
funds and their vendors and service providers to obtain reasonable assurances
that such service providers have taken appropriate measures to address the Year
2000 problem. Where practicable, we will assess and attempt to mitigate risks
that the organizations upon which we depend are not Year 2000 compliant. We
cannot, however, give assurance that failure of these firms to complete adequate
preparations in a timely manner will not have an adverse effect on the
Contracts.
The Year 2000 Information and Readiness Disclosure Act passed by Congress
in 1998 encourages businesses and other organizations to provide information
about the readiness of their computer systems. The Act also provides certain
protections to these organizations against potential liability for what they say
about their readiness. We specifically designate the information about our
readiness as readiness disclosure under the protections of the Act.
- --------------------------------------------------------------------------------
THE SEPARATE ACCOUNT
- --------------------------------------------------------------------------------
Penn Mutual established Penn Mutual Variable Annuity Account III (the
"Separate Account") on April 13, 1982. The Separate Account is registered with
the Securities and Exchange Commission as a unit investment trust and is a
"separate account" within the meaning of the federal securities laws. The
Separate Account is divided into subaccounts that invest in shares of different
mutual funds.
o The income, gains and losses of Penn Mutual do not have any effect on the
income, gains or losses of the Separate Account or any subaccount.
o The Separate Account and its subaccounts are not responsible for the
liabilities of any other business of Penn Mutual.
- --------------------------------------------------------------------------------
Accumulation Units
- --------------------------------------------------------------------------------
Money allocated to the Separate Account is invested in Accumulation Units
of the subaccounts of the Separate Account that you select. We value
Accumulation Units on each day the New York Stock Exchange is open. When you
invest in or transfer money to a subaccount, you receive the Accumulation Unit
price next computed after we receive your purchase payment or transfer request
at our administrative office. In the case of the your first purchase payment,
you receive the price next computed after we accept your application to
participate in the Contract.
The value of an Accumulation Unit is $10 when a subaccount begins
operation. The value of an Accumulation Unit may vary, and is determined by
multiplying its last computed value by the net investment factor for the
subaccount for the current valuation period. The net investment factor measures
(1) investment performance of Fund shares held in the subaccount, (2) any taxes
on income or gains from investments held in the subaccount, and (3) the
mortality and expense risk charge at an annual rate of 1.25%.
<PAGE>
- --------------------------------------------------------------------------------
Voting Instructions
- --------------------------------------------------------------------------------
You have the right to tell us how to vote proxies for the Fund shares in
which your purchase payments are invested through a subaccount of the Separate
Account. If the law changes and permits us to vote the Fund shares, we may do
so.
If you are a Participant, we determine the number of Fund shares that you
may vote by dividing your interest in a subaccount by the net asset value per
share of the Fund. If you are receiving annuity payments, we determine the
number of Fund shares that you may vote by dividing the reserve allocated to the
subaccount by the net asset value per share of the Fund. We change these
procedures whenever we are required to do so by law.
- --------------------------------------------------------------------------------
Investment Options in the Separate Account
- --------------------------------------------------------------------------------
Assets held in the Separate Account under a Contract are invested, at the
direction of the Owner, in one or more of the following Funds of Penn Series
Funds, Inc.:
GROWTH EQUITY FUND -- seeks long-term growth of capital and increase of
future income by investing primarily in common stocks of well established growth
companies;
VALUE EQUITY FUND -- seeks to maximize total return (capital appreciation
and income) primarily by investing in equity securities of companies believed to
be undervalued considering such factors as assets, earnings, growth potential
and cash flows;
FLEXIBLY MANAGED FUND -- seeks to maximize total return (capital
appreciation and income) by investing in common stocks, other equity securities,
corporate debt securities, and/or short term reserves, in proportions considered
appropriate in light of the availability of attractively valued individual
securities and current and expected economic and market conditions;
INTERNATIONAL EQUITY FUND -- seeks to maximize capital appreciation by
investing in a carefully selected diversified portfolio consisting primarily of
equity securities. The investments will consist principally of equity securities
of European and Pacific Basin Countries;
QUALITY BOND FUND -- seeks the highest income over the long term
consistent with the preservation of principal by investing primarily in
marketable investment grade debt securities;
HIGH YIELD BOND FUND -- seeks high current income by investing primarily
in a diversified portfolio of long term high-yield fixed income securities in
the medium to lower quality ranges; capital appreciation is a secondary
objective; such securities, which are commonly referred to as "junk" bonds,
generally involve greater risk of loss of income and principal than higher rated
securities (see accompanying Penn Series prospectus);
MONEY MARKET FUND -- seeks to preserve capital, maintain liquidity and
achieve the highest possible level of current income consistent therewith, by
investing in high quality money market instruments; an investment in the Fund is
neither insured nor guaranteed by the U.S. Government and there can be no
assurance that the Fund will be able to maintain a stable net asset value of
$1.00 per share.
INDEPENDENCE CAPITAL MANAGEMENT, INC., Horsham, Pennsylvania, is
investment adviser to each of the Funds. OpCap Advisors, New York, New York, is
investment sub-adviser to the Value Equity Fund. T. Rowe Price Associates, Inc.,
Baltimore, Maryland, is investment sub-adviser to the Flexibly Managed and High
Yield Bond Funds. Vontobel USA Inc., New York, New York, is investment
sub-adviser to the International Equity Fund.
Shares of Penn Series are also sold other variable annuity and variable
life separate accounts of Penn Mutual and its subsidiary, The Penn Insurance and
Annuity Company.
READ THE PROSPECTUS OF THE PENN SERIES FUNDS, INC. CAREFULLY BEFORE INVESTING.
<PAGE>
- --------------------------------------------------------------------------------
THE FIXED INTEREST ACCOUNTS
- --------------------------------------------------------------------------------
The Fixed Interest Accounts are part of the Company's general investment
account. Interests in the Fixed Interest Accounts are not registered under the
Securities Act of 1933 and the general account is not registered as an
investment company under the Investment Company Act of 1940. This Prospectus
generally discusses only the variable portion of the Contract. The staff of the
Securities and Exchange Commission has not reviewed the disclosure in this
Prospectus relating to the Fixed Interest Accounts. Disclosure regarding the
Fixed Interest Accounts, however, may be subject to generally applicable
provisions of the federal securities laws relating to the accuracy and
completeness of statements made in this Prospectus. See More Information about
the Fixed Interest Accounts.
- --------------------------------------------------------------------------------
THE CONTRACT
- --------------------------------------------------------------------------------
Participation in the Contract may be an attractive long-term investment
vehicle for many people. The Contract allows you to allocate your purchase
payments(s) and transfer amounts to the Separate Account, and direct investment
in one or more of the Growth Equity, Value Equity, Flexibly Managed,
International Equity, Quality Bond, High Yield Bond and Money Market Funds of
Penn Series Funds, Inc.
In addition, the Contract allows you to allocate your purchase payment(s)
and transfer amounts to one or more Fixed Interest Accounts. The Fixed Interest
Accounts are funded and guaranteed by Penn Mutual through our general account.
See THE FIXED INTEREST ACCOUNTS and MORE INFORMATION ABOUT THE FIXED INTEREST
ACCOUNTS in this Prospectus.
You decide, within Contract limits,
o how often you make a purchase payment and how much you invest;
o the Funds and/or Fixed Interest Accounts in which your purchase payments are
invested; o whether or not to transfer money among the available Funds and Fixed
Interest Accounts; o the type of annuity that we pay and who receives it; o the
Beneficiary or Beneficiaries to whom we pay death benefits: and o the amount and
frequency of withdrawals from the Contract Value.
The Contract has:
o an Accumulation Period, during which you make one or more purchase payments
and we invest your payments as you tell us; and
o an Annuity Payout Period, during which we make annuity payments to you. Your
Payout Period begins on your Annuity Date.
The Contract is available to groups of individuals, either as part of a
tax-qualified retirement plan or apart from such a plan.
We may amend the Contract at any time to comply with legal requirements.
State law may require us to obtain your approval for any Contract amendment. We
may, with approval of the Securities and Exchange Commission and the governing
state insurance department, substitute another mutual fund for any of the Funds
currently available.
You may contact us by writing The Penn Mutual Life Insurance Company,
Customer Service Group, Philadelphia, PA 19172. Or, you may call (800) 523-0650.
<PAGE>
- --------------------------------------------------------------------------------
How Do I Participate in a Contract?
- --------------------------------------------------------------------------------
Our representative will assist you in completing an application and
sending it, together with a check for your first purchase payment, to our
administrative office. All subsequent purchase payment should be sent to our
administrative office. We usually accept an application within two business days
after we receive it. If you send us an incomplete application, we will return
your purchase payment to you within five business days unless you ask us to keep
it while you complete the application.
The minimum purchase payment that we will accept is $5,000, although we
may decide to accept lower amounts. We will accept total purchase payments under
a Contract of up to $1 million. You must obtain our prior approval to make total
purchase payments in excess of $1 million.
The distributor of the Contracts is Hornor, Townsend & Kent, Inc., 600
Dresher Road, Horsham, PA 19044, a wholly-owned subsidiary of Penn Mutual.
- --------------------------------------------------------------------------------
What Type of Annuity Payments May I Choose?
- --------------------------------------------------------------------------------
You may choose: (1) an annuity for a specified number of years (not less
than 5 or more than 30); (2) a life annuity; (3) a life annuity with payments
guaranteed for 10 or 20 years; (4) a joint and survivor annuity; or (5) such
other form of annuity as we may agree upon. Your annuity payments will not start
until you choose an annuity option.
You will pay a mortality and expense risk charge during both the
Accumulation Period and Annuity Payout Period under the Contract. We charge this
fee while you receive a variable annuity even though we may no longer bear a
mortality risk.
Variable Annuity Payments. The size of your variable annuity payments will
vary depending upon the performance of the investment options that you choose
for the Annuity Payout Period. Your payments also will depend on factors such as
the size of your investment, the type of annuity you choose, the expected length
of the annuity period, and the annuity purchase rates and charges in your
Contract.
The variable annuity purchase rate assumes an annual net investment return
of 4%. If the annual net investment return during the annuity payout period is
greater than 4%, the amount of your payments will increase. If the annual net
investment return is less, the amount of your payments will decrease.
Fixed Annuity Payments. The size of your fixed annuity payments will not
change. The size of these payments is determined by a number of factors,
including the size of your investment, the form of annuity chosen, the expected
length of the annuity period.
Other Information. You or your surviving Beneficiary may change the
Annuity Date or your annuity option by giving us written notice at our
administrative office at least 30 days prior to the current Annuity Date. The
Annuity Date that you select may not be later than the first day of the next
month after the Annuitant's 85th birthday.
If your Participant's Variable Account Value is less than $2,000, we may
pay you in a lump sum in place of a variable annuity. Similarly, if your
Participant's Fixed Account Value is less than $2,000, we may pay you in a lump
sum in place of a fixed annuity. We usually make annuity payments on the first
day of each month, starting with the Annuity Date, but we will pay you
quarterly, semiannually or annually, if you prefer. If necessary, we will adjust
the frequency of your payments so that payments are at least $50 each. For
information on the treatment of annuity payments, see FEDERAL INCOME TAX
CONSIDERATIONS in this Prospectus.
<PAGE>
- --------------------------------------------------------------------------------
What Are the Death Benefits Under My Certificate?
- --------------------------------------------------------------------------------
You may designate a Beneficiary in your application. If you fail to
designate a Beneficiary, your Beneficiary will be your estate. You may change
your Beneficiary at any time before the death of the Participant.
If you die prior to the Annuity Date, we will pay your Beneficiary the
greater of:
o the sum of all purchase payments, adjusted for withdrawals and contract
transfers; or
o the sum of the Participant's Variable Account Value and the Participant's
Fixed Account Value for the value period in which proof of death and any
other required information is received at our service office.
The death benefit may be paid in lump sum or in the form of annuity
payments. We normally will pay the death benefit in a lump sum within seven days
after we receive proof of the date of death and all required information. We
will delay payment of the lump sum upon request, but not for longer than five
years.
If the Beneficiary is not the spouse of the decedent, he or she may choose
an annuity option rather than a lump sum payment. If he or she selects an
annuity option, payments must begin within one year of the decedent's death.
Payments may not be made over a period longer than the Beneficiary's life or
life expectancy (whichever is longer).
If the Beneficiary is the spouse of the decedent, he or she may select any
annuity option that was available to the decedent or apply to become the
Contract Owner.
If the Annuitant dies on or after the Annuity Date and the annuity is for
a specified number of years or for life with payments guaranteed for 10 or 20
years, the Beneficiary may elect to have the payments continue for the specified
or guaranteed period or to receive in lump sum the present value of the
remaining payments.
For information on the tax treatment of death benefits, see FEDERAL INCOME
TAX CONSIDERATIONS in this Prospectus.
- --------------------------------------------------------------------------------
MAY I TRANSFER MONEY AMONG SUBACCOUNTS AND THE FIXED INTEREST ACCOUNTS?
- --------------------------------------------------------------------------------
You may transfer amounts from one subaccount of the Separate Account to
another subaccount of the Separate Account. Within Contract limits, you also may
transfer from the subaccounts of the Separate Account to the Fixed Interest
Accounts. Transfers will be based on values at the end of the valuation period
in which the transfer request is received at our administrative office. You may
transfer from a Fixed Interest Account to subaccounts of the Separate Account or
to another Fixed Interest Account. You may make no more than four transfers in a
calendar year. No transfers may be made within 30 days of the Annuity Date. A
transfer will not be made unless the transfer request is received and any other
applicable requirements are made before the death of the Participant.
- --------------------------------------------------------------------------------
MAY I WITHDRAW ANY OF MY MONEY?
- --------------------------------------------------------------------------------
Prior to the earlier of the Annuity Date, you may withdraw all or part of
your Participant's Variable Account Value and Participant's Fixed Account Value.
A partial withdrawal must be at least $250. We normally will pay you within
seven days. You may pay tax when you make a withdrawal, including an additional
10% tax under certain circumstances. See FEDERAL INCOME TAX CONSIDERATIONS in
this Prospectus.
After the Annuity Date and election to receive annuity payments for a
specified number of years under Option 1, you may withdraw the present value of
your annuity.
If you do not tell us otherwise, the withdrawal will be taken first from
Fixed Interest Account Option B, next from Fixed Interest Account Option A, then
pro rata from your interests in the Separate Account, and finally from Fixed
Interest Account Option C.
<PAGE>
403(b) Withdrawals. There are restrictions on withdrawals from Contracts
qualifying under Section 403(b) of the Code. Generally, withdrawals attributable
to purchase payments made after December 31, 1988 pursuant to a salary reduction
plan may be made only if the Participant is over the age of 59?, leaves the
employment of the employer, dies, or becomes disabled as defined in the Code.
Withdrawals (other than withdrawals attributable to income earned on purchase
payments) may also be possible in the case of hardship as defined in the Code.
The restrictions do not apply to transfers among subaccounts and may also not
apply to transfers to other investments qualifying under Section 403(b). For
information on the tax treatment of withdrawals under Section 403(b) Contracts,
see FEDERAL INCOME TAX CONSIDERATIONS in this Prospectus.
- --------------------------------------------------------------------------------
DEFERMENT OF PAYMENTS AND TRANSFERS
- --------------------------------------------------------------------------------
We reserve the right to defer a withdrawal, a transfer of values or
annuity payments if (a) the New York Stock Exchange is closed (other than
customary weekend and holiday closings); (b) trading on the Exchange is
restricted; (c) an emergency exists such that it is not reasonably practical to
dispose of securities held in the Separate Account or to determine the value of
its assets; or (d) the Securities and Exchange Commission by order so permits
for the protection of investors. Conditions described in (b) and (c) will be
decided by, or in accordance with rules of, the Commission.
- --------------------------------------------------------------------------------
WHAT CHARGES DO I PAY?
The following discussion explains the Contract charges that you pay. Note
that you also indirectly pay the expenses of the Funds in which your interests
in the Separate Account are invested.
Administration Charges
These charges reimburse us for administering the Contracts and the
Separate Account
o We deduct from your Participant's Variable Account Value an annual contract
administration charge of $30. We deduct this charge each year on the date
specified in the Contract (and on the date the Participant's Variable Account
Value is withdrawn in full if other than the date specified). To pay this
charge, we cancel Accumulation Units credited to your Participant's Variable
Account, pro rata among the subaccounts in which you invested.
Mortality and Expense Risk Charges
o We deduct from the net asset value of the Separate Account a daily expense
risk charge equal to an annual rate of 0.5% of the daily net asset value of
the Separate Account. You pay this charge to compensate us for the risk of
guaranteeing not to increase the annual contract administration charge to
more than $30 regardless of actual administrative costs.
o We deduct a daily mortality risk charge equal to an annual rate of 0.75% of
the daily net asset value of the Separate Account. This charge is to
compensate us for the mortality-related guarantees (e.g. guarantees that the
annuity factors will never be decreased even if mortality experience is
substantially different than originally assumed) we make under your Contract.
You pay the mortality and expense risk charges during both the
accumulation and variable annuity pay-out phases of your Contract.
CONTINGENT DEFERRED SALES CHARGE
You may pay this charge if you make a full or partial withdrawal of your
Participant's Variable Account Value or Participant's Fixed Account Value, or if
you withdraw the present value of your annuity payments. Purchase payments will
be treated as withdrawn on a first-in, first-out basis. This charge pays for our
sales expenses. Sales expenses that are not covered by the deferred sales charge
are paid from our surplus, which may include proceeds from the expense and
mortality risk charges.
<PAGE>
If the contingent deferred sales charge applies, it will be 5% of the
amount withdrawn and will be made by canceling Accumulation Units credited to
the Participant's Variable Account. No charge will be made on a withdrawal if
the Participant has provided due proof of disability. Further, no charge will be
made on that portion of the first withdrawal made during an enrollment year that
does not exceed the following percentages of the sum of the Participant's
Variable Account Value and the Participant's Fixed Account Value set forth in
the following table.
Participant's Enrollment Year Percentage
- --------------------------------------------------------------------------------
Second through Seventh 10%
- --------------------------------------------------------------------------------
Eighth 25%
Ninth 50%
Tenth 75%
No charge will be made on any withdrawal after the Participant has been
enrolled for ten years.
Some states and municipalities impose premium taxes on purchase payments
received by insurance companies. Any premium taxes payable will be deducted at
the Annuity Date. Currently, they range from 0% to 3.5%.
- --------------------------------------------------------------------------------
PERFORMANCE INFORMATION
We may advertise total return performance and annual changes in
accumulation unit values.
Information on total return performance will include average annual rates
of total return for one, five and ten year periods, or lesser periods depending
on how long Fund has been available through a subaccount of the Separate
Account. Average annual total return figures will show the average annual rates
of increase or decrease in investments in the subaccounts, assuming a
hypothetical $1,000 investment at the beginning of the period, withdrawal of the
investment at the end of the period, and the deduction of all applicable fund
and Contract charges. We also may show average annual rates of total return,
assuming investment at the inception date of the underlying Funds, other amounts
invested at the beginning of the period and no withdrawal at the end of the
period. Average annual total return figures that assume no withdrawals at the
end of the period will reflect all recurring charges, but will not reflect the
contingent deferred sales charge (if applicable, the contingent deferred sales
charge would reduce the amount that may be withdrawn under the Contracts).
- --------------------------------------------------------------------------------
MORE INFORMATION ABOUT THE FIXED INTEREST OPTIONS
General Information
You may allocate or transfer all or part of your Participant's Variable
Account to one or more of the following Fixed Interest Accounts:
(1) (Option A) the One Year Guaranteed Account; and
(2) (Option B) the Fixed Holding Account;
(3) the Three Year Guaranteed Account.
The minimum amount for an allocation to the Fixed Holding Account is $50;
the minimum for an allocation to the One Year Guaranteed Account or the Three
Year Guaranteed Account is $250.
We periodically declare an effective annual interest rate applicable to
allocations to the Fixed Interest Accounts.
For each amount allocated to the Fixed Holding Account, interest will be
credited at an effective annual interest rate declared by us on the first day of
each calendar year. The declared rate of interest will apply through the end of
the calendar year in which an allocation is made to the Fixed Holding Account at
which time a new rate will be declared by Penn Mutual.
<PAGE>
For each amount allocated to the One Year Guaranteed Account and the Three
Year Guaranteed Account, interest will be credited at an annual effective
interest rate declared by us each month. The declared rate of interest will
apply through the end of the twelve month and thirty-six month periods, as
applicable, which begin on the first day of the calendar month in which the
allocation is made.
We guarantee an effective annual rate of interest on allocations to all
fixed interest options of not less than 4%. In addition, rates declared during
the first seven contract years for the One Year Guaranteed Account will not be
less than the 52 week Treasury Bill discount rate obtained from the most recent
regularly scheduled auction.
You may transfer money from a Fixed Account to subaccounts of the Separate
Account or to another Fixed Interest Account, in accordance with the terms of
the Contract. A premature withdrawal charge may be deducted from the interest
earned on any amount that is withdrawn from the Three Year Guaranteed Account.
We may defer a withdrawal or transfer from the Fixed Account for up to six
months if we reasonably determine that investment conditions are such that an
orderly sale of assets in Penn Mutual's general account is not feasible.
LOANS UNDER SECTION 403(B) CONTRACTS
If the Contract qualifies under Section 403(b) of the Code, and if state
law permits, you may be able to borrow against money that you have invested in a
Fixed Interest Account. Review your Certificate loan endorsement or consult our
representative for a complete description of the terms of the loan privilege,
including minimum and maximum loan amounts, repayment terms, and restrictions on
prepayments.
When you borrow, an amount equal to your loan will be transferred, as
collateral, from your interests in Separate Account subaccounts to an account in
our general account called the "Restricted Account." Amounts transferred to the
Restricted Account currently earn interest at a rate of 3 percentage points less
than the rate of interest that we charge you on the loan. On the anniversary of
your becoming a Participant, your interest earned in the Restricted Account will
be transferred to your Participant's Variable Account in accordance with your
current payment allocation instructions.
Loan repayments are due quarterly. When you repay part of your loan, we
transfer an amount equal to the principal portion of the repayment from the
Restricted Account to the Money Market account. You may then transfer amounts
from the Money Market account to the other investment options offered under the
Contract.
If you are in default, we must report the default to the Internal Revenue
Service as a taxable distribution and, if you are then under age 59?, as a
premature distribution that may be subject to a 10% penalty. We will repay the
loan by withdrawing the amount in default, plus interest and any applicable
contingent deferred sales charge, from your Participant's Variable Account in
accordance with your Loan Request and Agreement. If Section 403(b) prevents us
from doing this, your outstanding loan balance will continue to be charged
interest. The amount due on the loan will be withdrawn when a withdrawal becomes
permissible. While a loan balance is outstanding, any withdrawal or death
benefit proceeds must first be used to pay the loan.
Your right to borrow money under the Contract is limited by the terms of
the Contract, the Code and the Employee Retirement Income Security Act of 1974
("ERISA"). We reserve the right to suspend, modify or terminate the availability
of loans. Where there is a plan fiduciary, the fiduciary must ensure that any
Contract loans comply with plan qualification requirements, including ERISA.
- --------------------------------------------------------------------------------
FEDERAL INCOME TAX CONSIDERATIONS
The following is a general summary of some federal income tax
considerations. It is based on the law in effect on the date of this Prospectus,
which may change, and does not address state or local tax laws. For further
information, particularly as it may affect you, you should consult qualified tax
counsel.
You pay no federal income tax on increases in the value of your Contract
until money is distributed to you or your beneficiary as a withdrawal, death
benefit or an annuity payment.
Withdrawals and Death Benefits. You may pay tax on a withdrawal, and your
beneficiary may pay tax on a death benefit. The taxable portion of these
payments generally will be the amount by which the payment exceeds your cost.
Thus, you or your beneficiary generally will have taxable income to the extent
that your Participant's Variable Account Value and Participant's Fixed Account
Value exceeds your purchase payments. Ordinary income tax rates apply. If you
designate a Beneficiary who is either 37 ? years younger than you or your
grandchild, you may obtain generation skipping transfer tax treatment under
Section 2601 of the Code.
<PAGE>
Annuity Payments. The taxable portion of an annuity payment generally is
determined by a formula that establishes the ratio of your cost basis (as
adjusted for any refund feature) to the expected return under the Contract. The
taxable portion, which is the amount of the annuity payment in excess of the
cost basis, is taxed at ordinary income tax rates.
Subject to certain exceptions, a Contract must be held by or on behalf of
a natural person in order to be treated as an annuity contract under federal
income tax law and to be accorded the tax treatment described in the preceding
paragraphs. If a contract is not treated as an annuity contract for federal
income tax purposes, the income on the Contract is treated as ordinary income
received or accrued by the Contract Owner during the taxable year.
EARLY WITHDRAWALS. An additional income tax of 10% may be imposed on the
taxable portion of an early withdrawal or distribution unless one of several
exceptions apply. Generally, there will be no additional income tax on o early
withdrawals that are part of a series of substantially equal periodic payments
(not less frequently than annually) made for
life (or life expectancy) of the taxpayer or the joint lives (or joint life
expectancies) of the taxpayer and a Beneficiary; o withdrawals made on or after
age 59?; o on distributions made after death; o withdrawals attributable to
total and permanent disability.
TRANSFERS. You may pay tax if you transfer your Contract to someone else.
If the transfer is for less than adequate consideration, the taxable portion
would be your Participant's Variable Contract Value and Participant's Fixed
Contract Value at the time of transfer over your investment in the Contract at
the time. This rule does not apply to transfers between spouses or to transfers
incident to a divorce.
SEPARATE ACCOUNT DIVERSIFICATION. Section 817(h) of the Code provides that
the investments of a separate account underlying a variable annuity contract
which is not purchased under a qualified retirement plan or certain other types
of plans (or the investments of a mutual fund, the shares of which are owned by
the variable annuity separate account) must be "adequately diversified" in order
for the Contract to be treated as an annuity contract for tax purposes. Treasury
Department regulations further prescribe diversification requirements. The
Separate Account, through each of the available funds of the Penn Series Funds,
Inc., intends to comply with those requirements. The requirements are briefly
discussed in the accompanying prospectuses for the underlying funds.
The IRS has stated in published rulings that a variable contract owner
will be considered the owner of separate account assets if the contract owner
possesses incidents of ownership in those assets, such as the ability to
exercise investment control over the assets. In circumstances where the variable
contract owner is considered the owner of separate account assets, income and
gain from the assets would be includable in the variable contract owner's gross
income. In connection with the issuance of regulations on the phrase "adequate
diversification," the Treasury Department announced in 1984 that guidance would
be given, by way of regulation or ruling, on the "extent to which Policyholders
may direct their investments to particular subaccounts without being treated as
owners of underlying assets." As of the date of this Prospectus, no ruling or
regulation has been issued.
QUALIFIED PLANS. The Contracts may be used in connection with retirement
plans that qualify for special tax treatment under the Code. The plans include
individual retirement annuities qualified under Section 408(b) of the Code
(referred to as IRAs), simplified employee pension plans qualified under Section
408(k) of the Code, tax deferred annuities qualified under Section 403(b) of the
Code, state and local government deferred compensation plans qualified under
Section 457 of the Code, pension or profit sharing plans for self-employed
individuals qualified under Section 401 of the Code (referred to as H.R. 10 or
Keogh plans) and corporate pension or profit sharing plans qualified under
Section 401 of the Code, or annuity plans qualified under Section 403(a) of the
Code. Special provisions are required in some Contracts for qualification under
the Code.
<PAGE>
For some types of qualified retirement plans, there may be no cost basis
in the Contract. In this case, the total payments received may be taxable.
Before participating in a Contract under a qualified retirement plan, the tax
law provisions applicable to the particular plan should be considered.
Generally, under a nonqualified annuity or individual retirement annuity
qualified under Section 408(b), unless the Participant elects to the contrary,
any amounts that are received under the Contract that Penn Mutual believes are
includable in gross income for tax purposes will be subject to withholding to
meet federal income tax obligations. The same treatment will apply to
distributions from a qualified plan or Section 403(b) annuity that are payable
as an annuity for the life or life expectancy of one or more individuals, or for
a period of at least 10 years, or are required minimum distributions. Other
distributions from a qualified plan or a Section 403(b) annuity are subject to
federal income tax withholding, unless an election is made to make a direct
transfer to another eligible retirement plan. (Depending upon applicable State
law, however, mandatory withholding may not apply to distributions from a
Section 403(b) annuity plan maintained by a State or local government until
1994.) Distributions from a Section 457 deferred compensation plan are wages
subject to general income tax withholding requirements.
- --------------------------------------------------------------------------------
FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The consolidated financial statements of The Penn Mutual Life Insurance
Company and the financial statements of the Separate Account at December 31,
1998 and for the year then ended appear in the Statement of Additional
Information. The consolidated financial statements of Penn Mutual should be
considered only as bearing upon Penn Mutual's ability to meet its obligations
under the Contracts.
New subaccounts of the Separate Account have been established under the
Contracts subsequent to December 31, 1998. No amounts were allocated to the
subaccounts as of December 31, 1998. There are, therefore, no unit values for
the subaccounts at December 31, 1998.
- --------------------------------------------------------------------------------
STATEMENT OF ADDITIONAL INFORMATION CONTENTS
- --------------------------------------------------------------------------------
VARIABLE ANNUITY PAYMENTS
First Variable Annuity Payments
Subsequent Variable Annuity Payments
Annuity Units
Value of Annuity Units
Net Investment Factor
Assumed Interest Rate
Valuation Period
- --------------------------------------------------------------------------------
PERFORMANCE DATA
Average Annual Total Return
Annual Changes in Accumulation Unit Values
- --------------------------------------------------------------------------------
DISTRIBUTION OF CONTRACTS AND CERTIFICATES
CUSTODIAN
INDEPENDENT AUDITORS
LEGAL MATTERS
- --------------------------------------------------------------------------------
FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
<PAGE>
PART B
Information Required in a Statement
of Additional Information
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION -- MAY 1, 1999
PENN MUTUAL VARIABLE ANNUITY ACCOUNT III
THE PENN MUTUAL LIFE INSURANCE COMPANY
PHILADELPHIA, PENNSYLVANIA 19172 o TELEPHONE (800) 523-0650
This statement of additional information is not a prospectus. It should be read
in conjunction with the current prospectus for Penn Mutual Diversifier II
Variable/Fixed Contracts and Penn Mutual Diversifier II Variable Contracts or
the current prospectus for Penn Mutual Optimizer Group Variable and Fixed
Annuity Contracts, both dated May 1, 1999. The Contracts are funded through Penn
Mutual Variable Annuity Account III (referred to herein as the "Separate
Account"). To obtain a prospectus you may write to The Penn Mutual Life
Insurance Company (the "Company"), Customer Service Group, Philadelphia, PA
19172. Or, you may call, toll free, 1-800-523-0650.
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
VARIABLE ANNUITY PAYMENTS .................................................. B-2
First Variable Annuity Payments ........................................... B-2
Subsequent Variable Annuity Payments ...................................... B-2
Annuity Units ............................................................. B-2
Value of Annuity Units .................................................... B-2
Net Investment Factor ..................................................... B-2
Assumed Interest Rate ..................................................... B-3
Valuation Period .......................................................... B-3
- --------------------------------------------------------------------------------
PERFORMANCE DATA ........................................................... B-3
Average Annual Total Return ............................................... B-3
Annual Changes in Accumulation Unit Values ................................B-12
- --------------------------------------------------------------------------------
ADMINISTRATIVE AND RECORDKEEPING SERVICES ..................................B-14
- --------------------------------------------------------------------------------
DISTRIBUTION OF CONTRACTS AND CERTIFICATES .................................B-14
- --------------------------------------------------------------------------------
CUSTODIAN ..................................................................B-14
- --------------------------------------------------------------------------------
INDEPENDENT AUDITORS .......................................................B-14
- --------------------------------------------------------------------------------
LEGAL MATTERS ..............................................................B-14
- --------------------------------------------------------------------------------
FINANCIAL STATEMENTS .......................................................B-14
- --------------------------------------------------------------------------------
B-1
<PAGE>
VARIABLE ANNUITY PAYMENTS
First Variable Annuity Payment
The dollar amount of the first monthly annuity payment will be determined
by applying the net contract or variable account value to the annuity table set
forth in the contract for the annuity option chosen. The annuity tables show the
amount of the first monthly income payment under each annuity option for each
$1,000 of value applied. The annuity tables for the Diversifier II
Variable/Fixed Contracts are based on the 1983 Individual Annuity Mortality
Tables and the annuity tables for the Diversifier II Variable Contracts and the
Penn Mutual Optimizer Group Variable and Fixed Annuity Contracts are based on
the 1971 Individual Annuity Mortality Tables. The tables assume a rate of
interest of 4%. The amount of the first monthly income for each $1,000 of value
is shown at various ages.
The United States Supreme Court has ruled that life annuity payments under
an employer's retirement plan may not be based upon sex-distinct mortality
tables. Where this decision applies or where otherwise required by law, Penn
Mutual will provide annuity payments based upon unisex tables.
SUBSEQUENT VARIABLE ANNUITY PAYMENTS
The dollar amount of subsequent variable annuity payments will vary in
accordance with the investment experience of the subaccount(s) of the Separate
Account applicable to the annuity. Each subsequent variable annuity payment will
equal the number of annuity units credited, multiplied by the value of the
annuity unit for the valuation period. Penn Mutual guarantees that the amount of
each subsequent annuity payment will not be affected by variations in expense or
mortality experience.
ANNUITY UNITS
For each subaccount selected, the number of annuity units is the amount of
the first annuity payment allocated to the subaccount divided by the value of an
annuity unit for the subaccount on the annuity date. The number will not change
as a result of investment experience.
VALUE OF ANNUITY UNITS
For each subaccount selected, the value of an annuity unit was arbitrarily
set at $10 when the subaccount was established. The value may increase or
decrease from one valuation period to the next. For a valuation period, the
value of an annuity unit for a subaccount is the value of an annuity unit for
the subaccount for the last prior valuation period multiplied by the net
investment factor for the subaccount for the valuation period. The result is
then multiplied by a factor to neutralize the assumed interest rate of 4%
included in the annuity tables.
NET INVESTMENT FACTOR
For any subaccount the net investment factor for a valuation period is
determined by dividing (a) by (b) and subtracting (c):
WHERE (A) IS:
The net asset value per share of the Fund held in the subaccount, as of
the end of the valuation period
PLUS
----
The per share amount of any dividend or capital gain distributions by the
Fund if the "ex-dividend" date occurs in the valuation period
PLUS OR MINUS
-------------
A per share charge or credit, as we may determine as of the end of the
valuation period, for provision for taxes (if applicable).
WHERE (B) IS:
The net asset value per share of the Fund held in the subaccount as of the
end of the last prior valuation period
PLUS OR MINUS
-------------
The per share charge or credit for provision for taxes as of the end of the
last prior valuation period (if applicable).
WHERE (C) IS:
The sum of the daily expense risk charge and the daily mortality risk charge.
On an annual basis, the sum of such charges equals 1.25% of the daily net
asset value of the Separate Account.
B-2
<PAGE>
ASSUMED INTEREST RATE
A 4% assumed annual interest rate is included in the annuity tables in the
contracts. A higher assumption would mean a higher first annuity payment but
more slowly rising and more rapidly falling subsequent payments. A lower
assumption would have the opposite effect. If the actual net investment rate is
4% on an annual basis, annuity payments will be level.
VALUATION PERIOD
Valuation period is the period from one valuation to the next. Valuation is
performed each day the New York Stock Exchange is open for trading.
PERFORMANCE DATA
AVERAGE ANNUAL TOTAL RETURN
The performance data in the following tables include average annual total
return of subaccounts of the Separate Account computed in accordance with the
standard formula and limitations prescribed by the Securities and Exchange
Commission and average annual total return and cumulative total return
information based upon different hypothetical assumptions.
B-3
<PAGE>
Table 1A Diversifier II Variable/Fixed Annuity Contract
Average Annual Total Return On $1,000 Investment -- Computed as
Prescribed by the SEC and Assumes No Purchase Payments After the
First Contract Year
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
---------------------------------------------------------
FROM TEN FIVE ONE
INCEPTION YEARS YEARS YEAR
INCEPTION THROUGH ENDED ENDED ENDED
FUND (MANAGER) DATE* 12/31/98 12/31/98 12/31/98 12/31/98
- --------------------------------------------- ----------- ------------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Growth Equity (a)
Non-Qualified 6/1/83 12.80% 15.02% 17.68% 30.79%
Qualified 8/11/83 13.03% 15.02% 17.68% 30.79%
(Independence Capital)
Value Equity (a) 3/17/87 12.33% 13.00% 16.93% 0.98%
(OpCap)
Small-Cap Fund 5/1/95 9.21% n/a n/a (16.10%)
(OpCap)
Emerging Growth Fund (a) 5/1/97 39.79% n/a n/a 25.49%
(RS Investment Management)
Flexibly Managed (a) 7/31/84 12.81% 11.12% 10.21% (2.41%)
(T. Rowe Price)
International Equity (a) 11/2/92 12.65% n/a 8.07% 9.67%
(Vontobel)
Quality Bond (a) 3/17/87 6.82% 7.52% 5.09% 1.82%
(Independence Capital)
High Yield Bond (a) 8/6/84 8.91% 8.37% 6.22% (3.19%)
(T. Rowe Price)
Capital Appreciation (b) 5/1/93 3.63% n/a 1.39% (9.48%)
(American Century Investment Management)
Balanced Portfolio (c) 5/1/93 9.98% n/a 9.29% 3.71%
(Neuberger Berman)
Limited Maturity Bond Portfolio (c) 5/1/93 3.48% n/a 3.10% (3.62%)
(Neuberger Berman)
Partners Fund Portfolio (c) 5/1/97 13.72% n/a n/a (3.75%)
(Neuberger Berman)
Equity-Income Portfolio (d) 5/1/95 18.62% n/a n/a 3.22%
(Fidelity Investments)
Growth Portfolio (d) 5/1/95 26.19% n/a n/a 29.04%
(Fidelity Investments)
Asset Manager Portfolio (e) 5/1/95 15.66% n/a n/a 6.42%
(Fidelity Investments)
Index 500 (e) 5/1/97 28.80% n/a n/a 18.69%
(Fidelity Investments)
Emerging Markets Equity (International) (f) 5/1/97 (23.39%) n/a n/a (29.86%)
(Morgan Stanley Dean Witter)
</TABLE>
- -----------
* DATE THE UNDERLYING FUND WAS FIRST OFFERED THROUGH A SUBACCOUNT OF THE
SEPARATE ACCOUNT.
(a) PENN SERIES FUNDS, INC.
(b) AMERICAN CENTURY INVESTMENT MANAGEMENT
(c) NEUBERGER BERMAN ADVISERS MANAGEMENT TRUST
(d) VARIABLE INSURANCE PRODUCTS FUND
(e) VARIABLE INSURANCE PRODUCTS FUND II
(f) MORGAN STANLEY DEAN WITTER UNIVERSAL FUNDS, INC.
B-4
<PAGE>
Table 1B Diversifier II Variable/Fixed Annuity Contract
Average Annual Total Return On $1,000 Investment -- Computed as
Prescribed by the SEC and Assumes Purchase Payments After the First
Contract Year
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
-------------------------------------------------------
FROM TEN FIVE ONE
INCEPTION YEARS YEARS YEAR
INCEPTION THROUGH ENDED ENDED ENDED
FUND (MANAGER) DATE* 12/31/98 12/31/98 12/31/98 12/31/98
- --------------------------------------------- ----------- ------------- ---------- ---------- -------------
<S> <C> <C> <C> <C> <C>
Growth Equity (a)
Non-Qualified 6/1/83 12.80% 14.92% 17.57% 30.79%
Qualified 8/11/83 13.03% 14.92% 17.57% 30.79%
(Independence Capital)
Value Equity (a) 3/17/87 12.33% 12.90% 16.83% 0.98%
(OpCap)
Small-Cap Fund 5/1/95 9.21% n/a n/a (16.10%)
(OpCap)
Emerging Growth Fund (a) 5/1/97 39.79% n/a n/a 25.49%
(RS Investment Management)
Flexibly Managed (a) 7/31/84 12.81% 11.02% 10.10% (2.41%)
(T. Rowe Price)
International Equity (a) 11/2/92 12.40% n/a 7.97% 9.67%
(Vontobel)
Quality Bond (a) 3/17/87 6.82% 7.43% 4.99% 1.82%
(Independence Capital)
High Yield Bond (a) 8/6/84 8.91% 8.27% 6.12% (3.19%)
(T. Rowe Price)
Capital Appreciation (b) 5/1/93 3.63% n/a 1.29% (9.48%)
(American Century Investment Management)
Balanced Portfolio (c) 5/1/93 9.81% n/a 9.19% 3.71%
(Neuberger Berman)
Limited Maturity Bond Portfolio (c) 5/1/93 3.48% n/a 3.00% (3.62%)
(Neuberger Berman)
Partners Fund Portfolio (c) 5/1/97 13.41% n/a n/a (3.75%)
(Neuberger Berman)
Equity-Income Portfolio (d) 5/1/95 18.62% n/a n/a 3.22%
(Fidelity Investments)
Growth Portfolio (d) 5/1/95 26.19% n/a n/a 29.04%
(Fidelity Investments)
Asset Manager Portfolio (e) 5/1/95 15.38% n/a n/a 6.42%
(Fidelity Investments)
Index 500 (e) 5/1/97 27.75% n/a n/a 18.69%
(Fidelity Investments)
Emerging Markets Equity (International) (f) 5/1/97 (23.39%) n/a n/a (29.86%)
(Morgan Stanley Dean Witter)
</TABLE>
- -----------
* DATE THE UNDERLYING FUND WAS FIRST OFFERED THROUGH A SUBACCOUNT OF THE
SEPARATE ACCOUNT.
(a) PENN SERIES FUNDS, INC.
(b) AMERICAN CENTURY INVESTMENT MANAGEMENT
(c) NEUBERGER BERMAN ADVISERS MANAGEMENT TRUST
(d) VARIABLE INSURANCE PRODUCTS FUND
(e) VARIABLE INSURANCE PRODUCTS FUND II
(f) MORGAN STANLEY DEAN WITTER UNIVERSAL FUNDS, INC.
B-5
<PAGE>
Table 1C Diversifier II Variable Annuity Contract
Average Annual Total Return On $1,000 Investment -- Computed as
Prescribed by the SEC
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
-------------------------------------------------------
FROM TEN FIVE ONE
INCEPTION YEARS YEARS YEAR
INCEPTION THROUGH ENDED ENDED ENDED
FUND (MANAGER) DATE* 12/31/98 12/31/98 12/31/98 12/31/98
- --------------------------------------------- ----------- ------------- ---------- ---------- -------------
<S> <C> <C> <C> <C> <C>
Growth Equity (a)
Non-Qualified 6/1/83 12.80% 14.88% 17.81% 34.60%
Qualified 8/11/83 13.03% 14.88% 17.81% 34.60%
(Independence Capital)
Value Equity (a) 3/17/87 12.33% 12.83% 17.05% 2.89%
(OpCap)
Small-Cap Fund (a) 5/1/95 9.24% n/a n/a (14.43%)
(OpCap)
Emerging Growth Fund (a) 5/1/97 42.16% n/a n/a 28.93%
(RS Investment Management)
Flexibly Managed (a) 7/31/84 12.81% 10.93% 10.14% (0.55%)
(T. Rowe Price)
International Equity (a) 11/2/92 12.37% n/a 7.94% 12.07%
(Vontobel)
Quality Bond (a) 3/17/87 6.82% 7.26% 4.85% 3.73%
(Independence Capital)
High Yield Bond (a) 8/6/84 8.91% 8.12% 6.03% (1.35%)
(T. Rowe Price)
Capital Appreciation (b) 5/1/93 3.63% n/a 1.00% (7.73%)
(American Century Investment Management)
Balanced Portfolio (c) 5/1/93 9.41% n/a 9.20% 5.69%
(Neuberger Berman)
Limited Maturity Bond Portfolio (c) 5/1/93 3.48% n/a 2.78% (1.78%)
(Neuberger Berman)
Partners Fund Portfolio (c) 5/1/97 12.86% n/a n/a (1.92%)
(Neuberger Berman)
Equity-Income Portfolio (d) 5/1/95 18.62% n/a n/a 5.17%
(Fidelity Investments)
Growth Portfolio (d) 5/1/95 26.19% n/a n/a 32.72%
(Fidelity Investments)
Asset Manager Portfolio (e) 5/1/95 14.73% n/a n/a 8.58%
(Fidelity Investments)
Index 500 (e) 5/1/97 26.97% n/a n/a 21.68%
(Fidelity Investments)
Emerging Markets Equity (International) (f) 5/1/97 (23.27%) n/a n/a (28.39%)
(Morgan Stanley Dean Witter)
</TABLE>
- -----------
* DATE THE UNDERLYING FUND WAS FIRST OFFERED THROUGH A SUBACCOUNT OF THE
SEPARATE ACCOUNT.
(a) PENN SERIES FUNDS, INC.
(b) AMERICAN CENTURY INVESTMENT MANAGEMENT
(c) NEUBERGER BERMAN ADVISERS MANAGEMENT TRUST
(d) VARIABLE INSURANCE PRODUCTS FUND
(e) VARIABLE INSURANCE PRODUCTS FUND II
(f) MORGAN STANLEY DEAN WITTER UNIVERSAL FUNDS, INC.
B-6
<PAGE>
Table 1D Penn Mutual Optimizer Group Variable and Fixed Annuity Contract
Average Annual Total Return On $1,000 Investment -- Computed as
Prescribed by the SEC
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
---------------------------------------------------------
FROM
INCEPTION TEN YEARS FIVE YEARS ONE YEAR
INCEPTION DATE THROUGH ENDED ENDED ENDED
FUND (MANAGER) DATE* 12/31/98 12/31/98 12/31/98 12/31/98
- ------------------------------------ ----------- -------------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Growth Equity
Nonqualified Plans (a) 6/1/83 12.80% 14.88% 17.24% 33.31%
Quality Plans (a) 8/11/83 13.03% 14.88% 17.24% 33.31%
(Independence Capital Management)
Value Equity (a) 3/17/87 12.33% 12.86% 16.50% 2.93%
(OpCap Advisors)
Flexibly Managed (a) 7/31/84 12.81% 10.98% 9.79% (0.53%)
(T. Rowe Price Associates)
Quality Bond (a) 3/17/87 6.82% 7.39% 4.70% 3.78%
(Independence Capital Management)
High Yield Bond (a) 8/6/84 8.91% 8.23% 5.83% (1.33%)
(T. Rowe Price Associates)
International Equity (a) 11/2/92 11.97% n/a 7.67% 11.78%
(Vontobel USA)
</TABLE>
- -----------
* DATE THE UNDERLYING FUND WAS FIRST OFFERED THROUGH A SUBACCOUNT OF THE
SEPARATE ACCOUNT.
(a) PENN SERIES FUNDS, INC.
B-7
<PAGE>
Table 2A Diversifier II Variable/Fixed Annuity Contract and Diversifier II
Variable Annuity Contract Average Annual Total Return On $1,000
Investment -- Assumes No Contingent Deferred Sales Charge, Investment
on Inception Date of the Underlying Fund, and No Purchase Payments
Made After the First Contract Year Under the Variable/Fixed Contract
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
---------------------------------------------------------
FROM TEN FIVE ONE
INCEPTION YEARS YEARS YEAR
INCEPTION THROUGH ENDED ENDED ENDED
FUND (MANAGER) DATE* 12/31/98 12/31/98 12/31/98 12/31/98
- --------------------------------------------- ----------- ------------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Growth Equity (a)
Non-Qualified 06/01/83 12.80% 15.02% 18.32% 39.60%
Qualified 08/11/83 13.03% 15.02% 18.32% 39.60%
(Independence Capital)
Value Equity (a) 03/17/87 12.33% 13.00% 17.58% 7.80%
(OpCap)
Small-Cap Fund 03/01/95 9.81% n/a n/a (10.44%)
(OpCap)
Emerging Growth Fund (a) 05/01/97 44.52% n/a n/a 33.93%
(RS Investment Management)
Flexibly Managed (a) 07/31/84 12.81% 11.12% 10.81% 4.19%
(T. Rowe Price)
International Equity (a) 11/01/92 12.81% n/a 8.67% 17.07%
(Vontobel)
Quality Bond (a) 03/17/87 6.82% 7.52% 5.67% 8.67%
(Independence Capital)
High Yield Bond (a) 08/06/84 8.91% 8.37% 6.81% 3.33%
(T. Rowe Price)
Capital Appreciation (b) 11/20/87 6.80% 7.24% 1.94% (3.40%)
(American Century Investment Management)
Balanced Portfolio (c) 02/28/89 9.85% n/a 9.89% 10.69%
(Neuberger Berman)
Limited Maturity Bond Portfolio (c) 09/10/84 6.43% 5.29% 3.66% 2.87%
(Neuberger Berman)
Partners Fund Portfolio (c) 03/22/94 18.37% n/a n/a 2.73%
(Neuberger Berman)
Equity-Income Portfolio (d) 10/09/86 12.88% 14.06% 17.08% 10.17%
(Fidelity Investments)
Growth Portfolio (d) 10/09/86 15.87% 17.89% 20.18% 37.72%
(Fidelity Investments)
Asset Manager Portfolio (e) 09/06/89 11.55% n/a 10.37% 13.58%
(Fidelity Investments)
Index 500 (e) 08/27/92 19.95% n/a 22.44% 26.68%
(Fidelity Investments)
Emerging Markets Equity (International) (f) 10/01/96 (13.39%) n/a n/a (25.14%)
(Morgan Stanley Dean Witter)
</TABLE>
- -----------
* DATE THE UNDERLYING FUND WAS ESTABLISHED.
(a) PENN SERIES FUNDS, INC.
(b) AMERICAN CENTURY VARIABLE PORTFOLIOS, INC.
(c) NEUBERGER BERMAN ADVISERS MANAGEMENT TRUST
(d) VARIABLE INSURANCE PRODUCTS FUND
(e) VARIABLE INSURANCE PRODUCTS FUND II
(f) MORGAN STANLEY DEAN WITTER UNIVERSAL FUNDS, INC.
B-8
<PAGE>
Table 2B Penn Mutual Optimizer Group Variable and Fixed Annuity Contract
Average Annual Total Return On $1,000 Investment -- Assumes No
Contingent Deferred Sales Charge and Investment on Inception Date of
Underlying Fund
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
---------------------------------------------------
FROM TEN FIVE ONE
INCEPTION YEARS YEARS YEAR
INCEPTION THROUGH ENDED ENDED ENDED
FUND (MANAGER) DATE* 12/31/98 12/31/98 12/31/98 12/31/98
- ------------------------------------- ----------- ----------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Growth Equity
Nonqualified Plans (a) 06/01/83 12.80% 15.02% 18.32% 39.60%
Qualified Plans (a) 08/11/83 13.03% 15.02% 18.32% 39.60%
(Independence Capital Management)
Value Equity (a) 03/17/87 12.33% 13.00% 17.58% 7.80%
(OpCap Advisors)
Flexibly Managed (a) 07/31/84 12.81% 11.12% 10.81% 4.19%
(T. Rowe Price Associates)
Quality Bond (a) 03/17/87 6.82% 7.52% 5.67% 8.67%
(Independence Capital Management)
High Yield Bond (a) 08/06/84 8.91% 8.37% 6.81% 3.33%
(T. Rowe Price Associates)
International Equity (a) 11/01/92 12.81% n/a 8.67% 17.07%
(Vontobel USA)
</TABLE>
- -----------
* DATE THE UNDERLYING FUND WAS ESTABLISHED.
(a) PENN SERIES FUNDS, INC.
B-9
<PAGE>
Table 3A Diversifier II Variable/Fixed Annuity Contract and Diversifier II
Variable Contract Average Annual Total Return On $10,000 Investment --
Assumes No Contingent Deferred Sales Charge and Investment on the
Inception Date of Underlying Fund, and No Purchase Payment After the
First Contract Year Under the Variable Fixed Contract
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
-------------------------------------------------------
FROM TEN FIVE ONE
INCEPTION YEARS YEARS YEAR
INCEPTION THROUGH ENDED ENDED ENDED
FUND (MANAGER) DATE* 12/31/98 12/31/98 12/31/98 12/31/98
- --------------------------------------------- ----------- ------------- ---------- ---------- -------------
<S> <C> <C> <C> <C> <C>
Growth Equity (a)
Non-Qualified 06/01/83 12.95% 15.20% 18.57% 39.88%
Qualified 08/11/83 13.19% 15.20% 18.57% 39.88%
(Independence Capital)
Value Equity (a) 03/17/87 12.59% 13.27% 17.87% 8.18%
(OpCap)
Small-Cap Fund 03/01/95 9.92% n/a n/a (10.30%)
(OpCap)
Emerging Growth Fund (a) 05/01/97 44.59% n/a n/a 34.01%
(RS Investment Management)
Flexibly Managed (a) 07/31/84 13.06% 11.47% 11.25% 4.72%
(T. Rowe Price)
International Equity (a) 11/01/92 13.04% n/a 8.93% 17.34%
(Vontobel)
Quality Bond (a) 03/17/87 6.91% 7.60% 5.77% 8.79%
(Independence Capital)
High Yield Bond (a) 08/06/84 9.00% 8.48% 6.95% 3.48%
(T. Rowe Price)
Capital Appreciation (b) 11/20/87 6.82% 7.26% 1.96% ( 3.37%)
(American Century Investment Management)
Balanced Portfolio (c) 02/28/89 9.91% n/a 9.97% 10.77%
(Neuberger Berman)
Limited Maturity Bond Portfolio (c) 09/10/84 6.56% 5.44% 3.85% 3.07%
(Neuberger Berman)
Partners Fund Portfolio (c) 03/22/94 18.50% n/a n/a 2.90%
(Neuberger Berman)
Equity-Income Portfolio (d) 10/09/86 12.92% 14.10% 17.13% 10.23%
(Fidelity Investments)
Growth Portfolio (d) 10/09/86 15.89% 17.91% 20.21% 37.75%
(Fidelity Investments)
Asset Manager Portfolio (e) 09/06/89 11.57% n/a 10.41% 13.62%
Fidelity Investments)
Index 500 (e) 08/27/92 19.99% n/a 22.48% 26.73%
(Fidelity Investments)
Emerging Markets Equity (International) (f) 10/01/96 (13.35%) n/a n/a (25.12%)
(Morgan Stanley Dean Witter)
</TABLE>
- -----------
* DATE THE UNDERLYING FUND WAS ESTABLISHED.
(a) PENN SERIES FUNDS, INC.
(b) AMERICAN CENTURY VARIABLE PORTFOLIOS, INC.
(c) NEUBERGER BERMAN ADVISERS MANAGEMENT TRUST
(d) VARIABLE INSURANCE PRODUCTS FUND
(e) VARIABLE INSURANCE PRODUCTS FUND II
(f) MORGAN STANLEY DEAN WITTER UNIVERSAL FUNDS, INC.
B-10
<PAGE>
Table 3B Penn Mutual Optimizer Group Variable and Fixed Annuity Contract
Average Annual Total Return On $10,000 Investment -- Assumes No
Contingent Deferred Sales Charge and Investment on Inception Date of
Underlying Fund
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
--------------------------------------------------------------------
FROM
INCEPTION
DATE TEN YEARS FIVE YEARS ONE YEAR
INCEPTION THROUGH ENDED ENDED ENDED
FUND (MANAGER) DATE* 12/31/98 12/31/98 12/31/98 12/31/98
- ------------------------------------- ----------- ----------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Growth Equity
Quality Plans (a) 06/01/83 12.95% 15.20% 18.57% 39.88%
Nonqualified Plans (a) 08/11/83 13.19% 15.20% 18.57% 39.88%
(Independence Capital Management)
Value Equity (a) 03/17/87 12.59% 13.27% 17.87% 8.18%
(OpCap Advisors)
Flexibly Managed (a) 07/31/84 13.06% 11.47% 11.25% 4.72%
(T. Rowe Price Associates)
Quality Bond (a) 03/17/87 6.91% 7.60% 5.77% 8.79%
(Independence Capital Management)
High Yield Bond (a) 08/06/84 9.00% 8.48% 6.95% 3.48%
(T. Rowe Price Associates)
International Equity (a) 11/01/92 13.04% N/A 8.93% 17.34%
(Vontobel USA)
</TABLE>
- -----------
* DATE THE UNDERLYING FUND WAS ESTABLISHED.
(a) PENN SERIES FUNDS, INC.
Average annual total returns in Tables 1A, 1B, 1C and 1D are computed by finding
the average annual compounded rates of return over the periods shown that would
equate the initial amount invested to the withdrawal value, in accordance with
the following formula: P(1 + T) n = ERV. In the formula, P is a hypothetical
investment payment of $1,000; T is the average annual total return; n is the
number of years; and ERV is the withdrawal value at the end of the periods
shown. The computation assumes that the contract or account adminstration charge
is allocated equally across all available subaccounts by an average Contract
Owner or Participant and that the Contract Value or Participant's Variable
Account Value is of average size. The returns are computed according to the
formula assumptions prescribed by the SEC.
Average annual rates of total return in Tables 2A, 2B, 3A and 3B are computed by
finding the average annual compounded rates of return over the periods shown
that would equate the initial amount invested to the Contract account value at
the end of the periods shown, in accordance with the following formula: P(1 + T)
n = FV. In the formula, P is a hypothetical investment of $1,000 in Tables 2A
and 2B and $10,000 in Tables 3A and 3B; T is the average annual total return; n
is the number of years; and FV is the Contract Value. The computations assume
that no withdrawals were made at the end of the periods. The returns also show
investment performance from the inception date of the Fund, which may predate
the date the Separate Account began investing in the Fund. The returns are based
upon hypothetical assumptions which are not prescribed by the SEC.
B-11
<PAGE>
Annual Rate of Change in Accumulation Unit Values
Table 4A Diversifier II -- Variable/Fixed Annuity Contract and Variable Annuity
Contract Annual Rate of Change in Accumulation Unit Values
Annual Rate of Changes in Accumulation Unit Values for each of the
subaccounts of the Separate Account investing in each of the Funds are shown in
the Table. The returns show investment performance from the inception date of
the Fund, which may predate the date the Separate Account began investing in the
Fund.
<TABLE>
<CAPTION>
ANNUAL RATE OF CHANGE IN ACCUMULATION UNIT VALUES
--------------------------------------------------------------------
FUND (MANAGER) 1998 1997 1996 1995 1994
- --------------------------------------------- ------------- ------------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Growth Equity (a)
Qualified Plans 39.91% 25.17% 18.27% 24.88% 9.26%
Nonqualified Plans 39.91% 25.17% 18.27% 24.88% 9.26%
(Independence Capital Management)
Value Equity (a) 8.23% 23.42% 23.63% 35.77% 1.65%
(OpCap Advisors)
Small Capitalization (a) (10.29%) 21.50% 18.26% 11.71% N/A
(OpCap Advisors)
Emerging Growth Fund (a) 34.02% 38.06% N/A N/A N/A
(RS Investment Management)
Flexibly Managed (a) 4.77% 14.22% 14.92% 20.76% 2.85%
(T. Rowe Price Associates)
International Equity (a) 17.37% 9.03% 15.41% 13.39% 7.47%
(Vontobel USA)
Quality Bond (a) 8.80% 6.69% 2.84% 18.65% 6.47%
(Independence Capital Management)
High Yield Bond (a) 3.49% 14.35% 12.46% 14.97% 8.48%
(T. Rowe Price Associates)
Money Market (a) 3.72% 3.85% 3.69% 4.21% 2.43%
(Independence Capital Management)
Capital Appreciation (b) (3.37%) (4.46%) 5.51% 29.47% (2.40%)
(American Century Investment
Management)
Balanced Portfolio (c) 10.78% 17.97% 5.56% 22.22% (4.56%)
(Neuberger Berman)
Limited Maturity Bond (c) 3.09% 5.41% 3.01% 9.56% (1.39%)
(Neuberger Berman)
Partners Fund Portfolio (c) 2.91% 24.11% N/A N/A N/A
(Neuberger Berman)
Equity Income (d) 10.24% 26.52% 12.86% 19.20% N/A
(Fidelity Investors Research)
Growth (d) 37.76% 21.95% 13.28% 23.59% N/A
(Fidelity Investors Research)
Asset Manager (e) 13.62% 19.15% 13.18% 11.53% N/A
(Fidelity Investors Research)
Index 500 (e) 26.73% 21.62% N/A N/A N/A
Fidelity Investors Research)
Emerging Markets Equity (International) (f) (25.12%) (10.25%) N/A N/A N/A
(Morgan Stanley Dean Witter)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Annual Rate of Change in Accumulation Unit Values
----------------------------------------------------------------------
Fund (Manager) 1993 1992 1991 1990 1989
- --------------------------------------------- ------------- ---------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Growth Equity (a)
Qualified Plans (11.00%) 4.60% (33.10%) 12.30% 29.60%
Nonqualified Plans (11.00%) 4.60% (33.10%) 12.30% 29.60%
(Independence Capital Management)
Value Equity (a) 5.70% 13.40% 26.10% 9.30% (11.50%)
(OpCap Advisors)
Small Capitalization (a) N/A N/A N/A N/A N/A
(OpCap Advisors)
Emerging Growth Fund (a) N/A N/A N/A N/A N/A
(RS Investment Management)
Flexibly Managed (a) 14.40% 8.20% 20.10% 2.10% (19.60%)
(T. Rowe Price Associates)
International Equity (a) (36.40%) N/A N/A N/A N/A
(Vontobel USA)
Quality Bond (a) (10.30%) 5.20% 14.20% 6.60% 11.30%
(Independence Capital Management)
High Yield Bond (a) (18.30%) 14.40% 35.20% (10.00%) 1.90%
(T. Rowe Price Associates)
Money Market (a) 1.30% 1.80% 4.60% 5.60% 7.60%
(Independence Capital Management)
Capital Appreciation (b) N/A N/A N/A N/A N/A
(American Century Investment
Management)
Balanced Portfolio (c) N/A N/A N/A N/A N/A
(Neuberger Berman)
Limited Maturity Bond (c) N/A N/A N/A N/A N/A
(Neuberger Berman)
Partners Fund Portfolio (c) N/A N/A N/A N/A N/A
(Neuberger Berman)
Equity Income (d) N/A N/A N/A N/A N/A
(Fidelity Investors Research)
Growth (d) N/A N/A N/A N/A N/A
(Fidelity Investors Research)
Asset Manager (e) N/A N/A N/A N/A N/A
(Fidelity Investors Research)
Index 500 (e) N/A N/A N/A N/A N/A
Fidelity Investors Research)
Emerging Markets Equity (International) (f) N/A N/A N/A N/A N/A
(Morgan Stanley Dean Witter)
</TABLE>
- -----------
(a) PENN SERIES FUNDS, INC.
(b) AMERICAN CENTURY VARIABLE PORTFOLIOS, INC.
(c) NEUBERGER BERMAN ADVISERS MANAGEMENT TRUST.
(d) FIDELITY INVESTMENTS' VARIABLE INSURANCE PRODUCTS FUND.
(e) FIDELITY INVESTMENTS' VARIABLE INSURANCE PRODUCTS FUND II.
(f) MORGAN STANLEY DEAN WITTER UNIVERSAL FUNDS, INC.
B-12
<PAGE>
Table 4B Penn Mutual Optimizer Group Variable and Fixed Annuity Contract Annual
Rate of Change in Accumulation Unit Values
<TABLE>
<CAPTION>
ANNUAL RATE OF CHANGE IN ACCUMULATION UNIT VALUES
--------------------------------------------------------------
FUND (MANAGER) 1998 1997 1996 1995 1994
- -------------------------- ----------- ----------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Growth Equity (a)
Quality 39.91% 25.17% 18.27% 24.88% 9.26%
Nonqualified 39.91% 25.17% 18.27% 24.88% 9.26%
(Independence
Capital
Management)
Value Equity (a) 8.23% 23.42% 23.63% 35.77% 1.65%
(OpCap Advisors)
Flexibly Managed (a) 4.77% 14.22% 14.92% 20.76% 2.85%
(T. Rowe Price
Associates)
Quality Bond (a) 8.80% 6.69% 2.84% 18.65% 6.47%
(Independence
Capital
Management)
High Yield Bond (a) 3.49% 14.35% 12.46% 14.97% 8.48%
(T. Rowe Price
Associates)
International Equity (a) 17.37% 9.03% 15.41% 13.39% 7.47%
(Vontobel USA)
Money Market (a) 3.72% 3.85% 3.69% 4.21% 2.43%
(Independence
Capital
Management)
<CAPTION>
ANNUAL RATE OF CHANGE IN ACCUMULATION UNIT VALUES
----------------------------------------------------------------------
FUND (MANAGER) 1993 1992 1991 1990 1989
- -------------------------- ------------- ---------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Growth Equity (a)
Quality (11.00%) 4.60% (33.10%) 12.30% 29.60%
Nonqualified (11.00%) 4.60% (33.10%) 12.30% 29.60%
(Independence
Capital
Management)
Value Equity (a) 5.70% 13.40% 26.10% 9.30% (11.50%)
(OpCap Advisors)
Flexibly Managed (a) 14.40% 8.20% 20.10% 2.10% (19.60%)
(T. Rowe Price
Associates)
Quality Bond (a) (10.30%) 5.20% 14.20% 6.60% 11.30%
(Independence
Capital
Management)
High Yield Bond (a) (18.30%) 14.40% 35.20% (10.00%) 1.90%
(T. Rowe Price
Associates)
International Equity (a) (36.40%) N/A N/A N/A N/A
(Vontobel USA)
Money Market (a) 1.30% 1.80% 4.60% 5.60% 7.60%
(Independence
Capital
Management)
</TABLE>
- -----------
* DATE THE UNDERLYING FUND WAS ESTABLISHED.
(a) PENN SERIES FUNDS, INC.
- --------------------------------------------------------------------------------
The performance information set forth above is for past performance and is
not an indication or representation of future performance.
- --------------------------------------------------------------------------------
B-13
<PAGE>
ADMINISTRATIVE AND RECORDKEEPING SERVICES
- --------------------------------------------------------------------------------
The Company performs all data processing, recordkeeping and other related
services with respect to the Contracts and the Separate Accounts.
- --------------------------------------------------------------------------------
DISTRIBUTIONS OF CONTRACTS AND CERTIFICATES
Hornor, Townsend & Kent, Inc. is a wholly owned subsidiary of Penn Mutual,
serves as principal underwriter of the combination variable and fixed annuity
contracts and the variable annuity contracts. The address of Hornor, Townsend &
Kent, Inc. is 600 Dresher Road, Horsham, PA 19044. For 1998, 1997, and 1996
Penn Mutual paid Hornor, Townsend & Kent, Inc. underwriting commissions of
$450,661, $436,619 and $403,603, respectively.
- --------------------------------------------------------------------------------
CUSTODIAN
Penn Mutual is custodian of the assets held in the Separate Account.
- --------------------------------------------------------------------------------
INDEPENDENT AUDITORS
Ernst & Young LLP serve as independent auditors of the Separate Account
and the Company. Their offices are located at 2001 Market Street, Suite 4000,
Philadelphia, PA 19103.
- --------------------------------------------------------------------------------
LEGAL MATTERS
Morgan, Lewis & Bockius LLP of Philadelphia, Pennsylvania, has provided
advice on certain matters relating to the federal securities laws and the
offering of the Contracts and Certificates.
- --------------------------------------------------------------------------------
FINANCIAL STATEMENTS
The consolidated financial statements of The Penn Mutual Life Insurance
Company and the financial statements of the Separate Account at December 31,
1998 and for the year then ended appear in the Statement of Additional
Information. The consolidated financial statements of Penn Mutual should be
considered only as bearing upon Penn Mutual's ability to meet its obligations
under the Contracts.
New subaccounts of the Separate Account have been established under the
Contracts subsequent to December 31, 1998. No amounts were allocated to the
subaccounts as of December 31, 1998. There are, therefore, no unit values for
the subaccounts at December 31, 1998.
B-14
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
THE PENN MUTUAL LIFE INSURANCE COMPANY AND CONTRACT OWNERS OF PENN MUTUAL
VARIABLE ANNUITY ACCOUNT III
We have audited the accompanying statement of assets and liabilities of Penn
Mutual Variable Annuity Account III (comprising, respectively, Money Market
Fund, Quality Bond Fund, High Yield Bond Fund, Growth Equity Fund, Value Equity
Fund, Flexibly Managed Fund, International Equity Fund, Small Capitalization
Fund, Emerging Growth Fund, Balanced Portfolio, Limited Maturity Bond Portfolio,
Partners Portfolio, Capital Appreciation Portfolio, Equity Income Portfolio,
Growth Portfolio, Asset Manager Portfolio, Index 500 Portfolio, and Emerging
Markets Equity Portfolio) as of December 31, 1998, and the related statement of
operations and statements of changes in net assets for each of periods indicted
therein. These financial statements are the responsibility of the management of
Penn Mutual Variable Annuity Account III. Our responsibility is to express an
opinion on these financial statements based on our audit.
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. Our procedures included
confirmation of securities owned as of December 31, 1998, by correspondence with
the transfer agents. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of each of the respective
portfolios constituting the Penn Mutual Variable Annuity Account III at December
31, 1998, the results of their operations and changes in their net assets for
each of the periods indicated therein, in conformity with generally accepted
accounting principles.
Philadelphia, Pennsylvania ERNST & YOUNG LLP
April 2, 1999
B-15
<PAGE>
- --------------------------------------------------------------------------------
PENN MUTUAL VARIABLE ANNUITY ACCOUNT III
STATEMENT OF ASSETS AND LIABILITIES -- DECEMBER 31, 1998
<TABLE>
<CAPTION>
Money Quality High Yield Growth Equity
Total Market Fund++ Bond Fund+ Bond Fund+ Fund+
----------------- --------------- ------------- ------------- --------------
<S> <C> <C> <C> <C> <C>
Investment in Common Stock
Number of Shares .................... 29,226,007 3,531,561 4,932,997 5,192,077
Cost ................................ $ 997,139,079 $29,226,007 $36,316,362 $46,980,987 $107,364,728
Assets:
Investments at market value ......... $1,223,619,652 $29,226,007 $36,728,233 $45,334,241 $160,331,330
Dividends receivable ................ 115,690 115,690 -- -- --
Liabilities:
Due to (from) The Penn Mutual
Life Insurance Company ............ 421,701 (25,724) 11,770 15,896 66,829
-------------- ----------- ----------- ----------- ------------
Net Assets ........................... $1,223,313,641 $29,367,421 $36,716,463 $45,318,345 $160,264,501
============== =========== =========== =========== ============
</TABLE>
- --------------------------------------------------------------------------------
PENN MUTUAL VARIABLE ANNUITY ACCOUNT III
STATEMENT OF OPERATIONS -- FOR THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
Money Quality High Yield Growth Equity
Total Market Fund+ Bond Fund+ Bond Fund+ Fund+
-------------- --------------- ------------- --------------- ----------------
<S> <C> <C> <C> <C> <C>
Investment Income:
Dividends ............................ $ 22,196,411 $1,164,353 $ 1,661,348 $ 3,575,971 $ 107,422
Expense:
Mortality and expense risk
charges ............................ 14,451,169 300,924 420,725 560,207 1,750,208
------------ ---------- ----------- ------------ ------------
Net investment income (loss) ......... 7,745,242 863,429 1,240,623 3,015,764 (1,642,786)
------------ ---------- ----------- ------------ ------------
Realized and Unrealized Gains
(Losses) on Investments:
Realized gains (losses) from
redemption of fund shares ............ 890,703 -- 1,912 (3,290) 534,595
Capital gains distributions ........... 90,233,970 -- 1,081,936 -- 16,777,825
------------ ---------- ----------- ------------ ------------
Net realized gains (losses) from
investment transactions .............. 91,124,673 -- 1,083,848 (3,290) 17,312,420
Net change in unrealized
appreciation/depreciation of
investments .......................... 31,850,409 -- 469,323 (1,514,889) 29,742,092
------------ ---------- ----------- ------------ ------------
Net realized and unrealized gains
(losses) on investments .............. 122,975,082 -- 1,553,171 (1,518,179) 47,054,512
------------ ---------- ----------- ------------ ------------
Net increase (decrease) in
net assets resulting from
operations ........................... $130,720,324 $ 863,429 $ 2,793,794 $ 1,497,585 $ 45,411,726
============ ========== =========== ============ ============
</TABLE>
- -----------
+ INVESTMENT IN PENN SERIES FUNDS, INC.
++ INVESTMENT IN NEUBERGER BERMAN ADVISERS MANAGEMENT TRUST
+++ INVESTMENT IN AMERICAN CENTURY VARIABLE PORTFOLIOS, INC.
++++ INVESTMENT IN FIDELITY INVESTMENTS' VARIABLE INSURANCE PRODUCTS FUNDS
I AND II
+++++ INVESTMENT IN MORGAN STANLEY DEAN WITTER UNIVERSAL FUNDS, INC.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
B-16
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Flexibly Small Emerging
Value Equity Managed International Capitalization Growth
Fund+ Fund+ Equity Fund+ Fund+ Fund+
- --------------- --------------- --------------- ---------------- --------------
<S> <C> <C> <C> <C>
9,698,894 18,571,284 4,435,929 1,469,303 829,633
$ 146,389,313 $304,396,066 $60,456,004 $19,240,367 $12,098,508
$ 217,158,244 $340,040,217 $81,532,380 $18,821,773 $14,460,495
-- -- -- -- --
80,934 122,232 30,165 6,425 6,150
------------- ------------ ----------- ----------- -----------
$ 217,077,310 $339,917,985 $81,502,215 $18,815,348 $14,454,345
============= ============ =========== =========== ===========
</TABLE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Flexibly Small Emerging
Value Equity Managed International Capitalization Growth
Fund+ Fund+ Equity Fund+ Fund+ Fund+
- ---------------- ---------------- --------------- ---------------- ---------------
<S> <C> <C> <C> <C>
$ 2,711,886 $ 9,667,960 $ 749,841 $ 118,336 $ --
2,747,364 4,371,907 1,002,331 232,311 115,686
------------ ------------- ------------ ----------- -----------
(35,478) 5,296,053 (252,490) (113,975) (115,686)
------------ ------------- ------------ ----------- -----------
(253,955) 470,070 572,081 (73,896) (20,414)
17,723,221 34,454,748 2,613,424 307,141 2,258
------------ ------------- ------------ ----------- -----------
17,469,266 34,924,818 3,185,505 233,245 (18,156)
(1,405,794) (24,572,191) 9,485,903 (2,387,287) 2,702,071
------------ ------------- ------------ ----------- -----------
16,063,472 10,352,627 12,671,408 (2,154,042) 2,683,915
------------ ------------- ------------ ----------- -----------
$ 16,027,994 $ 15,648,680 $ 12,418,918 ($ 2,268,017) $ 2,568,229
============ ============= ============ =========== ===========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
B-17
<PAGE>
- --------------------------------------------------------------------------------
PENN MUTUAL VARIABLE ANNUITY ACCOUNT III
STATEMENT OF ASSETS AND LIABILITIES -- DECEMBER 31, 1998 (CONT'D.)
<TABLE>
<CAPTION>
Limited Capital
Balanced Maturity Bond Partners Appreciation
Portfolio++ Portfolio++ Portfolio++ Portfolio+++
--------------- --------------- --------------- ----------------
<S> <C> <C> <C> <C>
Investment in Common Stock
Number of Shares .................... 1,569,682 453,975 1,158,926 1,568,981
Identified Cost ..................... $24,116,435 $6,481,863 $22,808,452 $14,586,463
Assets:
Investments at market value ......... $25,648,596 $6,273,938 $21,938,469 $14,152,208
Dividends receivable ................ -- -- -- --
Liabilities:
Due to (from) The Penn Mutual
Life Insurance Company ............ 9,544 2,105 7,983 5,890
----------- ---------- ----------- -----------
Net Assets ........................... $25,639,052 $6,271,833 $21,930,486 $14,146,318
=========== ========== =========== ===========
</TABLE>
- --------------------------------------------------------------------------------
PENN MUTUAL VARIABLE ANNUITY ACCOUNT III
STATEMENT OF OPERATIONS -- FOR THE YEAR ENDED DECEMBER 31, 1998 (CONT'D.)
<TABLE>
<CAPTION>
Limited Capital
Balanced Maturity Bond Partners Appreciation
Portfolio++ Portfolio++ Portfolio++ Portfolio+++
--------------- --------------- --------------- ----------------
<S> <C> <C> <C> <C>
Investment Income:
Dividends ............................ $ 535,041 $ 343,516 $ 42,364 $ --
Expense:
Mortality and expense risk
charges ............................ 300,387 76,053 202,308 200,676
------------ --------- ------------ -----------
Net investment income (loss) ......... 234,654 267,463 (159,944) (200,676)
------------ --------- ------------ -----------
Realized and Unrealized Gains
(Losses) on Investments:
Realized gains (losses) from
redemption of fund shares .......... (46,570) 4,432 (19,925) (7,274)
Capital gains distributions .......... 3,758,025 -- 1,334,479 897,971
------------ --------- ------------ -----------
Net realized gains (losses) from
investment transactions ............ 3,711,455 4,432 1,314,554 890,697
Net change in unrealized
appreciation/depreciation of
investments ........................ (1,522,453) (90,968) (1,132,139) (1,315,911)
------------ --------- ------------ -----------
Net realized and unrealized
gains (losses) on investments 2,189,002 (86,536) 182,415 (425,214)
------------ --------- ------------ -----------
Net increase (decrease) in net
assets resulting from
operations ......................... $ 2,423,656 $ 180,927 $ 22,471 ($ 625,890)
============ ========= ============ ===========
</TABLE>
- -----------
++ INVESTMENT IN PENN SERIES FUNDS, INC.
++++ INVESTMENT IN NEUBERGER BERMAN ADVISERS MANAGEMENT TRUST
++++++ INVESTMENT IN AMERICAN CENTURY VARIABLE PORTFOLIOS, INC.
++++++++ INVESTMENT IN FIDELITY INVESTMENTS' VARIABLE INSURANCE PRODUCTS FUNDS
I AND II
++++++++++ INVESTMENT IN MORGAN STANLEY DEAN WITTER UNIVERSAL FUNDS, INC.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
B-18
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Emerging
Equity Income Growth Asset Manager Index 500 Markets Equity
Portfolio++++ Portfolio++++ Portfolio++++ Portfolio++++ Portfolio++++
- ------------------- ------------------- ------------------- ------------------- --------------------
<S> <C> <C> <C> <C>
2,821,444 1,951,799 754,546 256,571 384,256
$57,982,108 $61,686,131 $12,229,496 $30,768,653 $4,011,136
$71,721,096 $87,577,214 $13,702,561 $36,240,594 $2,732,056
-- -- -- -- --
27,927 33,764 4,917 13,879 1,015
----------- ----------- ----------- ----------- ----------
$71,693,169 $87,543,450 $13,697,644 $36,226,715 $2,731,041
=========== =========== =========== =========== ==========
</TABLE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Emerging
Equity Income Growth Asset Manager Index 500 Markets Equity
Portfolio++++ Portfolio++++ Portfolio+++ Portfolio++++ Portfolio+++++
- ------------------- ------------------- ------------------- ------------------- --------------------
<S> <C> <C> <C> <C>
$ 818,947 $ 276,373 $ 283,624 $ 124,449 $ 14,980
838,185 875,493 139,895 286,451 30,058
----------- ------------ ----------- ----------- ----------
(19,238) (599,120) 143,729 (162,002) (15,078)
----------- ------------ ----------- ----------- ----------
(105,681) (133,956) (15,231) (6,289) (5,906)
2,914,489 7,229,334 850,874 288,245 --
----------- ------------ ----------- ----------- ----------
2,808,808 7,095,378 835,643 281,956 (5,906)
3,216,502 15,492,226 416,857 5,006,490 (739,423)
----------- ------------ ----------- ----------- ----------
6,025,310 22,587,604 1,252,500 5,288,446 (745,329)
----------- ------------ ----------- ----------- ----------
$ 6,006,072 $ 21,988,484 $ 1,396,229 $ 5,126,444 ($ 760,407)
=========== ============ =========== =========== ==========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
B-19
<PAGE>
- --------------------------------------------------------------------------------
PENN MUTUAL VARIABLE ANNUITY ACCOUNT III
STATEMENTS OF CHANGES IN NET ASSETS -- FOR THE YEARS ENDED DECEMBER 31, 1998
AND 1997
<TABLE>
<CAPTION>
Total
--------------------------------------
1998 1997
------------------ ------------------
<S> <C> <C>
Operations:
Net investment income (loss) ............... $ 7,745,242 $ 10,673,323
Net realized gains (losses) from
investment transactions ................... 91,124,673 52,434,365
Net change in unrealized appreciation/
depreciation of investments ............... 31,850,409 80,424,769
-------------- --------------
Net increase (decrease) in net assets
resulting from operations .................. 130,720,324 143,532,457
-------------- --------------
Variable Annuity Activities:
Purchase payments .......................... 300,859,955 267,822,906
Surrender benefits ......................... (86,895,748) (77,835,445)
Net Transfers .............................. (144,859,060) (104,394,903)
Death Benefits ............................. (5,130,027) (5,546,379)
Contract administration charges ............ (960,359) (867,185)
Deferred sales charges ..................... (1,159,997) (941,155)
Annuity benefits ........................... (6,283,330) (4,608,091)
-------------- --------------
Net increase in net assets resulting from
variable annuity activities ................ 55,571,434 73,629,748
-------------- --------------
Total increase (decrease) in net assets .... 186,291,758 217,162,205
Net Assets:
Beginning of year .......................... 1,037,021,883 819,859,678
-------------- --------------
End of year ................................ $1,223,313,641 $1,037,021,883
============== ==============
<CAPTION>
Money Market Quality Bond
Fund+ Fund+
---------------------------------- --------------------------------
1998 1997 1998 1997
---------------- ---------------- --------------- ---------------
<S> <C> <C> <C> <C>
Operations:
Net investment income (loss) ............... $ 863,429 $ 868,851 $ 1,240,623 $ 1,305,261
Net realized gains (losses) from
investment transactions ................... -- -- 1,083,848 (62,983)
Net change in unrealized appreciation/
depreciation of investments ............... -- -- 469,323 690,652
-------------- -------------- ------------ ------------
Net increase (decrease) in net assets
resulting from operations .................. 863,429 868,851 2,793,794 1,932,930
-------------- -------------- ------------ ------------
Variable Annuity Activities:
Purchase payments .......................... 43,970,396 34,757,734 12,828,873 5,555,275
Surrender benefits ......................... (6,521,246) (9,401,752) (2,749,714) (3,121,924)
Net Transfers .............................. (30,458,666) (26,472,847) (5,801,159) (4,767,816)
Death Benefits ............................. (146,334) (79,929) (323,546) (447,151)
Contract administration charges ............ (15,517) (16,669) (23,415) (24,971)
Deferred sales charges ..................... (62,744) (66,903) (40,919) (26,092)
Annuity benefits ........................... (158,174) (128,331) (310,029) (364,470)
-------------- -------------- ------------ ------------
Net increase in net assets resulting from
variable annuity activities ................ 6,607,715 (1,408,697) 3,580,091 (3,197,149)
-------------- -------------- ------------ ------------
Total increase (decrease) in net assets .... 7,471,144 (539,846) 6,373,885 (1,264,219)
Net Assets:
Beginning of year .......................... 21,896,277 22,436,123 30,342,578 31,606,797
-------------- -------------- ------------ ------------
End of year ................................ $ 29,367,421 $ 21,896,277 $ 36,716,463 $ 30,342,578
============== ============== ============ ============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
High Yield
Bond Fund+
--------------------------------
1998 1997
--------------- ---------------
<S> <C> <C>
Operations:
Net investment income (loss) ................... $ 3,015,764 $ 2,776,213
Net realized gains (losses) from
investment transactions ....................... (3,290) 57,619
Net change in unrealized appreciation/
depreciation of investments ................... (1,514,889) 2,285,110
------------ ------------
Net increase (decrease) in net assets
resulting from operations ...................... 1,497,585 5,118,942
------------ ------------
Variable Annuity Activities:
Purchase payments .............................. 11,805,678 10,878,709
Surrender benefits ............................. (3,764,322) (3,014,970)
Net Transfers .................................. (5,718,830) (4,748,376)
Death Benefits ................................. (216,584) (353,295)
Contract administration charges ................ (33,874) (32,949)
Deferred sales charges ......................... (42,634) (41,927)
Annuity benefits ............................... (451,818) (263,827)
------------ ------------
Net increase (decrease) in net assets
resulting from variable annuity activities . 1,577,616 2,423,365
------------ ------------
Total increase (decrease) in net assets ........ 3,075,201 7,542,307
Net Assets:
Beginning of year .............................. 42,243,144 34,700,837
------------ ------------
End of year .................................... $ 45,318,345 $ 42,243,144
============ ============
<CAPTION>
Growth Equity Fund+ Value Equity Fund+
---------------------------------- ---------------------------------
1998 1997 1998 1997
---------------- ---------------- --------------- ----------------
<S> <C> <C> <C> <C>
Operations:
Net investment income (loss) ................... ($ 1,642,786) ($ 946,700) ($ 35,478) $ 171,478
Net realized gains (losses) from
investment transactions ....................... 17,312,420 12,252,124 17,469,266 11,178,890
Net change in unrealized appreciation/
depreciation of investments ................... 29,742,092 12,401,882 (1,405,794) 26,725,711
------------ ----------- ------------ -------------
Net increase (decrease) in net assets
resulting from operations ...................... 45,411,726 23,707,306 16,027,994 38,076,079
------------ ----------- ------------ -------------
Variable Annuity Activities:
Purchase payments .............................. 19,386,206 14,771,345 31,610,352 39,960,196
Surrender benefits ............................. (11,279,745) (9,992,279) (16,621,269) (13,261,992)
Net Transfers .................................. (8,257,183) (5,743,584) (17,458,000) (8,211,820)
Death Benefits ................................. (520,878) (432,200) (864,575) (1,000,702)
Contract administration charges ................ (117,047) (116,728) (161,845) (142,233)
Deferred sales charges ......................... (106,395) (96,532) (185,128) (141,327)
Annuity benefits ............................... (410,717) (232,640) (1,052,517) (750,028)
------------ ----------- ------------ -------------
Net increase (decrease) in net assets
resulting from variable annuity activities . (1,305,759) (1,842,618) (4,732,982) 16,452,094
------------ ----------- ------------ -------------
Total increase (decrease) in net assets ........ 44,105,967 21,864,688 11,295,012 54,528,173
Net Assets:
Beginning of year .............................. 116,158,534 94,293,846 205,782,298 151,254,125
------------ ----------- ------------ -------------
End of year .................................... $160,264,501 $ 116,158,534 $217,077,310 $ 205,782,298
============ ============= ============ =============
</TABLE>
- -----------
* FOR THE PERIOD FROM MAY 1, 1997 (DATE FUND BECAME AVAILABLE FOR INVESTMENT
TO CONTRACT OWNERS) TO DECEMBER 31, 1997.
+ INVESTMENT IN PENN SERIES FUNDS, INC.
++ INVESTMENT IN NEUBERGER BERMAN ADVISERS MANAGEMENT TRUST
+++ INVESTMENTS IN AMERICAN CENTURY VARIABLE PORTFOLIOS, INC. (TCI
PORTFOLIOS, INC.'S NAME CHANGED TO AMERICAN CENTURY VARIABLE
PORTFOLIOS, INC. AS OF MAY 1, 1997)
++++ INVESTMENT IN FIDELITY INVESTMENTS' VARIABLE INSURANCE PRODUCTS FUNDS
I AND II
+++++ INVESTMENT IN MORGAN STANLEY DEAN WITTER UNIVERSAL FUNDS, INC.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
B-20
<PAGE>
- --------------------------------------------------------------------------------
PENN MUTUAL VARIABLE ANNUITY ACCOUNT III
STATEMENTS OF CHANGES IN NET ASSETS -- FOR THE YEARS ENDED DECEMBER 31, 1998 AND
1997 (CONT'D.)
<TABLE>
<CAPTION>
Flexibly
Managed Fund+
----------------------------------
1998 1997
---------------- ----------------
<S> <C> <C>
Operations:
Net investment income (loss) ................... $ 5,296,053 $ 5,425,606
Net realized gains (losses) from
investment transactions ....................... 34,924,818 19,611,037
Net change in unrealized appreciation/
depreciation of investments ................... (24,572,191) 16,726,884
------------- -------------
Net increase (decrease) in net assets
resulting from operations ...................... 15,648,680 41,763,527
------------- -------------
Variable Annuity Activities:
Purchase payments .............................. 51,119,838 58,888,377
Surrender benefits ............................. (24,701,353) (21,762,080)
Net Transfers .................................. (33,470,654) (19,473,960)
Death Benefits ................................. (1,865,231) (2,171,468)
Contract administration charges ................ (297,618) (287,496)
Deferred sales charges ......................... (314,220) (275,949)
Annuity benefits ............................... (2,389,329) (1,873,395)
------------- -------------
Net increase (decrease) in net assets result-
ing from variable annuity activities ........... (11,918,567) 13,044,029
------------- -------------
Total increase (decrease) in net assets ........ 3,730,113 54,807,556
Net Assets:
Beginning of year .............................. 336,187,872 281,380,316
------------- -------------
End of year .................................... $ 339,917,985 $ 336,187,872
============= =============
<CAPTION>
International Small Capitalization
Equity Fund+ Fund+
--------------------------------- -------------------------------
1998 1997 1998 1997
---------------- --------------- -------------- ---------------
<S> <C> <C> <C> <C>
Operations:
Net investment income (loss) ................... ($ 252,490) $ 1,386,098 ($ 113,975) ($ 84,438)
Net realized gains (losses) from
investment transactions ....................... 3,185,505 2,495,757 233,245 1,049,563
Net change in unrealized appreciation/
depreciation of investments ................... 9,485,903 2,281,822 (2,387,287) 1,463,910
------------- ------------ ----------- -----------
Net increase (decrease) in net assets
resulting from operations ...................... 12,418,918 6,163,677 (2,268,017) 2,429,035
------------- ------------ ----------- -----------
Variable Annuity Activities:
Purchase payments .............................. 10,523,913 15,267,035 7,163,274 9,987,455
Surrender benefits ............................. (5,911,352) (5,349,569) (1,305,281) (929,941)
Net Transfers .................................. (10,270,675) (6,781,095) (2,355,711) (1,369,531)
Death Benefits ................................. (272,835) (237,872) (46,045) (106,697)
Contract administration charges ................ (73,241) (73,305) (17,860) (11,878)
Deferred sales charges ......................... (92,237) (72,607) (24,968) (9,920)
Annuity benefits ............................... (309,264) (274,746) (51,104) (27,558)
------------- ------------ ----------- -----------
Net increase (decrease) in net assets result-
ing from variable annuity activities ........... (6,405,691) 2,477,841 3,362,305 7,531,930
------------- ------------ ----------- -----------
Total increase (decrease) in net assets ........ 6,013,227 8,641,518 1,094,288 9,960,965
Net Assets:
Beginning of year .............................. 75,488,988 66,847,470 17,721,060 7,760,095
------------- ------------ ----------- -----------
End of year .................................... $ 81,502,215 $ 75,488,988 $18,815,348 $17,721,060
============= ============ =========== ===========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Emerging
Growth Fund+
-----------------------------
1998 1997*
-------------- -------------
<S> <C> <C>
Operations:
Net investment income (loss) ................... ($ 115,686) ($ 15,096)
Net realized gains (losses) from
investment transactions ....................... (18,156) 321,999
Net change in unrealized appreciation/
depreciation of investments ................... 2,702,071 (340,083)
----------- ---------
Net increase (decrease) in net assets
resulting from operations ...................... 2,568,229 (33,180)
----------- ---------
Variable Annuity Activities:
Purchase payments .............................. 9,803,496 4,773,188
Surrender benefits ............................. (303,992) (62,413)
Net Transfers .................................. (1,828,444) (414,030)
Death Benefits ................................. (8,772) --
Contract administration charges ................ (7,172) (624)
Deferred sales charges ......................... (6,090) (787)
Annuity benefits ............................... (17,597) (7,467)
----------- ---------
Net increase (decrease) in net assets result-
ing from variable annuity activities ........... 7,631,429 4,287,867
----------- ---------
Total increase (decrease) in net assets ........ 10,199,658 4,254,687
Net Assets:
Beginning of year .............................. 4,254,687 --
----------- ---------
End of year .................................... $14,454,345 $4,254,687
=========== ==========
<CAPTION>
Balanced Limited Maturity
Portfolio++ Bond Portfolio++
-------------------------------- ------------------------------
1998 1997 1998 1997
--------------- --------------- --------------- -------------
<S> <C> <C> <C> <C>
Operations:
Net investment income (loss) ................... $ 234,654 $ 100,421 $ 267,463 $ 237,192
Net realized gains (losses) from
investment transactions ....................... 3,711,455 1,039,436 $ 4,432 10,303
Net change in unrealized appreciation/
depreciation of investments ................... (1,522,453) 2,360,126 (90,968) 26,677
------------ ------------ ------------- ----------
Net increase (decrease) in net assets
resulting from operations ...................... 2,423,656 3,499,983 180,927 274,172
------------ ------------ ------------- ----------
Variable Annuity Activities:
Purchase payments .............................. 4,708,127 3,659,563 2,811,758 1,780,086
Surrender benefits ............................. (1,459,064) (1,445,846) (579,485) (685,437)
Net Transfers .................................. (2,543,550) (2,735,929) (1,594,229) (891,379)
Death Benefits ................................. (90,973) (234,335) (37,669) (73,242)
Contract administration charges ................ (20,547) (20,492) (4,237) (4,089)
Deferred sales charges ......................... (33,142) (31,195) (8,272) (4,872)
Annuity benefits ............................... (145,035) (132,766) (58,661) (36,318)
------------ ------------ ------------- ----------
Net increase (decrease) in net assets result-
ing from variable annuity activities ........... 415,816 (941,000) 529,205 84,749
------------ ------------ ------------- ----------
Total increase (decrease) in net assets ........ 2,839,472 2,558,983 710,132 358,921
Net Assets:
Beginning of year .............................. 22,799,580 20,240,597 5,561,701 5,202,780
------------ ------------ ------------- ----------
End of year .................................... $ 25,639,052 $ 22,799,580 $ 6,271,833 $5,561,701
============ ============ ============= ==========
</TABLE>
- -----------
* FOR THE PERIOD FROM MAY 1, 1997 (DATE FUND BECAME AVAILABLE FOR INVESTMENT
TO CONTRACT OWNERS) TO DECEMBER 31, 1997.
+ INVESTMENT IN PENN SERIES FUNDS, INC.
++ INVESTMENT IN NEUBERGER BERMAN ADVISERS MANAGEMENT TRUST
+++ INVESTMENTS IN AMERICAN CENTURY VARIABLE PORTFOLIOS, INC. (TCI
PORTFOLIOS, INC.'S NAME CHANGED TO AMERICAN CENTURY VARIABLE PORTFOLIOS,
INC. AS OF MAY 1, 1997)
++++ INVESTMENT IN FIDELITY INVESTMENTS' VARIABLE INSURANCE PRODUCTS FUNDS
I AND II
+++++ INVESTMENT IN MORGAN STANLEY DEAN WITTER UNIVERSAL FUNDS, INC.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
B-21
<PAGE>
PENN MUTUAL VARIABLE ANNUITY ACCOUNT III
STATEMENTS OF CHANGES IN NET ASSETS -- FOR THE YEARS ENDED DECEMBER 31, 1998 AND
1997 (CONT'D.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Partners Capital Appreciation
Portfolio++ Portfolio+++
----------------------------- --------------------------------
1998 1997* 1998 1997
-------------- ------------- -------------- ----------------
<S> <C> <C> <C> <C>
Operations:
Net investment income (loss) ................... ($ 159,944) ($ 28,275) ($ 200,676) ($ 281,031)
Net realized gains (losses) from
investment transactions ....................... 1,314,554 1,377 890,697 (242,067)
Net change in unrealized appreciation/
depreciation of investments ................... (1,132,139) 262,156 (1,315,911) (562,269)
----------- --------- ----------- -------------
Net increase (decrease) in net assets
resulting from operations ...................... 22,471 235,258 (625,890) (1,085,367)
----------- --------- ----------- -------------
Variable Annuity Activities:
Purchase payments .............................. 16,825,601 8,417,570 1,967,452 4,600,249
Surrender benefits ............................. (636,970) (127,161) (1,284,123) (2,129,250)
Net Transfers .................................. (2,421,858) (244,197) (5,680,990) (10,307,667)
Death Benefits ................................. (37,624) -- (24,305) (42,762)
Contract administration charges ................ (10,943) (950) (20,497) (29,637)
Deferred sales charges ......................... (10,334) (1,745) (31,644) (45,296)
Annuity benefits ............................... (58,006) (20,626) (41,725) (72,368)
----------- --------- ----------- -------------
Net increase (decrease) in net assets result-
ing from variable annuity activities ........... 13,649,866 8,022,891 (5,115,832) (8,026,731)
----------- --------- ----------- -------------
Total increase (decrease) in net assets ........ 13,672,337 8,258,149 (5,741,722) (9,112,098)
Net Assets:
Beginning of year .............................. 8,258,149 -- 19,888,040 29,000,138
----------- --------- ----------- -------------
End of year .................................... $21,930,486 $8,258,149 $14,146,318 $ 19,888,040
=========== ========== =========== =============
<CAPTION>
Equity Income
Portfolio++++
---------------------------------
1998 1997
---------------- ---------------
<S> <C> <C>
Operations:
Net investment income (loss) ................... ($ 19,238) $ 16,502
Net realized gains (losses) from
investment transactions ....................... 2,808,808 2,991,946
Net change in unrealized appreciation/
depreciation of investments ................... 3,216,502 7,434,103
----------- ------------
Net increase (decrease) in net assets
resulting from operations ...................... 6,006,072 10,442,551
----------- ------------
Variable Annuity Activities:
Purchase payments .............................. 19,104,376 20,275,870
Surrender benefits ............................. (4,228,476) (2,822,385)
Net Transfers .................................. (5,399,857) (3,908,648)
Death Benefits ................................. (297,915) (200,039)
Contract administration charges ................ (55,951) (40,423)
Deferred sales charges ......................... (72,716) (39,449)
Annuity benefits ............................... (427,304) (253,800)
----------- ------------
Net increase (decrease) in net assets result-
ing from variable annuity activities ........... 8,622,157 13,011,126
----------- ------------
Total increase (decrease) in net assets ........ 14,628,229 23,453,677
Net Assets:
Beginning of year .............................. 57,064,940 33,611,263
----------- ------------
End of year .................................... $ 71,693,169 $ 57,064,940
============ ============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Growth
Portfolio++++
--------------------------------
1998 1997
--------------- ---------------
<S> <C> <C>
Operations:
Net investment income (loss) ................... ($ 599,120) ($ 326,222)
Net realized gains (losses) from
investment transactions ....................... 7,095,378 1,202,712
Net change in unrealized appreciation/
depreciation of investments ................... 15,492,226 8,116,417
----------- -----------
Net increase (decrease) in net assets
resulting from operations ...................... 21,988,484 8,992,907
----------- -----------
Variable Annuity Activities:
Purchase payments .............................. 23,254,838 18,702,331
Surrender benefits ............................. (4,004,288) (3,085,102)
Net Transfers .................................. (6,920,426) (6,992,841)
Death Benefits ................................. (261,573) (147,166)
Contract administration charges ................ (71,268) (55,184)
Deferred sales charges ......................... (99,279) (74,954)
Annuity benefits ............................... (245,272) (125,244)
----------- -----------
Net increase (decrease) in net assets result-
ing from variable annuity activities ........... 11,652,732 8,221,840
----------- -----------
Total increase (decrease) in net assets ........ 33,641,216 17,214,747
Net Assets:
Beginning of year .............................. 53,902,234 36,687,487
----------- -----------
End of year .................................... $ 87,543,450 $ 53,902,234
============ ============
<CAPTION>
Asset Manager Index 500
Portfolio++++ Portfolio ++++
--------------------------------- -------------------------------
1998 1997 1998 1997*
---------------- --------------- --------------- --------------
<S> <C> <C> <C> <C>
Operations:
Net investment income (loss) ................... $ 143,729 $ 97,473 ($ 162,002) ($ 34,323)
Net realized gains (losses) from
investment transactions ....................... 835,643 459,956 281,956 1,410
Net change in unrealized appreciation/
depreciation of investments ................... 416,857 625,879 5,006,490 465,450
------------ ----------- ----------- ----------
Net increase (decrease) in net assets
resulting from operations ...................... 1,396,229 1,183,308 5,126,444 432,537
------------ ----------- ----------- ----------
Variable Annuity Activities:
Purchase payments .............................. 5,224,201 3,737,528 26,942,238 8,905,076
Surrender benefits ............................. (557,255) (467,149) (918,820) (159,993)
Net Transfers .................................. (891,784) (528,705) (3,321,795) (611,399)
Death Benefits ................................. (46,723) (19,521) (68,425) --
Contract administration charges ................ (10,316) (7,431) (16,392) (1,585)
Deferred sales charges ......................... (13,295) (10,039) (14,007) (1,208)
Annuity benefits ............................... (92,217) (36,991) (59,823) (6,133)
------------ ----------- ----------- ----------
Net increase (decrease) in net assets result-
ing from variable annuity activities ........... 3,612,611 2,667,692 22,542,976 8,124,758
------------ ----------- ----------- ----------
Total increase (decrease) in net assets ........ 5,008,840 3,851,000 27,669,420 8,557,295
Net Assets:
Beginning of year .............................. 8,688,804 4,837,804 8,557,295 --
------------ ----------- ----------- ----------
End of year .................................... $ 13,697,644 $ 8,688,804 $ 36,226,715 $ 8,557,295
============ =========== ============ ===========
</TABLE>
- -----------
* FOR THE PERIOD FROM MAY 1, 1997 (DATE FUND BECAME AVAILABLE FOR INVESTMENT
TO CONTRACT OWNERS) TO DECEMBER 31, 1997.
+ INVESTMENT IN PENN SERIES FUNDS, INC.
++ INVESTMENT IN NEUBERGER BERMAN ADVISERS MANAGEMENT TRUST
+++ INVESTMENTS IN AMERICAN CENTURY VARIABLE PORTFOLIOS, INC. (TCI
PORTFOLIOS, INC.'S NAME CHANGED TO AMERICAN CENTURY VARIABLE PORTFOLIOS,
INC. AS OF MAY 1, 1997)
++++ INVESTMENT IN FIDELITY INVESTMENTS' VARIABLE INSURANCE PRODUCTS FUNDS
I AND II
+++++ INVESTMENT IN MORGAN STANLEY DEAN WITTER UNIVERSAL FUNDS, INC.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
B-22
<PAGE>
PENN MUTUAL VARIABLE ANNUITY ACCOUNT III
STATEMENTS OF CHANGES IN NET ASSETS -- FOR THE YEARS ENDED DECEMBER 31, 1998 AND
1997 (CONT'D.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Emerging Markets
Portfolio+++++
--------------------------------
1998 1997*
-------------- ---------------
<S> <C> <C>
Operations:
Net investment income (loss) ................... ($ 15,078) $ 4,313
Net realized gains (losses) from
investment transactions ....................... (5,906) 65,286
Net change in unrealized appreciation/
depreciation of investments ................... (739,423) (539,658)
---------- -----------
Net increase (decrease) in net assets
resulting from operations ...................... (760,407) (470,059)
---------- -----------
Variable Annuity Activities:
Purchase payments .............................. 1,809,338 2,905,319
Surrender benefits ............................. (68,993) (16,202)
Net Transfers .................................. (465,249) (191,079)
Death Benefits ................................. (20) --
Contract administration charges ................ (2,619) (541)
Deferred sales charges ......................... (1,973) (353)
Annuity benefits ............................... (4,738) (1,383)
---------- -----------
Net increase (decrease) in net assets result-
ing from variable annuity activities ........... 1,265,746 2,695,761
---------- -----------
Total increase (decrease) in net assets ........ 505,339 2,225,702
Net Assets:
Beginning of year .............................. 2,225,702 --
---------- -----------
End of year .................................... $ 2,731,041 $ 2,225,702
=========== ===========
</TABLE>
- -----------
* FOR THE PERIOD FROM MAY 1, 1997 (DATE FUND BECAME AVAILABLE FOR INVESTMENT
TO CONTRACT OWNERS) TO DECEMBER 31, 1997.
+ INVESTMENT IN PENN SERIES FUNDS, INC.
++ INVESTMENT IN NEUBERGER BERMAN ADVISERS MANAGEMENT TRUST
+++ INVESTMENTS IN AMERICAN CENTURY VARIABLE PORTFOLIOS, INC. (TCI
PORTFOLIOS, INC.'S NAME CHANGED TO AMERICAN CENTURY VARIABLE PORTFOLIOS,
INC. AS OF MAY 1, 1997)
++++ INVESTMENT IN FIDELITY INVESTMENTS' VARIABLE INSURANCE PRODUCTS FUNDS
I AND II
+++++ INVESTMENT IN MORGAN STANLEY DEAN WITTER UNIVERSAL FUNDS, INC.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
B-23
<PAGE>
PENN MUTUAL VARIABLE ANNUITY ACCOUNT III
- --------------------------------------------------------------------------------
Notes to Financial Statements
December 31, 1998
Note 1. Significant Accounting Policies
The significant accounting policies of Penn Mutual Variable Annuity Account
III (Account III) are as follows:
GENERAL -- Account III was established by The Penn Mutual Life Insurance
Company (Penn Mutual) under the provisions of the Pennsylvania Insurance Law.
Account III is registered under the Investment Company Act of 1940, as amended,
as a unit investment trust. Account III offers units to variable annuity
contract owners to provide for the accumulation of value and for the payment of
annuities. The preparation of the accompanying financial statements requires
management to make estimates and assumptions that affect the reported values of
assets and liabilities as of December 31, 1998 and the reported amounts from
operations and annuity activities during 1998 and 1997. Actual results could
differ from those estimates. Certain 1997 amounts have been reclassified to
conform with 1998 presentation. As of January 1, 1999, Commander and Pennant
Select variable annuity contracts became available. These additions represent no
risk to the accompanying financial statements.
INVESTMENTS -- Assets of Account III are invested in shares of Penn Series
Funds, Inc. (Penn Series): Money Market, Quality Bond, High Yield Bond, Growth
Equity, Value Equity, Flexibly Managed, International Equity, Small
Capitalization and Emerging Growth Funds; Neuberger Berman Advisers Management
Trust (AMT): Limited Maturity Bond, Balanced and Partners Portfolios; American
Century Variable Portfolios, Inc. (ACI): Capital Appreciation Portfolio;
Fidelity Investments' Variable Insurance Products (Fidelity): Equity Income,
Growth, Asset Manager and Index 500 Portfolios; and Morgan Stanley Dean Witter
Universal Funds, Inc. (Morgan Stanley): Emerging Markets Equity Portfolio. Penn
Series, AMT, ACI, Fidelity and Morgan Stanley are open-end diversified
management investment companies. The investment in shares of these funds or
portfolios are carried at market value as determined by the underlying net
asset value of the respective funds or portfolios. Dividend income is recorded
on the ex-dividend date. Investment transactions are accounted for on a trade
date basis.
FEDERAL INCOME TAXES -- Penn Mutual is taxed under federal law as a life
insurance company. Account III is part of Penn Mutual's total operations and is
not taxed separately. Under existing federal law, no taxes are payable on
investment income and realized gains of Account III.
DIVERSIFICATION REQUIREMENTS -- Under the provisions of Section 817(h) of
the Internal Revenue Code, a variable annuity contract other than a contract
issued in connection with certain types of employee benefit plans will not be
treated as an annuity contract for federal tax purposes for any period for which
the investments of the segregated asset account on which the contract is based
are not adequately diversified. The Code provides that the "adequately
diversified" requirement may be met if the underlying investments satisfy either
a statutory safe harbor test or diversification requirements set forth in
regulations issued by the Secretary of Treasury. The Internal Revenue Service
has issued regulations under 817(h) of the Code. Penn Mutual believes that
Account III satisfies the current requirements of the regulations, and it
intends that Account III will continue to meet such requirements.
B-24
<PAGE>
Note 2. Purchases and Sales of Investments
The following table shows aggregate cost of shares purchased and proceeds
from sales of each fund or portfolio for the year ended December 31, 1998:
Purchases Sales
-------------- --------------
Money Market Fund .......................... $ 30,432,569 $ 23,045,084
Quality Bond Fund .......................... 10,882,705 5,085,192
High Yield Bond Fund ....................... 11,023,018 6,468,898
Growth Equity Fund ......................... 27,266,027 13,409,715
Value Equity Fund .......................... 32,277,856 18,324,692
Flexibly Managed Fund ...................... 60,707,211 32,903,505
International Equity Fund .................. 6,429,367 10,517,433
Small Capitalization Fund .................. 5,352,813 1,798,157
Emerging Growth Fund ....................... 8,570,511 1,047,959
Limited Maturity Bond Portfolio ............ 2,621,373 1,824,894
Balanced Portfolio ......................... 7,473,949 3,064,907
Partners Portfolio ......................... 16,217,272 1,388,054
Capital Appreciation Portfolio ............. 1,398,973 5,819,404
Equity Income Portfolio .................... 16,047,593 4,523,656
Growth Portfolio ........................... 23,369,223 5,071,622
Asset Manager Portfolio .................... 5,401,429 792,639
Index 500 Portfolio ........................ 23,991,511 1,311,578
Emerging Markets Equity Portfolio .......... 1,579,778 328,561
------------ ------------
Total ...................................... $291,043,178 $136,725,950
============ ============
Note 3. Contract Charges
Operations are charged for mortality and expense risks assumed by Penn
Mutual as determined daily at an annual rate of 1.25% of the average value of
Account III. As reimbursement for expenses incurred in administering the
contract, Penn Mutual receives $30 per year from each annuity contract prior to
the contract's date of maturity. The $30 charge is waived on certain contracts.
If a policy is surrendered within the first 11 years, a contingent deferred
sales charge may be assessed. This charge will be deducted before any surrender
proceeds are paid. See original contract documents for special charges assessed.
B-25
<PAGE>
Note 4. Unit Values
As of December 31, 1998, the accumulation units and accumulation unit
values are as follows:
Accumulation Accumulation
Units Unit Value
-------------- -------------
Diversifier II Variable Annuity Contract
Money Market Fund ........................... 1,449,199 $ 20.27
Quality Bond Fund ........................... 1,665,664 $ 22.04
High Yield Bond Fund ........................ 1,308,094 $ 34.64
Growth Equity Fund -- Qualified ............. 1,752,036 $ 67.51
Growth Equity Fund -- Non-Qualified ......... 626,895 $ 66.96
Value Equity Fund ........................... 5,273,048 $ 41.17
Flexibly Managed Fund ....................... 5,766,014 $ 58.95
International Equity Fund ................... 3,822,847 $ 21.32
Small Capitalization Fund ................... 1,306,650 $ 14.40
Emerging Growth Fund ........................ 781,196 $ 18.50
Limited Maturity Bond Portfolio ............. 509,381 $ 12.31
Balanced Portfolio .......................... 1,488,257 $ 17.23
Partners Portfolio .......................... 1,716,964 $ 12.77
Capital Appreciation Portfolio .............. 1,153,673 $ 12.26
Equity Income Portfolio ..................... 3,820,796 $ 18.76
Growth Portfolio ............................ 3,722,268 $ 23.52
Asset Manager Portfolio ..................... 801,557 $ 17.09
Index 500 Portfolio ......................... 2,350,293 $ 15.41
Emerging Markets Equity Portfolio ........... 406,394 $ 6.72
B-26
<PAGE>
- --------------------------------------------------------------------------------
REPORT OF INDEPENDENT AUDITORS
THE BOARD OF TRUSTEES
THE PENN MUTUAL LIFE INSURANCE COMPANY
PHILADELPHIA, PENNSYLVANIA
We have audited the accompanying consolidated balance sheets of The Penn Mutual
Life Insurance Company and subsidiaries as of December 31, 1998 and 1997, and
the related consolidated income statements, statements of changes in equity, and
statements of cash flows for the years then ended. These consolidated 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. The financial statements of the Company for the year ended December
31, 1996 were audited by other auditors whose report dated January 31, 1997
expressed an unqualified opinion on those statements.
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, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of The
Penn Mutual Life Insurance Company and subsidiaries as of December 31, 1998 and
1997, and the results of their operations and their cash flows for the years
then ended, in conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
Philadelphia, Pennsylvania
January 29, 1999
B-27
<PAGE>
- --------------------------------------------------------------------------------
THE PENN MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1998 1997
- ------------------------------------------------------------------- ------------- -------------
(in thousands)
<S> <C> <C>
ASSETS
Debt securities, at fair value .................................... $ 5,500,924 $5,427,652
Equity securities, at fair value .................................. 4,161 12,502
Mortgage loans on real estate ..................................... 38,828 52,996
Real estate, net of accumulated depreciation ...................... 15,791 22,358
Policy loans ...................................................... 638,376 642,989
Short-term investments ............................................ 1,024 43,470
Other invested assets ............................................. 98,571 88,928
----------- ----------
TOTAL INVESTMENTS ................................................ 6,297,675 6,290,895
Cash and cash equivalents ......................................... 24,468 37,064
Investment income due and accrued ................................. 104,208 103,072
Deferred acquisition costs ........................................ 399,742 384,542
Amounts recoverable from reinsurers ............................... 69,583 63,211
Broker/dealer receivables ......................................... 793,522 526,797
Other assets ...................................................... 94,179 92,203
Separate account assets ........................................... 2,302,937 1,869,094
----------- ----------
TOTAL ASSETS ..................................................... $10,086,314 $9,366,878
=========== ==========
LIABILITIES
Reserves for payment of future policy benefits .................... $ 2,761,319 $2,770,015
Other policyholder funds .......................................... 2,835,081 2,973,434
Policyholders' dividends payable .................................. 30,532 35,273
Broker/dealer payables ............................................ 488,783 333,104
Accrued income tax payable:
Current .......................................................... 34,853 17,476
Deferred ......................................................... 107,781 75,096
Other liabilities ................................................. 383,744 283,666
Separate account liabilities ...................................... 2,302,937 1,869,094
----------- ----------
TOTAL LIABILITIES ................................................ 8,945,030 8,357,158
----------- ----------
EQUITY
Retained earnings ................................................. 944,145 857,711
Accumulated other comprehensive income - unrealized gains ......... 197,139 152,009
----------- ----------
TOTAL EQUITY ..................................................... 1,141,284 1,009,720
----------- ----------
TOTAL LIABILITIES AND EQUITY .................................... $10,086,314 $9,366,878
=========== ==========
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
B-28
<PAGE>
- --------------------------------------------------------------------------------
THE PENN MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED INCOME STATEMENTS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31, 1998 1997 1996
- --------------------------------------------------------------------- ------------- ------------- -------------
(in thousands)
<S> <C> <C> <C>
REVENUES
Premium and annuity considerations .................................. $ 171,354 $ 195,220 $ 199,821
Policy fee income ................................................... 114,681 102,398 89,349
Net investment income ............................................... 444,697 460,206 475,315
Net realized capital gains/(losses) ................................. 3,912 9,655 (10,078)
Broker/dealer fees and commissions .................................. 331,285 290,005 241,068
Other income ........................................................ 16,491 11,851 11,544
---------- ---------- ----------
TOTAL REVENUE ...................................................... 1,082,420 1,069,335 1,007,019
---------- ---------- ----------
BENEFITS AND EXPENSES
Benefits paid to policyholders and beneficiaries .................... 455,036 480,234 462,412
Policyholder dividends .............................................. 61,369 67,412 67,596
Increase/(decrease) in liability for future policy benefits ......... (12,356) (11,972) 42,652
General expenses .................................................... 211,770 202,731 178,554
Broker/dealer sales expense ......................................... 180,255 160,730 132,724
Amortization of deferred acquisition costs .......................... 42,223 43,223 46,137
---------- ---------- ----------
TOTAL BENEFITS AND EXPENSES ........................................ 938,297 942,358 930,075
---------- ---------- ----------
Income Before Income Taxes .......................................... 144,123 126,977 76,944
---------- ---------- ----------
Income taxes:
Current ............................................................ 49,509 50,061 37,944
Deferred ........................................................... 8,180 3,851 (9,919)
---------- ---------- ----------
NET INCOME ........................................................ $ 86,434 $ 73,065 $ 48,919
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
B-29
<PAGE>
- --------------------------------------------------------------------------------
THE PENN MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
<TABLE>
<CAPTION>
OTHER
COMPREHENSIVE RETAINED TOTAL
FOR THE YEARS ENDED DECEMBER 31, INCOME EARNINGS EQUITY
- --------------------------------------------------------------- --------------- ---------- -------------
(in thousands)
<S> <C> <C> <C>
BALANCE AT JANUARY 1, 1996 .................................... $ 158,941 $735,727 $ 894,668
Comprehensive Income
Net income for 1996 .......................................... -- 48,919 48,919
Other comprehensive loss, net of tax .........................
Unrealized depreciation of securities, net of reclassification
adjustment ................................................. (73,211) -- (73,211)
----------
Comprehensive Loss ............................................ (24,292)
--------- -------- ----------
BALANCE AT DECEMBER 31, 1996 .................................. 85,730 784,646 870,376
Comprehensive Income
Net income for 1997 .......................................... -- 73,065 73,065
Other comprehensive income, net of tax .......................
Unrealized appreciation of securities, net of reclassification
adjustment ................................................. 66,279 -- 66,279
----------
Comprehensive Income .......................................... 139,344
--------- -------- ----------
BALANCE AT DECEMBER 31, 1997 .................................. 152,009 857,711 1,009,720
Comprehensive Income
Net income for 1998 .......................................... -- 86,434 86,434
Other comprehensive income, net of tax .......................
Unrealized appreciation of securities, net of reclassification
adjustment ................................................. 45,130 -- 45,130
----------
Comprehensive Income .......................................... 131,564
--------- -------- ----------
BALANCE AT DECEMBER 31, 1998 .................................. $ 197,139 $944,145 $1,141,284
========= ======== ==========
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
B-30
<PAGE>
- --------------------------------------------------------------------------------
THE PENN MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31, 1998 1997 1996
- -------------------------------------------------------------------------- --------------- --------------- ---------------
(in thousands)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income ............................................................... $ 86,434 $ 73,065 $ 48,919
Adjustments to reconcile net income to net cash provided by operations:
Capitalization of policy acquisition costs ............................ (72,356) (64,427) (60,234)
Amortization of deferred acquisition costs ............................ 42,223 43,223 46,137
Policy fees on universal life and investment contracts ................ (120,315) (104,342) (89,349)
Interest credited on universal life and investment contracts .......... 146,081 160,417 171,051
Depreciation and amortization ......................................... 4,750 18,682 11,613
Premiums due and other receivables .................................... (1,293) (7,291) (105)
Realized capital (gains)/losses ....................................... (3,912) (9,655) 10,078
(Increase)/decrease in accrued investment income ...................... (1,136) 60 6,474
(Increase)/decrease in amounts due from reinsurers .................... (6,372) (4,329) (14,200)
Increase/(decrease) in future policy benefit reserves ................. (8,696) (13,358) 58,697
Increase/(decrease) in income tax payable ............................. 25,622 (4,526) 7,798
Other, net ............................................................ 3,805 (6,693) 39,625
------------ ------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES ........................... 94,835 80,826 236,504
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Sale of investments:
Debt securities available for sale .................................... 1,837,209 1,235,274 927,905
Equity securities ..................................................... 35,496 20,374 25,413
Real estate ........................................................... 9,937 87,875 40,209
Other ................................................................. 18,074 14,355 15,284
Maturity and other principal repayments:
Debt securities available for sale .................................... 496,283 472,474 278,290
Mortgage loans ........................................................ 2,357 61,813 156,643
Cost of investments acquired:
Debt securities available for sale .................................... (2,315,067) (1,772,007) (1,427,048)
Equity securities ..................................................... (26,390) (15,268) (11,752)
Mortgage loans ........................................................ -- -- (36,155)
Real estate ........................................................... (293) (15,600) (8,542)
Other ................................................................. (17,917) (15,503) (8,789)
Change in policy loans, net .............................................. 4,613 13,084 1,234
(Increase)/decrease in short-term investments, net ....................... 42,446 (5,955) 51,290
Purchases of furniture and equipment, net ................................ (9,446) (4,116) (6,449)
------------ ------------ ------------
NET CASH (USED)/PROVIDED BY INVESTING
ACTIVITIES ......................................................... 77,302 76,800 (2,467)
------------ ------------ ------------
</TABLE>
-continued-
The accompanying notes are an integral part of the
consolidated financial statements.
B-31
<PAGE>
- --------------------------------------------------------------------------------
THE PENN MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31, 1998 1997 1996
- ------------------------------------------------------------------ ------------ ------------ ------------
(in thousands)
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Deposits for universal life and investment contracts ............. $ 589,070 $ 653,233 $ 625,816
Withdrawals from universal life and investment contracts ......... (605,821) (552,311) (567,697)
Transfers to separate accounts ................................... (147,708) (236,008) (269,735)
Issuance/(repayment) of debt ..................................... 90,772 24,842 (18,424)
(Increase)/decrease in net broker dealer receivables ............. (111,046) (47,632) 296
---------- ---------- ----------
NET CASH USED BY FINANCING ACTIVITIES ........................ (184,733) (157,876) (229,744)
---------- ---------- ----------
NET DECREASE IN CASH AND CASH EQUIVALENTS .................... (12,596) (250) 4,293
CASH AND CASH EQUIVALENTS ........................................
Beginning of the year ......................................... 37,064 37,314 33,021
---------- ---------- ----------
End of the year ............................................... $ 24,468 $ 37,064 $ 37,314
========== ========== ==========
</TABLE>
The accompanying notes are an intergal part of the
consolidated financial statements.
B-32
<PAGE>
- --------------------------------------------------------------------------------
THE PENN MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(IN THOUSANDS OF DOLLARS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
ORGANIZATION AND BASIS OF PRESENTATION
The Penn Mutual Life Insurance Company was founded and commenced business
in 1847 as a mutual life insurance company. The Company concentrates primarily
on the sale of individual life insurance and annuity products. The primary
products that the Company currently markets are traditional whole life, term
life, universal life, variable life, immediate annuities and deferred annuities,
both fixed and variable. The Company markets its products through a network of
career agents, independent agents, and independent marketing organizations. The
Company is also involved in the broker-dealer business which offers a variety of
investment products and services and is conducted through the Company's
non-insurance subsidiaries. The Company sells its products in all fifty states
and the District of Columbia. The Company is pursuing the sale of its disability
income line of business. This business had total assets of $226,672 as of
December 31, 1998 and premium and annuity considerations of $16,739 for the year
then ended.
The accompanying consolidated financial statements have been prepared in
conformity with generally accepted accounting principles and include the
accounts of The Penn Mutual Life Insurance Company, its wholly owned life
insurance subsidiary, The Penn Insurance and Annuity Company ("PIA"), and
non-insurance subsidiaries (principally broker/dealer and investment advisory
subsidiaries) (the "Company"). All significant intercompany accounts and
transactions have been eliminated in consolidation. The preparation of financial
statements requires management to make estimates and assumptions that affect the
amounts reported in the consolidated financial statements and notes to the
consolidated financial statements.
NEW ACCOUNTING PRONOUNCEMENTS
As of January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. (SFAS) 130, "Reporting Comprehensive Income." SFAS No.
130 establishes standards for the reporting and display of comprehensive income
and its components in the financial statements. The initial application of SFAS
No. 130, required the reclassification of prior-year financial statements to
reflect the components of comprehensive income.
During 1998, the Company adopted SFAS No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits," which revised disclosures
about pension and other postretirement benefit plans. As SFAS No. 132 does not
change the measurement or recognition of these plans, its adoption had no impact
on the Company's financial condition or results of operations.
In June 1998, The FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 requires all derivatives to be
recognized in the statement of financial position as either assets or
liabilities and measured at fair value. The corresponding derivative gains and
losses should be reported based on hedge relationships that exist. Changes in
the fair value of derivatives that are not designated as hedges or that do not
meet the hedge accounting criteria in SFAS No. 133, are required to be reported
in earning. SFAS No. 133 is effective for fiscal years beginning after June 15,
1999. Adoption of SFAS No. 133 is not expected to have a material effect on the
Company's financial condition or results of operations.
INVESTMENTS
Debt securities (bonds, notes, redeemable preferred stocks and
mortgage-backed securities) which might be sold prior to maturity are classified
as available for sale. These securities are carried at fair value, with the
change in unrealized gains and losses reported in other comprehensive income.
Interest on debt securities is credited to income as it is earned. Debt
securities are amortized using the scientific method. These assumptions are
consistent with the current interest rate and economic environments. The
retrospective adjustment method is used to value all securities.
Equity securities are classified as available for sale and carried at fair
value. Dividends on equity securities are credited to income on their
ex-dividend dates.
The Company regularly evaluates the carrying value of debt and equity
securities based on current economic conditions, past credit loss experience and
other circumstances of the investee. A decline in a security's fair value that
is deemed to be other than temporary is treated as a realized loss and a
reduction in the cost basis of the security.
B-33
<PAGE>
- --------------------------------------------------------------------------------
THE PENN MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(IN THOUSANDS OF DOLLARS)
Mortgage loans on real estate are stated at unpaid principal balances, net
of unamortized discounts and valuation allowances. Valuation allowances on
impaired loans are based on the present value of expected future cash flows
discounted at the loan's original effective interest rate or the collateral
value if the loan is collateral dependent. However, if foreclosure is or becomes
probable, the measurement method used is collateral value.
Investment real estate, which the Company has the intent to hold, is
carried at cost less accumulated depreciation and valuation reserves. The
Company establishes valuation reserves for investment real estate when declines
in value are deemed to be other then temporary based on an analysis of
discounted future cash flows. Properties held for sale are carried at the lower
of depreciated cost or fair value less selling costs. Valuation reserves are
established for properties held for sale when the fair value less estimated
selling costs is below depreciated cost. Real estate acquired through
foreclosure is recorded at the lower of cost or fair value less estimated
selling costs at the time of foreclosure. Depreciation is calculated using the
straight-line method over the estimated useful lives of the real estate.
Policy loans are carried at the unpaid principal balances.
Short-term investments include securities purchased with a maturity date of
90 days to less than one year. Short-term investments are valued at cost.
Other invested assets primarily include venture capital limited
partnerships which are carried at fair value.
Realized gains and losses are determined by specific identification and are
included in income on the trade date, net of amortization of deferred
acquisition costs. Unrealized gains and losses, net of appropriate taxes and
amortization of deferred acquisition costs, are accounted for as a separate
component of other comprehensive income.
The Company utilizes various financial instruments, such as interest rate
swaps, financial futures and structured notes, to hedge against interest rate
fluctuation. Most of these investments are recorded as accounting hedges using a
valuation method consistent with the valuation method of the assets hedged.
Gains and losses on these instruments are deferred and recognized in the
Consolidated Income Statements over the remaining life of the hedged security.
Changes in the fair value of these instruments are reported as unrealized gains
or losses. Realized gains or losses are recognized when the hedged securities
are sold.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash on hand, money market instruments
and other debt securities with a maturity of 90 days or less when purchased.
OTHER ASSETS
Property and equipment and leasehold improvements are stated at cost, less
accumulated depreciation and amortization. Depreciation is calculated using the
straight-line method over the estimated useful lives of the related assets.
Amortization of leasehold improvements is calculated using the straight-line
method over the lesser of the term of the leases or the estimated useful life of
the improvements. Accumulated depreciation and amortization on property and
equipment and leasehold improvements was $49,816 and $44,329 at December 31,
1998 and 1997, respectively. Related depreciation and amortization expense was
$8,586, $8,183 and $7,510 for the years ended December 31, 1998, 1997 and 1996,
respectively.
Goodwill represents the excess of the cost of the businesses acquired over
the fair value of their net assets. These costs are amortized on a straight-line
basis over not more than 40 years and are included in other assets in the
Consolidated Balance Sheets. Unamortized goodwill amounted to $16,126 and
$16,932 at December 31, 1998 and 1997, respectively. Goodwill amortization was
$806, $808 and $909 for 1998, 1997 and 1996, respectively.
DEFERRED ACQUISITION COSTS
Costs of acquiring new insurance and annuity contracts, which vary with and
are primarily related to the production of new business, have been deferred to
the extent that such costs are deemed recoverable from future gross profits.
Such costs include commissions, certain costs of policy issuance and
underwriting, and certain variable agency expenses.
B-34
<PAGE>
- --------------------------------------------------------------------------------
THE PENN MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(IN THOUSANDS OF DOLLARS)
Deferred acquisition costs related to participating traditional and
universal life insurance policies and annuity products without mortality risk
that include significant surrender charges are being amortized over the lesser
of the estimated or actual contract life in proportion to estimated gross
profits arising principally from interest, mortality and expense margins and
surrender charges. The effects on amortization of deferred acquisition costs of
revisions to estimated gross profits are reflected in earnings in the period
such estimated gross profits are revised. Deferred acquisition costs are
reviewed to determine that the unamortized portion of such costs is recoverable
from future estimated gross profits. Certain costs and expenses reported in the
consolidated income statements are net of amounts deferred.
SEPARATE ACCOUNTS
Separate Account assets and liabilities represent segregated funds
administered and invested by the Company primarily for the benefit of variable
life insurance policyholders and annuity and pension contractholders, including
certain of the Company's benefit plans. The value of the assets in the Separate
Accounts reflects the actual investment performance of the respective accounts
and is not guaranteed by the Company. The carrying value for Separate Account
assets and liabilities approximates the estimated fair value of the underlying
assets.
INSURANCE LIABILITIES AND REVENUE RECOGNITION
Participating Traditional Life and Life Contingent Annuity Products
Future policy benefits include reserves for participating traditional life
insurance and life contingent annuity products and are established in amounts
adequate to meet the estimated future obligations of the policies in force.
Liabilities for participating traditional life products are computed using the
net level premium method, using assumptions for investment yields, mortality,
morbidity and withdrawals, which are consistent with the dividend fund interest
rate and mortality rates used in calculating cash surrender values. Interest
rate assumptions used in the calculation of the liabilities for participating
traditional life products ranged from 2.25% to 4.5%. Premiums are recognized as
income when due. Death and surrender benefits are reported in expense as
incurred.
Liabilities for life contingent annuity products are computed by estimating
future benefits and expenses. Assumptions are based on Company experience
projected at the time of policy issue, with provision for adverse deviations.
Interest rate assumptions range from 2.25% to 13.25%. Premiums are recognized as
income as they are received. Death and surrender benefits are reported in
expense as incurred.
Universal Life Products and Other Annuity Products
Other policyholder funds represent liabilities for universal life and
investment-type annuity products. The liabilities for these products are based
on the contract account value which consists of deposits received from customers
and investment earnings on the account value, less administrative and expense
charges. The liability for universal life products is also reduced by mortality
charges. Liabilities for the non-life contingent annuity products are computed
by estimating future benefits and expenses. Assumptions are based on Company
experience projected at the time of policy issue. Interest rate assumptions
range from 2.0% to 11.25%.
Contract charges assessed against account value for universal life and
investment-type annuities are reflected as policy fee income in revenue.
Interest credited to account values and universal life benefit claims in excess
of fund values are reflected as benefit expense.
Policyholders' Dividends
The majority of the Company's insurance products have been issued on a
participating basis. As of December 31, 1998, participating insurance expressed
as a percentage of insurance in force is 92%, and as a percentage of premium
income is 89%. The amount of policyholders' dividends to be paid is approved
annually by the Board of Trustees. The aggregate amount of policyholders'
dividends is calculated based on actual interest, mortality, morbidity and
expense experience for the year and on management's judgment as to the
appropriate level of equity to be retained by the Company. The carrying value of
this liability approximates the earned amount and fair value at December 31,
1998.
B-35
<PAGE>
- --------------------------------------------------------------------------------
THE PENN MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(IN THOUSANDS OF DOLLARS)
BROKER/DEALER REVENUE RECOGNITION
Broker-dealer transactions in securities and listed options, including
related commission revenue and expense, are recorded on a settlement-date basis.
There would be no material effect on the financial statements if such
transactions were recorded on a trade-date basis.
FEDERAL INCOME TAXES
The Company files a consolidated federal income tax return with its life
and non-life insurance subsidiaries. Federal income taxes are charged or
credited to operations based upon amounts estimated to be payable or recoverable
as a result of taxable operations for the current year. Deferred income tax
assets and liabilities are established to reflect the impact of temporary
differences between the amount of assets and liabilities recognized for
financial reporting purposes and such amounts recognized for tax purposes. These
deferred tax assets or liabilities are measured by using the enacted tax rates
expected to apply to taxable income in the period in which the deferred tax
liabilities or assets are expected to be settled or realized.
REINSURANCE
In the normal course of business, the Company seeks to limit its exposure
to loss on any single insured and to recover a portion of benefits paid by
ceding reinsurance to other insurance enterprises or reinsurers under excess
coverage and coinsurance contracts. The Company has set its retention limit for
acceptance of risk on life insurance policies at various levels up to $1,250.
Insurance liabilities are reported before the effects of reinsurance.
Reinsurance receivables (including amounts related to insurance liabilities) are
reported as assets. Estimated reinsurance receivables are recognized in a manner
consistent with the liabilities related to the underlying reinsured contracts.
2. INVESTMENTS:
DEBT SECURITIES
The following tables summarize the Company's investment in debt securities,
including redeemable preferred stocks. All debt securities are classified as
available for sale and are carried at estimated fair value. Amortized cost is
net of cumulative writedowns for other than temporary declines in value of
$3,056 and $1,208 as of December 31, 1998 and 1997, respectively.
<TABLE>
<CAPTION>
December 31, 1998
-------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-------------- ------------ ------------ --------------
<S> <C> <C> <C> <C>
U.S. Treasury securities and U.S. Government and agency
securities ........................................... $ 13,109 $ 1,271 $ -- $ 14,380
States and political subdivisions ..................... 12,094 2,216 -- 14,310
Foreign governments ................................... 24,920 3,323 -- 28,243
Corporate securities .................................. 3,058,066 299,489 4,956 3,352,599
Mortgage and other asset-backed securities ............ 2,006,891 86,271 4,399 2,088,763
----------- --------- ------- -----------
Total bonds ........................................... 5,115,080 392,570 9,355 5,498,295
Redeemable preferred stocks ........................... 2,696 -- 67 2,629
----------- --------- ------- -----------
TOTAL .............................................. $ 5,117,776 $ 392,570 $ 9,422 $ 5,500,924
=========== ========= ======= ===========
</TABLE>
B-36
<PAGE>
- --------------------------------------------------------------------------------
THE PENN MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
December 31, 1997
-------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-------------- ------------ ------------ --------------
<S> <C> <C> <C> <C>
U.S. Treasury securities and U.S. Government and agency
securities ........................................... $ 107,539 $ 6,302 $ -- $ 113,841
States and political subdivisions ..................... 12,085 569 -- 12,654
Foreign governments ................................... 20,397 3,049 -- 23,446
Corporate securities .................................. 2,854,234 218,145 6,748 3,065,631
Mortgage and other asset-backed securities ............ 2,133,758 76,160 757 2,209,161
----------- --------- ------- -----------
Total bonds ........................................... 5,128,013 304,225 7,505 5,424,733
Redeemable preferred stocks ........................... 3,085 -- 166 2,919
----------- --------- ------- -----------
TOTAL .............................................. $ 5,131,098 $ 304,225 $ 7,671 $ 5,427,652
=========== ========= ======= ===========
</TABLE>
The following tables summarize the amortized cost and estimated fair value
of debt securities, including redeemable preferred stocks, as of December 31,
1998 by contractual maturity.
<TABLE>
<CAPTION>
Amortized Estimated
Cost Fair Value
-------------- --------------
<S> <C> <C>
Years to Maturity:
One or less ........................................ $ 279,580 $ 294,068
After one through five ............................. 357,684 369,099
After five through ten ............................. 566,864 631,968
After ten .......................................... 1,904,061 2,114,397
Mortgage and other asset-backed securities ......... 2,006,891 2,088,763
----------- -----------
Total bonds ...................................... 5,115,080 5,498,295
Redeemable preferred stocks ........................ 2,696 2,629
----------- -----------
TOTAL ............................................ $ 5,117,776 $ 5,500,924
=========== ===========
</TABLE>
Expected maturities may differ from contractual maturities because certain
borrowers have the right to call or prepay obligations with or without call or
prepayment penalties. Mortgage and other asset-backed securities are presented
separately in the maturity schedule due to the potential for prepayment. The
weighted average life of these securities is 7.1 years.
At December 31, 1998, the Company held $2,088,763 in mortgage and other
asset-backed securities. The structured securities portfolio consists of
commercial and residential mortgage pass-through holdings totaling $1,865,556
and securities backed by credit card receivables, auto loans, home equity and
manufactured housing loans totaling $223,207. These securities follow a
structured principal repayment schedule and are of high credit quality.
Securities totaling $1,512,963 are rated AAA and include $20,394 of
interest-only tranches that were retained from the securitization of the
Company's mortgage loan portfolio.
At December 31, 1998, the largest industry concentration of the Company's
portfolio was investments in the finance industry of $624,768 representing 11%
of the total debt portfolio.
Proceeds during 1998, 1997 and 1996 from sales of available-for-sale
securities were $1,931,269, $1,353,112 and $927,905, respectively. Gross gains
and gross losses realized on those sales were $37,324 and $35,257, respectively,
during 1998, $21,799 and $8,990, respectively, during 1997 and $15,932 and
$6,899, respectively, during 1996.
The Company's investment portfolio of debt securities is predominantly
comprised of investment grade securities. At December 31, 1998 and 1997, debt
securities with amortized cost totaling $192,724 and $198,943, respectively,
were less than investment grade. At December 31, 1998 the Company held
securities with a carrying value of $9,170 which are to be restructured pursuant
to commenced negotiations. At December 31 1997, the Company did not hold any
securities which were either in default as to principal and/or interest
payments, were to be restructured pursuant to commenced negotiations or were in
situations where the borrowers went into bankruptcy subsequent to acquisition.
The Company did not hold any debt securities which were non-income producing for
the preceding twelve months as of December 31, 1998 and 1997.
B-37
<PAGE>
- --------------------------------------------------------------------------------
THE PENN MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(IN THOUSANDS OF DOLLARS)
EQUITY SECURITIES
During 1998, 1997 and 1996, the proceeds from sales of equity securities
amounted to $18,487, $20,374 and $25,413, respectively. The gross gains and
gross losses realized on those sales were $3,095 and $239, $975 and $239 and
$1,369 and $247 for 1998, 1997 and 1996, respectively.
MORTGAGE LOANS
On August 29, 1996, the Company securitized the majority of its mortgage
loan portfolio by transferring the loans to a trust which qualifies as a REMIC
(Real Estate Mortgage Investment Conduit) under the Internal Revenue Code. Prior
to transferring the loans with a principal value of $781,564 and a book value of
$780,942, the loans were written down to a fair market value of $755,559, and
the related reserve of $25,285 was released. The trust issued sixteen classes of
Commercial Mortgage Pass-Through Certificates with a total par value of
$781,564. The certificates evidence the entire beneficial ownership interest in
the trust. The cash flow from the mortgages will be used to repay the
certificates over an average life of 4.28 years. The actual date on which the
principal amount of the notes may be paid in full could be substantially earlier
or later based on performance of the mortgages. The cash flows of the assets of
the trust will be the sole source of payments on the notes. The Company has not
guaranteed these certificates or the mortgage loans held by the trust. As a
result of this transaction, the Company recognized a loss of $98 upon the
transfer of the mortgages to the trust, representing the difference between the
fair market value of the certificates and the book value of the mortgage loans
transferred to the trust.
The Company retained the highest quality classes of certificates with a par
value of $715,126 and a fair market value of $734,326 at the time of the
securitization. As of December 31, 1998, the par value and fair value of these
securities were $460,753 and $475,699, respectively. As of December 31, 1997,
the par value and fair value of these securities were $570,130 and $597,248,
respectively. The Company sold the lowest rated classes of certificates with a
par value of $66,438 and a fair market value of $24,838.
The mortgage loans which were not included in the securitization and were
retained by the Company had a book value of $171,555 with a related reserve of
$21,907 and an estimated fair value of $153,405 on the date of the
securitization. Loans which the Company intended to dispose of within a period
of 6 to 24 months were written down to their estimated net realizable value.
These loans had a book value of $99,817 and an estimated net realizable value of
$81,310 at the time of the securitization. The writedown of $18,507 was fully
offset by a release in mortgage loss reserve. As of December 31, 1998 and 1997,
the Company held $0 and $12,368 of these loans, respectively. The Company
intended to hold mortgage loans with a book value of $71,738 on the date of the
securitization through their remaining terms. As of December 31, 1998 and 1997,
the Company continued to hold $42,628 and $44,428 of these mortgages,
respectively. The Company discontinued the origination of commercial mortgage
loans in 1996.
The following tables summarize the carrying value of mortgage loans, by
property type and geographic concentration, at December 31.
1998 1997
------------ -----------
Property Type
Office buildings ............ $ 9,204 $ 20,012
Retail ...................... 5,553 7,862
Dwellings ................... 24,741 25,237
Other ....................... 3,130 3,685
Valuation allowance ......... (3,800) (3,800)
-------- --------
TOTAL ..................... $ 38,828 $ 52,996
======== ========
B-38
<PAGE>
- --------------------------------------------------------------------------------
THE PENN MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(IN THOUSANDS OF DOLLARS)
1998 1997
---------- ----------
Geographic Concentration
Northeast ................... $ 10,273 $ 23,313
Midwest ..................... 5,728 5,922
South ....................... 12,075 12,502
West ........................ 14,552 15,059
Valuation allowance ......... (3,800) (3,800)
-------- --------
TOTAL ..................... $ 38,828 $ 52,996
======== ========
The following table presents changes in the mortgage loan valuation
allowance for the years presented:
1998 1997
---------- ----------
Balance at January 1 .............. $ 3,800 $ 3,400
Provision ......................... -- 400
Charge-offs ....................... -- --
------- -------
BALANCE AT DECEMBER 31 .......... $ 3,800 $ 3,800
======= =======
As of December 31, 1998 and 1997, the Company's mortgage loan portfolio
contained no loans delinquent over 60 days or in foreclosure and there were no
non-income producing mortgage loans for the preceding twelve months.
During 1998 and 1997, the Company did not restructure the terms of any
outstanding mortgages. As of December 31, 1998 and 1997, the mortgage loan
portfolio included $2,555 and $2,834, respectively, of restructured mortgage
loans. Restructured mortgage loans include commercial loans for which the basic
terms, such as interest rate, maturity date, collateral or guaranty have been
changed as a result of actual or anticipated delinquency. Restructures do not
include mortgages refinanced upon maturity at or above current market rates.
Gross interest income on restructured mortgage loans on real estate that would
have been recorded in accordance with the original terms of such loans amounted
to $258 and $298 in 1998 and 1997, respectively. Gross interest income from
these loans included in net investment income totaled $236 and $262 in 1998 and
1997, respectively.
At December 31, 1998, no loans were considered to be impaired. At December
31, 1997, the recorded investment in loans that were considered to be impaired
was $12,368 that, as a result of writedowns, did not have a valuation allowance.
The average recorded investment in impaired loans during the year ended December
31, 1998 and 1997 was approximately $6,184 and $38,096, respectively. During
1998 and 1997, $163 and $1,454 was received, respectively, on these impaired
loans which was applied to the outstanding principal balance or will be applied
to principal at the date of foreclosure.
REAL ESTATE
The following table summarizes the carrying value of the Company's real
estate holdings at December 31.
1998 1997
----------- -----------
Investment ......................... $ 19,111 $ 19,999
Properties held for sale ........... 1,914 7,828
Less: Valuation allowance .......... (5,234) (5,469)
-------- --------
TOTAL ............................ $ 15,791 $ 22,358
======== ========
At December 31, 1998 and 1997, accumulated depreciation on real estate
amounted to $6,218 and $6,498, respectively. Depreciation expense on real estate
totaled $1,071, $5,709 and $6,488 for the years ended December 31, 1998, 1997
and 1996, respectively. During 1997, the Company sold its largest real estate
investment for $65,007 cash to an unrelated buyer. At the date of the sale, this
property had a carrying value of $61,914, net of related reserves, resulting in
a gain of $3,093. During 1996, the Company wrote down the statement value of
this property by $16,000 to its estimated fair value, based on changes in future
valuation assumptions.
B-39
<PAGE>
- --------------------------------------------------------------------------------
THE PENN MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(IN THOUSANDS OF DOLLARS)
OTHER
Investments on deposit with regulatory authorities as required by law were
$7,104 and $7,106 at December 31, 1998 and 1997, respectively.
As of December 31, 1998 and 1997, the Company's investments included
$475,699 and $597,248, respectively, of the tranches retained from the 1996
securitization of the Company's commercial mortgage loan portfolio. These
investments represented 42% and 59% of equity at December 31, 1998 and 1997,
respectively.
3. INVESTMENT INCOME AND CAPITAL GAINS:
The following table summarizes the sources of investment income, excluding
investment gains/(losses), for the year ended December 31.
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Debt securities ..................... $ 395,628 $ 390,852 $ 356,669
Equity securities ................... 206 1,371 1,313
Mortgages ........................... 4,268 12,098 62,454
Real estate ......................... 2,903 17,519 24,143
Policy loans ........................ 39,760 40,921 40,580
Short-term investments .............. 2,029 2,426 6,052
Other invested assets ............... 11,330 21,268 14,665
Cash and cash equivalents ........... 3 2 44
--------- --------- ---------
Gross investment income ............. 456,127 486,457 505,920
Less: Investment expenses .......... 11,430 26,251 30,605
--------- --------- ---------
Investment income, net .............. $ 444,697 $ 460,206 $ 475,315
========= ========= =========
</TABLE>
The following table summarizes net realized capital gains/(losses) on
investments for the year ended December 31. Net realized capital gains/(losses)
include decreases in valuation allowances of $235, $3,154 and $44,164 in 1998,
1997 and 1996, respectively.
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- --------------
<S> <C> <C> <C>
Debt securities ..................................... $ 110 $ 12,991 $ 10,412
Equity securities ................................... 2,856 417 1,122
Mortgage loans ...................................... 210 280 (2,821)
Real estate ......................................... 4,148 (684) (22,356)
Other ............................................... (2,109) (811) 3,565
Amortization of deferred acquisition costs .......... (1,303) (2,538) --
-------- -------- ----------
Realized gains/(losses) ............................. $ 3,912 $ 9,655 $ (10,078)
======== ======== ==========
</TABLE>
B-40
<PAGE>
- --------------------------------------------------------------------------------
THE PENN MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(IN THOUSANDS OF DOLLARS)
The following table summarizes the change in unrealized gains and losses
for investments carried at fair value which are reflected in other comprehensive
income for the year ended December 31.
<TABLE>
<CAPTION>
1998 1997 1996
----------- ------------ ---------------
<S> <C> <C> <C>
Unrealized gains/(losses):
Debt securities ................................ $ 86,594 $ 160,850 $ (149,259)
Equity securities .............................. (2,092) 408 (582)
Other .......................................... (2,091) (14,581) (1,545)
--------- --------- -----------
82,411 146,677 (151,386)
--------- --------- -----------
Less:
Deferred policy acquisition costs .............. (12,841) (45,043) 38,324
Deferred income taxes .......................... (24,440) (35,355) 39,851
--------- --------- -----------
Net change in unrealized gains/(losses) ......... $ 45,130 $ 66,279 $ (73,211)
========= ========= ===========
</TABLE>
The following table sets forth the reclassification adjustment required to
avoid double-counting in comprehensive income items that are included as part of
net income for a period that also had been part of other comprehensive income in
earlier periods:
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- --------------
<S> <C> <C> <C>
Reclassification Adjustments
Unrealized holding gains/(losses) arising during period .............. $ 53,576 $ 71,797 $ (57,160)
Reclassification adjustment for gains included in net income ......... 8,446 5,518 16,051
-------- -------- ----------
Unrealized gains/(losses) on investments, net of
reclassification adjustment ......................................... $ 45,130 $ 66,279 $ (73,211)
======== ======== ==========
</TABLE>
Reclassification adjustments reported in the above table for the years
ended December 31, 1998, 1997 and 1996 are net of income tax expense of $7,679,
$4,519 and $13,350, respectively, and $5,815, $2,875 and $8,740, respectively,
relating to the effects of such amounts on deferred acquisition costs.
B-41
<PAGE>
- --------------------------------------------------------------------------------
THE PENN MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(IN THOUSANDS OF DOLLARS)
4. FAIR VALUE INFORMATION:
The following table summarizes the carrying value and estimated fair value
of the Company's financial instruments as of December 31, 1998 and 1997.
<TABLE>
<CAPTION>
1998 1997
------------------------------- -------------------------------
Carrying Fair Carrying Fair
Value Value Value Value
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
FINANCIAL ASSETS:
Debt securities
Available for sale ...................... $ 5,500,924 $ 5,500,924 $ 5,427,652 $ 5,427,652
Equity securities
Common stock ............................ 158 158 3,051 3,051
Non-redeemable preferred stocks ........... 4,003 4,003 9,451 9,451
Mortgage loans ............................ 38,828 42,678 52,996 57,224
Policy loans .............................. 638,376 605,144 642,989 606,681
Cash and cash equivalents ................. 24,468 24,468 37,064 37,064
Short-term investments .................... 1,024 1,024 43,470 43,470
Separate account assets ................... 2,302,937 2,302,937 1,869,094 1,869,094
Other invested assets ..................... 98,571 98,571 88,928 88,928
FINANCIAL LIABILITIES:
Investment-type contracts
Individual annuities .................... $ 1,108,274 $ 1,143,373 $ 1,225,192 $ 1,260,639
Guaranteed investment contracts ......... 39,571 40,556 59,809 61,456
Other group annuities ................... 113,974 115,422 147,061 148,257
Other policyholder funds ................ 1,573,262 1,573,262 1,541,372 1,541,372
----------- ----------- ----------- -----------
Total policyholder funds .................. 2,835,081 2,866,627 2,973,434 3,011,724
Policyholders' dividends payable .......... 30,532 30,532 35,273 35,273
Separate account liabilities .............. 2,302,937 2,302,937 1,869,094 1,869,094
</TABLE>
The estimated fair values for the Company's investments in debt and equity
securities are based on quoted market prices, where available. In situations
where market prices are not readily available, primarily private placements,
fair values are estimated using a formula pricing method based on fair values of
securities with similar characteristics. The estimated fair value of currently
performing mortgage loans is estimated by discounting the cash flows associated
with the investment, using an interest rate currently offered for similar loans
to borrowers with similar credit ratings. Loans with similar credit quality,
characteristics and time to maturity are aggregated for purposes of discounted
cash flow analysis. Assumptions regarding credit risk, cash flows and discount
rates are determined using the available market and borrower-specific
information. The estimated fair value for non-performing loans is based on the
estimated fair value of the underlying real estate, which is based on recent
appraisals or other estimation techniques. The estimated fair value of policy
loans is calculated by discounting estimated future cash flows using interest
rates currently being offered for similar loans. Loans with similar
characteristics are aggregated for purposes of the calculations. The carrying
values of cash, cash equivalents, short-term investments and separate account
assets approximate their fair values. The estimated fair values for the venture
capital limited partnerships are based on values determined by the partnerships'
managing general partners. The resulting estimated fair values may not be
indicative of the value which could be negotiated in an actual sale.
The fair values of the Company's liabilities for individual annuities,
guaranteed investment contracts and certain group annuities are estimated by
discounting the cash flows associated with the contracts, using an interest rate
currently offered for similar contracts with maturities similar to those
remaining for the contracts being valued. The statement value for certain of the
other group annuities approximates their fair value due to the nature of the
contracts. The statement values of other policyholder funds, policyholders'
dividends payable and separate account liabilities approximate their fair
values.
B-42
<PAGE>
- --------------------------------------------------------------------------------
THE PENN MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(IN THOUSANDS OF DOLLARS)
Currently, disclosure of estimated fair values is not required for all the
Company's assets and liabilities. Therefore, presentation of the estimated fair
value of a significant portion of assets without a corresponding valuation of
liabilities associated with insurance contracts can be misinterpreted. The
estimated fair values of liabilities under all of the Company's contracts are
considered in the overall management of interest rate risk. The continuing
management of the relationship between the maturities of the Company's
investments and the amounts due under insurance contracts reduces the Company's
exposure to changing interest rates.
The Company is exposed to interest rate risk on its interest-sensitive
products. The Company's investment strategy is designed to minimize interest
risk by managing the durations and anticipated cash flows of the Company's
assets and liabilities.
To minimize exposure and reduce risk from exchange and interest rate
fluctuations in the normal course of business, the Company enters into interest
rate swap programs for purposes other than trading. As of December 31, 1998 and
1997, the Company had interest rate swaps with aggregate notional amounts equal
to $95,000 and $105,000, respectively, with average unexpired terms of 8 and 19
months, respectively. Interest rate swap agreements involve the exchange of
fixed and floating rate interest payment obligations without an exchange of the
underlying notional principal amounts. During the term of the swap, the net
settlement amount is accrued as an adjustment to interest income. Gross
unrealized gains and losses, which represent fair value based on dealer-quoted
prices, were $2,248 and $0, respectively, at December 31, 1998 and $5,164 and
$0, respectively, at December 31, 1997. These fair values represent the amount
at risk if the counterparties default and the amount that the Company would
receive to terminate the contracts, taking into account current interest rates
and, where appropriate, the current creditworthiness of the counterparties.
In the normal course of business, the Company loans securities under
arrangements in which collateral is obtained in amounts greater than the current
market value of loaned securities. This collateral is held in the form of cash,
cash equivalents or securities issued or guaranteed by the United States
Government. The Company is at risk to the extent the value of loaned securities
exceeds the value of the collateral obtained. The Company controls this risk by
requiring collateral of the highest quality and requiring that additional
collateral be deposited when the market value of loaned securities increases in
relation to the collateral held or the value of the collateral held decreases in
relation to the value of the loaned securities. The Company had loaned
securities outstanding of $38,144 and $155,356 as of December 31, 1998 and 1997,
respectively.
5. INCOME TAXES:
The Company follows the asset and liability method of accounting for income
taxes whereby current and deferred tax assets and liabilities are recognized
utilizing currently enacted tax laws and rates. Deferred taxes are adjusted to
reflect tax rates at which future tax liabilities or assets are expected to be
settled or realized.
B-43
<PAGE>
- --------------------------------------------------------------------------------
THE PENN MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(IN THOUSANDS OF DOLLARS)
Deferred income taxes reflect the impact for financial statement reporting
purposes of temporary differences between the financial statement carrying
amounts and tax bases of assets and liabilities. The significant temporary
differences that give rise to the deferred tax assets and liabilities at
December 31 relate to the following:
1998 1997
----------- -----------
DEFERRED TAX ASSETS
Future policy benefits ................... $ 92,909 $ 88,172
Dividend award ........................... 10,255 11,970
Allowances for investment losses ......... 4,232 3,667
Employee benefit liabilities ............. 29,762 27,979
Other .................................... 18,677 24,728
--------- --------
Total deferred tax asset ............... 155,835 156,516
--------- --------
DEFERRED TAX LIABILITIES
Deferred acquisition costs ............... 135,248 127,495
Unrealized investment gains .............. 105,993 81,553
Other .................................... 22,375 22,564
--------- --------
Total deferred tax liability ........... 263,616 231,612
--------- --------
NET DEFERRED TAX LIABILITY ................ $ 107,781 $ 75,096
========= ========
The federal income taxes attributable to consolidated net income are
different from the amounts determined by multiplying consolidated net income
before federal income taxes by the expected federal income tax rate. The
difference between the amount of tax at the U.S. federal income tax rate of 35%
and the consolidated tax provision is summarized as follows:
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Tax expense at 35% ................................ $ 50,443 $ 44,442 $ 26,930
Increase/(decrease) in income taxes resulting from:
Differential earnings amount ..................... 2,681 6,942 500
Other ............................................ 4,565 2,528 595
-------- -------- --------
Federal income tax expense/(benefit) .............. $ 57,689 $ 53,912 $ 28,025
======== ======== ========
</TABLE>
As a mutual life insurance company, the Company is subject to Internal
Revenue Code provisions which require mutual, but not stock, life insurance
companies to include the Differential Earnings Amount (DEA) in each year's
taxable income. This amount is computed by multiplying the Company's average
taxable equity base by a prescribed rate, which is intended to reflect the
difference between stock and mutual companies' earnings rates.
The Internal Revenue Service has examined the Company's income tax returns
through the year 1994. Management believes that an adequate provision has been
made for potential assessments.
B-44
<PAGE>
- --------------------------------------------------------------------------------
THE PENN MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(IN THOUSANDS OF DOLLARS)
6. BENEFIT PLANS:
The following table summarizes the funded status and accrued benefit cost
for the Company's defined benefit plans and other postretirement benefit plans:
As of December 31,
<TABLE>
<CAPTION>
Pension Benefits Other Benefits
------------------------------- -------------------------------
1998 1997 1998 1997
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Benefit obligation ................................ $ (90,428) $ (84,051) $ (26,439) $ (31,413)
Fair value of plan assets ......................... 53,349 42,783 -- --
---------- ---------- ---------- ----------
Funded Status ..................................... $ (37,079) $ (41,268) $ (26,439) $ (31,413)
========== ========== ========== ==========
Accrued benefit cost recognized in the consolidated
balance sheet .................................... $ (22,530) $ (23,527) $ (44,558) $ (45,143)
</TABLE>
The weighted-average assumptions used to measure the actuarial present
value of the projected benefit obligation were:
<TABLE>
<CAPTION>
Pension Benefits Other Benefits
----------------------- -----------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Discount rate .......................... 6.75% 7.00% 6.75% 7.00%
Expected return on plan assets ......... 8.00% 8.00% -- --
Rate of compensation increase .......... 5.50% 5.50% 5.00% 5.50%
</TABLE>
At December 31, 1998, the assumed health care cost trend rate used in
measuring the accumulated postretirement benefit obligation was 8% in 1999,
grading to 5% in the year 2004. At December 31, 1997, the assumed health care
cost trend rate used in measuring the accumulated postretirement benefit
obligation was 8.5% in 1998, grading to 5.0% in the year 2004. The assumed
health care cost trend rate used at December 31, 1996 in measuring the
accumulated postretirement benefit obligation was 8.5% in 1997, grading to 5.0%
in the year 2004. Assumed health care cost trend rates have a significant effect
on the amounts reported for the health care plans.
The contributions made and the benefits paid from the plan were:
<TABLE>
<CAPTION>
Pension Benefits Other Benefits
----------------------- ---------------------
1998 1997 1998 1997
---------- ---------- -------- ----------
<S> <C> <C> <C> <C>
Benefit cost recognized in consolidated income
statement ................................... $ 5,692 $ 5,917 $ 831 $ 1,515
Employer contribution ........................ 6,687 3,006 1,415 2,191
Plan participants' contribution .............. -- -- -- --
Benefits paid ................................ 3,229 3,085 1,415 2,191
</TABLE>
The Company maintains four defined contribution pension plans for
substantially all of its employees and full-time agents. For two plans,
designated contributions of up to 6% or 8% of annual compensation are eligible
to be matched by the Company. Contributions for the third plan are based on
tiered earnings of full-time agents. The last plan, which covers employees of a
subsidiary, are determined on a discretionary basis by the Board of Directors of
that subsidiary. For the years ended December 31, 1998, 1997 and 1996, the
expense recognized for these plans was $9,526, $8,345 and $6,092, respectively.
The estimated fair value of the defined contribution plans' assets at December
31, 1998 and 1997 was $260,706 and $229,378, respectively.
B-45
<PAGE>
- --------------------------------------------------------------------------------
THE PENN MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(IN THOUSANDS OF DOLLARS)
7. REINSURANCE:
The Company has assumed and ceded reinsurance on certain life and annuity
contracts under various agreements. Reinsurance permits recovery of a portion of
losses from reinsurers, although the Company remains primarily liable as the
direct insurer on all risks reinsured. The Company evaluates the financial
strength of potential reinsurers and continually monitors the financial
condition of present reinsurers to ensure that amounts due from reinsurers are
collectible. The table below highlights the amounts shown in the accompanying
financial statements.
<TABLE>
<CAPTION>
Assumed Ceded to
Gross from Other Other Net
Amount Companies Companies Amount
-------------- ------------ ------------- --------------
<S> <C> <C> <C> <C>
DECEMBER 31, 1998:
Life Insurance in Force ......... $32,066,821 $5,115,520 $5,954,701 $31,227,640
Premiums ........................ 166,708 10,586 5,940 171,354
Benefits ........................ 457,239 15,710 17,913 455,036
Reserves ........................ 5,594,712 1,688 62,198 5,534,202
DECEMBER 31, 1997:
Life Insurance in Force ......... $31,027,764 $5,217,856 $4,620,599 $31,625,021
Premiums ........................ 190,754 11,189 6,723 195,220
Benefits ........................ 492,857 14,293 26,916 480,234
Reserves ........................ 5,741,456 1,993 59,322 5,684,127
</TABLE>
During 1996, the Company had gross premiums of $196,897, assumed premiums
of $12,745 and ceded premiums of $9,821 and gross benefits of $293,270, assumed
benefits of $16,466 and ceded benefits of $16,808. Reinsurance receivables with
a carrying value of $55,119 and $50,617 were associated with a single reinsurer
at December 31, 1998 and 1997, respectively.
8. COMMITMENTS AND CONTINGENCIES:
The Company and its subsidiaries are respondents in a number of
proceedings, some of which involve extra-contractual damage in addition to other
damages. In addition, insurance companies are subject to assessments, up to
statutory limits, by state guaranty funds for losses of policyholders of
insolvent insurance companies. In the opinion of management, the outcome of the
proceedings and assessments are not likely to have a material adverse effect on
the financial position of the Company.
The Company, in the ordinary course of business, extends commitments
relating to its investment activities. As of December 31, 1998, the Company had
outstanding commitments totaling $19,413 relating to these investment
activities. The fair value of these commitments approximates the face amount.
9. STATUTORY INFORMATION:
State insurance regulatory authorities prescribe or permit statutory
accounting practices for calculating net income and capital and surplus which
differ in certain respects from generally accepted accounting principles (GAAP).
The significant differences relate to deferred acquisition costs, which are
charged to expenses as incurred; federal income taxes, which reflect amounts
that are currently taxable; and benefit reserves, which are determined using
prescribed mortality, morbidity and interest assumptions, and which, when
considered in light of the assets supporting these reserves, adequately provide
for obligations under policies and contracts. In addition, the recording of
impairments in the value of investments generally lags recognition under GAAP.
The combined insurance companies' statutory capital and surplus at December
31, 1998 and 1997 was $495,212 and $435,861, respectively. The combined
insurance companies' net income, determined in accordance with statutory
accounting practices, for the years ended December 31, 1998, 1997 and 1996, was
$83,676 $63,613 and $25,905, respectively.
B-46
<PAGE>
- --------------------------------------------------------------------------------
THE PENN MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(IN THOUSANDS OF DOLLARS)
10. YEAR 2000 (Unaudited):
The services provided by the Company depend on the smooth functioning of
computer systems. Many computer systems in use today cannot recognize the Year
2000, but revert to 1900 or some other date, due to the manner in which dates
were encoded and calculated earlier in this century. If not corrected, many
computer applications could fail or create erroneous results by or at the Year
2000. Failure of computer systems could affect pricing, account services, and
the handling of investment transactions, among other things. The Company began
preparing for the Year 2000 actively in 1996. The effort involves assessing all
computers, computer programs and related equipment, making necessary changes and
ensuring that all systems process dates correctly. The Company believes that it
has designed and implemented an efficient process for identifying what needs to
be changed and is working to correct and test systems that research shows will
be affected by dates in the Year 2000 and beyond. The Company expects its
computer systems to be Year 2000 compliant.
The Company has relationships with vendors and other service providers that
are not affiliated with the Company. As part of its plan, the Company is
contacting vendors and service providers to obtain assurances that such service
providers have taken appropriate measures to address the Year 2000 issue. The
Company will assess and attempt to mitigate risks where outside service
providers are not Year 2000 ready. However, there is no assurance that the
failure of outside service providers to complete adequate preparations in a
timely manner, which results in systems interruptions or other consequences,
will not have an adverse effect, directly or indirectly, on the Company.
The cost of addressing the Year 2000 issue is significant but not material
to the Company's financial condition or results of operations. The Company will
continue to incur costs in addressing the Year 2000, but does not anticipate
that the costs will be material going forward.
The foregoing statements are designated Year 2000 Readiness Disclosure
within the meaning of The Year 2000 Information and Readiness Disclosure Act
(P.L. 105-271,S.2392).
B-47
