<PAGE>
As filed with the Securities and Exchange Commission on April 25, 2000
File No. 333-62811
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
FORM N-4
REGISTRATION STATEMENT UNDER SECURITIES ACT OF 1933 /X/
Pre-Effective Amendment No. / /
Post-Effective Amendment No. 3 /X/
REGISTRATION STATEMENT UNDER THE INVESTMENT
COMPANY ACT of 1940 /X/
Amendment No. 28 /X/
----------------
Penn Mutual Variable Annuity Account III
(Exact Name of Registrant)
----------------
THE PENN MUTUAL LIFE INSURANCE COMPANY
(Name of Depositor)
----------------
600 Dresher Road
Horsham, Pennsylvania 19044
(Address of Principal Executive Offices of Depositor)
Depositor's Telephone Number: 215-956-8000
----------------
Richard F. Plush
Vice President, Products and Programs
The Penn Mutual Life Insurance Company
600 Dresher Road
Horsham, Pennsylvania 19044
(Name and Address of Agent for Service)
Copy to:
C. Ronald Rubley
Morgan, Lewis & Bockius LLP
1701 Market Street
Philadelphia, PA 19103
----------------
It is proposed that this filing will become effective (check appropriate box)
___ immediately upon filing pursuant to paragraph (b) of Rule 485
_X_ on May 1, 2000 pursuant to paragraph (b) of Rule 485
___ 60 days after filing pursuant to paragraph (a) of Rule 485
___ on (date) pursuant to paragraph (a) of Rule 485
<PAGE>
CROSS REFERENCE SHEET
================================================================================
<TABLE>
<CAPTION>
Location in Statement of
Form N-4 Item Number Location in Prospectuses Additional Information
- -------------------- ------------------------ ----------------------
<S> <C> <C> <C>
Item 1. Cover Page Cover Page N/A
Item 2. Definitions Glossary N/A
Item 3. Synopsis or Highlights Cover Page; Expenses N/A
Item 4. Condensed Financial N/A N/A
Information
Item 5. General Description The Penn Mutual Life N/A
of Registrant, Depositor Insurance Company;
and Portfolio Companies The Separate Account
Item 6. Deductions and Expenses The Contract - What Charges N/A
Do I Pay?
Item 7. General Description The Contract N/A
of Variable Annuity
Contracts
Item 8. Annuity Period Options The Contract - What Types of N/A
Annuity Payments May I Choose?
Item 9. Death Benefit On Death The Contract - What are the Death N/A
Benefits Under My Contract?
Item 10. Purchases and Contract The Contract - How Do I Purchase N/A
Value a Contract?
The Separate Account -
Accumulation Units
Item 11. Redemptions The Contract - May I Withdraw Any N/A
of My Money?
Item 12. Taxes Federal Income Tax N/A
Considerations
Item 13. Legal Proceedings N/A N/A
Item 14. Table of Contents of Statement of Additional N/A
Statement of Additional Information Contents
Information
Item 15. Cover Page N/A Cover Page
Item 16. Table of Contents N/A Cover Page
Item 17. General Information N/A N/A
and History
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Location in Statement of
Form N-4 Item Number Location in Prospectuses Additional Information
- -------------------- ------------------------ ----------------------
<S> <C> <C> <C>
Item 18. Services N/A Administrative and
Recordkeeping
Services; Custodian;
Independent Auditors
Item 19. Purchase of Securities The Contract - How Do I Purchase Distribution of
Being Offered and Expenses a Contract? Contracts
The Contract - May I Transfer
Money Among Investment Options?
The Contract - What Charges Do
I Pay?
Item 20. Underwriters N/A Distribution of
Contracts
Item 21. Calculation of Performance N/A Performance Data
Data
Item 22. Annuity Payments N/A Variable Annuity
Payments
Item 23. Financial Statements N/A Financial Statements
</TABLE>
<PAGE>
PART A
Information Required in a Prospectus
<PAGE>
<TABLE>
<CAPTION>
PROSPECTUS -- MAY 1, 2000
Individual Variable and Fixed Annuity Contract -- Flexible Purchase Payments
- ---------------------------------------------------------------------------------------------------------
PENNANT SELECT
PENN MUTUAL VARIABLE ANNUITY ACCOUNT III
THE PENN MUTUAL LIFE INSURANCE COMPANY
Philadelphia, Pennsylvania 19172 o Telephone (800) 523-0650
- ---------------------------------------------------------------------------------------------------------
<S> <C>
This Prospectus describes an individual variable and fixed annuity contract ("Contract") 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 you and Penn Mutual. You 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 your Variable Account Value and any variable payout will
be based upon investment experience.
o has a fixed component, which means that your Fixed Account Value and any fixed payout will be based
on purchase payments accumulated with interest at a rate of not less than 3%.
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 the variable component of the Contract, you may 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
Money Market Fund Independence Capital Management, Inc.
Limited Maturity Bond Fund Independence Capital Management, Inc.
Quality Bond Fund Independence Capital Management, Inc.
High Yield Bond Fund T. Rowe Price Associates, Inc.
Flexibly Managed Fund T. Rowe Price Associates, Inc.
Growth Equity Fund Independence Capital Management, Inc.
Large Cap Value Fund Putnam Investment Management, Inc.
Index 500 Fund Wells Capital Management Incorporated
Mid Cap Growth Fund Turner Investment Partners, Inc.
Mid Cap Value Fund Neuberger Berman Management Inc.
Emerging Growth Fund RS Investment Management, Inc.
Small Cap Value Fund Royce & Associates, Inc.
International Equity Fund Vontobel USA, Inc.
- ---------------------------------------------------------------------------------------------------------
Neuberger Berman Advisors Management Trust Manager
Balanced Portfolio Neuberger Berman Management Inc.
- ---------------------------------------------------------------------------------------------------------
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
- ---------------------------------------------------------------------------------------------------------
Morgan Stanley's The Universal Institutional Funds, Inc. Manager
Emerging Markets Equity (International) Portfolio Morgan Stanley Asset Management
- ---------------------------------------------------------------------------------------------------------
</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>
Under the fixed component of the Contract, you may direct us to allocate money
to 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 up to 7% on early withdrawals. If you withdraw money before age
59 1/2, 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 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.
2
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
PROSPECTUS CONTENTS
- -------------------------------------------------------------------------------------------------------------------
<S> <C>
GLOSSARY........................................................................................................5
- -------------------------------------------------------------------------------------------------------------------
EXPENSES........................................................................................................6
- -------------------------------------------------------------------------------------------------------------------
EXAMPLES OF FEES AND EXPENSES...................................................................................8
- -------------------------------------------------------------------------------------------------------------------
CONDENSED FINANCIAL INFORMATION................................................................................10
- -------------------------------------------------------------------------------------------------------------------
THE PENN MUTUAL LIFE INSURANCE COMPANY.........................................................................14
- -------------------------------------------------------------------------------------------------------------------
THE SEPARATE ACCOUNT...........................................................................................15
Accumulation Units........................................................................................15
Voting Instructions.......................................................................................15
Investment Options in the Separate Account................................................................15
Penn Series Funds, Inc. ..............................................................................15
Neuberger Berman Advisers Management Trust............................................................17
Fidelity Investments' Variable Insurance Products Fund................................................17
Fidelity Investments' Variable Insurance Products Fund II.............................................17
Morgan Stanley's The 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 ..............................................................................20
Other Information ....................................................................................20
What Are the Death Benefits Under My Contract?............................................................20
Enhanced Guaranteed Minimum Death Benefit ............................................................21
Choosing a Lump Sum or Annuity .......................................................................21
May I Transfer Money Among Subaccounts and the Fixed Interest Accounts?...................................21
Before the Annuity Date .............................................................................21
After the Annuity Date .............................................................................22
General Rules.........................................................................................22
Dollar Cost Averaging.................................................................................22
Automatic Rebalancing.................................................................................22
May I Withdraw Any of My Money?...........................................................................22
Systematic Withdrawals................................................................................23
403(b) Withdrawals....................................................................................23
Deferment of Payments and Transfers.......................................................................23
What Charges Do I Pay?....................................................................................23
Administration Charges................................................................................23
Mortality and Expense Risk Charge.....................................................................24
Contingent Deferred Sales Charge......................................................................24
Free Withdrawals......................................................................................24
Enhanced Guaranteed Minimum Death Benefit (Optional)..................................................25
Premium Taxes.........................................................................................25
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
- -------------------------------------------------------------------------------------------------------------------
PERFORMANCE INFORMATION........................................................................................25
- -------------------------------------------------------------------------------------------------------------------
MORE INFORMATION ABOUT THE FIXED INTEREST ACCOUNTS.............................................................26
General Information.......................................................................................26
Loans Under Section 403(b) Contracts......................................................................26
- -------------------------------------------------------------------------------------------------------------------
FEDERAL INCOME TAX CONSIDERATIONS..............................................................................27
Withdrawals and Death Benefits............................................................................27
Annuity Payments..........................................................................................27
Early Withdrawals.........................................................................................27
Transfers.................................................................................................27
Separate Account Diversification..........................................................................27
Qualified Plans...........................................................................................28
- -------------------------------------------------------------------------------------------------------------------
FINANCIAL STATEMENTS...........................................................................................28
- -------------------------------------------------------------------------------------------------------------------
STATEMENT OF ADDITIONAL INFORMATION CONTENTS...................................................................29
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
===================================================================================================================
GLOSSARY
<S> <C>
Accumulation Period: A period that begins with your first purchase payment and ends on the
Annuity Date.
Accumulation Unit: A unit of measure used to compute the Variable Account Value under the
Contract 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 described in this prospectus.
Contract Owner: The person specified in the Contract as the Contract Owner.
Contract Value: The sum of the Variable Account Value and the Fixed Interest Account Value.
Fixed Account Value: The value of amounts held under the Contract in the Fixed Interest Account.
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.
We or Us: A reference to "we" or "us" denotes The Penn Mutual Life Insurance Company, also
referred to in this Prospectus as Penn Mutual.
You: A reference to "you" denotes the Contract Owner or prospective Contract Owner.
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
===================================================================================================================
EXPENSES
<S> <C>
Contract Owner Transaction Expenses
Sales Load Imposed on Purchase Payments................................................................... None
Maximum Contingent Deferred Sales Charge...................................7% of purchase payments withdrawn(a)
Transfer Fee...............................................................................................None
Maximum Annual Contract Administration Charge............................................................$40(b)
Separate Account Annual Expenses (as a percentage of Variable Account Value)
Mortality and Expense Risk Charge.......................................................................1.20%
Contract Administration Charge..........................................................................0.15%
-----
Total Separate Account Annual Expenses................................................................ 1.35%(c)
</TABLE>
- -------------
(a) The charge decreases each year to zero in the seventh year.
(b) You pay $40 or 2% of the Variable Account Value, whichever is less. You do
not pay this charge if your Variable Account Value is more than $100,000.
(c) You may purchase an Enhanced Guaranteed Minimum Death Benefit rider with
your Contract. The current annual charge for this rider is 0.20% of the Variable
Account Value, and will never be more than 0.25%.
See What Charges Do I Pay? in this Prospectus.
- --------------------------------------------------------------------------------
Penn Series Funds, Inc.
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>
Money Market (1) ........... 0.20% 0.15% 0.08% 0.08% 0.51%
Limited Maturity Bond(1) ... 0.30% 0.15% 0.08% 0.03% 0.56%
Quality Bond(1) ............ 0.35% 0.15% 0.08% 0.10% 0.68%
High Yield Bond(2) ......... 0.50% 0.15% 0.08% 0.09% 0.82%
Flexibly Managed(1) ........ 0.60% 0.15% 0.05% 0.06% 0.86%
Growth Equity(1) ........... 0.65% 0.15% 0.06% 0.05% 0.91%
Large Cap Value(1) ......... 0.60% 0.15% 0.06% 0.05% 0.86%
Index 500 Fund(1) .......... 0.07% 0.09% 0.06% 0.03% 0.25%(3)
Mid Cap Growth Fund(1) ..... 0.70% 0.15% 0.08% 0.07% 1.00%
Mid Cap Value Fund(1) ...... 0.55% 0.15% 0.08% 0.08% 0.86%
Emerging Growth(2) ......... 0.73% 0.15% 0.07% 0.09% 1.04%
Small Value Cap (1) ........ 0.85% 0.15% 0.08% 0.09% 1.17%
International Equity(1) .... 0.85% 0.15% 0.08% 0.10% 1.18%
</TABLE>
- ----------------------
(1) The expenses are estimates provided by the Funds' investment adviser.
(2) The expenses are for the last fiscal year.
(3) The total expenses for the Index 500 Fund are estimated to be 0.31% if the
Fund's administrator does not waive part of its Administrative and Corporate
Service Fees.
6
<PAGE>
- --------------------------------------------------------------------------------
Neuberger Berman Advisers Management Trust (a)
Underlying Fund Annual Expenses (as a % of portfolio average net assets)
<TABLE>
<CAPTION>
Management,
Advisory and
Administration Other Total Fund
Fees Expenses Expenses
-------------- -------- ----------
<S> <C> <C> <C>
Balanced........................................................... 0.85% 0.18% 1.03%
</TABLE>
- ----------------------
(a) Neuberger Berman Advisers Management Trust (the "Trust") is divided into
portfolios (each a "Portfolio"). Each Portfolio invests in a corresponding
series ("Series") of the Trust. This table shows the current expenses paid by
the Balanced 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)
<TABLE>
<CAPTION>
Management Other Total Fund
Fee Expenses Expenses
---------- -------- ----------
<S> <C> <C> <C>
Equity-Income.............................................. 0.49% 0.07% 0.56%
Growth..................................................... 0.59% 0.06% 0.65%
</TABLE>
- ----------------------
(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 0.57% for the Equity Income
Portfolio and 0.66% for the Growth Portfolio.
- --------------------------------------------------------------------------------
Fidelity Investments' Variable Insurance Products Fund II
Underlying Fund Annual Expenses (as a % of portfolio average net assets)
<TABLE>
<CAPTION>
Management Fee Other Total Fund
(After Waiver) Expenses Expenses
-------------- -------- ----------
<S> <C> <C> <C>
Asset Manager (a).......................................... 0.54% 0.08% 0.62%
</TABLE>
- ----------------------
(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 0.63% for the Asset Manager
Portfolio.
7
<PAGE>
- --------------------------------------------------------------------------------
Morgan Stanley's The Universal Institutional Funds, Inc.
Underlying Fund Annual Expenses (as a % of portfolio average net assets)
<TABLE>
<CAPTION>
Management Other Total Fund
Fee Expenses Expenses
---------- -------- ----------
<S> <C> <C> <C>
Emerging Markets Equity (International).................... 1.25% 0.50% 1.75%
</TABLE>
- --------------------------------------------------------------------------------
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., Neuberger Berman Advisers Management
Trust, Fidelity Investments' Variable Insurance Products Fund, Fidelity
Investments' Variable Insurance Products Fund II and Morgan Stanley's The
Universal Institutional 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.
================================================================================
EXAMPLES OF FEES AND EXPENSES
The following examples show the total expenses that you would pay on each $1,000
invested.
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 Money Market Fund*....................................... $81 $107 $133 $225
Penn Series Limited Maturity Bond Fund*(a)........................... $81 $108 $136 $230
Penn Series Quality Bond Fund*....................................... $82 $112 $142 $242
Penn Series High Yield Bond Fund**................................... $84 $116 $149 $257
Penn Series Flexibly Managed Fund*................................... $84 $117 $151 $261
Penn Series Growth Equity Fund*...................................... $85 $119 $153 $266
Penn Series Large Cap Value Fund*(b)................................. $84 $117 $151 $261
Penn Series Index 500 Fund*(c)....................................... $78 $ 99 $120 $196
Penn Series Mid Cap Growth Fund*..................................... $85 $121 $158 $275
Penn Series Mid Cap Value Fund*(d)................................... $84 $117 $151 $261
Penn Series Emerging Growth Fund**................................... $86 $122 $160 $279
Penn Series Small Cap Value Fund*(e)................................. $87 $126 $166 $292
Penn Series International Equity Fund*............................... $87 $126 $166 $293
Neuberger Berman Balanced Portfolio**................................ $86 $122 $159 $278
Fidelity's Equity Income Portfolio**................................. $81 $109 $136 $231
Fidelity's Growth Portfolio**........................................ $82 $111 $141 $240
Fidelity's Asset Manager Portfolio**................................. $82 $110 $139 $237
Morgan Stanley Emerging Markets Equity (International) Portfolio**... $92 $142 $193 $347
</TABLE>
8
<PAGE>
You would pay the following expenses on each $1,000 invested by the end of the
year shown (assuming a 5% annual return) if you do not surrender your Contract
or if you annuitize your Contract:
<TABLE>
<CAPTION>
One Three Five Ten
Year Years Years Years
---- ----- ----- -----
<S> <C> <C> <C> <C>
Penn Series Money Market Fund*....................................... $19 $60 $104 $225
Penn Series Limited Maturity Bond Fund*(a)........................... $20 $62 $106 $230
Penn Series Quality Bond Fund*....................................... $21 $66 $112 $242
Penn Series High Yield Bond Fund**................................... $23 $70 $120 $257
Penn Series Flexibly Managed Fund*................................... $23 $71 $122 $261
Penn Series Growth Equity Fund*...................................... $24 $72 $124 $266
Penn Series Large Cap Value Fund*(b)................................. $23 $71 $122 $261
Penn Series Index 500 Fund*(c)....................................... $17 $52 $ 90 $196
Penn Series Mid Cap Growth Fund*..................................... $24 $75 $129 $275
Penn Series Mid Cap Value Fund*(d)................................... $23 $71 $122 $261
Penn Series Emerging Growth Fund**................................... $25 $76 $131 $279
Penn Series Small Cap Value Fund*(e)................................. $26 $80 $137 $292
Penn Series International Equity Fund*............................... $26 $81 $138 $293
Neuberger Berman Balanced Portfolio**................................ $25 $76 $130 $278
Fidelity's Equity Income Portfolio**................................. $20 $62 $107 $231
Fidelity's Growth Portfolio**........................................ $21 $65 $111 $240
Fidelity's Asset Manager Portfolio**................................. $21 $64 $110 $237
Morgan Stanley Emerging Markets Equity (International) Portfolio**... $32 $97 $166 $347
</TABLE>
- ----------------------
* These examples are based upon estimates of Fund expenses provided by the
Funds' investment adviser.
** These examples are based upon Fund data for the
fiscal year ended December 31, 1999.
(a) Neuberger Berman Limited Maturity Bond Portfolio Subaccount prior to May 1,
2000.
(b) Penn Series' Value Equity Fund Subaccount prior to May 1, 2000.
(c) Fidelity Investments' Index 500 Fund Subaccount prior to May 1, 2000.
(d) Neuberger Berman Partners Portfolio Subaccount prior to May 1, 2000.
(e) Penn Series Small Capitalization Fund Subaccount prior to May 1, 2000.
These are only examples. Your expenses may be more or less than what is shown.
9
<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. The financial data included in the tables
should be read in conjunction with the financial statements and the related
notes included in the Statement of Additional Information.
- --------------------------------------------------------------------------------
PENN SERIES MONEY MARKET FUND SUBACCOUNT
Values of an Accumulation Unit Outstanding Throughout Each Period
<TABLE>
<CAPTION>
Year Ended
December 31,1999 (a)
- ----------------------------------------------------------------------------------------------------------------
<S> <C>
Accumulation Unit Value, beginning of period .......................... $10.000
Accumulation Unit Value, end of period ................................ $10.321
Number of Accumulation Units outstanding, end of period ............... 826,316
</TABLE>
- ----------------------
(a) For the period January 16, 1999 (date subaccount was established) through
December 31, 1999.
- --------------------------------------------------------------------------------
PENN SERIES QUALITY BOND FUND SUBACCOUNT
Values of an Accumulation Unit Outstanding Throughout Each Period
<TABLE>
<CAPTION>
Year Ended
December 31,1999 (a)
- ----------------------------------------------------------------------------------------------------------------
<S> <C>
Accumulation Unit Value, beginning of period......................... $10.000
Accumulation Unit Value, end of period................................ $ 9.877
Number of Accumulation Units outstanding, end of period............... 261,461
</TABLE>
- ----------------------
(a) For the period January 16, 1999 (date subaccount was established) through
December 31, 1999.
- --------------------------------------------------------------------------------
PENN SERIES LIMITED MATURITY BOND FUND SUBACCOUNT(a)
Values of an Accumulation Unit Outstanding Throughout Each Period
<TABLE>
<CAPTION>
Year Ended
December 31, 1999 (b)
- ----------------------------------------------------------------------------------------------------------------
<S> <C>
Accumulation Unit Value, beginning of period ......................... $10.000
Accumulation Unit Value, end of period ............................... $10.020
Number of Accumulation Units outstanding, end of period .............. 61,833
</TABLE>
- ----------------------
(a) Neuberger Berman Limited Maturity Bond Portfolio Subaccount prior to May 1,
2000.
(b) For the period January 16, 1999 (date subaccount was established) through
December 31, 1999.
10
<PAGE>
- --------------------------------------------------------------------------------
PENN SERIES HIGH YIELD BOND FUND SUBACCOUNT
Values of an Accumulation Unit Outstanding Throughout Each Period
<TABLE>
<CAPTION>
Year Ended
December 31, 1999(a)
- ----------------------------------------------------------------------------------------------------------------
<S> <C>
Accumulation Unit Value, beginning of period........................... $10.000
Accumulation Unit Value, end of period................................. $10.264
Number of Accumulation Units outstanding, end of period................ 164,772
</TABLE>
- ----------------------
(a) For the period January 16, 1999 (date subaccount was established) through
December 31, 1999.
- --------------------------------------------------------------------------------
PENN SERIES FLEXIBLY MANAGED FUND SUBACCOUNT
Values of an Accumulation Unit Outstanding Throughout Each Period
<TABLE>
<CAPTION>
Year Ended
December 31, 1999(a)
- ----------------------------------------------------------------------------------------------------------------
<S> <C>
Accumulation Unit Value, beginning of period ................... $10.000
Accumulation Unit Value, end of period ......................... $10.552
Number of Accumulation Units outstanding, end of period ........ 544,267
</TABLE>
- ----------------------
(a) For the period January 16, 1999 (date subaccount was established) through
December 31, 1999.
- --------------------------------------------------------------------------------
PENN SERIES GROWTH EQUITY FUND SUBACCOUNT
Values of an Accumulation Unit Outstanding Throughout Each Period
<TABLE>
<CAPTION>
Year Ended
December 31, 1999(a)
- ----------------------------------------------------------------------------------------------------------------
<S> <C>
Accumulation Unit Value, beginning of period .................. $10.000
Accumulation Unit Value, end of period ........................ $13.267
Number of Accumulation Units outstanding, end of period ....... 371,063
</TABLE>
- ----------------------
(a) For the period January 16, 1999 (date subaccount was established) through
December 31, 1999.
- --------------------------------------------------------------------------------
PENN SERIES LARGE CAP VALUE FUND SUBACCOUNT(a)
Values of an Accumulation Unit Outstanding Throughout Each Period
<TABLE>
<CAPTION>
Year Ended
December 31, 1999(b)
- ----------------------------------------------------------------------------------------------------------------
<S> <C>
Accumulation Unit Value, beginning of period .................. $ 10.000
Accumulation Unit Value, end of period ........................ $ 9.823
Number of Accumulation Units outstanding, end of period ....... 332,695
</TABLE>
- ----------------------
(a) Penn Series' Value Equity Fund Subaccount prior to May 1, 2000.
(b) For the period January 16, 1999 (date subaccount was established) through
December 31, 1999.
11
<PAGE>
- --------------------------------------------------------------------------------
PENN SERIES INDEX 500 FUND SUBACCOUNT(a)
Values of an Accumulation Unit Outstanding Throughout Each Period
<TABLE>
<CAPTION>
Year Ended
December 31, 1999(b)
- ----------------------------------------------------------------------------------------------------------------
<S> <C>
Accumulation Unit Value, beginning of period ........................... $ 10.000
Accumulation Unit Value, end of period ................................. $ 11.913
Number of Accumulation Units outstanding, end of period ................ 933,121
</TABLE>
- ----------------------
(a) Fidelity Investments' Index 500 Fund Subaccount prior to May 1, 2000.
(b) For the period January 16, 1999 (date subaccount was established) through
December 31, 1999.
- --------------------------------------------------------------------------------
PENN SERIES MID CAP VALUE FUND SUBACCOUNT(a)
Values of an Accumulation Unit Outstanding Throughout Each Period
<TABLE>
<CAPTION>
Year Ended
December 31, 1999(b)
- ----------------------------------------------------------------------------------------------------------------
<S> <C>
Accumulation Unit Value, beginning of period ......................... $ 10.000
Accumulation Unit Value, end of period ............................... $ 10.606
Number of Accumulation Units outstanding, end of period .............. 163,977
</TABLE>
- ----------------------
(a) Neuberger Berman Partners Portfolio Subaccount prior to May 1, 2000.
(b) For the period January 16, 1999 (date subaccount was established) through
December 31, 1999.
- --------------------------------------------------------------------------------
PENN SERIES EMERGING GROWTH FUND SUBACCOUNT
Values of an Accumulation Unit Outstanding Throughout Each Period
<TABLE>
<CAPTION>
Year Ended
December 31, 1999(a)
- ----------------------------------------------------------------------------------------------------------------
<S> <C>
Accumulation Unit Value, beginning of period ......................... $ 10.000
Accumulation Unit Value, end of period ............................... $ 28.370
Number of Accumulation Units outstanding, end of period .............. 259,172
</TABLE>
- ----------------------
(a) For the period January 16, 1999 (date subaccount was established) through
December 31, 1999.
12
<PAGE>
- --------------------------------------------------------------------------------
PENN SERIES SMALL CAP VALUE FUND SUBACCOUNT (a)
Values of an Accumulation Unit Outstanding Throughout Each Period
<TABLE>
<CAPTION>
Year Ended
December 31, 1999(b)
- ----------------------------------------------------------------------------------------------------------------
<S> <C>
Accumulation Unit Value, beginning of period ......................... $ 10.000
Accumulation Unit Value, end of period ............................... $ 9.752
Number of Accumulation Units outstanding, end of period .............. 109,420
</TABLE>
- ----------------------
(a) Penn Series Small Capitalization Fund Subaccount prior to May 1, 2000.
(b) For the period January 16, 1999 (date subaccount was established) through
December 31, 1999.
- --------------------------------------------------------------------------------
PENN SERIES INTERNATIONAL EQUITY FUND SUBACCOUNT
Values of an Accumulation Unit Outstanding Throughout Each Period
<TABLE>
<CAPTION>
Year Ended
December 31, 1999 (a)
- -----------------------------------------------------------------------------------------------------------
<S> <C>
Accumulation Unit Value, beginning of period .......................... $ 10.000
Accumulation Unit Value, end of period ................................ $ 14.086
Number of Accumulation Units outstanding, end of period ............... 169,274
</TABLE>
- ----------------------
(a) For the period January 16, 1999 (date subaccount was established) through
December 31, 1999.
- --------------------------------------------------------------------------------
NEUBERGER BERMAN BALANCED PORTFOLIO SUBACCOUNT
Values of an Accumulation Unit Outstanding Throughout Each Period
<TABLE>
<CAPTION>
Year Ended
December 31, 1999 (a)
- ----------------------------------------------------------------------------------------------------------------
<S> <C>
Accumulation Unit Value, beginning of period .................... $ 10.000
Accumulation Unit Value, end of period .......................... $ 13.285
Number of Accumulation Units outstanding, end of period.......... 86,030
</TABLE>
- ----------------------
(a) For the period January 16, 1999 (date subaccount was established) through
December 31, 1999.
- --------------------------------------------------------------------------------
FIDELITY INVESTMENTS' EQUITY INCOME FUND SUBACCOUNT
Values of an Accumulation Unit Outstanding Throughout Each Period
<TABLE>
<CAPTION>
Year Ended
December 31, 1999 (a)
- ----------------------------------------------------------------------------------------------------------------
<S> <C>
Accumulation Unit Value, beginning of period ................... $ 10.000
Accumulation Unit Value, end of period ......................... $ 10.533
Number of Accumulation Units outstanding, end of period ........ 381,000
</TABLE>
- ----------------------
(a) For the period January 16, 1999 (date subaccount was established) through
December 31, 1999.
13
<PAGE>
- --------------------------------------------------------------------------------
FIDELITY INVESTMENTS' GROWTH FUND SUBACCOUNT
Values of an Accumulation Unit Outstanding Throughout Each Period
<TABLE>
<CAPTION>
Year Ended
December 31, 1999(a)
- ----------------------------------------------------------------------------------------------------------------
<S> <C>
Accumulation Unit Value, beginning of period.................... $ 10.000
Accumulation Unit Value, end of period .................... $ 13.562
Number of Accumulation Units outstanding, end of period......... 656,284
</TABLE>
- ----------------------
(a) For the period January 16, 1999 (date subaccount was established) through
December 31, 1999.
- --------------------------------------------------------------------------------
FIDELITY INVESTMENTS' ASSET MANAGER FUND SUBACCOUNT
Values of an Accumulation Unit Outstanding Throughout Each Period
<TABLE>
<CAPTION>
Year Ended
December 31, 1999(a)
- ----------------------------------------------------------------------------------------------------------------
<S> <C>
Accumulation Unit Value, beginning of period....................... $10.000
Accumulation Unit Value, end of period............................. $10.980
Number of Accumulation Units outstanding, end of period............ 94,897
</TABLE>
- ----------------------
(a) For the period January 16, 1999 (date subaccount was established) through
December 31, 1999.
- --------------------------------------------------------------------------------
MORGAN STANLEY EMERGING MARKETS EQUITY (INTERNATIONAL) FUND SUBACCOUNT
Values of an Accumulation Unit Outstanding Throughout Each Period
<TABLE>
<CAPTION>
Year Ended
December 31, 1999 (a)
- ----------------------------------------------------------------------------------------------------------------
<S> <C>
Accumulation Unit Value, beginning of period ........................... $10.000
Accumulation Unit Value, end of period ................................. $18.922
Number of Accumulation Units outstanding, end of period ................ 35,779
</TABLE>
- ----------------------
(a) For the period January 16, 1999 (date subaccount was established) through
December 31, 1999.
As of the date of this prospectus, the Mid Cap Growth Fund had not yet
commenced operations. Accordingly, financial information is not presented.
The financial statements of the Separate Account for the year ended
December 31, 1999 are included in the statement of additional information
referred to on the cover page of this prospectus.
================================================================================
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 Contract.
14
<PAGE>
================================================================================
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
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 1.20% and contract administration
charge at an annual rate of 0.15% assessed against the subaccount.
- --------------------------------------------------------------------------------
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 may change these
procedures whenever we are required or permitted to do so by law.
- --------------------------------------------------------------------------------
Investment Options in the Separate Account
The Separate Account currently has subaccounts that invest in the following
Funds:
Penn Series Funds, Inc.:
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.
Limited Maturity Bond Fund -- seeks highest available current income
consistent with liquidity and low risk to principal through investment primarily
in marketable investment grade debt securities; total return is secondary.
15
<PAGE>
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.
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.
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.
Large Cap Value Fund (formerly, "Value Equity Fund") -- seeks to
maximize total return (capital appreciation and income) primarily by investing
in equity securities of companies believed to be undervalued.
Index 500 Fund -- 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.
Mid Cap Growth Fund -- seeks to maximize capital appreciation by
investing primarily in common stocks of U.S. companies with medium market
capitalizations (i.e., between $1 billion and $8 billion) that have strong
earnings growth potential.
Mid Cap Value -- seeks to achieve growth of capital by investing
primarily in U.S. companies with market medium capitalizations that are
undervalued.
Emerging Growth Fund -- seeks capital appreciation by investing
primarily in common stocks of emerging growth companies with above-average
growth prospects.
Small Cap Value Fund (formerly, "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 $1.5 billion.
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.
Independence Capital Management, Inc., Horsham, Pennsylvania is
investment adviser to each of the Funds. Putnam Investment Management, Inc.,
Boston, Massachusetts, is investment sub-adviser to the Large Cap Value Fund.
T. Rowe Price Associates, Baltimore, Maryland, is investment sub-adviser to the
Flexibly Managed and High Yield Bond Funds. Wells Capital Management
Incorporated, San Francisco, California, is investment sub- adviser to the Index
500 Fund. Turner Investment Partners, Inc., Berwyn, Pennsylvania is sub-adviser
to the Mid Cap Growth Fund. Neuberger Berman Management Inc., New York, New
York, is investment sub-adviser to the Mid Cap Value Fund. Royce & Associates,
Inc., New York, New York, is investment sub-adviser to the Small Cap Value Fund.
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>
Neuberger Berman Advisers Management Trust:
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.
Neuberger Berman Management Inc., New York, New York, is investment
adviser to the Balanced 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.
Fidelity Management & Research Company, Boston, Massachusetts, is
investment adviser to the Asset Manager Portfolio.
Morgan Stanley's The Universal Institutional 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 Asset Management, 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 Neuberger Berman Advisers Management Trust,
Fidelity Investments' Variable Insurance Products Fund and Variable Insurance
Products Fund II and Morgan Stanley's The Universal Institutional Funds, Inc.
are offered not only to variable annuity and 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's The Universal Institutional Funds, Inc., directly to
qualified pension and retirement plans. For more information on the possible
conflicts involved when the Separate Account invests in Funds offered to other
separate accounts, see the Fund prospectuses and Statements of Additional
Information.
Read the Prospectuses of these Funds before investing.
17
<PAGE>
================================================================================
THE FIXED INTEREST ACCOUNTS
Interests in the Company's general account are not registered under the
Securities Act of 1933 and the general account is not registered as an
investment company under the Investment Company Act of 1940. The general account
and any interests held in the general account are not subject to the provisions
of these Acts. 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 ACCOUNT.
================================================================================
THE CONTRACT
An individual variable and fixed annuity contract may be an attractive long-term
investment vehicle for many people. Our Contract allows you to invest in:
o the Separate Account, through which you may invest in one or
more of the available Funds of Penn Series Funds, Inc.,
Neuberger Berman Advisers Management Trust, Fidelity
Investments' Variable Insurance Products Fund, Fidelity
Investments' Variable Insurance Products Fund II and Morgan
Stanley's The Universal Institutional Funds, Inc. See THE
SEPARATE ACCOUNT in this Prospectus.
o one or more Fixed Interest Accounts. The Fixed Interest
Accounts are guaranteed and funded 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.
18
<PAGE>
The Contract is available to individuals and institutions. The
Contracts also may be issued as individual retirement annuities under section
408(b) of the Internal Revenue Code (the "Code") in connection with IRA
rollovers and as tax-deferred annuities under Section 403(b) of the Code (often
referred to as qualified Contracts).
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.
- --------------------------------------------------------------------------------
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 our
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.
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
your Contract of up to $1 million. You must obtain our prior approval to make
total purchase payments in excess of $1 million.
The principal underwriter of the Contracts is Hornor, Townsend & Kent,
Inc., 600 Dresher Road, Horsham, PA 19044, a wholly-owned subsidiary of Penn
Mutual.
- --------------------------------------------------------------------------------
What Types of Annuity Payments May I Choose?
You may choose: (1) an annuity for a set 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) any other form of annuity that we may
agree upon. You may choose a variable annuity (except for a set number of
years), a fixed annuity, or a combination of both. You may choose a person other
than yourself to be the Annuitant. Currently, during the Annuity Payout Period,
your variable annuity may not be allocated to more than four subaccounts.
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 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.
When you purchase a variable annuity, you will pick an assumed interest
rate of 3% or 5%. If the annual net investment return during the annuity payout
period is greater than the rate chosen, your annuity payments will increase. If
the annual net investment return is less, your payments will decrease. Choosing
a higher assumed interest rate would mean a higher first annuity payment but
more slowly rising or more rapidly falling subsequent payments. Choosing a lower
assumed interest rate would have the opposite effect.
During the Variable Annuity Payout Period, you (or your Beneficiary in
the event of death) may transfer your Annuity Unit Values among four subaccounts
of the Separate Account that you choose on the Annuity Date. You may not select
other subaccounts after the Annuity Date.
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, and a guaranteed 3% rate of return.
19
<PAGE>
Other Information. Unless you tell us otherwise:
o you will receive a life annuity with payments guaranteed for
10 years. Tax deferred annuities under Section 403(b) of the
Code will receive a joint and survivor annuity.
o the annuity will be split between fixed and variable in the
same proportions as your Contract Value on the Annuity Date,
except if your Contract Value is allocated to more than four
subaccounts, the variable portion will be allocated to the
Money Market subaccount until you give us instructions to
allocate to not more than four subaccounts.
o your annuity payments will begin on the later of (1) the first
day of the next month after the Annuitant's 95th birthday or
(2) 10 years after the contract date, unless state law
requires an earlier Annuity Date. The Annuity Date under the
Contract must be on the first day of a month.
You 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. If your Contract Value is less than $5,000, we may pay you in a
lump sum. We usually make annuity payments monthly, 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
the Beneficiary at any time before your death or the death of the Annuitant,
whichever occurs first.
If you die before the Annuity Date and you are not the Annuitant, we
will pay your Beneficiary the Contract Value as of the date our administrative
office receives proof of death and other information required to process the
payment. If you are the Annuitant, we will pay your Beneficiary the death
benefit described in the next paragraph.
If the Annuitant dies before the Annuity Date, we will pay a death
benefit equal to the sum of the Variable Account death benefit and the Fixed
Interest Account death benefit as of the date we receive proof of death and
other information required to process the payment. The Variable Account death
benefit is the greater of (1) the Variable Account Value; or (2) all purchase
payments allocated and transfers made to the Variable Account, less withdrawals
and amounts transferred out. The Fixed Interest Account death benefit is the
Fixed Interest Account Value.
We generally pay the death benefit within seven days after we receive
proof of death and all required information.
Enhanced Guaranteed Minimum Death Benefit. If the Annuitant is 75 years
of age or less, you may purchase an enhanced guaranteed minimum death benefit as
part of your Contract. The enhanced guaranteed minimum death benefit is paid in
place of the Variable Account death benefit, if it is greater, and if the
Annuitant dies before the Annuity Date and before age 90. We offer two different
enhanced guaranteed minimum death benefits. You may purchase either, but only at
the time you purchase your Contract.
The guaranteed minimum death benefit - step-up: This is the highest
Variable Account Value on the current or prior contract anniversary dates,
adjusted as follows. For this purpose, the Variable Account Value on an
anniversary date will be adjusted upward by the amount of any purchase payments
allocated and transfers made to the Variable Account after the anniversary date,
and before the next anniversary date, and adjusted downward by an amount that is
in the same proportion that the Variable Account Value was decreased by
transfers and withdrawals (including any deferred sales charge) after the
anniversary date and before the next anniversary date.
20
<PAGE>
The guaranteed minimum death benefit - rising floor: This is the sum of
all purchase payments allocated and transfers made to the Variable Account,
minus a reduction for any withdrawals or transfers made from the Variable
Account (as described below), plus interest at 5%, calculated as follows.
Interest is reflected for the periods amounts are held in the Variable Account,
but not for any period after the Annuitant attains 80 years of age. If a
withdrawal or transfer is made from the Variable Account prior to death, the
guaranteed minimum death benefit will be reduced by an amount that is in the
same proportion that the amount withdrawn or transferred from the Variable
Account (including any contingent deferred sales charge) was to the Variable
Account Value on the date of the withdrawal or transfer.
The enhanced guaranteed minimum death benefit will terminate if you
withdraw or transfer the full Variable Account Value from your Contract. For
information on the cost of the enhanced guaranteed minimum death benefits, see
What Charges Do I Pay? In this Prospectus.
Choosing a Lump Sum or Annuity. Your Beneficiary has one year from your
death to choose to receive the death benefit in a lump sum or as an annuity.
o The Beneficiary has only 60 days to make this election if the
death benefit is paid upon death of an Annuitant other than
you.
o If the Beneficiary chooses a lump sum, he or she may ask us to
postpone payment of the lump sum for up to five years (until
paid out, the death benefit will be allocated to subaccounts
of the Separate Account and/or Fixed Interest Accounts as
directed by the Beneficiary).
o If the Beneficiary chooses an annuity, we will begin annuity
payments no later than one year from the date of death.
Payments will be made over the Beneficiary's life or over a
period not longer than the Beneficiary's life expectancy.
o If an election is not made within one year of the date of
death of the Contract Owner or within 60 days of the death of
an Annuitant other than you, the death benefit will be paid to
the Beneficiary in a lump sum.
If your Beneficiary is your surviving spouse, he or she may become the
Contract Owner rather than receive the death benefit. If there is more than one
surviving Beneficiary, they must choose their portion of the death benefit in
accordance with the above options. If the Annuitant dies on or after the Annuity
Date, the death benefit payable, if any, will be paid in accordance with your
choice of annuity.
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 One Year Fixed Interest Account?
Before the Annuity Date. You may transfer your Contract Value among
subaccounts of the Separate Account and the One Year Fixed Interest Account.
o The minimum amount that may be transferred is $250 or, if
less, the amount held in the subaccount or Fixed Interest
Account. In the case of partial transfers, the amount
remaining in the subaccount or Fixed Interest Account must be
at least $250.
o You may transfer amounts from the Fixed Interest Account only
at the end of the interest period or within 25 days
thereafter.
o You may transfer from the Six Month Fixed Interest Account to
the Variable Account as described under Dollar Cost Averaging
below 100% at any time.
21
<PAGE>
After the Annuity Date. You or the Beneficiary (upon your death or the
death of the Annuitant) may transfer amounts among subaccounts of the Separate
Account.
o The minimum amount that may be transferred is $250 or, if
less, the amount held in the subaccount. In the case of
partial transfers, the amount remaining in the subaccount must
be at least $250.
o Transfers are currently limited to the four subaccounts
selected at the time of annuitization.
General Rules. Transfers will be based on values at the end of the
valuation period in which the transfer request is received at our administrative
office. A transfer request must be received at our
administrative office, and all other administrative requirements must be met to
make the transfer. We will not 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. For transfers other than dollar cost averaging and automatic
rebalancing, we reserve the right to charge a fee, although we have no present
intention of doing so. The Contract is not designed for individuals and
professional market timing organizations that use programmed and frequent
transfers amount investment options. We therefore reserve the right to change
our telephone transaction policies and procedures at any time to restrict the
use of telephone transfers for market timing and to otherwise restrict market
timing when we believe it is in the interest of all of our Contract Owners to do
so.
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. 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. These transfers may be made only from one of the following accounts:
Money Market Subaccount, Limited Maturity Bond Subaccount, Quality Bond
Subaccount, or the Six Month Fixed Interest Account. You may do this for up to
60 months with a maximum of 6 months for the Six Month Fixed Interest Account,
or until you tell us to change or cancel the dollar cost averaging. If you stop
dollar cost averaging during a six month period, any money left in the Six Month
Fixed Interest Account will be transferred into the One Year Fixed Interest
Account. If you stop dollar cost averaging at the end of a six month period, you
may ask us to transfer money left in the Six Month Fixed Interest Account to the
One Year Fixed Interest Account.
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. If you have a Contract Value of at
least $10,000 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.
- --------------------------------------------------------------------------------
May I Withdraw Any of My Money?
Before the Annuity Date and the death of the Contract Owner or
Annuitant, you may withdraw all or part of your Contract Value. We base your
withdrawal on your Contract Value next determined after we receive a proper
written request for withdrawal at our administrative office (and the Contract,
in case of a full withdrawal). 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.
o The minimum withdrawal is $500. If it is your first withdrawal
in a Contract Year, the minimum withdrawal is the Free
Withdrawal Amount if less than $500. The Free Withdrawal
Amount is equal to 15% of the purchase payments as of the date
of the request.
22
<PAGE>
o You may make a partial withdrawal only if the amount remaining
in the contract is at least $5,000 and the balance remaining
in each subaccount or a fixed interest account is at least
$250.
o If you do not tell us otherwise, the withdrawal will be taken
pro rata from the variable subaccounts; if the partial
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.
Systematic Withdrawals. If your Contract Value is at least $25,000 and
you have not made a Free Withdrawal in the current contract year, you can make
systematic withdrawals. These are regular payments that we make to you on a
monthly, quarterly, semiannual or annual basis. It is a convenient way for you
to withdraw a limited percentage of purchase payments without incurring a
contingent deferred sales charge. The total amount that you withdraw in a
Contract Year cannot exceed your Free Withdrawal Amount, and the minimum amount
of each withdrawal payment is $100. Your payments will begin on the next
withdrawal date after we receive your request. See Free Withdrawals below. For
information on the tax treatment of withdrawals, see FEDERAL INCOME TAX
CONSIDERATIONS in this Prospectus.
403(b) Withdrawals. There are restrictions on withdrawals from
Contracts qualifying under Section 403(b) of the Code. Generally, withdrawals
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.
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
What Charges Do I Pay?
The following discussion explains the Contract charges that you pay.
You also pay expenses of 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 Contract and the
Separate Account.
o We deduct from your Variable Account Value an annual contract
administration charge that is the lesser of $40 or 2% of your
Variable Account Value. You will not pay this charge if your
Variable Account Value is more than $100,000. To pay this
charge, we cancel Accumulation Units credited to your
Contract, pro rata among the subaccounts in which you invest.
o We deduct from the net asset value of the Separate Account a
daily administration charge that will not exceed an effective
annual rate of 0.15%.
23
<PAGE>
For transfers among investment options other than dollar cost averaging
and automatic rebalancing, we reserve the right to charge for making the
transfer, although we have no present intention of doing so.
Mortality and Expense Risk Charge:
We deduct from the net asset value of the Separate Account a daily
mortality and expense risk charge that will not exceed an effective annual rate
of 1.20%. This charge compensates us for the mortality-related guarantees we
make under the Contract (e.g., the death benefit and the guarantee that the
annuity factors will never be decreased even if mortality experience is
substantially different than originally assumed), and for the risk that our
administration charges will be insufficient to cover administration expenses
over the life of the Contracts. The mortality and expense risk charge is paid
during both the accumulation and variable annuity pay-out phases of the
Contract.
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 the surplus of the Company,
which may include proceeds from the mortality and expense risk charge.
You pay this charge only if you withdraw a purchase payment within
seven years of the effective date of payment. The following table shows the
schedule of the contingent deferred sales charge that will be applied to
withdrawal of a purchase payment, after allowing for the free withdrawals which
are described in the next subsection. Purchase payments will be treated as
withdrawn on a first-in, first-out basis.
<TABLE>
<CAPTION>
Number of Full Contract
Years Since Purchase Payment Applicable Charge
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
0 7%
- -------------------------------------------------------------------------------------------------------------------
1 7%
- -------------------------------------------------------------------------------------------------------------------
2 6%
- -------------------------------------------------------------------------------------------------------------------
3 5%
- -------------------------------------------------------------------------------------------------------------------
4 4%
- -------------------------------------------------------------------------------------------------------------------
5 3%
- -------------------------------------------------------------------------------------------------------------------
6 1.5%
- -------------------------------------------------------------------------------------------------------------------
7+ 0%
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
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
unfairly discriminate against any Contract Owner.
Free Withdrawals:
Seven-Year-Old Purchase Payments. You may withdraw any purchase payment
that was made more than 7 years before the withdrawal without incurring a
contingent deferred sales charge.
Annual Withdrawals of 15% of Purchase Payments. On the last day of the
first contract year and once each contract year thereafter, you may withdraw,
without incurring a contingent deferred sales charge, up to 15% of total
purchase payments as of the date of the request. You may take a free withdrawal
on a single sum basis or systematically, but not both. The free withdrawal
amount will be applied to purchase payments on a first-in, first-out basis. With
respect to any withdrawal in excess of the free withdrawal limit in a contract
year, the contingent deferred sales charge schedule set
24
<PAGE>
forth above will apply to the remainder of the purchase payments so withdrawn on
a first-in, first-out basis. This free withdrawal applies only to the first
withdrawal request made in a contract year and the amount is not cumulative from
year to year.
Medically Related Withdrawal. Subject to state law, after the first
contract year and before the Annuity Date, you may withdraw, without incurring a
contingent deferred sales charge, all or part of your Contract Value if certain
medically related contingencies occur. This free withdrawal is available if you
are (1) first confined in a nursing home or hospital while this Contract is in
force and remain confined for at least 90 days in a row or (2) first diagnosed
as having a fatal illness (an illness expected to result in death within 2 years
for 80% of diagnosed cases) while this Contract is in force. The precise terms
and conditions of this benefit are set forth in the Contract. It is not
available if your age at issue is greater than 75. The medically related
contingencies that must be met for free withdrawal vary in some states.
Disability Related Withdrawal. You may withdraw, without incurring a
contingent deferred sales charge, part or all of your Contract Value if you (you
or the Annuitant for qualified Contracts) become totally disabled as defined in
the Contract.
Other Withdrawals. There is no contingent deferred sales charge imposed
upon minimum distributions under qualified contracts which are required by the
Code.
Enhanced Guaranteed Minimum Death Benefit (Optional):
If you purchase an Enhanced Guaranteed Minimum Death Benefit as part of
your Contract, we will deduct a guaranteed minimum death benefit charge from the
Variable Account Value. The charge is currently 0.20% of the average annual
Variable Account Value, but may be raised to a maximum rate of 0.25% at the
discretion of Penn Mutual. The charge will be made on each Contract anniversary
and at any time the Variable Account Value is withdrawn or transferred in full.
The charge will be deducted by canceling Accumulation Units credited to your
Contract, with the charge allocated pro rata among the subaccounts comprising
the Variable Account Value.
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
1/2%.
================================================================================
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 the underlying 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 on the inception date of the
underlying Fund, other amounts invested at the beginning of the period and no
withdrawal at the end of the period. Average annual total return figures which
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).
25
<PAGE>
================================================================================
MORE INFORMATION ABOUT THE FIXED INTEREST ACCOUNTS
General Information
You may allocate or transfer money to our One Year Fixed Interest
Account. The interest rate that you earn on money in this account is set at the
time you invest and will not vary during the one year period. The rate will
never be less than 3%.
If you participate in our dollar cost averaging program, you may
allocate money to our Six Month Fixed Interest Account. The interest rate that
you earn is set at the time that you invest and will not vary during the six
month period. The rate will never be less than 3%. If you stop dollar cost
averaging before your money has been in this account six months, your money will
be transferred to the One Year Fixed Interest Account unless you specify a
different investment option.
You may transfer money in the Fixed Interest Accounts to subaccounts of
the Separate Account, subject to the fixed interest account provisions of your
Contract. If you do not withdraw or reallocate money in the One Year Fixed
Interest Account within 25 days after the end of an interest period, we will
treat it as a new allocation to the One Year Fixed Interest Account.
- --------------------------------------------------------------------------------
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 1 1/2 percentage points less than
the rate of interest that we charge you on the loan. The lowest possible
interest that you could earn on your Restricted Account assets is 2 1/2
percentage points less than the rate charged 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 Money Market subaccount. You may then transfer amounts
from the Money Market subaccount to the other investment options offered under
the Contract.
If you are in default, we will 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.
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.
26
<PAGE>
================================================================================
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.
In the case of a nonqualified Contract and death of an Annuitant who
was not the Contract Owner, an election to receive the death benefit in the form
of annuity payment must be made within 60 days. If such election is not made,
the gain from the Contract will generally be taxed as a lump sum payment, as
described in the preceding paragraph.
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; or
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,
27
<PAGE>
through each of the available funds of the Penn Series Funds, Inc., Neuberger
Berman Advisers Management Trust, Variable Insurance Products Fund, Variable
Insurance Products Fund II, and Morgan Stanley Universal Institutional Funds,
Inc. intends to comply with those requirements. The requirements are briefly
discussed in the accompanying prospectuses for the underlying funds.
The Treasury Department 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. If a variable contract
owner is treated as owner of separate account assets, income and gain from the
assets would be includable in the variable contract owner's gross income. In
1984 the Treasury Department announced that it would provide guidance, 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 certain
retirement plans that qualify for special tax treatment under the Code. The
plans include rollover individual retirement annuities qualified under Section
408(b) of the Code (referred to as IRAs) and certain tax deferred annuities
qualified under Section 403(b) of the Code. Qualified Contracts have special
provisions in order to be treated as qualified 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.
Distribution must generally commence from individual retirement
annuities and from contracts qualified under Section 403(b) no later than the
April 1 following the calendar year in which the Contract Owner attains age 70
1/2. Failure to make such required minimum distributions may result in a 50% tax
on the amount of the required distribution.
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.
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,
1999 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.
28
<PAGE>
<TABLE>
<CAPTION>
=================================================================================================================
<S> <C>
STATEMENT OF ADDITIONAL INFORMATION 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-4
Average Annual Total Return..........................................................................B-4
Average Rate of Change in Accumulation...............................................................B-8
- -----------------------------------------------------------------------------------------------------------------
ADMINISTRATIVE AND RECORDKEEPING SERVICES.....................................................................B-9
- -----------------------------------------------------------------------------------------------------------------
DISTRIBUTION OF CONTRACTS.....................................................................................B-9
- -----------------------------------------------------------------------------------------------------------------
CUSTODIAN.....................................................................................................B-9
- -----------------------------------------------------------------------------------------------------------------
INDEPENDENT AUDITORS..........................................................................................B-9
- -----------------------------------------------------------------------------------------------------------------
LEGAL MATTERS.................................................................................................B-9
- -----------------------------------------------------------------------------------------------------------------
FINANCIAL STATEMENTS..........................................................................................B-9
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
29
<PAGE>
PART B
Information Required in a Statement
of Additional Information
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION -- MAY 1, 2000
- -------------------------------------------------------------------------------
PENNANT SELECT
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 the Pennant Select Contract,
dated May 1, 2000. The Contract is funded through Penn Mutual Variable Account
III (referred to 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 (800) 523-0650. Terms
used in this statement of additional information have the same meaning as the
Prospectus.
- -------------------------------------------------------------------------------
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-4
Average Annual Total Return......................................B-4
Annual Rate of Change in Accumulation Unit Values................B-8
- -------------------------------------------------------------------------------
ADMINISTRATIVE AND RECORDKEEPING SERVICES.................................B-9
- -------------------------------------------------------------------------------
DISTRIBUTION OF CONTRACTS.................................................B-9
- -------------------------------------------------------------------------------
CUSTODIAN.................................................................B-9
- -------------------------------------------------------------------------------
INDEPENDENT AUDITORS......................................................B-9
- -------------------------------------------------------------------------------
LEGAL MATTERS.............................................................B-9
- -------------------------------------------------------------------------------
FINANCIAL STATEMENTS......................................................B-9
- -------------------------------------------------------------------------------
B-1
<PAGE>
- -------------------------------------------------------------------------------
VARIABLE ANNUITY PAYMENTS
- -------------------------------------------------------------------------------
First Variable Annuity Payment
When a variable annuity is effected, we will first deduct applicable
premium taxes, if any, from the Contract Value. The dollar amount of the first
monthly annuity payment will be determined by applying the net Contract 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, based on the Annuitant's age at
the Annuity Date. The annuity tables are based on the Annuity 2000 Basic Table
with interest rates at 3% or 5%.
- -------------------------------------------------------------------------------
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. The Company 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 of your
annuity units will not change as a result of investment experience.
- -------------------------------------------------------------------------------
Value of Annuity Units
The value of an annuity unit for each subaccount 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 an assumed interest rate of 3% or 5%, as applicable, built
into 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 mutual 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 mutual 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).
B-2
<PAGE>
Where (b) is:
The net asset value per share of the mutual 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 mortality and expense risk charge and the daily
administration charge. On an annual basis, the sum of such charges
equals 1.35% of the daily net asset value of the subaccount.
- -------------------------------------------------------------------------------
Assumed Interest Rate
Assumed interest rates of 3% or 5% are included in the annuity tables
in the contracts. A higher assumption would mean a higher first annuity payment
but more slowly rising or more rapidly falling subsequent payments. A lower
assumption would have the opposite effect. If the actual net investment rate on
an annual basis is equal to the assumed interest rate you have selected, annuity
payments will be level.
- -------------------------------------------------------------------------------
Valuation Period
Valuation period is the period from one valuation of underlying fund
assets to the next. Valuation is performed each day the New York Stock Exchange
is open for trading.
B-3
<PAGE>
- -------------------------------------------------------------------------------
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.
Table 1 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* 12/31/99 12/31/99 12/31/99 12/31/99
- -------------- ------ -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Quality Bond (a)................................. 3/17/87 6.00% 6.05% 6.09% -7.45%
(Independence Capital)
High Yield Bond (a).............................. 8/6/84 8.37% 8.74% 8.65% -3.51%
(T. Rowe Price)
Flexibly Managed (a)............................. 7/31/84 12.75% 9.89% 11.08% -0.79%
(T. Rowe Price)
Growth Equity (a)................................ 6/1/83 14.94% 15.18% 26.96% 24.20%
(Independence Capital)
Large Cap Value (a)(f)........................... 3/17/87 11.15% 11.58% 16.16% -8.19%
(Putnam)
Emerging Growth Fund (a)......................... 5/1/97 81.62% n/a n/a 164.25%
(RS Investment Management)
Small Cap Value Fund (a)(f)...................... 5/1/95 6.43% n/a n/a -8.68%
(Royce)
International Equity (a)......................... 11/1/92 16.63% n/a 18.09% 34.96%
(Vontobel)
Balanced Portfolio (b)........................... 5/3/93 12.58% n/a 16.42% 23.70%
(Neuberger Berman)
Equity-Income Portfolio (c)...................... 5/1/95 14.48% n/a n/a -1.57%
(Fidelity Investments)
Growth Portfolio (c)............................. 5/1/95 26.96% n/a n/a 27.29%
(Fidelity Investments)
Asset Manager Portfolio (d)...................... 5/1/95 13.25% n/a n/a 2.85%
(Fidelity Investments)
Emerging Markets Equity (International) (e)...... 5/1/97 7.51% n/a n/a 80.54%
(Morgan Stanley)
</TABLE>
- ----------------
* Date the underlying fund was first offered through a subaccount of the
Separate Account. Performance information is not shown for subaccounts
which began investing in new funds on the date of this prospectus.
(a) Penn Series Funds, Inc.
(b) Neuberger Berman Advisers Management Trust
(c) Variable Insurance Products Fund
(d) Variable Insurance Products Fund II
(e) The Universal Institutional Funds, Inc.
(f) Prior to May 1, 2000, the Penn Series Large Cap Value Fund Subaccount was
the Penn Series Value Equity Fund Subaccount and the Penn Series Small Cap
Value Fund Subaccount was the Penn Series Small Capitalization Fund
Subaccount, and the Funds in which the Subaccounts invested were managed by
OpCap Advisors.
B-4
<PAGE>
Table 2 Average Annual Total Return on $1,000 Investment - Assumes No
Contingent Deferred Sales Charge and Investment on Inception Date of the
Underlying Fund
<TABLE>
<CAPTION>
Average Annual Total Return
--------------------------------------------------------
From Ten Five One
Inception Years Years Year
Inception Through Ended Ended Ended
Fund (Manager)* Date** 12/31/99 12/31/99 12/31/99 12/31/99
- -------------- --------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Quality Bond (a)................................ 3/17/87 6.04% 6.05% 6.64% -1.58%
(Independence Capital)
High Yield Bond (a)............................. 8/6/84 8.44% 8.74% 9.21% 2.61%
(T. Rowe Price)
Flexibly Managed (a)............................ 7/31/84 12.80% 9.89% 11.65% 5.50%
(T. Rowe Price)
Growth Equity (a)............................... 6/1/83 15.00% 15.18% 27.62% 32.07%
(Independence Capital)
Large Cap Value (a)(f).......................... 3/17/87 11.19% 11.58% 16.76% -2.37%
(Putnam)
Emerging Growth Fund (a)........................ 5/1/97 85.22% n/a n/a 180.98%
(RS Investment Management)
Small Cap Value Fund (a)(f)..................... 3/1/95 6.93% n/a n/a -2.89%
(Royce)
International Equity (a)........................ 11/1/92 16.63% n/a 18.70% 43.52%
(Vontobel)
Balanced Portfolio (b).......................... 2/28/89 11.51% 10.96% 17.03% 31.54%
(Neuberger Berman)
Equity-Income Portfolio (c)..................... 10/9/86 12.15% 12.78% 16.85% 4.67%
(Fidelity Investments)
Growth Portfolio (c)............................ 10/9/86 17.08% 18.16% 27.82% 35.36%
(Fidelity Investments)
Asset Manager Portfolio (d)..................... 9/6/89 11.12% 11.47% 13.89% 9.37%
(Fidelity Investments)
Emerging Markets Equity (International) (e)..... 10/1/96 10.27% n/a n/a 91.98%
(Morgan Stanley)
</TABLE>
- ------------
* Prior to May 1, 2000, the Limited Maturity Bond, Index 500, Mid Cap Growth
and Mid Cap Value Funds had no assets. Accordingly, no performance
information is presented.
** Date underlying fund was established.
(a) Penn Series Funds, Inc.
(b) Neuberger Berman Advisers Management Trust
(c) Variable Insurance Products Fund
(d) Variable Insurance Products Fund II
(e) The Universal Institutional Funds, Inc.
(f) Prior to May 1, 2000, the Penn Series Large Cap Value Fund Subaccount was
the Penn Series Value Equity Fund Subaccount and the Penn Series Small Cap
Value Fund Subaccount was the Penn Series Small Capitalization Fund
Subaccount, and the Funds in which the Subaccounts invested were managed by
OpCap Advisors.
B-5
<PAGE>
Table 3 Average Annual Total Return on $1,000 Investment - Assumes No
Contingent Deferred Sales Charge and Investment on Inception Date of the
Underlying Fund
<TABLE>
<CAPTION>
Average Annual Total Return
--------------------------------------------------------
From Ten Five One
Inception Years Years Year
Inception Through Ended Ended Ended
Fund (Manager)* Date** 12/31/99 12/31/99 12/31/99 12/31/99
- --------------- --------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Quality Bond (a)................................. 3/17/87 6.16% 6.21% 6.81% -1.36%
(Independence Capital)
High Yield Bond (a).............................. 8/06/84 8.50% 8.88% 9.38% 2.82%
(T. Rowe Price)
Flexibly Managed (a)............................. 7/31/84 12.85% 10.04% 11.81% 5.71%
(T. Rowe Price)
Growth Equity (a)................................ 6/1/83 15.04% 15.34% 27.77% 32.28%
(Independence Capital)
Large Cap Value (a)(f)........................... 3/17/87 11.29% 11.72% 16.90% -2.16%
(Putnam)
Emerging Growth Fund (a)......................... 5/1/97 85.39% n/a n/a 181.19%
(RS Investment Management)
Small Cap Value Fund (a)(f)...................... 3/1/95 7.10% n/a n/a -2.67%
(Royce)
International Equity (a)......................... 11/1/92 16.79% n/a 18.87% 43.73%
(Vontobel)
Balanced Portfolio (b)........................... 2/28/89 11.65% 11.12% 17.19% 31.75%
(Neuberger Berman)
Equity-Income Portfolio (c)...................... 10/9/86 12.24% 12.93% 16.99% 4.88%
(Fidelity Investments)
Growth Portfolio (c)............................. 10/9/86 17.16% 18.30% 27.97% 35.57%
(Fidelity Investments)
Asset Manager Portfolio (d)...................... 9/6/89 11.27% 11.61% 14.05% 9.58%
(Fidelity Investments)
Emerging Markets Equity (International) (e)...... 10/1/96 10.57% n/a n/a 92.19%
(Morgan Stanley)
</TABLE>
- -------------
* Prior to May 1, 2000, the Limited Maturity Bond, Index 500, Mid Cap Growth
and Mid Cap Value Fund had no assets. Accordingly, no performance
information is presented.
** Date underlying fund was established.
(a) Penn Series Funds, Inc.
(b) Neuberger Berman Advisers Management Trust
(c) Variable Insurance Products Fund
(d) Variable Insurance Products Fund II
(e) The Universal Institutional Funds, Inc.
(f) Prior to May 1, 2000, the Penn Series Large Cap Value Fund Subaccount was
the Penn Series Value Equity Fund Subaccount and the Penn Series Small Cap
Value Fund Subaccount was the Penn Series Small Capitalization Fund
Subaccount, and the Funds in which the Subaccounts invested were managed by
OpCap Advisors.
B-6
<PAGE>
Average annual total returns in Table 1 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 charge is allocated across all
available subaccounts by an average Contract Owner and that the Contract Value
is of average size. The returns are computed according to the formula and
assumptions prescribed by the SEC.
Average annual rates of total return in Tables 2 and 3 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 Table 2
and $10,000 in Table 3; 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, and therefore do not reflect the contract's
contingent deferred sales charge which declines from 7% to 0% over seven years.
The computation assumes that the contract charge is allocated across all
available subaccounts by an average contract owner and that the contract value
is of average size. 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-7
<PAGE>
- -------------------------------------------------------------------------------
Annual Rate of Change in Accumulation Unit Values
Table 4 Annual Rate of Change in Accumulation Unit Values
Table 4 shows the changes in values of accumulation units for each
subaccount of the Separate Account for calendar year 1999. Accumulation unit
values do not reflect the $40 annual contract or account administration charge
or the contingent deferred sales charge that may be applicable to a withdrawal
from the Contract.
Annual Rate of Change in
Accumulation Unit Values
- -------------------------------------------------------------------------------
Fund (Manager)* 1999
- --------------- ----
Money Market (a)................................ 3.21%
(Independence Capital)
Quality Bond (a)................................ -1.23%
(Independence Capital)
High Yield Bond (a)............................. 2.64%
(T. Rowe Price)
Flexibly Managed (a)............................ 5.52%
(T. Rowe Price)
Growth Equity (a)............................... 32.67%
(Independence Capital)
Large Cap Value (a)(f).......................... -1.77%
(Putnam)
Emerging Growth Fund (a)........................ 183.70%
(RS Investment Management)
Small Cap Value Fund (a)(f)..................... -2.48%
(Royce)
International Equity (a)........................ 40.86%
(Vontobel)
Balanced Portfolio (b).......................... 32.85%
(Neuberger Berman)
Equity-Income Portfolio (c)..................... 5.33%
(Fidelity Investments)
Growth Portfolio (c)............................ 35.62%
(Fidelity Investments)
Asset Manager Portfolio (d)..................... 9.80%
(Fidelity Investments)
Emerging Markets Equity (International) (e).... 89.22%
(Morgan Stanley)
- -----------------
* Performance information is not shown for subaccounts which began
investing in new funds on the date of this prospectus.
(a) Penn Series Funds, Inc.
(b) Neuberger Berman Advisers Management Trust
(c) Variable Insurance Products Fund
(d) Variable Insurance Products Fund II
(e) The Universal Institutional Funds, Inc.
(f) Prior to May 1, 2000, the Penn Series Large Cap Value Fund Subaccount
was the Penn Series Value Equity Fund Subaccount and the Penn Series
Small Cap Value Fund Subaccount was the Penn Series Small
Capitalization Fund Subaccount, and the Funds in which the Subaccounts
invested were managed by OpCap Advisors.
-----------------------------------------------------
The performance information set forth above is for past performance of
the Funds, assuming the subaccounts of the Separate Account had invested in the
Funds from the date the underlying Fund was first available through a subaccount
of the Separate Account or the date the underlying Fund was established. The
performance information is not an indication or representation of future
performance.
B-8
<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.
- -------------------------------------------------------------------------------
DISTRIBUTION OF CONTRACTS
Hornor, Townsend & Kent, Inc. ("HTK"), a wholly owned subsidiary of The
Penn Mutual Life Insurance Company ("Penn Mutual"), serves as principal
underwriter of the Contracts. The address of HTK is 600 Dresher Road, Horsham,
PA 19044. For 1999, Penn Mutual paid commissions of approximately $110,095 to
HTK.
The Contracts will be distributed by Hornor, Townsend & Kent, Inc.
through broker-dealers. Total commissions on purchase payments made under the
Contract will not exceed 7% and trailer commissions based on a percentage of
Contract Value may be paid. The offering of the Contracts is continuous, and the
Company does not anticipate discontinuing the offering of the Contract, although
we reserve the right to do so.
- -------------------------------------------------------------------------------
CUSTODIAN
The Company is custodian of the assets held in the Separate Account.
- -------------------------------------------------------------------------------
INDEPENDENT AUDITORS
Ernst & Young LLP serves as independent auditors of The Penn Mutual
Life Insurance Company and Penn Mutual Variable Annuity Account III. Their
offices are located at 2001 Market Street, Suite 4000, Philadelphia, PA.
- -------------------------------------------------------------------------------
LEGAL MATTERS
Morgan, Lewis & Bockius LLP has provided advice on certain matters
relating to the federal securities laws and the offering of the Contracts. Their
offices are located at 1701 Market Street, Philadelphia, PA.
- -------------------------------------------------------------------------------
FINANCIAL STATEMENTS
The consolidated financial statement of The Penn Mutual Life Insurance
Company and the financial statements of the subaccounts of the Separate Account
at December 31, 1999 and for the year are set forth on the following pages. 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.
B-9
<PAGE>
PENN MUTUAL VARIABLE ANNUITY ACCOUNT III
STATEMENT OF ASSETS AND LIABILITIES - DECEMBER 31, 1999 (CONT'D)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Limited
Balanced Maturity Bond Partners
Portfolio++ Portfolio++ Portfolio++
------------ ------------ ------------
<S> <C> <C> <C>
Investment in Common Stock
Number of Shares .................................. 1,523,587 491,386 1,335,442
Cost .............................................. $ 23,474,293 $ 6,965,240 $ 26,216,021
Assets:
Investments at market value ....................... $ 31,827,712 $ 6,505,950 $ 26,228,078
Dividends receivable ............................. -- -- --
Liabilities:
Due to(from) the Penn Mutual Life Insurance Company 22,432 3,587 13,410
------------ ------------ ------------
Net Assets ........................................ $ 31,805,280 $ 6,502,363 $ 26,214,668
============ ============ ============
</TABLE>
- --------------------------------------------------------------------------------
PENN MUTUAL VARIABLE ANNUITY ACCOUNT III
STATEMENT OF OPERATIONS - FOR THE YEAR ENDED DECEMBER 31, 1999 (CONT'D.)
<TABLE>
<CAPTION>
Limited
Balanced Maturity Bond Partners
Portfolio++ Portfolio++ Portfolio++
------------ ------------ ------------
<S> <C> <C> <C>
Investment Income:
Dividends ........................................ $ 429,804 $ 348,661 $ 268,107
Expense:
Mortality and expense risk charges ............... 337,705 83,191 301,943
------------ ------------ ------------
Net investment income (loss) ..................... 92,099 265,470 (33,836
------------ ------------ ------------
Realized and Unrealized Gains (Losses) on
Investments:
Realized gains (losses) from redemption of fund
shares ...................................... 243,656 4,918 (80,300
Capital gains distributions ...................... 636,748 -- 466,273
------------ ------------ ------------
Net realized gains (losses) from investment
transactions ................................ 880,404 4,918 385,973
Net change in unrealized appreciation/depreciation
of investments .............................. 6,821,258 (251,365) 882,040
------------ ------------ ------------
Net realized and unrealized gains (losses) on
investments ................................. 7,701,662 (246,447) 1,268,013
------------ ------------ ------------
Net increase (decrease) in net assets resulting
from operations ............................. $ 7,793,761 $ 19,023 $ 1,234,177
============ ============ ============
</TABLE>
<PAGE>
[RESTUBBED]
PENN MUTUAL VARIABLE ANNUITY ACCOUNT III
STATEMENT OF ASSETS AND LIABILITIES - DECEMBER 31, 1999 (CONT'D)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Capital
Appreciation Equity Income Growth
Portfolio+++ Portfolio++++ Portfolio++++
------------ ------------- -------------
<S> <C> <C> <C>
Investment in Common Stock
Number of Shares .................................. 1,230,995 3,122,147 3,059,029
Cost .............................................. $ 11,489,792 $ 65,554,119 $110,317,173
Assets:
Investments at market value ....................... $ 18,267,967 $ 80,270,405 $168,032,483
Dividends receivable ............................. -- -- --
Liabilities:
Due to(from) the Penn Mutual Life Insurance Company 13,379 42,636 104,303
------------ ------------ ------------
Net Assets ........................................ $ 18,254,588 $ 80,227,769 $167,928,180
============ ============ ============
</TABLE>
- --------------------------------------------------------------------------------
PENN MUTUAL VARIABLE ANNUITY ACCOUNT III
STATEMENT OF OPERATIONS - FOR THE YEAR ENDED DECEMBER 31, 1999 (CONT'D.)
<TABLE>
<CAPTION>
Capital
Appreciation Equity Income Growth
Portfolio+++ Portfolio++++ Portfolio++++
------------ ------------- -------------
<S> <C> <C> <C>
Investment Income:
Dividends ........................................ $ -- $ 1,074,391 $ 163,364
Expense:
Mortality and expense risk charges ............... 182,384 965,521 1,612,474
------------ ------------ ------------
Net investment income (loss) ..................... (182,384) 108,870 (1,449,110)
------------ ------------ ------------
Realized and Unrealized Gains (Losses) on
Investments:
Realized gains (losses) from redemption of fund
shares ...................................... 240,140 (44,049) 87,967
Capital gains distributions ...................... -- 2,374,969 10,271,514
------------ ------------ ------------
Net realized gains (losses) from investment
transactions ................................ 240,140 2,330,920 10,359,481
Net change in unrealized appreciation/depreciation
of investments .............................. 7,212,430 977,298 31,824,227
------------ ------------ ------------
Net realized and unrealized gains (losses) on
investments ................................. 7,452,570 3,308,218 42,183,708
------------ ------------ ------------
Net increase (decrease) in net assets resulting
from operations ............................. $ 7,270,186 $ 3,417,088 $ 40,734,598
============ ============ ============
</TABLE>
<PAGE>
[RESTUBBED]
PENN MUTUAL VARIABLE ANNUITY ACCOUNT III
STATEMENT OF ASSETS AND LIABILITIES - DECEMBER 31, 1999 (CONT'D)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Emerging
Asset Manager Index 500 Markets Equity
Portfolio++++ Portfolio++++ Portfolio+++++
------------- ------------- --------------
<S> <C> <C> <C>
Investment in Common Stock
Number of Shares .................................. 1,360,596 552,959 656,819
Cost .............................................. $ 22,601,629 $ 74,984,601 $ 6,646,444
Assets:
Investments at market value ....................... $ 25,402,339 $ 92,570,771 $ 9,136,347
Dividends receivable ............................. -- -- --
Liabilities:
Due to(from) the Penn Mutual Life Insurance Company 14,342 55,672 6,135
------------ ------------ ------------
Net Assets ........................................ $ 25,387,997 $ 92,515,099 $ 9,130,212
============ ============ ============
</TABLE>
- --------------------------------------------------------------------------------
PENN MUTUAL VARIABLE ANNUITY ACCOUNT III
STATEMENT OF OPERATIONS - FOR THE YEAR ENDED DECEMBER 31, 1999 (CONT'D.)
<TABLE>
<CAPTION>
Emerging
Asset Manager Index 500 Markets Equity
Portfolio++++ Portfolio++++ Portfolio+++++
------------- ------------- --------------
<S> <C> <C> <C>
Investment Income:
Dividends ........................................ $ 485,862 $ 396,849 $ 1,007
Expense:
Mortality and expense risk charges ............... 271,581 839,364 64,702
------------ ------------ ------------
Net investment income (loss) ..................... 214,281 (442,515) (63,695)
------------ ------------ ------------
Realized and Unrealized Gains (Losses) on
Investments:
Realized gains (losses) from redemption of fund
shares ...................................... (63,119) (42,703) 109,924
Capital gains distributions ...................... 615,425 269,291 --
------------ ------------ ------------
Net realized gains (losses) from investment
transactions ................................ 552,306 226,588 109,924
Net change in unrealized appreciation/depreciation
of investments .............................. 1,327,645 12,114,229 3,768,983
------------ ------------ ------------
Net realized and unrealized gains (losses) on
investments ................................. 1,879,951 12,340,817 3,878,907
------------ ------------ ------------
Net increase (decrease) in net assets resulting
from operations ............................. $ 2,094,232 $ 11,898,302 $ 3,815,212
============ ============ ============
</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-10
<PAGE>
<TABLE>
<CAPTION>
PENN MUTUAL VARIABLE ANNUITY ACCOUNT III
STATEMENTS OF CHANGES IN NET ASSETS - FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
Total Money Market Fund+
-------------------------------------------- ---------------------------------------
1999 1998 1999 1998
-------------------- --------------------- ------------------- ------------------
Operations:
<S> <C> <C> <C> <C>
Net investment income (loss) .......... ($12,021,272) $7,745,242 $1,228,846 $863,429
Net realized gains (losses) from
investment transactions .......... 18,656,424 91,124,673 - -
Net change in unrealized
appreciation/ depreciation
of investments ................... 225,948,976 31,850,409 - -
-------------------- --------------------- ------------------- ------------------
Net increase (decrease) in net assets
resulting from operations ........ 232,584,128 130,720,324 1,228,846 863,429
-------------------- --------------------- ------------------- ------------------
Variable Annuity Activities:
Purchase payments ..................... 574,203,492 300,859,955 121,832,838 43,970,396
Surrender benefits .................... (118,977,195) (86,895,748) (11,197,551) (6,521,246)
Net Transfers ......................... (385,402,907) (144,859,060) (96,586,146) (30,458,666)
Death Benefits ........................ (5,743,417) (5,130,027) (220,239) (146,334)
Contract administration charges ....... (1,019,724) (960,359) (18,923) (15,517)
Deferred sales charges ................ (1,712,520) (1,159,997) (185,645) (62,744)
Annuity benefits ...................... (9,193,907) (6,283,330) (494,203) (158,174)
-------------------- --------------------- ------------------- ------------------
Net increase in net assets resulting
from variable annuity activities ...... 52,153,822 55,571,434 13,130,131 6,607,715
-------------------- --------------------- ------------------- ------------------
Total increase (decrease)
in net assets .................... 284,737,950 186,291,758 14,358,977 7,471,144
Net Assets:
Beginning of year ........................ 1,223,313,641 1,037,021,883 29,367,421 21,896,277
-------------------- --------------------- ------------------- ------------------
End of year .............................. $1,508,051,591 $1,223,313,641 $43,726,398 $29,367,421
==================== ===================== =================== ==================
High Yield Bond Fund+ Growth Equity Fund+
-------------------------------------------- ---------------------------------------
1999 1998 1999 1998
-------------------- --------------------- ------------------- ------------------
Operations:
Net investment income (loss) .......... ($582,283) $3,015,764 ($2,379,763) ($1,642,786)
Net realized gains (losses) from
investment transactions .......... 124,263 (3,290) 530,746 17,312,420
Net change in unrealized
appreciation/ depreciation
of investments ................... 1,804,756 (1,514,889) 56,280,956 29,742,092
-------------------- --------------------- ------------------- ------------------
Net increase (decrease) in net assets
resulting from operations ........ 1,346,736 1,497,585 54,431,939 45,411,726
-------------------- --------------------- ------------------- ------------------
Variable Annuity Activities:
Purchase payments ..................... 12,170,588 11,805,678 45,856,043 19,386,206
Surrender benefits .................... (3,539,725) (3,764,322) (17,409,478) (11,279,745)
Net Transfers ......................... (10,743,367) (5,718,830) (19,004,434) (8,257,183)
Death Benefits ........................ (92,686) (216,584) (370,498) (520,878)
Contract administration charges ....... (31,629) (33,874) (129,646) (117,047)
Deferred sales charges ................ (45,494) (42,634) (156,475) (106,395)
Annuity benefits ...................... (521,630) (451,818) (745,465) (410,717)
-------------------- --------------------- ------------------- ------------------
Net increase in net assets resulting
from variable annuity activities ...... (2,803,943) 1,577,616 8,040,047 (1,305,759)
-------------------- --------------------- ------------------- ------------------
Total increase (decrease)
in net assets .................... (1,457,207) 3,075,201 62,471,986 44,105,967
Net Assets:
Beginning of year ........................ 45,318,345 42,243,144 160,264,501 116,158,534
-------------------- --------------------- ------------------- ------------------
End of year .............................. $43,861,138 $45,318,345 $222,736,487 $160,264,501
==================== ===================== =================== ==================
==========================================
+ 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.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
[RESTUBBED]
Quality Bond Fund+ Flexibly Managed Fund+
--------------------------------------- -----------------------------------------
1999 1998 1999 1998
------------------- ------------------ ------------------- -------------------
Operations:
<S> <C> <C> <C> <C>
Net investment income (loss) .......... ($472,167) $1,240,623 ($3,924,484) $5,296,053
Net realized gains (losses) from
investment transactions .......... (8,658) 1,083,848 757,206 34,924,818
Net change in unrealized
appreciation/ depreciation
of investments ................... 3,987 469,323 20,809,174 (24,572,191)
------------------- ------------------ ------------------- -------------------
Net increase (decrease) in net assets
resulting from operations ........ (476,838) 2,793,794 17,641,896 15,648,680
------------------- ------------------ ------------------- -------------------
Variable Annuity Activities:
Purchase payments ..................... 12,756,541 12,828,873 36,447,765 51,119,838
Surrender benefits .................... (3,355,904) (2,749,714) (28,871,142) (24,701,353)
Net Transfers ......................... (6,819,329) (5,801,159) (64,501,255) (33,470,654)
Death Benefits ........................ (320,089) (323,546) (1,848,244) (1,865,231)
Contract administration charges ....... (24,084) (23,415) (265,216) (297,618)
Deferred sales charges ................ (45,635) (40,919) (403,427) (314,220)
Annuity benefits ...................... (464,887) (310,029) (2,777,506) (2,389,329)
------------------- ------------------ ------------------- -------------------
Net increase in net assets resulting
from variable annuity activities ...... 1,726,613 3,580,091 (62,219,025) (11,918,567)
------------------- ------------------ ------------------- -------------------
Total increase (decrease)
in net assets .................... 1,249,775 6,373,885 (44,577,129) 3,730,113
Net Assets:
Beginning of year ........................ 36,716,463 30,342,578 339,917,985 336,187,872
------------------- ------------------ ------------------- -------------------
End of year .............................. $37,966,238 $36,716,463 $295,340,856 $339,917,985
=================== ================== =================== ===================
Value Equity Fund+ Emerging Growth Fund+
--------------------------------------- ------------------------------------------
1999 1998 1999 1998
------------------- ------------------ ------------------- -------------------
Operations:
Net investment income (loss) .......... ($2,477,020) ($35,478) ($570,399) ($115,686)
Net realized gains (losses) from
investment transactions .......... 889,798 17,469,266 62,845 (18,156)
Net change in unrealized
appreciation/ depreciation
of investments ................... (2,352,948) (1,405,794) 50,119,776 2,702,071
------------------- ------------------ ------------------- -------------------
Net increase (decrease) in net assets
resulting from operations ........ (3,940,170) 16,027,994 49,612,222 2,568,229
------------------- ------------------ ------------------- -------------------
Variable Annuity Activities:
Purchase payments ..................... 26,170,266 31,610,352 43,166,695 9,803,496
Surrender benefits .................... (18,289,385) (16,621,269) (2,242,458) (303,992)
Net Transfers ......................... (37,271,848) (17,458,000) (10,898,712) (1,828,444)
Death Benefits ........................ (894,529) (864,575) (107,642) (8,772)
Contract administration charges ....... (148,072) (161,845) (25,721) (7,172)
Deferred sales charges ................ (213,107) (185,128) (64,122) (6,090)
Annuity benefits ...................... (1,269,558) (1,052,517) (103,794) (17,597)
------------------- ------------------ ------------------- -------------------
Net increase in net assets resulting
from variable annuity activities ...... (31,916,233) (4,732,982) 29,724,246 7,631,429
------------------- ------------------ ------------------- -------------------
Total increase (decrease)
in net assets .................... (35,856,403) 11,295,012 79,336,468 10,199,658
Net Assets:
Beginning of year ........................ 217,077,310 205,782,298 14,454,345 4,254,687
------------------- ------------------ ------------------- -------------------
End of year .............................. $181,220,907 $217,077,310 $93,790,813 $14,454,345
=================== ================== =================== ===================
==========================================
+ 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.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
[RESTUBBED]
Small
International Equity Fund+ Capitalization Fund +
--------------------------------------- --------------------------------------
1999 1998 1999 1998
------------------- ----------------- ----------------- ------------------
Operations:
<S> <C> <C> <C> <C>
Net investment income (loss) .......... ($1,129,230) ($252,490) ($223,952) ($113,975)
Net realized gains (losses) from
investment transactions .......... 1,418,907 3,185,505 (209,337) 233,245
Net change in unrealized
appreciation/ depreciation
of investments ................... 34,686,729 9,485,903 (80,199) (2,387,287)
------------------- ----------------- ----------------- ------------------
Net increase (decrease) in net assets
resulting from operations ........ 34,976,406 12,418,918 (513,488) (2,268,017)
------------------- ----------------- ----------------- ------------------
Variable Annuity Activities:
Purchase payments ..................... 51,502,135 10,523,913 6,536,071 7,163,274
Surrender benefits .................... (6,872,196) (5,911,352) (1,191,638) (1,305,281)
Net Transfers ......................... (47,349,992) (10,270,675) (4,851,905) (2,355,711)
Death Benefits ........................ (327,860) (272,835) (49,326) (46,045)
Contract administration charges ....... (70,048) (73,241) (17,181) (17,860)
Deferred sales charges ................ (100,631) (92,237) (26,858) (24,968)
Annuity benefits ...................... (431,841) (309,264) (86,613) (51,104)
------------------- ----------------- ----------------- ------------------
Net increase in net assets resulting
from variable annuity activities ...... (3,650,433) (6,405,691) 312,550 3,362,305
------------------- ----------------- ----------------- ------------------
Total increase (decrease)
in net assets .................... 31,325,973 6,013,227 (200,938) 1,094,288
Net Assets:
Beginning of year ........................ 81,502,215 75,488,988 18,815,348 17,721,060
------------------- ----------------- ----------------- ------------------
End of year .............................. $112,828,188 $81,502,215 $18,614,410 $18,815,348
=================== ================= ================= ==================
Limited Maturity
Balanced Portfolio++ Bond Portfolio++
--------------------------------------- --------------------------------------
1999 1998 1999 1998
------------------- ----------------- ----------------- ------------------
Operations:
Net investment income (loss) .......... $92,099 $234,654 $265,470 $267,463
Net realized gains (losses) from
investment transactions .......... 880,404 3,711,455 $4,918 4,432
Net change in unrealized
appreciation/ depreciation
of investments ................... 6,821,258 (1,522,453) (251,365) (90,968)
------------------- ----------------- ----------------- ------------------
Net increase (decrease) in net assets
resulting from operations ........ 7,793,761 2,423,656 19,023 180,927
------------------- ----------------- ----------------- ------------------
Variable Annuity Activities:
Purchase payments ..................... 4,661,798 4,708,127 13,051,511 2,811,758
Surrender benefits .................... (1,972,767) (1,459,064) (1,963,467) (579,485)
Net Transfers ......................... (3,913,423) (2,543,550) (10,599,182) (1,594,229)
Death Benefits ........................ (163,231) (90,973) (153,870) (37,669)
Contract administration charges ....... (19,388) (20,547) (4,309) (4,237)
Deferred sales charges ................ (37,246) (33,142) (21,946) (8,272)
Annuity benefits ...................... (183,276) (145,035) (97,230) (58,661)
------------------- ----------------- ----------------- ------------------
Net increase in net assets resulting
from variable annuity activities ...... (1,627,533) 415,816 211,507 529,205
------------------- ----------------- ----------------- ------------------
Total increase (decrease)
in net assets .................... 6,166,228 2,839,472 230,530 710,132
Net Assets:
Beginning of year ........................ 25,639,052 22,799,580 6,271,833 5,561,701
------------------- ----------------- ----------------- ------------------
End of year .............................. $31,805,280 $25,639,052 $6,502,363 $6,271,833
=================== ================= ================= ==================
==========================================
+ 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.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
[RESTUBBED]
Partners
Portfolio++
---------------------------------------
1998 1998
------------------ ------------------
Operations:
<S> <C> <C>
Net investment income (loss) .......... ($33,836) ($159,944)
Net realized gains (losses) from
investment transactions .......... 385,973 1,314,554
Net change in unrealized
appreciation/ depreciation
of investments ................... 882,040 (1,132,139)
------------------ ------------------
Net increase (decrease) in net assets
resulting from operations ........ 1,234,177 22,471
------------------ ------------------
Variable Annuity Activities:
Purchase payments ..................... 10,660,075 16,825,601
Surrender benefits .................... (1,352,491) (636,970)
Net Transfers ......................... (6,059,956) (2,421,858)
Death Benefits ........................ (87,737) (37,624)
Contract administration charges ....... (18,477) (10,943)
Deferred sales charges ................ (28,727) (10,334)
Annuity benefits ...................... (62,682) (58,006)
------------------ ------------------
Net increase in net assets resulting
from variable annuity activities ...... 3,050,005 13,649,866
------------------ ------------------
Total increase (decrease)
in net assets .................... 4,284,182 13,672,337
Net Assets:
Beginning of year ........................ 21,930,486 8,258,149
------------------ ------------------
End of year .............................. $26,214,668 $21,930,486
================== ==================
Growth
Portfolio++++
------------------ ------------------
1998 1998
------------------ ------------------
Operations:
Net investment income (loss) .......... ($1,449,110) ($599,120)
Net realized gains (losses) from
investment transactions .......... 10,359,481 7,095,378
Net change in unrealized
appreciation/ depreciation
of investments ................... 31,824,227 15,492,226
------------------ ------------------
Net increase (decrease) in net assets
resulting from operations ........ 40,734,598 21,988,484
------------------ ------------------
Variable Annuity Activities:
Purchase payments ..................... 76,915,718 23,254,838
Surrender benefits .................... (8,149,247) (4,004,288)
Net Transfers ......................... (27,789,707) (6,920,426)
Death Benefits ........................ (444,998) (261,573)
Contract administration charges ....... (101,515) (71,268)
Deferred sales charges ................ (155,211) (99,279)
Annuity benefits ...................... (624,908) (245,272)
------------------ ------------------
Net increase in net assets resulting
from variable annuity activities ...... 39,650,132 11,652,732
------------------ ------------------
Total increase (decrease)
in net assets .................... 80,384,730 33,641,216
Net Assets:
Beginning of year ........................ 87,543,450 53,902,234
------------------ ------------------
End of year .............................. $167,928,180 $87,543,450
================== ==================
==========================================
+ Investment in Penn Series Funds, Inc.
++ Investment in Neuberger Berman Advisers Management Trust
+++ Investment in American Century Variable Portfolios, Inc.
++++ Investment in Fidelity Investments' Variable Insurance Products Funds I and II
+++++ Investment in Morgan Stanley Dean Witter Universal Funds, Inc.
</TABLE>
<PAGE>
PENN MUTUAL VARIABLE ANNUITY ACCOUNT III
STATEMENTS OF CHANGES IN NET ASSETS - FOR THE YEARS ENDED DECEMBER 31, 1999 AND
1998 (CONT'D.)
<TABLE>
<CAPTION>
Capital Appreciation Equity Income
Portfolio+++ Portfolio++++
---------------------------- ----------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Operations:
Net investment income (loss) ........... ($ 182,384) ($ 200,676) $ 108,870 ($ 19,238)
Net realized gains (losses) from
investment transactions ........... 240,140 890,697 2,330,920 2,808,808
Net change in unrealized appreciation/
depreciation of investments ....... 7,212,430 (1,315,911) 977,298 3,216,502
------------ ------------ ------------ ------------
Net increase (decrease) in net assets
resulting from operations ......... 7,270,186 (625,890) 3,417,088 6,006,072
------------ ------------ ------------ ------------
Variable Annuity Activities:
Purchase payments ...................... 2,923,082 1,967,452 22,934,408 19,104,376
Surrender benefits ..................... (1,533,308) (1,284,123) (6,015,583) (4,228,476)
Net Transfers .......................... (4,358,209) (5,680,990) (10,733,426) (5,399,857)
Death Benefits ......................... (102,465) (24,305) (270,605) (297,915)
Contract administration charges ........ (16,308) (20,497) (61,920) (55,951)
Deferred sales charges ................. (30,459) (31,644) (110,931) (72,716)
Annuity benefits ....................... (44,249) (41,725) (624,431) (427,304)
------------ ------------ ------------ ------------
Net increase in net assets resulting
from variable annuity activities ....... (3,161,916) (5,115,832) 5,117,512 8,622,157
------------ ------------ ------------ ------------
Total increase (decrease) in net assets 4,108,270 (5,741,722) 8,534,600 14,628,229
Net Assets:
Beginning of year ......................... 14,146,318 19,888,040 71,693,169 57,064,940
------------ ------------ ------------ ------------
End of year ............................... $ 18,254,588 $ 14,146,318 $ 80,227,769 $ 71,693,169
============ ============ ============ ============
</TABLE>
[TABLE RESTUBBED]
<TABLE>
<CAPTION>
Emerging Markets
Portfolio+++++
----------------------------
1999 1998
------------ ------------
<S> <C> <C>
Operations:
Net investment income (loss) ........... ($ 63,695) ($ 15,078)
Net realized gains (losses) from
investment transactions ........... 109,924 (5,906)
Net change in unrealized appreciation/
depreciation of investments ....... 3,768,983 (739,423)
------------ ------------
Net increase (decrease) in net assets
resulting from operations ......... 3,815,212 (760,407)
------------ ------------
Variable Annuity Activities:
Purchase payments ...................... 13,056,491 1,809,338
Surrender benefits ..................... (425,250) (68,993)
Net Transfers .......................... (10,018,072) (465,249)
Death Benefits ......................... (360) (20)
Contract administration charges ........ (4,512) (2,619)
Deferred sales charges ................. (8,889) (1,973)
Annuity benefits ....................... (15,449) (4,738)
------------ ------------
Net increase in net assets resulting
from variable annuity activities ....... 2,583,959 1,265,746
------------ ------------
Total increase (decrease) in net assets 6,399,171 505,339
Net Assets:
Beginning of year ......................... 2,731,041 2,225,702
------------ ------------
End of year ............................... $ 9,130,212 $ 2,731,041
============ ============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Asset Manager Index 500
Portfolio++++ Portfolio++++
---------------------------- ----------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Operations:
Net investment income (loss) ........... $ 214,281 $ 143,729 ($ 442,515) ($ 162,002)
Net realized gains (losses) from
investment transactions ........... 552,306 835,643 226,588 281,956
Net change in unrealized appreciation/
depreciation of investments ....... 1,327,645 416,857 12,114,229 5,006,490
------------ ------------ ------------ ------------
Net increase (decrease) in net assets
resulting from operations ......... 2,094,232 1,396,229 11,898,302 5,126,444
------------ ------------ ------------ ------------
Variable Annuity Activities:
Purchase payments ...................... 15,081,833 5,224,201 58,479,634 26,942,238
Surrender benefits ..................... (1,169,535) (557,255) (3,426,070) (918,820)
Net Transfers .......................... (3,970,374) (891,784) (9,933,570) (3,321,795)
Death Benefits ......................... (13,421) (46,723) (275,617) (68,425)
Contract administration charges ........ (14,367) (10,316) (48,408) (16,392)
Deferred sales charges ................. (16,481) (13,295) (61,236) (14,007)
Annuity benefits ....................... (301,534) (92,217) (344,651) (59,823)
------------ ------------ ------------ ------------
Net increase in net assets resulting
from variable annuity activities ....... 9,596,121 3,612,611 44,390,082 22,542,976
------------ ------------ ------------ ------------
Total increase (decrease) in net assets 11,690,353 5,008,840 56,288,384 27,669,420
Net Assets:
Beginning of year ......................... 13,697,644 8,688,804 36,226,715 8,557,295
------------ ------------ ------------ ------------
End of year ............................... $ 25,387,997 $ 13,697,644 $ 92,515,099 $ 36,226,715
============ ============ ============ ============
</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.
B-11
<PAGE>
PENN MUTUAL VARIABLE ANNUITY ACCOUNT III
- --------------------------------------------------------------------------------
Notes to Financial Statements
December 31, 1999
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, 1999 and the reported amounts from
operations and contract transactions during 1999 and 1998. Actual results could
differ from those estimates.
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-12
<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,
1999:
Purchases Sales
--------- -----
Money Market Fund ................................ $93,075,237 $78,935,799
Quality Bond Fund ................................ 9,065,818 7,802,883
High Yield Bond Fund ............................. 7,362,642 10,741,430
Growth Equity Fund ............................... 26,374,757 20,633,519
Value Equity Fund ................................ 6,687,202 41,064,418
Flexibly Managed Fund ............................ 9,271,795 75,378,500
Small Capitalization Fund ........................ 3,855,827 3,763,109
International Equity Fund ........................ 41,048,208 45,784,642
Emerging Growth Fund ............................. 34,912,414 5,698,064
Limited Maturity Bond Portfolio .................. 12,895,202 12,416,743
Balanced Portfolio ............................... 3,892,676 4,778,473
Partners Portfolio ............................... 7,746,775 4,258,908
Capital Appreciation Portfolio ................... 1,261,520 4,598,331
Equity Income Portfolio .......................... 16,989,451 9,373,391
Growth Portfolio ................................. 70,264,693 21,721,619
Asset Manager Portfolio .......................... 17,243,893 6,808,640
Index 500 Portfolio .............................. 48,656,560 4,397,908
Emerging Markets Equity Portfolio ................ 11,920,803 9,395,423
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 of 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-13
<PAGE>
Note 4. Unit Values
As of December 31, 1999, the accumulation units and accumulation unit
values are as follows:
Variable Annuity Contracts: Accumulation Accumulation
Units Unit Value
------------ ------------
Money Market Fund
Commander 15,304 $10.39
Diversifier II 1,669,670 $20.95
Pennant Select 826,316 $10.32
Quality Bond Fund
Commander 28,113 $9.87
Diversifier II 1,612,651 $21.77
Pennant Select 261,461 $9.88
High Yield Bond Fund
Commander 21,145 $10.26
Diversifier II 1,176,269 $35.67
Pennant Select 164,772 $10.26
Growth Equity Fund
Commander 25,504 $13.26
Diversifier II - Qualified 1,772,202 $89.41
Diversifier II - 665,530 $88.68
Pennant Select 371,063 $13.27
Value Equity Fund
Commander 22,230 $9.82
Diversifier II 4,407,110 $40.33
Pennant Select 332,695 $9.82
Flexibly Managed Fund
Commander 39,752 $10.55
Diversifier II 4,634,490 $62.40
Pennant Select 544,267 $10.55
Small Capitalization Fund
Commander 1,759 $9.75
Diversifier II 1,249,298 $14.03
Pennant Select 109,420 $9.75
International Equity Fund
Commander 45,321 $14.08
Diversifier II 3,579,323 $30.68
Emerging Growth Fund
Commander 26,453 $28.36
Diversifier II 1,645,175 $52.08
Pennant Select 259,172 $28.37
<PAGE>
Variable Annuity Contracts: Accumulation Accumulation
Units Unit Value
------------ ------------
Limited Maturity Bond Portfolio
Commander 4,391 $10.02
Diversifier II 473,183 $12.34
Pennant Select 61,833 $10.02
Balanced Portfolio
Commander 1,560 $13.28
Diversifier II 1,348,416 $22.72
Pennant Select 86,030 $13.29
Partners Portfolio
Commander 25,519 $10.60
Diversifier II 1,787,163 $13.54
Pennant Select 163,977 $10.61
Capital Appreciation Portfolio
Diversifier II 916,231 $19.92
Equity Income Portfolio
Commander 88,377 $10.53
Diversifier II 3,820,785 $19.70
Pennant Select 381,000 $10.53
Growth Portfolio
Commander 60,951 $13.55
Diversifier II 4,955,849 $31.92
Pennant Select 656,284 $13.56
Asset Manager Portfolio
Commander 14,010 $10.97
Diversifier II 1,290,362 $18.75
Pennant Select 94,897 $10.98
Index 500 Portfolio
Commander 72,842 $11.91
Diversifier II 4,389,976 $18.34
Pennant Select 933,121 $11.91
Emerging Markets Equity
Commander 572 $18.91
Diversifier II 649,652 $13.00
Pennant Select 35,779 $18.92
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, 1999, and the related statement of
operations for the year then ended and statements of changes in net assets for
each of the two years in the period then ended. The 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 audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatements. 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, 1999, by
correspondence with the transfer agents. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of each of the respective
portfolios constituting the Penn Mutual Variable Annuity Account III at December
31, 1999, the results of their operations for the year then ended and the
changes in their net assets for each of the two years in the period then ended,
in conformity with accounting principles generally accepted in the United
States.
/s/ Ernst & Young LLP
Philadelphia, Pennsylvania
April 4, 2000
B-15
<PAGE>
The Penn Mutual Life Insurance Company and Subsidiaries
Consolidated Balance Sheets
================================================================================
As of December 31, 1999 1998
- --------------------------------------------------------------------------------
(in thousands)
ASSETS
Debt securities, at fair value $ 4,733,261 $ 5,500,924
Equity securities, at fair value 3,949 4,161
Mortgage loans on real estate 27,115 38,828
Real estate, net of accumulated depreciation 15,461 15,791
Policy loans 642,420 638,376
Short-term investments 6,934 1,024
Other invested assets 137,766 98,571
------------ ------------
Total investments 5,566,906 6,297,675
Cash and cash equivalents 37,481 24,468
Investment income due and accrued 89,254 104,208
Deferred acquisition costs 549,573 399,742
Amounts recoverable from reinsurers 220,847 69,583
Broker/dealer receivables 1,143,702 793,522
Other assets 109,818 94,179
Separate account assets 2,865,366 2,302,937
------------ ------------
Total Assets $ 10,582,947 $10,086,314
============ ============
LIABILITIES
Reserves for payment of future policy benefits $ 2,735,609 $ 2,761,319
Other policyholder funds 2,710,589 2,835,081
Policyholders' dividends payable 28,770 30,532
Broker/dealer payables 646,479 488,783
Accrued income tax payable 31,919 142,634
Other liabilities 573,909 383,744
Separate account liabilities 2,865,366 2,302,937
------------ ------------
Total Liabilities 9,592,641 8,945,030
------------ ------------
EQUITY
Retained earnings 1,023,704 944,145
Accumulated other comprehensive income/(loss) -
unrealized gains/(losses) (33,398) 197,139
------------ ------------
Total Equity 990,306 1,141,284
------------ ------------
Total Liabilities and Equity $ 10,582,947 $ 10,086,314
============ ============
The accompanying notes are an integral part of these financial statements.
B-16
<PAGE>
The Penn Mutual Life Insurance Company and Subsidiaries
Consolidated Income Statements
<TABLE>
<CAPTION>
For the Years Ended December 31, 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C>
REVENUES
Premium and annuity considerations $ 130,516 $ 154,615 $ 178,338
Policy fee income 131,709 114,681 102,398
Net investment income 431,222 433,530 448,135
Net realized capital gains/(losses) 803 3,912 9,655
Broker/dealer fees and commissions 395,483 331,285 290,005
Other income 24,895 15,543 10,920
----------- ----------- -----------
Total Revenue 1,114,628 1,053,566 1,039,451
----------- ----------- -----------
BENEFITS AND EXPENSES
Benefits paid to policyholders and beneficiaries 429,791 445,148 463,444
Policyholder dividends 56,603 61,369 67,412
Decrease in liability for future policy benefits (54,080) (23,337) (10,275)
General expenses 238,603 205,698 195,336
Broker/dealer sales expense 216,712 180,255 160,730
Amortization of deferred acquisition costs 52,668 42,223 43,223
----------- ----------- -----------
Total Benefits and Expenses 940,297 911,356 919,870
----------- ----------- -----------
Income from Continuing Operations Before Income Taxes 174,331 142,210 119,581
----------- ----------- -----------
Income taxes 66,324 57,019 51,323
----------- ----------- -----------
Income from Continuing Operations 108,007 85,191 68,258
----------- ----------- -----------
DISCONTINUED OPERATIONS
Income (loss) from operations of discontinued segment
(net of income taxes of $(2,137), $670 and $2,589) (3,968) 1,243 4,807
Loss on sale of discontinued operations (less
applicable income tax benefit of $13,181) (24,480) -- --
----------- ----------- -----------
NET INCOME $ 79,559 $ 86,434 $ 73,065
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
B-17
<PAGE>
The Penn Mutual Life Insurance Company and Subsidiaries
Consolidated Statements of Changes in Equity
<TABLE>
<CAPTION>
Other
Comprehensive Retained Total
Income/(Loss) Earnings Equity
- ---------------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C>
Balance at January 1, 1997 $ 85,730 $ 784,646 $ 870,376
Comprehensive Income
Net income for 1997 -- 73,065 73,065
Other comprehensive loss, 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
Comprehensive Loss
Net income for 1999 -- 79,559 79,559
Other comprehensive loss, net of tax
Unrealized depreciation of securities,
net of reclassification adjustment (230,537) -- (230,537)
-----------
Comprehensive Loss (150,978)
----------- ----------- -----------
Balance at December 31, 1999 $ (33,398) $ 1,023,704 $ 990,306
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
B-18
<PAGE>
The Penn Mutual Life Insurance Company and Subsidiaries
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
For the Years Ended December 31, 1999 1998 1997
- --------------------------------------------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C>
Cash Flows from Operating Activities
Net income $ 79,559 $ 86,434 $ 73,065
Adjustments to reconcile net income to net cash provided by operations:
Capitalization of policy acquisition costs (78,644) (72,356) (64,427)
Amortization of deferred acquisition costs 52,668 42,223 43,223
Policy fees on universal life and investment contracts (80,456) (120,315) (104,342)
Interest credited on universal life and investment contracts 132,213 146,081 160,417
Depreciation and amortization 6,294 4,750 18,682
Premiums due and other receivables (16,794) (1,293) (7,291)
Net realized capital (gains)/losses (803) (3,912) (9,655)
Net realized loss on sale of discontinued operations 37,661 -- --
(Increase)/decrease in investment income due and accrued 14,954 (1,136) 60
(Increase) in amounts recoverable from reinsurers (18,419) (6,372) (4,329)
(Decrease) in reserves for payment of future policy benefits (25,710) (8,696) (13,358)
Increase/(decrease) in accrued income tax payable 13,222 25,622 (4,526)
Other, net 12,652 3,805 (6,693)
---------- ----------- -----------
Net cash provided by operating activities 128,397 94,835 80,826
---------- ----------- -----------
Cash Flows from Investing Activities
Sale of investments:
Debt securities available for sale 1,624,576 1,837,209 1,235,274
Equity securities 12,003 35,496 20,374
Real estate 853 9,937 87,875
Other 3,884 18,074 14,355
Maturity and other principal repayments:
Debt securities available for sale 415,888 496,283 472,474
Mortgage loans 17,596 2,357 61,813
Other 3,963 -- --
Cost of investments acquired:
Debt securities available for sale (1,752,394) (2,315,067) (1,772,007)
Equity securities (12,097) (26,390) (15,268)
Real estate (1,366) (293) (15,600)
Other (39,139) (17,917) (15,503)
Change in policy loans, net (4,044) 4,613 13,084
(Increase)/decrease in short-term investments, net (5,910) 42,446 (5,955)
Purchases of furniture and equipment, net (10,900) (9,446) (4,116)
Sale of discontinued operations (160,332) -- --
---------- ----------- -----------
Net cash provided by investing activities 92,581 77,302 76,800
---------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
B-19
<PAGE>
The Penn Mutual Life Insurance Company and Subsidiaries
Consolidated Statements of Cash Flows - Continued
<TABLE>
<CAPTION>
For the Years Ended December 31, 1999 1998 1997
- --------------------------------------------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C>
Cash Flows from Financing Activities
Deposits for universal life and investment contracts $ 605,568 $ 589,070 $ 653,233
Withdrawals from universal life and investment contracts (641,296) (605,821) (552,311)
Transfers to separate accounts (146,981) (147,708) (236,008)
Issuance/(repayment) of debt 167,228 90,772 24,842
(Increase)/decrease in net broker dealer receivables (192,484) (111,046) (47,632)
---------- ---------- ----------
Net cash used by financing activities (207,965) (184,733) (157,876)
---------- ---------- ----------
Net increase/(decrease) in cash and cash equivalents 13,013 (12,596) (250)
Cash and cash equivalents
Beginning of the year 24,468 37,064 37,314
---------- ---------- ----------
End of the year $ 37,481 $ 24,468 $ 37,064
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
B-20
<PAGE>
- --------------------------------------------------------------------------------
THE PENN MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For The Years Ended December 31, 1999, 1998 and 1997
(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 accompanying consolidated financial statements have been prepared in
conformity with accounting principles generally accepted in the United States
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, 1999, the Company adopted Statement of Position (SOP) 97-3,
"Accounting by Insurance and Other Enterprises for Insurance-Related
Assessments." SOP 97-3 provides guidance for determining when and how to measure
assets and liabilities associated with guaranty fund and other insurance related
assessments. The Company also adopted SOP 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use" which gives guidance
on accounting for the costs related to developing, obtaining, modifying and/or
implementing internal use software. The adoption of SOP 97-3 and SOP 98-1 did
not have a material effect on the Company's financial condition or results of
operations.
As of January 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. (SFAS) 130, "Reporting Comprehensive Income." SFAS No. 130
established 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.
In June 1998, the FASB issued Statement of Financial Accounting Standards (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 earnings. In June 1999, the FASB issued
SFAS No. 137 which defers the effective date for implementation of SFAS No. 133
to fiscal years beginning after June 15, 2000. 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. Prepayment assumptions for loan-backed
and structured securities are obtained from broker dealer survey values or
internal estimates. These assumptions are
B-21
<PAGE>
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements, continued
(In Thousands of Dollars)
- --------------------------------------------------------------------------------
consistent with the current interest rate and economic environments. The
retrospective adjustment method is used to value all such 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.
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 $50,971 and $46,292 at December 31,
1999 and 1998,
B-22
<PAGE>
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements, continued
(In Thousands of Dollars)
- --------------------------------------------------------------------------------
respectively. Related depreciation and amortization expense was $8,441, $8,586
and $8,183 for the years ended December 31, 1999, 1998 and 1997, 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 included in other assets
amounted to $17,228 and $16,126 at December 31, 1999 and 1998, respectively.
Goodwill amortization was $1,008, $806 and $808 for 1999, 1998 and 1997,
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.
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
B-23
<PAGE>
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements, continued
(In Thousands of Dollars)
- --------------------------------------------------------------------------------
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, 1999, participating insurance expressed
as a percentage of insurance in force is 91%, and as a percentage of premium
income is 83%. 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,
1999.
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.
Reclassification
Certain 1998 and 1997 amounts have been reclassified to conform with 1999
presentation.
2. DISCONTINUED OPERATIONS:
During 1999, the Company decided to exit the Disability Income (DI) line of
business and entered into an indemnity reinsurance agreement with Christian
Mutual Life Insurance Company and ACE Bermuda Ltd. to cede all of its remaining
risk associated with this line. Under the agreement, effective July 1, 1999, the
Company agreed to transfer assets with a fair market value of $167,750 to
reinsure net liabilities of $139,889. The Company recognized a pretax loss of
$37,661 on this transaction, including costs of sale. Under the agreement, 95%
of the assets and liabilities were transferred to the reinsurer effective July
1, 1999. The remaining 5% of the related assets are being held in an escrow
account under the Company's control, pending approval of the transaction by the
State of New York. Accordingly,
B-24
<PAGE>
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements, continued
(In Thousands of Dollars)
- --------------------------------------------------------------------------------
reserves for payment of future policy benefits at December 31, 1999 include
$7,458 related to the remaining 5% of the DI business.
As this is a disposal of a segment of business, the Company has modified the
presentation in the accompanying income statements to separate the results of
operations attributable to this business. Revenue from discontinued operations
for the year ended December 31, 1999, 1998 and 1997 were $16,855, $28,854 and
$29,884, respectively.
The reinsurance agreement is secured for the Company by a collateralized trust
which names the Company as the beneficiary. As of December 31, 1999, the Company
had a reinsurance recoverable from Christian Mutual of $141,707 which was
secured by investment grade securities with a market value of $155,046 held in
trust.
3. 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
$8,703 and $3,056 as of December 31, 1999 and 1998, respectively.
<TABLE>
<CAPTION>
December 31, 1999
--------------------------------------------------------------
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 $ 10,527 $ 119 $ 178 $ 10,468
States and political subdivisions 11,600 -- 58 11,542
Foreign governments 19,854 758 -- 20,612
Corporate securities 2,678,302 69,875 116,357 2,631,820
Mortgage and other asset-backed securities 2,106,506 9,975 58,011 2,058,470
---------- ---------- ---------- ----------
Total bonds 4,826,789 80,727 174,604 4,732,912
Redeemable preferred stocks 360 -- 11 349
---------- ---------- ---------- ----------
Total $4,827,149 $ 80,727 $ 174,615 $4,733,261
========== ========== ========== ==========
December 31, 1998
--------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------- ---------- ---------- ----------
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-25
<PAGE>
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements, continued
(In Thousands of Dollars)
- --------------------------------------------------------------------------------
The following table summarizes the amortized cost and estimated fair value of
debt securities, including redeemable preferred stocks, as of December 31, 1999
by contractual maturity.
Amortized Estimated
Years to maturity: Cost Fair Value
---------- ----------
One or less $ 226,324 $ 215,589
After one through five 247,287 248,905
After five through ten 523,294 545,057
After ten 1,723,378 1,664,891
Mortgage and other asset-backed securities 2,106,506 2,058,470
---------- ----------
Total bonds 4,826,789 4,732,912
Redeemable preferred stocks 360 349
---------- ----------
Total $4,827,149 $4,733,261
========== ==========
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 7.5 years.
At December 31, 1999, the Company held $2,058,470 in mortgage and other
asset-backed securities. The structured securities portfolio consists of
commercial and residential mortgage pass-through holdings totaling $1,675,587
and securities backed by credit card receivables, auto loans, home equity and
manufactured housing loans totaling $382,883. These securities follow a
structured principal repayment schedule and are of high credit quality.
Securities totaling $1,412,879 are rated AAA and include $16,617 of
interest-only tranches . As of December 31, 1999 and 1998, the Company's
investments included $370,541 and $475,699, respectively, of the tranches
retained from the 1996 securitization of the Company's commercial mortgage loan
portfolio. These investments represented 37% and 42% of equity at December 31,
1999 and 1998, respectively.
At December 31, 1999, the largest industry concentration of the Company's
portfolio was investments in the finance industry of $506,017 representing 11%
of the total debt portfolio.
Proceeds during 1999, 1998 and 1997 from sales of available-for-sale securities
were $1,623,191, $1,931,269 and $1,353,112, respectively. Gross gains and gross
losses realized on those sales were $18,843 and $17,702, respectively, during
1999, $37,324 and $35,257, respectively, during 1998 and $21,799 and $8,990,
respectively, during 1997.
The Company's investment portfolio of debt securities is predominantly comprised
of investment grade securities. At December 31, 1999 and 1998, debt securities
with amortized cost totaling $218,351 and $192,724, respectively, were less than
investment grade. At December 31, 1999 and 1998, the Company held securities
with a carrying value of $0 and $9,170, respectively, which were to be
restructured pursuant to commenced negotiations. The Company did not hold any
debt securities which were non-income producing for the preceding twelve months
as of December 31, 1999 and 1998.
Equity Securities
During 1999, 1998 and 1997, the proceeds from sales of equity securities
amounted to $12,003, $35,496 and $20,374, respectively. The gross gains and
gross losses realized on those sales were $89 and $352, $3,095 and $239 and $975
and $239 for 1999, 1998 and 1997, respectively
B-26
<PAGE>
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements, continued
(In Thousands of Dollars)
- --------------------------------------------------------------------------------
Mortgage Loans
The following tables summarize the carrying value of mortgage loans, by property
type and geographic concentration, at December 31.
1999 1998
-------- --------
Property Type
Office building $ 1,366 $ 9,204
Retail 8,414 5,553
Dwellings 16,062 24,741
Other 2,773 3,130
Valuation Allowance (1,500) (3,800)
-------- -------
Total $27,115 $38,828
======== =======
1999 1998
-------- --------
Geographic Concentration
Northeast $ 5,506 $10,273
Midwest 5,515 5,728
South 11,612 12,075
West 5,982 14,552
Valuation Allowance (1,500) (3,800)
-------- -------
Total $27,115 $38,828
======== =======
The following table presents changes in the mortgage loan valuation allowance
for the years presented:
1999 1998
-------- --------
Balance at January 1 $ 3,800 $ 3,800
Reduction in provision (2,300) -
Charge-offs - -
-------- -------
Balance at December 31 $ 1,500 $ 3,800
======== =======
As of December 31, 1999 and 1998, 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 1999 and 1998, the Company did not restructure the terms of any
outstanding mortgages. As of December 31, 1999 and 1998, the mortgage loan
portfolio included $2,275 and $2,555, 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
$305 and $258 in 1999 and 1998, respectively. Gross interest income from these
loans included in net investment income totaled $211 and $236 in 1999 and 1998,
respectively.
B-27
<PAGE>
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements, continued
(In Thousands of Dollars)
- --------------------------------------------------------------------------------
At December 31, 1999 and 1998, no loans were considered to be impaired. The
Company had no investments in impaired loans during the year ended December 31,
1999. The average recorded investment in impaired loans during the year ended
December 31, 1998 was approximately $6,184. During 1998, $163 was received 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.
1999 1998
-------- --------
Investment $19,461 $19,111
Properties held for sale - 1,914
Less: Valuation allowance (4,000) (5,234)
-------- --------
Total $15,461 $15,791
======== ========
At December 31, 1999 and 1998, accumulated depreciation on real estate amounted
to $7,233 and $6,218, respectively. Depreciation expense on real estate totaled
$1,015, $1,071 and $5,709 for the years ended December 31, 1999, 1998 and 1997,
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.
Other
Investments on deposit with regulatory authorities as required by law were
$6,444 and $7,104 at December 31, 1999 and 1998, respectively.
4. INVESTMENT INCOME AND CAPITAL GAINS:
The following table summarizes the sources of investment income, excluding
investment gains/(losses), for the year ended December 31.
1999 1998 1997
--------- --------- ---------
Debt securities $ 385,963 $ 395,628 $ 390,852
Equity securities 311 206 1,371
Mortgage loans 2,706 4,268 12,098
Real estate 2,209 2,903 17,519
Policy loans 39,371 39,760 40,921
Short-term investments 830 2,032 2,428
Other invested assets 17,446 11,330 21,268
--------- --------- ---------
Gross investment income 448,836 456,127 486,457
Less: Investment expense 11,104 11,430 26,251
Less: Discontinued operations 6,510 11,167 12,071
--------- --------- ---------
Investment income, net $ 431,222 $ 433,530 $ 448,135
========= ========= =========
B-28
<PAGE>
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements, continued
(In Thousands of Dollars)
- --------------------------------------------------------------------------------
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 $1,066, $235 and $3,154 in 1999,
1998 and 1997, respectively.
1999 1998 1997
--------- -------- ---------
Debt securities $ (4,506) $ 110 $ 12,991
Equity securities (263) 2,856 417
Mortgage loans 2,300 210 280
Real estate 173 4,148 (684)
Other 2,430 (2,109) (811)
Amortization of deferred
acquisition costs 669 (1,303) (2,538)
--------- -------- ---------
Net realized capital
gains/(losses) $ 803 $ 3,912 $ 9,655
========= ======== =========
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.
1999 1998 1997
----------- --------- ----------
Unrealized gains/(losses):
Debt securities $ (477,036) $ 86,594 $ 160,850
Equity securities (43) (2,092) 408
Other 5,555 (2,091) (14,581)
----------- --------- ----------
(471,524) 82,411 146,677
----------- --------- ----------
Less:
Deferred policy acquisition
costs 117,050 (12,841) (45,043)
Deferred income taxes 123,937 (24,440) (35,355)
----------- --------- ----------
Net change in unrealized
gains/(losses) $ (230,537) $ 45,130 $ 66,279
=========== ========= ==========
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:
1999 1998 1997
----------- --------- ----------
Reclassification Adjustments
Unrealized holding gains/(losses)
arising during period $ (255,859) $ 53,576 $ 71,797
Reclassification adjustment
for gains included in net income 25,322 8,446 5,518
----------- --------- ----------
Unrealized gains/(losses) on
investments, net of
reclassification adjustment $ (230,537) $ 45,130 $ 66,279
=========== ========= ==========
Reclassification adjustments reported in the above table for the years ended
December 31, 1999, 1998 and 1997 are net of income tax expense of $13,635,
$7,679 and $4,519, respectively, and $11,760, $5,815 and $2,875, respectively,
relating to the effects of such amounts on deferred acquisition costs.
B-29
<PAGE>
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements, continued
(In Thousands of Dollars)
- --------------------------------------------------------------------------------
5. FAIR VALUE INFORMATION:
The following table summarizes the carrying value and estimated fair value of
the Company's financial instruments as of December 31, 1999 and 1998.
<TABLE>
<CAPTION>
1999 1998
----------------------------- -----------------------------
Carrying Fair Carrying Fair
Value Value Value Value
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Financial Assets:
Debt securities, available for sale $ 4,733,261 $ 4,733,261 $ 5,500,924 $ 5,500,924
Equity securities
Common stock 276 276 158 158
Non-redeemable preferred stocks 3,673 3,673 4,003 4,003
Mortgage loans 27,115 28,615 38,828 42,675
Policy loans 642,420 612,501 638,376 605,144
Cash and cash equivalents 37,481 37,481 24,468 24,468
Short-term investments 6,934 6,934 1,024 1,024
Separate account assets 2,865,366 2,865,366 2,302,937 2,302,937
Other invested assets 137,766 137,766 98,571 98,571
Financial Liabilities:
Investment-type contracts
Individual annuities $ 997,686 $ 1,011,298 $ 1,108,274 $ 1,143,373
Guaranteed investment contracts 22,786 21,353 39,571 40,556
Other group annuities 85,465 85,213 113,974 115,422
Other policyholder funds 339,937 339,937 340,761 340,761
----------- ----------- ----------- -----------
Total policyholder funds 1,445,874 1,457,801 1,602,580 1,640,112
Policyholder's dividends payable 28,770 28,770 30,532 30,532
Separate account liabilities 2,865,366 2,865,366 2,302,937 2,302,937
</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.
B-30
<PAGE>
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements, continued
(In Thousands of Dollars)
- --------------------------------------------------------------------------------
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 values of policyholders'
dividends payable and separate account liabilities approximate their fair
values.
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, 1999 and
1998, the Company had interest rate swaps with aggregate notional amounts equal
to $20,000 and $95,000, respectively, with average unexpired terms of 7 months
and 8 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 $335 and $0, respectively, at December 31, 1999 and $2,248 and $0,
respectively, at December 31, 1998. 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 $34,457 and $38,144 as of December 31, 1999 and 1998,
respectively.
B-31
<PAGE>
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements, continued
(In Thousands of Dollars)
- --------------------------------------------------------------------------------
6. 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.
Deferred income taxes reflect the impact for financial statement reporting
purposes of temporary differences between the financial statement carrying
amounts and tax basis 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:
1999 1998
--------- ----------
Deferred tax assets
Future policy benefits $ 90,877 $ 92,909
Dividend award 10,010 10,255
Allowances for investment losses 6,153 4,232
Employee benefit liabilities 30,479 29,762
Unrealized investment losses 17,934 -
Other 17,256 18,677
--------- ----------
Total deferred tax asset 172,709 155,835
--------- ----------
Deferred tax liabilities
Deferred acquisition costs 145,360 135,248
Unrealized investment gains - 105,993
Other 18,484 22,375
--------- ----------
Total deferred tax liability 163,844 263,616
--------- ----------
Net deferred tax liability (8,865) 107,781
Tax currently payable 40,784 34,853
--------- ----------
Accrued income tax payable $ 31,919 $ 142,634
========= ==========
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:
1999 1998 1997
-------- -------- --------
Tax expense at 35% $ 45,697 $ 50,443 $ 44,442
Increase in income taxes resulting
from:
Differential earnings amount 3,010 2,681 6,942
Other 2,299 4,565 2,528
-------- -------- --------
Federal income tax expense $ 51,006 $ 57,689 $ 53,912
======== ======== ========
B-32
<PAGE>
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements, continued
(In Thousands of Dollars)
- --------------------------------------------------------------------------------
The make up of the tax expense/(benefit) is as follows:
1999 1998 1997
-------- -------- --------
Continuing operations $ 66,324 $ 57,019 $ 51,323
Discontinued operations:
Operations (2,137) 670 2,589
Sale (13,181) - -
-------- -------- --------
Total federal income tax expense $ 51,006 $ 57,689 $ 53,912
======== ======== ========
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 and is currently examining years 1995 through 1997.
Management believes that an adequate provision has been made for potential
assessments.
7. 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
------------------------ ------------------------
1999 1998 1999 1998
-------- -------- -------- ---------
<S> <C> <C> <C> <C>
Benefit Obligation $(90,293) $(90,428) $(27,808) $ (26,439)
Fair value of plan assets 63,616 53,349 - -
-------- -------- -------- ---------
Funded Status $(26,677) $(37,079) $(27,808) $ (26,439)
======== ======== ======== =========
Accrued benefit cost recognized in the
consolidated balance sheet $(25,861) $(22,530) $(44,205) $ (44,558)
</TABLE>
The weighted-average assumptions used to measure the actuarial present value of
the projected benefit obligation were:
<TABLE>
<CAPTION>
Pension Benefits Other Benefits
------------------------ ------------------------
1999 1998 1999 1998
-------- -------- -------- ---------
<S> <C> <C> <C> <C>
Discount rate 6.75% 6.75% 6.75% 6.75%
Expected return on plan assets 8.00% 8.00% - -
Rate of compensation increase 5.50% 5.50% 5.00% 5.00%
</TABLE>
At December 31, 1999, the assumed health care cost trend rate used in measuring
the accumulated postretirement benefit obligation was 8% for 2000, grading to 5%
for 2004. At December 31, 1998, the assumed health care cost trend rate used in
measuring the accumulated postretirement benefit obligation was 8% for 1999,
grading to 5% for 2004. The assumed health care cost trend rate used at December
31, 1997 in measuring the accumulated postretirement benefit obligation was 8.5%
for 1998, grading to 5% for 2004. Assumed health care cost trend rates have a
significant effect on the amounts reported for the health care plans.
B-33
<PAGE>
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements, continued
(In Thousands of Dollars)
- --------------------------------------------------------------------------------
The contributions made and the benefits paid from the plans were:
<TABLE>
<CAPTION>
Pension Benefits Other Benefits
------------------------ ------------------------
1999 1998 1999 1998
-------- -------- -------- ---------
<S> <C> <C> <C> <C>
Benefit cost recognized in $ 5,072 $ 5,692 $ 1,140 $ 831
consolidated income statement
Employer contribution 1,741 6,687 1,493 1,415
Plan participants' contribution - - - -
Benefits paid 3,593 3,229 1,493 1,415
</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, 1999, 1998 and 1997, the
expense recognized for these plans was $11,192, $9,526 and $8,345, respectively.
The estimated fair value of the defined contribution plans' assets at December
31, 1999 and 1998 was $300,170 and $260,706, respectively.
8. 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, 1999:
Life Insurance in Force $ 33,554,483 $ 353,382 $ 8,185,527 $ 25,722,338
Premiums 149,187 6,399 16,803 138,783
Benefits 455,518 15,629 32,705 438,442
Reserves 5,446,024 175 220,656 5,225,543
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
</TABLE>
For the years ended December 31, 1999 and 1998, the above numbers include
premiums from discontinued operations of $8,267 and $16,739, respectively, and
benefits from discontinued operations of $8,651 and $9,888, respectively.
During 1997, the Company had gross premiums of $190,754, assumed premiums of
$11,189 and ceded premiums of $6,723 and gross benefits of $492,857, assumed
benefits of $14,293 and ceded benefits of $26,916. Reinsurance receivables with
a carrying value of $205,559 and $55,119 were associated with a single reinsurer
at December 31, 1999 and 1998, respectively.
B-34
<PAGE>
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements, continued
(In Thousands of Dollars)
- --------------------------------------------------------------------------------
9. 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, 1999, the Company had outstanding
commitments totaling $70,757 relating to these investment activities. The fair
value of these commitments approximates the face amount.
10. 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,
1999 and 1998 was $558,700 and $495,212, respectively. The combined insurance
companies' net income, determined in accordance with statutory accounting
practices, for the years ended December 31, 1999, 1998 and 1997, was $76,680,
$83,676 and $63,613, respectively.
The National Association of Insurance Commissioners has released a comprehensive
guide to Statutory Accounting Principles, Accounting Practices and Procedures
Manual - version effective January 1, 2001, (Codification) to provide a
consistent basis of statutory accounting effective for years ending December 31,
2001. The Company does not expect the adoption of Codification to have a
material effect on its statutory capital and surplus.
B-35
<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, 1999 and 1998, and
the related consolidated income statements, statements of changes in equity, and
statements of cash flows for each of the three years in the period ended
December 31, 1999. 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.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the 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, 1999 and
1998, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 1999, in conformity with accounting
principles generally accepted in the United States.
/s/ ERNST & YOUNG LLP
Philadelphia, Pennsylvania
January 28, 2000
B-36
<PAGE>
PART C
Other Information
<PAGE>
Item 24. Financial Statements and Exhibits
(a) Financial Statements included in Part B:
Financial Statements of Penn Mutual Variable Annuity Account
III:
Report of Independent Auditors Statements of Assets and
Liabilities at December 31, 1999 Statement of Operations for
the year ended December 31, 1999 Statements of Changes in
Net Assets for the years ended December 31, 1999 and 1998
Notes to Financial Statements
Consolidated Financial Statements of The Penn Mutual Life
Insurance Company:
Report of Independent Auditors Statements of Financial
Condition at December 31, 1999 and 1998 Statements of
Operations and Surplus for the years ended December 31,
1999, 1998 and 1997 Statements of Cash Flows for the years
ended December 31, 1999, 1998, and 1997
Notes to Financial Statements
(b) Exhibits
1. (a) Resolutions of Executive Committee of Board
of Trustees of The Penn Mutual Life Insurance
Company authorizing the establishment of the
Registrant. Previously filed as Exhibit 1(a)
to this Registration Statement on September
3, 1998 (File No. 333-62811 and Accession No.
0001036050-98-001504) and incorporated herein
by reference.
(b) Resolutions of Executive Committee of Board
of Trustees of the Penn Mutual Life Insurance
Company authorizing investments of the
Registrant. Previously filed as Exhibit 1(b)
to Post-Effective Amendment No. 1 to the
Registration Statement on April 27, 1999
(File No. 333-62825 and Accession No.
0000950116-99-000834) and incorporated herein
by reference.
2. Not applicable
3. (a) Sales Support Agreement between The Penn
Mutual Life Insurance Company and Horner,
Townsend & Kent, Inc., a wholly-owned
subsidiary of Penn Mutual. Previously filed
as Exhibit 3(a) to Pre-Effective Amendment
No. 1 to this Registration Statement on
November 30, 1998 (File No. 333-62811 and
Accession No. 0001036050-98-002055) and
incorporated herein by reference.
(b) Form of Distribution Agreement between The
Penn Mutual Life Insurance Company and
Horner, Townsend & Kent, Inc., a wholly-owned
subsidiary of Penn Mutual. Previously filed
as Exhibit 3(b) to Pre-Effective Amendment
No. 1 to this Registration Statement on
November 30, 1998 (File No. 333-62811 and
Accession No. 0001036050-98-002055) and
incorporated herein by reference.
(c) Form of Agent's Agreement relating to
broker-dealer supervision. Previously filed
as Exhibit 3(c) to this Registration
Statement on September 3, 1998 (File No.
333-62811 and Accession No.
0001036050-98-001504) and incorporated herein
by reference.
<PAGE>
(d) Form of Broker-Dealer Selling Agreement (for
broker-dealers licensed to sell variable
annuity contracts and/or variable life
insurance contracts under state insurance
laws). Previously filed as Exhibit 3(d) to
Pre-Effective Amendment No. 1 to this
Registration Statement on November 30, 1998
(File No. 333-62811 and Accession No.
0001036050-98-002055) and incorporated herein
by reference.
(e) Form of Broker-Dealer Selling Agreement (for
broker-dealers with affiliated corporations
licensed to sell variable annuity contracts
and/or variable life insurance contracts
under state insurance laws. Previously filed
as Exhibit 3(e) to the Post-Effective
Amendment to the Registration Statement on
April 27, 1999 (File No. 333-62825 and
Accession No. 0000950116-99-000834) and
incorporated herein by reference.
(f) Form of Addendum (Form 98-1) to Broker-Dealer
Selling Agreement. Previously filed as
Exhibit 3(f) to this Registration Statement
on September 3, 1998 (File No. 333-62811 and
Accession No. 0001036050-98-001504) and
incorporated herein by reference.
4. (a) Individual Variable and Fixed Annuity
Contract (Form VAA-98). Previously filed as
Exhibit 4(a) to Pre-Effective Amendment No. 1
to this Registration Statement on November
30, 1998 (File No. 333-62811 and Accession
No. 0001036050-98-002055) and incorporated
herein by reference.
(b) Rider -- Guaranteed Minimum Death Benefit --
Rising Floor (GDBRF-98). Previously filed as
Exhibit 4(b) to Pre-Effective Amendment No. 1
to this Registration Statement on November
30, 1998 (File No. 333-628115 and Accession
No. 0001036050-98-002055) and incorporated
herein by reference.
(c) Rider -- Guaranteed Minimum Death Benefit --
Step Up (GDBSU-98). Previously filed as
Exhibit 4(c) to Pre-Effective Amendment No. 1
to this Registration Statement on November
30, 1998 (File No. 333-62811 and Accession
No. 0001036050-98-002055) and incorporated
herein by reference.
(d) Endorsement No. 1534-96 to Individual
Variable and Fixed Annuity Contract.
Previously filed as Exhibit 4(d) to this
Registration Statement on September 3, 1998
(File No. 333-62811 and Accession No.
0001036050-98-001504) and incorporated herein
by reference.
(e) Endorsement No. 1542-97 to Individual
Variable and Fixed Annuity Contract.
Previously filed as Exhibit 4(e) to this
Registration Statement on September 3, 1998
(File No. 333-62811 and Accession No.
0001036050-98-001504) and incorporated herein
by reference.
<PAGE>
(f) Endorsement No. 1536-98 to Individual
Variable and Fixed Annuity Contract.
Previously filed as Exhibit 4(f) to Pre-
Effective Amendment No. 1 to the Registration
Statement on February 24, 1999 (File No.
333-62811 and Accession No.
0000950116-99-000291) and incorporated herein
by reference.
5. Application (Form PM5790) for Individual
Variable Annuity Contract. Previously filed
as Exhibit 5 to this Registration Statement
on September 3, 1998 (File No. 333-62811 and
File No. 333-62825 and Accession No.
0001036050-98-001504) and incorporated herein
by reference.
6. (a) Charter of The Penn Mutual Life Insurance
Company (May 1983). Previously filed as
Exhibit 6(a) to this Registration Statement
on September 3, 1998 (File No. 333-62811 and
Accession No. 0001036050-98-001504) and
incorporated herein by reference.
(b) By-laws of The Penn Mutual Life Insurance
Company, as amended through February 21,
1997. Previously filed as Exhibit 6(b) to
this Registration Statement on September 3,
1998 (File No. 333-62811 and Accession No.
0001036050-98-001504) and incorporated herein
by reference.
7. None
8. (a)(1) Form of Sales Agreement between The Penn
Mutual Life Insurance Company and Neuberger &
Berman Advisers Management Trust. Previously
filed as Exhibit 8(b)(1) to this Registration
Statement on September 3, 1998 (File No. 333-
62811 and Accession No. 0001036050-98-001504)
and incorporated herein by reference.
(a)(2) Form of Assignment and Modification Agreement
between Neuberger & Berman Management
Incorporated, Neuberger & Berman Advisers
Management Trust, Advisers Managers Trust and
The Penn Mutual Life Insurance Company.
Previously filed as Exhibit 8(b)(2) to this
Registration Statement on September 3, 1998
(File No. 333-62811 and Accession No.
0001036050-98-001504) and incorporated
herein by reference.
(a)(3) Amendment to Fund Participation Agreement
between The Penn Mutual Life Insurance
Company and Neuberger & Berman Advisers
Management Trust. Previously filed as Exhibit
8(b)(3) to Post-Effective Amendment No.5 to
the Registration Statement of Penn Mutual
Variable Life Account I on April 30, 1997
(File No. 33-54662 and Accession No.
0000950109-97-003328) and incorporated herein
by reference.
(b) Form of Sales Agreement between The Penn
Mutual Life Insurance Company and Penn Series
Funds, Inc. Previously filed as Exhibit 8(c)
to this Registration Statement on September
3, 1998 (File No. 333-62811 and Accession No.
0001036050-98-001504) and incorporated
herein by reference.
(c) Form of Participation Agreement between The
Penn Mutual Life Insurance Company, Variable
Insurance Products Fund and Fidelity
Distributors Corporation. Previously filed as
Exhibit 8(d) to this Registration Statement
on September 3, 1998 (File No. 333-62811 and
Accession No. 0001036050-98-001504) and
incorporated herein by reference.
(d) Form of Participation Agreement between The
Penn Mutual Life Insurance Company, Variable
Insurance Products Fund II and Fidelity
Distributors Corporation. Previously filed as
Exhibit 8(e) to this Registration Statement
on September 3, 1998 (File No. 333-62811 and
Accession No. 0001036050-98-001504) and
incorporated herein by reference.
<PAGE>
(e) Participation Agreement between The Penn
Mutual Life Insurance Company, Morgan Stanley
Universal Funds, Inc., Morgan Stanley Asset
Management Inc. and Miller Andersen &
Sherrerd LLP. Previously filed as Exhibit
8(f) to Post-Effective Amendment No. 2 to the
Registration Statement of PIA Variable
Annuity Account I on April 30, 1998 (File No.
33-83120 and Accession No.
0000950109-97-003327) and incorporated herein
by reference.
9. Opinion and Consent of Franklin L. Best, Jr.,
Esq., Associate General Counsel of The Penn
Mutual Life Insurance Company, as to the
legality of the variable annuity contracts
being registered. Incorporated herein by
reference to Exhibit 9 to Post Effective
Amendment No. 26 to Registrant's Registration
Statement on Form N-4 (File No. 2-77283), as
filed with the Securities and Exchange
Commission (Accession No.
0000950116-99-001164) on June 11, 1999.
10. (a) Consent of Ernst & Young LLP. Filed herewith.
(b) Consent of Morgan, Lewis & Bockius LLP. Filed
herewith.
11. Not applicable.
12. Not applicable.
13. Schedule of Computation of Performance
Quotations. Filed herewith.
14. (a) Powers of Attorney of Trustees (except Ms.
Bloch and Messrs. Notebaert and Rock).
Incorporated herein by reference to Exhibit
14 to Post Effective Amendment No. 22 to
Registrant's Registration Statement on Form
N-4 (File No. 2-77283), as filed with the
Securities and Exchange Commission (Accession
No. 0001021408-97-000161) on April 29, 1997.
(b) Powers of Attorney of Edmond F. Notebaert and
Robert H. Rock. Incorporated herein by
reference to Exhibit 14(b) to Post Effective
Amendment No. 24 to Registrant's Registration
Statement on Form N-4 (File No. 2-77283), as
filed with the Securities and Exchange
Commission (Accession No.
0000950109-98-002717) on April 24, 1998.
(c) Power of Attorney for Julia Chang Bloch.
Incorporated herein by reference to Exhibit
14(c) to Post Effective Amendment No. 26 to
Registrant's Registration Statement on Form
N-4 (File No. 2-77283), as filed with the
Securities and Exchange Commission (Accession
No. 0000950116-99-00164) on June 11, 1999.
<PAGE>
Item 25. Directors and Officers of the Depositor
The following table sets forth the names of the officers and
trustees of the Depositor who are engaged directly or indirectly in
activities relating to the Registrant or the variable annuity
contracts offered by the Registrant and the executive officers of
the Depositor.
Robert E. Chappell Ann M. Strootman
Chairman of the Board and Chief Vice President and Controller
Executive Officer and Member of
the Board of Trustees
Daniel J. Toran Ralph I. Pence
President and Chief Operating Vice President and Chief
Officer and Member of the Board of Actuary
Trustees
Nancy S. Brodie Frederick M. Rackovan
Executive Vice President and Chief Vice President, New Business
Financial Officer
Larry L. Mast Richard F. Plush
Executive Vice President, Sales and Vice President, Products and
Marketing Programs
Peter M. Sherman James McElwain
Executive Vice President and Vice President, Broker Dealer
Chief Investment Officer Sales
Bill D. Fife Steven M. Herzberg
Senior Vice President, Assistant Vice President
Independence Financial Network and Treasurer
John M. Albanese Laura Ritzko
Senior Vice President, Customer Secretary
Service and Information Systems
The business address of the director and officers is The Penn
Mutual Life Insurance Company, Philadelphia, PA 19172.
<PAGE>
Item 26. Persons Controlled By or Under Common Control with the Depositor
or Registrant
<TABLE>
<CAPTION>
Penn Mutual Wholly-Owned Subsidiaries
-------------------------------------
Corporation Principal Business State of Incorporation
- ----------- ------------------ ----------------------
<S> <C> <C>
The Penn Insurance and Life Insurance and Annuities Delaware
Annuity Company
Independence Capital Investment Adviser Pennsylvania
Management, Inc.
Penn Janney Fund, Inc. Investments Pennsylvania
Independence Square Holding Company Pennsylvania
Properties, Inc.
The Pennsylvania Trust Trust Company Pennsylvania
Company
Independence Square Properties, Inc.
Wholly-Owned Subsidiaries
-------------------------
Corporation Principal Business State of Incorporation
- ----------- ------------------ ----------------------
Indepro Corporation Real Estate Investment Delaware
WPI Investment Company Real Estate Investment Delaware
Hornor, Townsend & Registered Broker-Dealer and Pennsylvania
Kent, Inc. Investment Adviser
Penn Tallahassee Real Estate Investment Florida
Corporation
Janney Montgomery Registered Broker-Dealer and Delaware
Scott Inc. Investment Adviser
Indepro Corporation
Wholly-Owned Subsidiaries
-------------------------
Corporation Principal Business State of Incorporation
- ----------- ------------------ ----------------------
Indepro Property Fund I Real Estate Investment Delaware
Corporation
Indepro Property Fund II Real Estate Investment Delaware
Corporation
Commons One Real Estate Investment Delaware
Corporation
West Hazleton, Inc. Real Estate Investment Delaware
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Janney Montgomery Scott LLC
Wholly-Owned Subsidiaries
-------------------------
Corporation Principal Business State of Incorporation
- ----------- ------------------ ----------------------
<S> <C> <C>
JMS Resources, Inc. Oil and Gas Development Pennsylvania
JMS Investor Services, Insurance Sales Delaware
Inc.
</TABLE>
Item 27. Number of Contract Owners
As of March 31, 2000, there were:
1,176 -- owners of qualified individual variable annuity contracts;
0 -- owners of qualified group variable annuity contracts;
0 -- owners of certificates issued under qualified group variable
annuity contracts; and
332 -- owners of nonqualified individual variable annuity
contracts.
Item 28. Indemnification
Section 6.2 of the By-laws of The Penn Mutual Life Insurance
Company provides that, in accordance with the provisions of the
Section, the Company shall indemnify trustees and officers against
expenses (including attorneys' fees), judgments, fines, excise
taxes and amounts paid in settlement actually and reasonably
incurred in connection with actions, suits and proceedings, to the
extent such indemnification is not prohibited by law, and may
provide other indemnification to the extent not prohibited by law.
The By-laws are filed as Exhibit 6(b) to Post-Effective Amendment
No. 12 to this Registration Statement and are incorporated in this
Post-Effective Amendment by reference.
Pennsylvania law (15 Pa. C.S.A.ss.ss.1741-1750) authorizes
Pennsylvania corporations to provide indemnification to directors,
officers and other persons.
<PAGE>
Penn Mutual owns a directors and officers liability insurance
policy covering liabilities directors and officers of Penn Mutual
and its subsidiaries may incur in acting as directors and officers.
Selling Agreements entered into by The Penn Mutual Life Insurance
Company ("Penn Mutual") and its subsidiary, Hornor, Townsend &
Kent, Inc. ("HTK") with securities brokers and insurance agents
generally provide for indemnification of Penn Mutual and HTK and
their directors and officers in the event of liability resulting
from unauthorized acts of the brokers and insurance agents.
Insofar as indemnification for liability arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the registrant pursuant to the foregoing
provisions, or otherwise, the registrant has been advised that in
the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by
the registrant of expenses incurred or paid by a director, officer
or controlling person of the registrant in the successful defense
of any action, suit or proceeding) is asserted by such director,
officer or controlling person in connection with the securities
being registered, the registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in
the Act and will be governed by the final adjudication of such
issue.
Item 29. Principal Underwriters
Hornor Townsend & Kent, Inc. serves as principal underwriters of
the securities of the Registrant.
Hornor, Townsend & Kent, Inc. - Directors and Officers
John J. Gray, Director and Chairman of the Board
Larry L. Mast, Director
Nina M. Mulrooney, Director
Norman T. Wilde, Jr., Director
Daniel J. Toran, Director
Ronald C. Zimmerman, President and Chief Executive Officer
Michael D. Sweeney, Assistant Vice President, Director of
Compliance and Secretary
Edward G. Pecelli - Assistant Vice President, Director of Sales
and Marketing
Laura M. Ritzko, Assistant Secretary
Henry S. Buck, Assistant Vice President and Assistant Treasurer
Barbara S. Wood, Senior Vice President, Finance and Treasurer
Joseph R. Englert, Assistant Vice President, Director of Operations
Franklin L. Best, Jr., Counsel
Constance Flaville, Assistant Secretary
<PAGE>
The principal business address of Messrs. Gray and Wilde is Janney,
Montgomery, Scott Inc., 1801 Market Street, Philadelphia,
Pennsylvania. The principal business address of Mses. Mulrooney and
Ritzko and Messrs. Mast, Toran and Best is The Penn Mutual Life
Insurance Company, Philadelphia, Pennsylvania, 19172. The principal
business address of the other directors and officers is Hornor,
Townsend & Kent, Inc., 600 Dresher Road, Horsham, Pennsylvania.
Commissions and Other Compensation Received By Each Principal
Underwriter During Last Fiscal Year
<TABLE>
<CAPTION>
Net
Name of Underwriting Compensation Brokerage Other
Principal Discounts on Commissions Compensation
Underwriter and Redemption
Commissions
- ------------------ ----------------- ----------------- ------------------ -----------------
<S> <C> <C> <C> <C>
Hornor, $ 110,095 $0 $0 $0
Townsend &
Kent, Inc.
</TABLE>
Item 30. Location of Accounts and Records
The name and address of the person who maintains physical
possession of each account, book or other documents required by
Section 31(a) of the Investment Company Act of 1940 is as follows:
The Penn Mutual Life Insurance Company 600 Dresher Road Horsham,
Pennsylvania 19044
Item 31. Management Services
See "Administrative and Recordkeeping Services" in Part B of this
Registration Statement.
Item 32. Undertakings
The Penn Mutual Life Insurance Company hereby undertakes:
(a) to file a post-effective amendment to this Registration
Statement as frequently as is necessary to ensure that the
audited financial statements in the Registration Statement
are never more than 16 months old for so long as payments
under the variable annuity contracts may be accepted;
(b) to include either (1) as part of any application to purchase
a contract or account offered by the prospectus, a space
that an applicant can check to request a statement of
additional information, or (2) a post card or similar
<PAGE>
written communication affixed to or included in the
prospectus that the applicant can remove to send for a
statement of additional information;
(c) to deliver any statement of additional information and any
financial statements required to be made available under
Form N-4 promptly upon written or oral request.
Restrictions on withdrawals under Section 403(b) Contracts
are imposed in reliance upon, and in compliance with, a
no-action letter issued by the Chief of the Office of
Insurance Products and Legal Compliance of the Securities
and Exchange Commission to the American Council of Life
Insurance on November 28, 1988.
The Penn Mutual Life Insurance Company represents that the
fees and charges deducted under the Individual Variable and
Fixed Annuity Contract, in the aggregate, are reasonable in
relation to the services rendered, the expenses expected to
be incurred, and the risks assumed by the Registrant.
<PAGE>
SIGNATURES
As required by the Securities Act of 1933 and the Investment Company Act
of 1940, the Registrant certifies that it meets the requirements of Securities
Act Rule 485(b) for effectiveness of this Post-Effective Amendment No. 3 of this
Registration Statement and has caused this Post-Effective Amendment to the
Registration Statement to be signed on its behalf, by the undersigned, thereunto
duly authorized, in the Township of Horsham and Commonwealth of Pennsylvania on
this 21st day of April, 2000.
PENN MUTUAL VARIABLE ANNUITY ACCOUNT III
(Registrant)
By: THE PENN MUTUAL LIFE INSURANCE COMPANY
(Depositor)
By: /s/Robert E. Chappell
---------------------------------
Robert E. Chappell
Chairman of the Board of Trustees
and Chief Executive Officer
As required by the Securities Act of 1933, this Post-Effective Amendment
No. 3 to the Registration Statement has been signed by the following persons, in
the capacities indicated, on the 21st day of April, 2000.
Signature Title
- --------- -----
/s/Robert E. Chappell Chairman of the Board of Trustees
- --------------------------------------- and Chief Executive Officer
Robert E. Chappell
/s/Nancy S. Brodie Executive Vice President and
- --------------------------------------- Chief Financial Officer
Nancy S. Brodie
*JULIA CHANG BLOCH Trustee
*JAMES A. HAGEN Trustee
*PHILLIP E. LIPPINCOTT Trustee
*JOHN F. MCCAUGHAN Trustee
*ALAN B. MILLER Trustee
*EDMOND F. NOTEBAERT Trustee
*ROBERT H. ROCK Trustee
*DANIEL J. TORAN Trustee
*NORMAN T. WILDE, JR. Trustee
*WESLEY S. WILLIAMS, JR. Trustee
*By: Robert E. Chappell, attorney-in-fact
<PAGE>
EXHIBIT INDEX
EX.99 B 10. (a) Consent of Ernst & Young LLP.
EX.99 B 10. (b) Consent of Morgan, Lewis & Bockius LLP.
EX. 99 B 13. Schedule of Computation of Performance Quotations.
<PAGE>
Consent of Ernst & Young LLP, Independent Auditors
We consent to the reference to our firm under the caption "Independent Auditors"
in the Statement of Additional Information, and to the use of our report dated
January 28, 2000 accompanying the consolidated financial statements of the Penn
Mutual Life Insurance Company and to the use of our report dated April 4, 2000
accompanying the financial statements of the Penn Mutual Variable Annuity
Account III for the year ended December 31, 1999 in the Post-Effective Amendment
Number 3 to Registration Statement Number 333-62811 on Form N-4 and the related
Statement of Additional Information of Penn Mutual Variable Annuity Account III.
/s/ Ernst & Young LLP
-------------------------
Ernst & Young LLP
Philadelphia, Pennsylvania
April 18, 2000
<PAGE>
EX.99 B 10.(b)
Morgan, Lewis & Bockius LLP
1701 Market Street
Philadelphia, Pennsylvania 19103
April 25, 2000
Board of Trustees
The Penn Mutual Life Insurance Company
Philadelphia, Pennsylvania 19172
Re: Penn Mutual Variable Annuity Account III
----------------------------------------
SEC Registration No. 333-62811
------------------------------
Dear Ladies and Gentlemen:
We hereby consent to the reference of our name under the caption "Legal Matters"
in the Statement of Additional Information filed as part of this Post-Effective
Amendment No. 3. In giving this consent, we do not admit that we are in the
category of persons whose consent is required under Section 7 of the Securities
Act of 1933.
Very truly yours,
/s/ Morgan, Lewis & Bockius LLP
- -------------------------------
<PAGE>
Penn Mutual
Pennant Select
Table 1
1 Year Calculation
<TABLE>
<CAPTION>
beginning
fund name begin date unit value value ending date unit value ending value charges return
--------- ---------- ---------- --------- ----------- ---------- ------------ ------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Neuberger Berman Balanced 12/31/1998 10.08 $1,000.00 12/31/1999 13.29 $1,236.99 0.50 23.70%
Emerging Growth Fund 12/31/1998 10.09 $1,000.00 12/31/1999 28.37 $2,642.47 1.93 164.25%
MS Emerging Market International 12/31/1998 9.79 $1,000.00 12/31/1999 18.83 $1,805.39 0.68 80.54%
Fidelity Asset Manager 12/31/1998 10.02 $1,000.00 12/31/1999 10.98 $1,028.46 0.35 2.85%
Fidelity Equity Income 12/31/1998 10.04 $1,000.00 12/31/1999 10.53 $984.27 1.42 -1.57%
Fidelity Growth 12/31/1998 10.00 $1,000.00 12/31/1999 13.56 $1,272.92 2.85 27.29%
Fidelity Index 500 12/31/1998 10.02 $1,000.00 12/31/1999 11.91 $1,115.85 2.85 11.59%
Flexibly Managed Fund 12/31/1998 9.98 $1,000.00 12/31/1999 10.55 $992.11 1.60 -0.79%
Growth Equity Fund 12/31/1998 10.03 $1,000.00 12/31/1999 13.27 $1,241.96 1.65 24.20%
High Yield Bond Fund 12/31/1998 9.98 $1,000.00 12/31/1999 10.26 $964.92 0.59 -3.51%
International Equity Fund 12/31/1998 9.80 $1,000.00 12/31/1999 14.09 $1,349.62 1.27 34.96%
Neuberger Berman Limited Maturity 12/31/1998 10.01 $1,000.00 12/31/1999 10.02 $939.25 0.47 -6.08%
Neuberger Berman Partners 12/31/1998 10.01 $1,000.00 12/31/1999 10.61 $993.93 0.57 -0.61%
Quality Bond Fund 12/31/1998 10.01 $1,000.00 12/31/1999 9.88 $925.54 0.71 -7.45%
Small Capitalization Fund 12/31/1998 10.02 $1,000.00 12/31/1999 9.75 $913.22 0.53 -8.68%
Value Equity Fund 12/31/1998 10.04 $1,000.00 12/31/1999 9.82 $918.08 1.47 -8.19%
</TABLE>
Penn Mutual
Pennant Select
Table 2
1 Year Calculation
<TABLE>
<CAPTION>
beginning
fund name begin date unit value value ending date unit value ending value charges return
--------- ---------- ---------- --------- ----------- ---------- ------------ ------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Neuberger Berman Balanced 12/31/1998 10.08 $1,000.00 12/31/1999 13.29 $1,316.74 0.50 31.67%
Emerging Growth Fund 12/31/1998 10.09 $1,000.00 12/31/1999 28.37 $2,808.28 1.93 180.83%
MS Emerging Market International 12/31/1998 9.79 $1,000.00 12/31/1999 18.92 $1,930.47 0.68 93.05%
Fidelity Asset Manager 12/31/1998 10.02 $1,000.00 12/31/1999 10.98 $1,095.33 0.35 9.53%
Fidelity Equity Income 12/31/1998 10.04 $1,000.00 12/31/1999 10.53 $1,046.20 1.42 4.62%
Fidelity Growth 12/31/1998 10.00 $1,000.00 12/31/1999 13.56 $1,350.26 2.85 35.03%
Fidelity Index 500 12/31/1998 10.02 $1,000.00 12/31/1999 11.91 $1,183.25 2.85 18.32%
Flexibly Managed Fund 12/31/1998 9.98 $1,000.00 12/31/1999 10.55 $1,054.17 1.60 5.42%
Growth Equity Fund 12/31/1998 10.03 $1,000.00 12/31/1999 13.27 $1,319.74 1.65 31.97%
High Yield Bond Fund 12/31/1998 9.98 $1,000.00 12/31/1999 10.26 $1,027.28 0.59 2.73%
International Equity Fund 12/31/1998 9.80 $1,000.00 12/31/1999 14.09 $1,434.97 1.27 43.50%
Neuberger Berman Limited Maturity 12/31/1998 10.01 $1,000.00 12/31/1999 10.02 $1,000.23 0.47 0.02%
Neuberger Berman Partners 12/31/1998 10.01 $1,000.00 12/31/1999 10.61 $1,058.16 0.57 5.82%
Quality Bond Fund 12/31/1998 10.01 $1,000.00 12/31/1999 9.88 $985.18 0.71 -1.48%
Small Capitalization Fund 12/31/1998 10.02 $1,000.00 12/31/1999 9.75 $972.45 0.53 -2.76%
Value Equity Fund 12/31/1998 10.04 $1,000.00 12/31/1999 9.82 $975.73 1.47 -2.43%
</TABLE>
<PAGE>
Penn Mutual
Pennant Select
Table 3
1 Year Calculation
<TABLE>
<CAPTION>
beginning
fund name begin date unit value value ending date unit value ending value charges return
--------- ---------- ---------- --------- ----------- ---------- ------------ ------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Neuberger Berman Balanced 12/31/1998 10.08 $10,000.00 12/31/1999 13.29 $13,176.42 1.00 31.76%
Emerging Growth Fund 12/31/1998 10.09 $10,000.00 12/31/1999 28.37 $28,117.54 3.86 181.18%
MS Emerging Market International 12/31/1998 9.79 $10,000.00 12/31/1999 18.92 $19,316.96 1.36 93.17%
Fidelity Asset Manager 12/31/1998 10.02 $10,000.00 12/31/1999 10.98 $10,959.54 0.69 9.60%
Fidelity Equity Income 12/31/1998 10.04 $10,000.00 12/31/1999 10.53 $10,487.57 2.84 4.88%
Fidelity Growth 12/31/1998 10.00 $10,000.00 12/31/1999 13.56 $13,553.81 5.69 35.54%
Fidelity Index 500 12/31/1998 10.02 $10,000.00 12/31/1999 11.91 $11,883.75 5.70 18.84%
Flexibly Managed Fund 12/31/1998 9.98 $10,000.00 12/31/1999 10.55 $10,570.55 3.20 5.71%
Growth Equity Fund 12/31/1998 10.03 $10,000.00 12/31/1999 13.27 $13,226.98 3.29 32.27%
High Yield Bond Fund 12/31/1998 9.98 $10,000.00 12/31/1999 10.26 $10,283.44 1.18 2.83%
International Equity Fund 12/31/1998 9.80 $10,000.00 12/31/1999 14.09 $14,372.48 2.53 43.72%
Neuberger Berman Limited Maturity 12/31/1998 10.01 $10,000.00 12/31/1999 10.02 $10,010.75 0.94 0.11%
Neuberger Berman Partners 12/31/1998 10.01 $10,000.00 12/31/1999 10.61 $10,591.90 1.14 5.92%
Quality Bond Fund 12/31/1998 10.01 $10,000.00 12/31/1999 9.88 $9,864.50 1.41 -1.36%
Small Capitalization Fund 12/31/1998 10.02 $10,000.00 12/31/1999 9.75 $9,733.91 1.05 -2.66%
Value Equity Fund 12/31/1998 10.04 $10,000.00 12/31/1999 9.82 $9,783.66 2.93 -2.16%
</TABLE>
Penn Mutual
Pennant Select
Table 1
5 Year Calculation
<TABLE>
<CAPTION>
beginning
fund name begin date unit value value ending date unit value ending value charges return
--------- ---------- ---------- --------- ----------- ---------- ------------ ------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Neuberger Berman Balanced 12/31/1994 6.00 $1,000.00 12/31/1999 13.29 $2,139.72 2.50 16.42%
Flexibly Managed Fund 12/31/1994 6.03 $1,000.00 12/31/1999 10.55 $1,691.28 8.00 11.08%
Growth Equity Fund 12/31/1994 3.89 $1,000.00 12/31/1999 13.27 $3,301.40 8.23 26.96%
High Yield Bond Fund 12/31/1994 6.55 $1,000.00 12/31/1999 10.26 $1,514.24 2.95 8.65%
International Equity Fund 12/31/1994 5.93 $1,000.00 12/31/1999 14.09 $2,297.57 6.33 18.09%
Neuberger Berman Limited Maturity 12/31/1994 8.19 $1,000.00 12/31/1999 10.02 $1,179.73 2.35 3.36%
Quality Bond Fund 12/31/1994 7.10 $1,000.00 12/31/1999 9.88 $1,344.00 3.53 6.09%
Value Equity Fund 12/31/1994 4.50 $1,000.00 12/31/1999 9.82 $2,115.77 7.33 16.16%
</TABLE>
<PAGE>
Penn Mutual
Pennant Select
Table 2
5 Year Calculation
<TABLE>
<CAPTION>
beginning
fund name begin date unit value value ending date unit value ending value charges return
--------- ---------- ---------- --------- ----------- ---------- ------------ ------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Neuberger Berman Balanced 12/31/1994 6.00 $1,000.00 12/31/1999 13.29 $2,205.63 2.50 17.13%
Fidelity Asset Manager 12/31/1994 5.68 $1,000.00 12/31/1999 10.98 $1,927.49 1.73 14.02%
Fidelity Equity Income 12/31/1994 4.80 $1,000.00 12/31/1999 10.53 $2,176.37 7.10 16.82%
Fidelity Growth 12/31/1994 3.95 $1,000.00 12/31/1999 13.56 $3,384.14 14.23 27.59%
Fidelity Index 500 12/31/1994 3.69 $1,000.00 12/31/1999 11.91 $3,186.40 14.25 26.07%
Flexibly Managed Fund 12/31/1994 6.03 $1,000.00 12/31/1999 10.55 $1,730.54 8.00 11.59%
Growth Equity Fund 12/31/1994 3.89 $1,000.00 12/31/1999 13.27 $3,379.19 8.23 27.56%
High Yield Bond Fund 12/31/1994 6.55 $1,000.00 12/31/1999 10.26 $1,560.56 2.95 9.30%
International Equity Fund 12/31/1994 5.93 $1,000.00 12/31/1999 14.09 $2,356.30 6.33 18.69%
Neuberger Berman Limited Maturity 12/31/1994 8.19 $1,000.00 12/31/1999 10.02 $1,218.05 2.35 4.02%
Neuberger Berman Partners 12/31/1994 4.37 $1,000.00 12/31/1999 10.61 $2,419.99 2.85 19.32%
Quality Bond Fund 12/31/1994 7.10 $1,000.00 12/31/1999 9.88 $1,384.28 3.53 6.72%
Value Equity Fund 12/31/1994 4.50 $1,000.00 12/31/1999 9.82 $2,167.74 7.33 16.73%
</TABLE>
Penn Mutual
Pennant Select
Table 3
5 Year Calculation
<TABLE>
<CAPTION>
beginning
fund name begin date unit value value ending date unit value ending value charges return
--------- ---------- ---------- --------- ----------- ---------- ------------ ------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Neuberger Berman Balanced 12/31/1994 6.00 $10,000.00 12/31/1999 13.29 $22,122.12 5.00 17.20%
Fidelity Asset Manager 12/31/1994 5.68 $10,000.00 12/31/1999 10.98 $19,315.27 3.45 14.06%
Fidelity Equity Income 12/31/1994 4.80 $10,000.00 12/31/1999 10.53 $21,924.99 14.20 16.99%
Fidelity Growth 12/31/1994 3.95 $10,000.00 12/31/1999 13.56 $34,305.81 28.45 27.94%
Fidelity Index 500 12/31/1994 3.69 $10,000.00 12/31/1999 11.91 $32,277.26 28.50 26.39%
Flexibly Managed Fund 12/31/1994 6.03 $10,000.00 12/31/1999 10.55 $17,475.17 16.00 11.80%
Growth Equity Fund 12/31/1994 3.89 $10,000.00 12/31/1999 13.27 $34,064.80 16.45 27.76%
High Yield Bond Fund 12/31/1994 6.55 $10,000.00 12/31/1999 10.26 $15,665.79 5.90 9.39%
International Equity Fund 12/31/1994 5.93 $10,000.00 12/31/1999 14.09 $23,746.88 12.65 18.87%
Neuberger Berman Limited Maturity 12/31/1994 8.19 $10,000.00 12/31/1999 10.02 $12,224.75 4.70 4.10%
Neuberger Berman Partners 12/31/1994 4.37 $10,000.00 12/31/1999 10.61 $24,265.14 5.70 19.39%
Quality Bond Fund 12/31/1994 7.10 $10,000.00 12/31/1999 9.88 $13,911.04 7.05 6.82%
Value Equity Fund 12/31/1994 4.50 $10,000.00 12/31/1999 9.82 $21,834.39 14.65 16.89%
</TABLE>
<PAGE>
Penn Mutual
Pennant Select
Table 1
10 Year Calculation
<TABLE>
<CAPTION>
beginning
fund name begin date unit value value ending date unit value ending value charges return
--------- ---------- ---------- --------- ----------- ---------- ------------ ------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Flexibly Managed Fund 12/31/1989 4.05 $1,000.00 12/31/1999 10.55 $2,568.79 16.00 9.89%
Growth Equity Fund 12/31/1989 3.18 $1,000.00 12/31/1999 13.27 $4,110.98 16.45 15.18%
High Yield Bond Fund 12/31/1989 4.37 $1,000.00 12/31/1999 10.26 $2,311.55 5.90 8.74%
Quality Bond Fund 12/31/1989 5.40 $1,000.00 12/31/1999 9.88 $1,800.18 7.05 6.05%
Value Equity Fund 12/31/1989 3.24 $1,000.00 12/31/1999 9.82 $2,992.11 14.65 11.58%
</TABLE>
Penn Mutual
Pennant Select
Table 2
10 Year Calculation
<TABLE>
<CAPTION>
beginning
fund name begin date unit value value ending date unit value ending value charges return
--------- ---------- ---------- --------- ----------- ---------- ------------ ------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Neuberger Berman Balanced 12/31/1989 4.62 $1,000.00 12/31/1999 13.29 $2,856.59 5.00 11.06%
Fidelity Asset Manager 12/31/1989 3.66 $1,000.00 12/31/1999 10.98 $2,991.86 3.45 11.58%
Fidelity Equity Income 12/31/1989 3.12 $1,000.00 12/31/1999 10.53 $3,321.96 14.20 12.75%
Fidelity Growth 12/31/1989 2.52 $1,000.00 12/31/1999 13.56 $5,208.70 28.45 17.93%
Flexibly Managed Fund 12/31/1989 4.05 $1,000.00 12/31/1999 10.55 $2,554.72 16.00 9.83%
Growth Equity Fund 12/31/1989 3.18 $1,000.00 12/31/1999 13.27 $4,085.14 16.45 15.10%
High Yield Bond Fund 12/31/1989 4.37 $1,000.00 12/31/1999 10.26 $2,329.00 5.90 8.82%
Neuberger Berman Limited Maturity 12/31/1989 6.49 $1,000.00 12/31/1999 10.02 $1,532.82 4.70 4.36%
Quality Bond Fund 12/31/1989 5.40 $1,000.00 12/31/1999 9.88 $1,812.14 7.05 6.12%
Value Equity Fund 12/31/1989 3.24 $1,000.00 12/31/1999 9.82 $2,981.26 14.65 11.54%
</TABLE>
<PAGE>
Penn Mutual
Pennant Select
Table 3
10 Year Calculation
<TABLE>
<CAPTION>
beginning
fund name begin date unit value value ending date unit value ending value charges return
--------- ---------- ---------- --------- ----------- ---------- ------------ ------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Neuberger Berman Balanced 12/31/1989 4.62 $10,000.00 12/31/1999 13.29 $28,737.56 10.00 11.13%
Fidelity Asset Manager 12/31/1989 3.66 $10,000.00 12/31/1999 10.98 $30,027.76 6.90 11.62%
Fidelity Equity Income 12/31/1989 3.12 $10,000.00 12/31/1999 10.53 $33,748.53 28.40 12.93%
Fidelity Growth 12/31/1989 2.52 $10,000.00 12/31/1999 13.56 $53,642.13 56.90 18.28%
Flexibly Managed Fund 12/31/1989 4.05 $10,000.00 12/31/1999 10.55 $26,019.88 32.00 10.03%
Growth Equity Fund 12/31/1989 3.18 $10,000.00 12/31/1999 13.27 $41,665.38 32.90 15.33%
High Yield Bond Fund 12/31/1989 4.37 $10,000.00 12/31/1999 10.26 $23,448.37 11.80 8.89%
Neuberger Berman Limited Maturity 12/31/1989 6.49 $10,000.00 12/31/1999 10.02 $15,427.06 9.40 4.43%
Quality Bond Fund 12/31/1989 5.40 $10,000.00 12/31/1999 9.88 $18,282.94 14.10 6.22%
Value Equity Fund 12/31/1989 3.24 $10,000.00 12/31/1999 9.82 $30,305.80 29.30 11.72%
</TABLE>
Penn Mutual
Pennant Select
Table 1
Since Inception Calculation
<TABLE>
<CAPTION>
beginning
fund name begin date unit value value ending date unit value ending value charges return
--------- ---------- ---------- --------- ----------- ---------- ------------ ------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Neuberger Berman Balanced 05/03/1993 5.89 $1,000.00 12/31/1999 13.29 $2,202.46 3.00 12.58%
Emerging Growth Fund 05/01/1997 5.46 $1,000.00 12/31/1999 28.37 $4,915.63 3.86 81.62%
MS Emerging Market International 05/01/1997 14.62 $1,000.00 12/31/1999 18.83 $1,213.10 1.36 7.51%
Fidelity Asset Manager 05/01/1995 5.88 $1,000.00 12/31/1999 10.98 $1,788.33 1.38 13.25%
Fidelity Equity Income 05/01/1995 5.37 $1,000.00 12/31/1999 10.53 $1,880.94 5.68 14.48%
Fidelity Growth 05/01/1995 4.27 $1,000.00 12/31/1999 13.56 $3,050.04 11.38 26.96%
Fidelity Index 500 05/01/1997 6.51 $1,000.00 12/31/1999 11.91 $1,728.65 5.70 22.77%
Flexibly Managed Fund 07/31/1984 1.63 $1,000.00 12/31/1999 10.55 $6,368.01 24.00 12.75%
Growth Equity Fund 06/01/1983 1.30 $1,000.00 12/31/1999 13.27 $10,076.24 26.32 14.94%
High Yield Bond Fund 08/06/1984 2.92 $1,000.00 12/31/1999 10.26 $3,452.98 8.85 8.37%
International Equity Fund 11/01/1992 4.62 $1,000.00 12/31/1999 14.09 $3,012.24 8.86 16.63%
Neuberger Berman Limited Maturity 05/03/1993 8.17 $1,000.00 12/31/1999 10.02 $1,192.39 2.82 2.67%
Neuberger Berman Partners 05/01/1997 7.85 $1,000.00 12/31/1999 10.61 $1,275.17 1.14 9.54%
Quality Bond Fund 03/17/1987 4.59 $1,000.00 12/31/1999 9.88 $2,108.54 8.46 6.00%
Small Capitalization Fund 05/01/1995 6.98 $1,000.00 12/31/1999 9.75 $1,337.78 2.10 6.43%
Value Equity Fund 03/17/1987 2.50 $1,000.00 12/31/1999 9.82 $3,870.45 17.58 11.15%
</TABLE>
<PAGE>
Penn Mutual
Pennant Select
Table 2
Since Inception Calculation
<TABLE>
<CAPTION>
beginning
fund name begin date unit value value ending date unit value ending value charges return
--------- ---------- ---------- --------- ----------- ---------- ------------ ------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Neuberger Berman Balanced 02/28/1989 4.01 $1,000.00 12/31/1999 13.29 $3,287.99 3.00 11.60%
Emerging Growth Fund 05/01/1997 5.46 $1,000.00 12/31/1999 28.37 $5,170.99 3.86 85.10%
MS Emerging Market International 10/01/1996 13.57 $1,000.00 12/31/1999 18.92 $1,386.58 1.36 10.58%
Fidelity Asset Manager 09/06/1989 3.64 $1,000.00 12/31/1999 10.98 $3,001.98 1.38 11.24%
Fidelity Equity Income 10/09/1986 2.28 $1,000.00 12/31/1999 10.53 $4,520.71 5.68 12.07%
Fidelity Growth 10/09/1986 1.67 $1,000.00 12/31/1999 13.56 $7,844.09 11.38 16.84%
Fidelity Index 500 08/27/1992 3.22 $1,000.00 12/31/1999 11.91 $3,607.81 5.70 19.08%
Flexibly Managed Fund 07/31/1984 1.63 $1,000.00 12/31/1999 10.55 $6,335.62 24.00 12.71%
Growth Equity Fund 06/01/1983 1.30 $1,000.00 12/31/1999 13.27 $10,011.33 26.32 14.89%
High Yield Bond Fund 08/06/1984 2.92 $1,000.00 12/31/1999 10.26 $3,486.81 8.85 8.44%
International Equity Fund 11/01/1992 4.62 $1,000.00 12/31/1999 14.09 $3,009.67 8.86 16.62%
Neuberger Berman Limited Maturity 09/10/1984 4.08 $1,000.00 12/31/1999 10.02 $2,434.71 2.82 5.98%
Neuberger Berman Partners 03/22/1994 4.52 $1,000.00 12/31/1999 10.61 $2,337.15 1.14 15.82%
Quality Bond Fund 03/17/1987 4.59 $1,000.00 12/31/1999 9.88 $2,126.06 8.46 6.07%
Small Capitalization Fund 03/01/1995 6.99 $1,000.00 12/31/1999 9.75 $1,389.50 2.10 7.04%
Value Equity Fund 03/17/1987 2.50 $1,000.00 12/31/1999 9.82 $3,854.34 17.58 11.12%
</TABLE>
Penn Mutual
Pennant Select
Table 3
Since Inception Calculation
<TABLE>
<CAPTION>
beginning
fund name begin date unit value value ending date unit value ending value charges return
--------- ---------- ---------- --------- ----------- ---------- ------------ ------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Neuberger Berman Balanced 02/28/1989 4.01 $10,000.00 12/31/1999 13.29 $33,074.52 6.00 11.66%
Emerging Growth Fund 05/01/1997 5.46 $10,000.00 12/31/1999 28.37 $51,915.41 7.72 85.38%
MS Emerging Market International 10/01/1996 13.57 $10,000.00 12/31/1999 18.92 $13,938.81 2.72 10.76%
Fidelity Asset Manager 09/06/1989 3.64 $10,000.00 12/31/1999 10.98 $30,140.20 2.76 11.28%
Fidelity Equity Income 10/09/1986 2.28 $10,000.00 12/31/1999 10.53 $46,072.13 11.36 12.23%
Fidelity Growth 10/09/1986 1.67 $10,000.00 12/31/1999 13.56 $81,126.38 22.76 17.14%
Fidelity Index 500 08/27/1992 3.22 $10,000.00 12/31/1999 11.91 $36,916.81 11.40 19.45%
Flexibly Managed Fund 07/31/1984 1.63 $10,000.00 12/31/1999 10.55 $64,445.74 48.00 12.84%
Growth Equity Fund 06/01/1983 1.30 $10,000.00 12/31/1999 13.27 $102,158.00 52.64 15.03%
High Yield Bond Fund 08/06/1984 2.92 $10,000.00 12/31/1999 10.26 $35,175.27 17.70 8.50%
International Equity Fund 11/01/1992 4.62 $10,000.00 12/31/1999 14.09 $30,421.72 17.72 16.79%
Neuberger Berman Limited Maturity 09/10/1984 4.08 $10,000.00 12/31/1999 10.02 $24,532.27 5.64 6.03%
Neuberger Berman Partners 03/22/1994 4.52 $10,000.00 12/31/1999 10.61 $23,456.80 2.28 15.89%
Quality Bond Fund 03/17/1987 4.59 $10,000.00 12/31/1999 9.88 $21,497.09 16.92 6.16%
Small Capitalization Fund 03/01/1995 6.99 $10,000.00 12/31/1999 9.75 $13,943.73 4.20 7.11%
Value Equity Fund 03/17/1987 2.50 $10,000.00 12/31/1999 9.82 $39,276.21 35.16 11.28%
</TABLE>
