<PAGE>
As filed with the Securities and Exchange Commission on April 23, 1998
Registration No. 33-87276
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------------
FORM S-6
FOR REGISTRATION UNDER THE SECURITIES ACT OF 1933
OF SECURITIES OF UNIT INVESTMENT TRUSTS
REGISTERED ON FORM N-8B-2
--------------------------
POST-EFFECTIVE AMENDMENT NO. 4
--------------------------
Penn Mutual Variable Life Account I
(Exact name of trust)
THE PENN MUTUAL LIFE INSURANCE COMPANY
(Name of depositor)
600 Dresher Road
Horsham, Pennsylvania 19044
(Complete address of depositor's principal executive offices)
--------------------------
Richard F. Plush
Vice President
The Penn Mutual Life Insurance Company
600 Dresher Road
Horsham, PA 19044
(Name and complete address of agent for service)
--------------------------
Copy to:
Richard W. Grant, Esq.
C. Ronald Rubley
Morgan, Lewis & Bockius LLP
Philadelphia, PA 19103-6993
--------------------------
It is proposed that this filing will become effective:
[_] Immediately upon filing pursuant to paragraph (b) of Rule
485.
[X] On May 1, 1998 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>
PENN MUTUAL VARIABLE LIFE ACCOUNT I
THE PENN MUTUAL LIFE INSURANCE COMPANY
Cross Reference to Items Required by Form N-8B-2
N-8B-2 Item Caption in Prospectus
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1 Cover Page
2 Cover Page
3 Not applicable
4 Sale of the Policies
5 Penn Mutual Variable Life Account I
6 Penn Mutual Variable Life Account I
7 Not applicable
8 Not applicable
9 Litigation
10 Summary and Diagram of the Policy; Premiums and Allocations; Cash
Benefits; Other Policy Benefits and Provisions; Substitution of
Securities; Voting Rights
11 The Funds
12 The Funds
13 Charges and Deductions
14 Premiums and Allocations
15 Crediting Premiums
16 The Funds
17 Surrendering the Policy for Net Cash Surrender Value; Partial
Surrenders; When Proceeds Are Paid
18 Penn Mutual Variable Life Account I
19 Reports to Policy Owners
20 Changes in the Policy or Benefits
21 Policy Loans
22 Not applicable
23 Not applicable
24 Not applicable
25 The Penn Mutual Life Insurance Company
26 Charges and Deductions
27 The Penn Mutual Life Insurance Company
28 The Penn Mutual Life Insurance Company; Penn Mutual Trustees and
Officers
29 Not applicable
30 Not applicable
31 Not applicable
32 Not applicable
<PAGE>
33 Not applicable
34 Not applicable
35 The Penn Mutual Life Insurance Company; Premiums and Allocations
36 Not applicable
37 Not applicable
38 Sale of the Policies
39 Sale of the Policies
40 Sale of the Policies
41 Not applicable
42 Not applicable
43 Not applicable
44 Determining the Policy Value; The Funds
45 Not applicable
46 Determining the Policy Value; The Funds
47 Penn Mutual Variable Life Account I; The Funds
48 The Penn Mutual Life Insurance Company
49 Not applicable
50 Not applicable
51 Premiums and Allocations; Death Benefits and Changes in Specified
Amount; Sale of the Policies
52 Substitution of Securities
53 Tax Considerations
54 Not applicable
55 Illustrations of Policy Values, Net Cash Surrender Values, Death
Benefits and Accumulated Premiums
56 Not applicable
57 Not applicable
58 Not applicable
59 Financial Statements
<PAGE>
PART I
Information Required in Prospectus
<PAGE>
PROSPECTUS -- MAY 1, 1998
LAST SURVIVOR FLEXIBLE PREMIUM ADJUSTABLE VARIABLE LIFE INSURANCE POLICIES
- --------------------------------------------------------------------------------
PENN MUTUAL VARIABLE LIFE ACCOUNT I
THE PENN MUTUAL LIFE INSURANCE COMPANY
PHILADELPHIA, PA 19172 . TELEPHONE (215) 956-8000
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This prospectus describes a last survivor flexible premium adjustable variable
life insurance policy (the "Policy" or "Policies") offered by The Penn Mutual
Life Insurance Company ("Penn Mutual"). The Policy is designed to provide
lifetime insurance protection on two insureds named in the Policy and at the
same time provide flexibility to vary the amount and timing of premiums and to
change the amount of death benefits payable under the Policy on the death of
the last surviving insured. This flexibility allows you to provide for changing
insurance needs under a single insurance policy.
You also have the opportunity to allocate net premiums and Policy Value to
one or more subaccounts of the Penn Mutual Variable Life Account I (the
"Separate Account") and Penn Mutual's general account (the "Fixed Account"),
within limits. The assets of each subaccount are invested in a corresponding
fund (each, a "Fund," and together, the "Funds") of Penn Series Funds, Inc.,
Neuberger & Berman Advisers Management Trust, American Century Variable
Portfolios, Inc., Fidelity Investments' Variable Insurance Products Fund,
Fidelity Investments' Variable Insurance Products Fund II or Morgan Stanley
Universal Funds, Inc. Each Fund is managed by the investment adviser shown
below:
<TABLE>
<CAPTION>
FUNDS MANAGERS
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<S> <C>
PENN SERIES FUNDS, INC.
Growth Equity Fund Independence Capital Management, Inc.
(a wholly owned subsidiary of The Penn Mutual Life
Insurance Company)
Value Equity Fund OpCap Advisors
Small Capitalization Fund OpCap Advisors
Emerging Growth Fund RS Investment Management, Inc.
Flexibly Managed Fund T. Rowe Price Associates, Inc.
International Equity Fund Vontobel USA Inc.
Quality Bond Fund Independence Capital Management, Inc.
High Yield Bond Fund T. Rowe Price Associates, Inc.
Money Market Fund Independence Capital Management, Inc.
- -----------------------------------------------------------------------------------------------------------
NEUBERGER & BERMAN ADVISER MANAGEMENT TRUST
Limited Maturity Bond Portfolio Neuberger & Berman Management, Inc.
Balanced Portfolio Neuberger & Berman Management, Inc.
Partners Portfolio Neuberger & Berman Management, Inc.
- -----------------------------------------------------------------------------------------------------------
AMERICAN CENTURY VARIABLE PORTFOLIOS, INC.
Capital Appreciation Portfolio American Century Investment Management, Inc.
- -----------------------------------------------------------------------------------------------------------
FIDELITY INVESTMENTS' VARIABLE INSURANCE PROD-
UCTS FUND
Equity-Income Portfolio Fidelity Management & Research Company
Growth Portfolio Fidelity Management & Research Company
- -----------------------------------------------------------------------------------------------------------
FIDELITY INVESTMENTS' VARIABLE INSURANCE PROD-
UCTS FUND II
Asset Manager Portfolio Fidelity Management & Research Company
Index 500 Portfolio Fidelity Management & Research Company
- -----------------------------------------------------------------------------------------------------------
MORGAN STANLEY UNIVERSAL FUNDS, INC.
Emerging Markets Equity (International) Portfolio Morgan Stanley Asset Management Inc.
- -----------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying prospectuses for the Funds describe the Funds, including the
risks of investing in the Funds, and provide other information on the Funds.
This prospectus generally describes only those features of the Policy related
to the Separate Account. For a brief summary of the Fixed Account, see "The
Fixed Account," page 15.
You can select from two death benefit options available under the Policy: a
level death benefit ("Specified Amount" or "Option 1") and an increasing death
benefit ("Specified Amount Plus Policy Value" or "Option 2"). Penn Mutual
guarantees
<PAGE>
that the death benefit will never be less than the Specified Amount (less any
unrepaid policy loans and past due charges) so long as the Policy is in force.
The Policy provides for a net cash surrender value that can be obtained by
surrendering the Policy. Because this value is based on the performance of the
Funds, to the extent of allocations to the Separate Account, there is no
guaranteed net cash surrender value.
If the net cash surrender value is insufficient to cover the charges due
under the Policy, the Policy will lapse without value. However, Penn Mutual
guarantees to keep the Policy in force during the first five policy years so
long as the No-Lapse Premium requirement and other conditions have been met.
The Policy also provides for policy loans and permits partial surrenders within
limits.
It may not be advantageous to replace existing insurance with the Policy.
Within certain limits, you may return the Policy or convert it to a life
insurance policy with benefits that do not vary with the investment results of
a separate account.
THIS PROSPECTUS SETS FORTH CONCISELY THE INFORMATION YOU SHOULD KNOW BEFORE
DECIDING TO PURCHASE A POLICY. IT SHOULD BE RETAINED FOR FUTURE REFERENCE. THIS
PROSPECTUS MUST BE ACCOMPANIED OR PRECEDED BY A CURRENT PROSPECTUS FOR EACH
FUND. THE FUND PROSPECTUSES SHOULD BE READ IN CONJUNCTION WITH THIS PROSPECTUS.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
2
<PAGE>
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PROSPECTUS CONTENTS
<TABLE>
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<S> <C>
DEFINITIONS OF TERMS........................................................ 5
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SUMMARY AND DIAGRAM OF THE POLICY........................................... 6
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GENERAL INFORMATION ABOUT PENN MUTUAL, THE SEPARATE ACCOUNT AND THE FUNDS... 9
The Penn Mutual Life Insurance Company.................................... 9
Penn Mutual Variable Life Account I....................................... 9
The Funds................................................................. 9
Substitution of Securities................................................ 11
Voting Rights............................................................. 12
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PREMIUMS AND ALLOCATIONS.................................................... 12
Applying for a Policy..................................................... 12
Free Look Right to Cancel Policy.......................................... 12
Premiums.................................................................. 12
Premiums to Prevent Lapse................................................. 13
Net Premium Allocations................................................... 13
Crediting Premiums........................................................ 14
Transfers................................................................. 14
Dollar Cost Averaging Program............................................. 14
Asset Rebalancing......................................................... 15
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FIXED ACCOUNT............................................................... 15
Fixed Account............................................................. 15
Interest Credited on Policy Value in the Fixed Account.................... 15
Calculating Fixed Account Value........................................... 15
Deductions, Surrenders and Transfers from the Fixed Account............... 16
Payments from the Fixed Account........................................... 16
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CHARGES AND DEDUCTIONS...................................................... 16
Premium Charge............................................................ 16
Daily Mortality and Expense Risk Charge................................... 16
Monthly Deduction......................................................... 16
Transfer Charge........................................................... 17
Surrender Charge.......................................................... 18
Partial Surrender Charge.................................................. 18
Fund Expenses............................................................. 18
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HOW YOUR POLICY VALUES VARY................................................. 19
Determining the Policy Value.............................................. 19
Net Policy Value.......................................................... 19
Cash Surrender Value...................................................... 19
Net Cash Surrender Value.................................................. 20
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DEATH BENEFIT AND CHANGES IN SPECIFIED AMOUNT............................... 20
Amount of Death Benefit................................................... 20
Basic Death Benefit and Specified Amount Options.......................... 20
Specified Amount.......................................................... 20
Changes in Specified Amount Option........................................ 20
</TABLE>
3
<PAGE>
<TABLE>
<S> <C>
Changes in Specified Amount.............................................. 21
Selecting and Changing the Beneficiary................................... 21
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CASH BENEFITS.............................................................. 21
Policy Loans............................................................. 21
Surrendering the Policy for Net Cash Surrender Value..................... 22
Partial Surrenders....................................................... 22
Maturity Benefit......................................................... 22
Payment Options.......................................................... 22
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ILLUSTRATIONS OF POLICY VALUES, NET CASH SURRENDER VALUES, DEATH BENEFITS
AND ACCUMULATED PREMIUMS.................................................. 23
- -------------------------------------------------------------------------------
OTHER POLICY BENEFITS AND PROVISIONS....................................... 28
Right to Convert to a Fixed Benefit Policy............................... 28
Dividends................................................................ 28
Incontestability......................................................... 28
Suicide Exclusion........................................................ 28
Misstatement of Age or Sex............................................... 28
When Proceeds Are Paid................................................... 28
Reports to Policy Owners................................................. 28
Assignment............................................................... 29
Reinstatement............................................................ 29
Supplemental Benefits.................................................... 29
- -------------------------------------------------------------------------------
FEDERAL INCOME TAX CONSIDERATIONS.......................................... 29
Introduction............................................................. 29
Tax Status of the Policy................................................. 29
Tax Treatment of Policy Benefits......................................... 30
Charge for Penn Mutual's Taxes........................................... 31
- -------------------------------------------------------------------------------
OTHER INFORMATION ABOUT THE POLICIES AND PENN MUTUAL....................... 32
Sale of the Policies..................................................... 32
Penn Mutual Trustees and Officers........................................ 33
State Regulations........................................................ 34
Additional Information................................................... 34
Experts.................................................................. 35
Litigation............................................................... 35
Legal Matters............................................................ 35
Financial Statements..................................................... 35
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APPENDICES
A--Minimum Initial Annual Premiums....................................... A-1
B--Administrative Surrender Charges per $1,000 of Initial Specified
Amount and Sample Charges............................................... B-1
Premiums for $1,000,000 Specified Amount................................. B-1
C--Illustrative Net Single Premium Factors............................... C-1
D--Policies Issued to New York Residents................................. D-1
</TABLE>
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING IN ANY JURISDICTION IN WHICH
SUCH OFFERING MAY NOT BE LAWFULLY MADE. NO PERSON IS AUTHORIZED TO MAKE ANY
REPRESENTATIONS IN CONNECTION WITH THE OFFERING OTHER THAN THOSE CONTAINED IN
THIS PROSPECTUS AND THE ACCOMPANYING PROSPECTUSES OF THE FUNDS OR THEIR
RESPECTIVE STATEMENTS OF ADDITIONAL INFORMATION.
4
<PAGE>
DEFINITIONS OF TERMS
ATTAINED AGE: An Insured's age on the Policy Date, plus the number of full
years since the Policy Date.
BASIC DEATH BENEFIT: Specified Amount or Specified Amount Plus Policy
Value, depending on the option selected. See page 20.
BENEFICIARY: The person to whom the Death Benefit is paid.
CASH SURRENDER VALUE: Policy Value less any surrender charges that would be
deducted if the Policy were surrendered. See page 19.
DEATH BENEFIT: The amount of money payable to the Beneficiary upon the
death of the last surviving Insured if the Policy is then still in force.
The calculation of the Death Benefit is described on page 20.
FIXED ACCOUNT: An account consisting of assets owned by Penn Mutual with
respect to the Policies, other than those in the Separate Account.
INDEBTEDNESS: The total amount owed Penn Mutual as a result of Policy
loans, including both principal and accrued interest.
INITIAL SPECIFIED AMOUNT: The Specified Amount on the Policy Date.
INSURED: A person whose life is covered by the Policy.
ISSUE DATE: The date the Policy is issued. A Policy is issued after
completion of underwriting. If the initial premium is received at our
Office and invested before underwriting has been completed, the Issue Date
will be later than the Policy Date. In that case, once issued, Policy
coverage is retroactive to the Policy Date. The Issue Date is used to
measure contestability periods. See page 28.
MATURITY DATE: The Policy Anniversary nearest the younger Insured's 100th
birthday.
MONTHLY ANNIVERSARY: The same day as the Policy Date for each succeeding
month, except that, if the Policy Date is the 29th, 30th or 31st of a
month, the Monthly Anniversary is deemed to be the first of the following
month. The Monthly Deduction is deducted on each Monthly Anniversary.
NET CASH SURRENDER VALUE: Net Policy Value less any applicable surrender
charge that would be deducted upon surrender. See page 18.
NET POLICY VALUE: Policy Value less any Indebtedness.
NET PREMIUM: A premium minus the premium charge. See page 16.
NO-LAPSE PREMIUM: An amount used to measure premiums paid during the first
five Policy Years for purposes of the Five-Year Guarantee. See page 12.
OFFICE: Operations Offices, 600 Dresher Road, Horsham, PA 19044
OWNER, YOU: The person who purchases a Policy.
PENN MUTUAL, WE, US: The Penn Mutual Life Insurance Company.
POLICY ANNIVERSARY: An anniversary of the Policy Date.
POLICY DATE: The date from which Policy Years and Monthly Anniversaries are
measured.
POLICY LOAN ACCOUNT: A portion of the Policy Value held in the Fixed
Account as collateral for policy loans. See page 21.
POLICY VALUE: The total amount in the Fixed Account and Subaccounts
credited to a Policy. Calculation of the Policy Value is described on page
19.
POLICY YEAR: The year commencing with the Policy Date and ending on the day
before the first Policy Anniversary, or any following year commencing with
a Policy Anniversary and ending on the day before the next Policy
Anniversary.
SEPARATE ACCOUNT: Penn Mutual Variable Life Account I, a separate
investment account of The Penn Mutual Life Insurance Company.
SPECIFIED AMOUNT: A dollar amount used to determine the death benefit under
a Policy. See page 20.
SUBACCOUNT: A division of the Separate Account established to invest in a
particular Fund and available for investment under the Policies.
SURRENDER CHARGE PREMIUM: An amount used to determine the sales charge
deducted on surrender of the Policy. See page 18 and Appendix B.
VALUATION DATE: Each day the New York Stock Exchange and our Office are
open for business.
VALUATION PERIOD: A period commencing with the close of business on the New
York Stock Exchange and ending at the close of business on the New York
Stock Exchange for the next succeeding Valuation Date.
5
<PAGE>
- --------------------------------------------------------------------------------
SUMMARY AND DIAGRAM OF THE POLICY
THE FOLLOWING SUMMARY OF PROSPECTUS INFORMATION AND DIAGRAM OF THE POLICY
SHOULD BE READ IN CONJUNCTION WITH THE DETAILED INFORMATION APPEARING ELSEWHERE
IN THIS PROSPECTUS. UNLESS OTHERWISE INDICATED, THE DESCRIPTION OF THE POLICY
IN THIS PROSPECTUS ASSUMES THAT THE POLICY IS IN FORCE AND THERE IS NO
OUTSTANDING INDEBTEDNESS.
The Policy is similar in many ways to fixed-benefit life insurance. As with
fixed-benefit life insurance, the Owner of a Policy pays premiums for insurance
coverage on the persons insured. Also like fixed-benefit life insurance, the
Policy provides for accumulation of Net Premiums and a Net Cash Surrender Value
which is payable if the Policy is surrendered during an Insured's lifetime. As
with fixed-benefit life insurance, the Net Cash Surrender Value during the
early Policy Years is likely to be substantially lower than the premiums paid.
However, the Policy differs from fixed-benefit life insurance in several
important respects. Unlike fixed-benefit life insurance, the Death Benefit of a
Policy may and Policy Value will increase or decrease to reflect the investment
performance of the Subaccounts to which the Policy Value is allocated. Also,
there is no guaranteed minimum Net Cash Surrender Value. Nonetheless, Penn
Mutual guarantees to keep the Policy in force during the first five Policy
Years so long as the No-Lapse Premium requirement has been met and Indebtedness
is not excessive. See "Five-Year Guarantee," page 13. Otherwise, if the Net
Cash Surrender Value is insufficient to pay charges due, the Policy will lapse
without value after a grace period. See "Premiums to Prevent Lapse," page 13.
The Policy is called "last survivor" because no death benefit is payable
until the death of the second of the two named Insureds (the "last surviving
Insured"). The Policy continues in force without any adjustment after the death
of the first Insured.
The most important features of the Policy, such as charges, cash benefits,
death benefits, and calculation of Policy values, are summarized in the diagram
on the following pages.
PURPOSE OF THE POLICY. The Policy is designed to be a long-term investment
providing significant insurance benefits. The Policy should be considered in
conjunction with other insurance policies owned by the Owner. It may not be
advantageous to replace existing insurance with the Policy.
TAX CONSIDERATIONS. Penn Mutual intends for the Policy to satisfy the
definition of a life insurance contract under section 7702 of the Internal
Revenue Code. Under certain circumstances, a Policy could be treated as a
"modified endowment contract." Penn Mutual will monitor Policies and will
attempt to notify an Owner on a timely basis if his or her Policy is in
jeopardy of becoming a modified endowment contract. For further discussion of
the tax status of a Policy and the tax consequences of being treated as a life
insurance contract or a modified endowment contract, see page 29.
FREE LOOK RIGHT TO CANCEL AND CONVERSION RIGHT. For a limited time after the
Policy is issued, you have the right to cancel your Policy and receive a full
refund of the initial premium paid. See "Free Look Right to Cancel Policy,"
page 12. Until the end of this limited period, Net Premiums paid will be
invested in the Subaccount investing in the Penn Series Money Market Fund. See
"Net Premium Allocations," page 13. At any time within the first 24 Policy
Months, you may transfer all funds held in the Separate Account to the Fixed
Account, and thereby convert your Policy to a fixed-benefit (non-variable)
policy. See "Right to Convert to a Fixed Benefit Policy," page 28.
OWNER INQUIRIES. If you have any questions, you may write to us (The Penn
Mutual Life Insurance Company, Philadelphia, PA 19172) or call us (1-800-523-
0650).
6
<PAGE>
DIAGRAM OF POLICY
---------------------------------------------
PREMIUM PAYMENTS
. You select a payment plan but are not
required to pay premiums according to
the plan. You can vary the amount and
frequency and can skip planned
premiums. See page 16 for rules and
limits.
. Minimum initial premium and planned
premium depend on the Insureds' age,
sex and underwriting class, Specified
Amount selected, and any supplemental
riders. See Appendix A for sample
minimum initial premiums.
. Unplanned premiums may be made, within
limits. See page 12.
. Under certain circumstances, extra
premiums may be required to prevent
lapse. See page 13.
------------------------------------------
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DEDUCTIONS FROM PREMIUMS
. For sales load (5.0% of premiums; the Company's
current intention is to reduce this charge to 3.0%
of premiums paid after the first 15 Policy Years).
. For state premium tax (2.5% of premiums). See page
16.
------------------------------------------------------------
- ------------------------------------------------------------------------------
NET PREMIUMS
. You direct the allocation of Net Premiums among 18 Subaccounts of the
Separate Account and the Fixed Account (the "Accounts"). See page 13
for rules and limits on Net Premium allocations.
. The Subaccounts invest in corresponding portfolios ("Funds") of Penn
Series Funds, Inc. ("Penn Series"), Neuberger & Berman Advisers
Management Trust ("AMT"), American Century Variable Portfolios, Inc.
("American Century Variable Portfolios"), Fidelity Investments'
Variable Insurance Products Fund ("VIP Fund"), Fidelity Investments'
Variable Insurance Products Fund II ("VIP Fund II") and Morgan Stanley
Universal Funds, Inc. ("Morgan Stanley"). See page 9. Funds available
are:
Penn Series - Growth Equity Fund AMT - Limited Maturity Bond
Penn Series - Value Equity Fund Portfolio
AMT - Balanced Portfolio
Penn Series - Small Capitalization Fund
Penn Series - Emerging Growth Fund AMT - Partners Portfolio
Penn Series - Flexibly Managed Fund American Century Variable
Portfolio--Capital Appreciation
Penn Series - International Equity Fund
Penn Series - Quality Bond Fund VIP Fund - Equity-Income Portfolio
Penn Series - High Yield Bond Fund VIP Fund - Growth Portfolio
Penn Series - Money Market Fund VIP Fund II - Asset Manager
Portfolio
. Interest is credited on amounts allocated to the Fixed Account at a
minimum guaranteed rate of 4%. See page 15 for rules and limits on
Fixed Account allocations.
VIP Fund II - Index 500 Portfolio
Morgan Stanley - Emerging Markets
Equity (International) Portfolio
- -----------------------------------------------------------------------------
7
<PAGE>
DEDUCTIONS FROM ASSETS
. Monthly Deduction for cost of insurance, administrative expenses, and
charges for any supplemental benefits. Administrative expenses are
currently $15.00 per month the first Policy Year, $5.00 per month
thereafter, plus for the first 12 months after the Policy Date, a
charge calculated as $.20 for each $1,000 of the Initial Specified
Amount. See page 16.
. Daily charge at an annual rate of 0.90% (currently declining to 0.60%
after the first 15 Policy Years) from the Subaccounts for mortality and
expense risks. See page 16. This charge is not deducted from Fixed
Account Value.
. Investment advisory fees and other fund expenses are deducted from the
assets of each Fund. See page 18.
- --------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
POLICY VALUE
. Is the amount in the Subaccounts and the Fixed Account credited to your
Policy. It is equal to Net Premiums, as adjusted each Valuation Date to
reflect Subaccount investment experience, interest credited on Fixed
Account Value, charges deducted and other policy transactions (such as
transfers and partial surrenders). See page 18.
. Varies from day to day. There is no minimum guaranteed Policy Value.
The Policy may lapse if the Net Cash Surrender Value is insufficient to
cover the Monthly Deduction then due. See page 19.
. Policy Value can be transferred among the Accounts. See page 14 for
rules and limits. Policy loans reduce the amount available for
allocations and transfers.
. Dollar cost averaging and asset rebalancing programs are available. See
page 14.
. Policy Value is the starting point for calculating certain values under
a Policy, such as the Cash Surrender Value, Net Cash Surrender Value,
Net Policy Value and the Basic Death Benefit used to determine
benefits.
-------------------------------------------------------------------------------
- --------------------------------------- --------------------------------------
CASH BENEFITS DEATH BENEFITS
. Available as lump sum or
. Loans may be taken for under a variety of payment
amounts up to 90% of Cash options.
Surrender Value, at a net
interest rate of 1.0%,
currently declining to
0.25% after the first 10
Policy Years. See page 21
for rules and limits.
. Minimum Basic Death Benefit
("Specified Amount") of
$200,000.
. Two Specified Amount
. Partial surrenders options available: Option 1
generally can be made up to (which provides a level
four times a Policy Year Basic Death Benefit equal
provided there is to the Specified Amount)
sufficient remaining Net and Option 2 (which is the
Cash Surrender Value. An Specified Amount plus
administrative charge of Policy Value and thereby
the lesser of $25 or 2% of provides a potentially
the surrender amount increasing Basic Death
requested will apply. See Benefit). See page 20.
page 22 for rules and
limits.
. Income tax free to
Beneficiary.
. The Policy may be
surrendered in full at any . Flexibility to change
time for its Net Cash Specified Amount option and
Surrender Value. A decrease Specified Amount.
declining sales load See page 21 for rules and
charge, starting at a level limits.
of up to 25% of the Premium
(an amount calculated
separately for each Policy)
as well as a declining
administrative charge will
apply to a full surrender
made during the first 16
Policy Years. See page 22.
See Appendix D for special
rules for Policies issued
to New York residents.
. Supplemental benefits
available by rider. See
page 29.
. Payment options available.
See page 22.
8
<PAGE>
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GENERAL INFORMATION ABOUT PENN MUTUAL, THE SEPARATE ACCOUNT AND THE FUNDS
- --------------------------------------------------------------------------------
THE PENN MUTUAL LIFE INSURANCE COMPANY
Penn Mutual is a Pennsylvania mutual life insurance company. We were
chartered in 1847 and have been continuously engaged in the life insurance
business since that date. We are authorized to sell insurance in all 50 states
and the District of Columbia. Our corporate headquarters are located at The
Penn Mutual Life Insurance Company, Philadelphia, Pennsylvania, 19172, and our
operations offices are located at 600 Dresher Road, Horsham, Pennsylvania,
19044.
- --------------------------------------------------------------------------------
PENN MUTUAL VARIABLE LIFE ACCOUNT I
We established Penn Mutual Variable Life Account I (the "Separate Account")
as a separate investment account under Pennsylvania law on January 27, 1987. It
is used to support the Policies as well as other variable life insurance
policies, and for other purposes permitted by law. The Separate Account is
registered with the Securities and Exchange Commission (the "SEC") as a unit
investment trust under the Investment Company Act of 1940 (the "1940 Act") and
qualifies as a "separate account" within the meaning of the federal securities
laws. We have established other separate investment accounts, of which Penn
Mutual Variable Life Account I is registered with the SEC.
We own the assets in the Separate Account. The Separate Account is divided
into Subaccounts. The Subaccounts available under the Policies invest in shares
of a specific Fund of Penn Series Funds, Inc. ("Penn Series"), Neuberger &
Berman Advisers Management Trust ("AMT"), American Century Variable Portfolios,
Inc. ("American Century Variable Portfolios") (formerly TCI Portfolios, Inc.),
Fidelity Investments' Variable Insurance Products Fund ("VIP Fund"), Fidelity
Investments' Variable Insurance Products Fund II ("VIP Fund II") and Morgan
Stanley Universal Funds, Inc. ("Morgan Stanley"). The Separate Account includes
other Subaccounts which are not available under the Policy and are not
otherwise discussed in this prospectus.
Income, gains and losses, realized or unrealized, of a Subaccount are
credited to or charged against the Subaccount without regard to any other
income, gains or losses of Penn Mutual. Assets equal to the reserves and other
contract liabilities with respect to each Subaccount are not chargeable with
liabilities arising out of any other business or account of Penn Mutual. If the
assets exceed the required reserves and other liabilities, we may transfer the
excess to our general account. We are obligated to pay all benefits provided
under the Policies.
Like other business organizations and individuals around the world, the
Separate Account could be adversely affected if the computer systems do not
properly process and calculate date-related information from and after January
1, 2000. This is commonly known as the "Year 2000 Problem." Penn Mutual is
taking steps that it believes are reasonably designed to address the Year 2000
Problem with respect to the computer systems that it uses and to obtain
satisfactory assurances that comparable steps are being taken by the Separate
Account's major service providers. At this time, however, there can be no
assurance that these steps will be sufficient to avoid any adverse impact on
the Separate Account.
- --------------------------------------------------------------------------------
THE FUNDS
Penn Series, AMT, American Century Variable Portfolios, VIP Fund, VIP Fund II
and Morgan Stanley are each registered with the SEC as a diversified open-end
management investment company under the 1940 Act. Each is a series-type mutual
fund made up of different series or Funds.
The investment objectives of each of the Funds in which Subaccounts invest is
set forth below. There is, of course, no assurance that these objectives will
be met.
PENN SERIES - 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.
PENN SERIES - VALUE EQUITY FUND - seeks to maximize total return (capital
appreciation and income) primarily by investing in equity securities of
companies believed to be undervalued considering such factors as assets,
earnings, growth potential and cash flows.
PENN SERIES - SMALL CAPITALIZATION FUND - seeks capital appreciation through
investment in a diversified portfolio of securities consisting primarily of
equity securities of companies with market capitalization of under $1 billion.
PENN SERIES - EMERGING GROWTH FUND - seeks capital appreciation by investing
primarily in common stocks of emerging growth companies with above-average
growth prospects.
PENN SERIES - 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.
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PENN SERIES - 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.
PENN SERIES - QUALITY BOND FUND - seeks the highest income over the long term
consistent with the preservation of principal by investing primarily in
marketable investment-grade debt securities.
PENN SERIES - HIGH YIELD BOND FUND - seeks high current income by investing
primarily in a diversified portfolio of long term high-yield fixed income
securities in the medium to lower quality ranges; capital appreciation is a
secondary objective; such securities, which are commonly referred to as "junk"
bonds, generally involve greater risks of loss of income and principal than
higher rated securities.
PENN SERIES - MONEY MARKET FUND - seeks to preserve capital, maintain
liquidity and achieve the highest possible level of current income consistent
therewith, by investing in high quality money market instruments; an investment
in the Fund is neither insured nor guaranteed by the U.S. Government and there
can be no assurance that the Fund will be able to maintain a stable net asset
value of $1.00 per share.
AMT - LIMITED MATURITY BOND PORTFOLIO - seeks the highest current income
consistent with low risk to principal and liquidity; as a secondary objective,
seeks to enhance its total return through capital appreciation when market
factors, such as falling interest rates and rising bond prices, indicate that
capital appreciation may be available without significant risk to principal;
investments are made by investing net investable assets in a series of Advisers
Managers Trust (a diversified open-end management investment company) with
identical investment objective, policies and limitations; the underlying series
pursues objectives primarily by investing in a diversified portfolio of limited
maturity debt securities.
AMT - BALANCED PORTFOLIO - seeks long-term capital growth and reasonable
current income without undue risk to principal through investment in common
stocks and debt securities; investments are made by investing net investable
assets in a series of Advisers Managers Trust (a diversified open-end
management investment company) with identical investment objective, policies
and limitations; as to the underlying series, it is anticipated that normally
60% of total assets will be invested in common stocks and remaining assets will
be invested in debt securities; at least 25% of the Series' assets will be
invested in fixed income senior securities.
AMT - PARTNERS PORTFOLIO - seeks capital growth by investing primarily in
common stocks of established companies, using the value oriented investment
approach. Neuberger & Berman reserves the right to make changes in the
investment objectives, but will notify shareholders thirty days in advance of
any proposed material change.
AMERICAN CENTURY VARIABLE PORTFOLIOS - CAPITAL APPRECIATION PORTFOLIO
(FORMERLY GROWTH PORTFOLIO) - seeks capital growth by investing in common
stocks (including securities convertible into common stocks) and other
securities that meet certain fundamental and technical standards of selection
and, in the opinion of the Fund's management, have better than average
potential for appreciation; the Fund intends to stay fully invested in such
securities.
VIP 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.
VIP FUND - 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.
VIP 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 instruments.
VIP FUND II - INDEX 500 PORTFOLIO - seeks to match the total return of the
S&P 500 while keeping expenses low. The S&P 500 is an index of 500 common
stocks, most of which trade on the New York Stock Exchange.
MORGAN STANLEY UNIVERSAL FUNDS, INC. - EMERGING MARKETS EQUITY
(INTERNATIONAL) PORTFOLIO - seeks long term capital appreciation by investing
primarily in equity securities of emerging market countries issuers. The
Portfolio will focus on economies which are developing strongly and in which
the markets are becoming more sophisticated.
Each Fund sells and redeems its shares at net asset value without any sales
charge. Any dividend from net investment income or distribution from realized
gains from security transactions of a Fund is reinvested at net asset value in
shares of the same Fund.
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THE MANAGERS
INDEPENDENCE CAPITAL MANAGEMENT, INC. ("Independence Capital Management"), of
Horsham, Pennsylvania, is investment adviser to each of the Penn Series Funds.
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T. ROWE PRICE ASSOCIATES, INC. ("Price Associates"), of Baltimore, Maryland,
is investment sub-adviser to the Penn Series Flexibly Managed Fund and Penn
Series High Yield Bond Fund.
OPCAP ADVISORS ("OpCap") (formerly Quest for Value Advisors), of New York,
New York, is investment sub-adviser to the Penn Series Value Equity Fund and
the Penn Series Small Capitalization Fund.
VONTOBEL USA INC. ("Vontobel"), of New York, New York, is the investment sub-
adviser to the Penn Series International Equity Fund.
RS INVESTMENT MANAGEMENT, INC. (FORMERLY ROBERTSON STEPHENS INVESTMENT
MANAGEMENT, INC.), of San Francisco, California, is investment sub-adviser to
the Penn Series Emerging Growth Fund.
NEUBERGER & BERMAN MANAGEMENT INCORPORATED ("N&B Management"), of New York,
New York, is the investment adviser to each series of Advisers Managers Trust
underlying the AMT Limited Maturity Bond Portfolio, the AMT Balanced Portfolio
and the AMT Partner Portfolio.
AMERICAN CENTURY INVESTMENT MANAGEMENT, INC. ("American Century"), of Kansas
City, Missouri, is the investment adviser to Capital Appreciation Portfolio.
FIDELITY MANAGEMENT & RESEARCH CORPORATION ("FMR"), of Boston, Massachusetts,
is the investment adviser to VIP Fund's Equity Income Portfolio and Growth
Portfolio and VIP Fund II's Asset Manager Portfolio and Index 500 Portfolio.
FMR utilizes the services of two subsidiaries on a sub-advisory basis for
foreign securities investments for the Asset Manager Portfolio. These
subsidiaries are Fidelity Management & Research (U.K.) Inc. and Fidelity
Management & Research (Far East) Inc.
MORGAN STANLEY ASSET MANAGEMENT INC. ("Morgan Stanley"), of New York, New
York, is the investment adviser to Morgan Stanley Universal Funds' Emerging
Markets Equity (International) Portfolio.
Further information about the Funds is contained in the accompanying
prospectuses, which you should read in conjunction with this prospectus.
We have entered into agreements with Penn Series, AMT, American Century
Variable Portfolios, VIP Fund, VIP Fund II and Morgan Stanley governing the
Separate Account's investment in those Funds. Under the agreement with American
Century Variable Portfolios, the adviser to the American Century Variable
Portfolios compensates Penn Mutual for certain administrative services provided
by Penn Mutual. The advisers to the VIP Fund, VIP Fund II and Morgan Stanley
Portfolios, or their affiliates, also compensate Penn Mutual for services
rendered in making shares of the portfolios available under the Policies.
The shares of Penn Series, AMT, American Century Variable Portfolios, VIP
Fund, VIP Fund II and Morgan Stanley are sold not only to the Separate Account,
but to other separate accounts of Penn Mutual that fund benefits under variable
annuity policies. The shares of AMT, American Century Variable Portfolios, VIP
Fund, VIP Fund II and Morgan Stanley are also sold to separate accounts of
other insurance companies and, in the case of AMT, also directly to qualified
pension and retirement plans. It is conceivable that in the future it may
become disadvantageous for both variable life and variable annuity policy
separate accounts (and also qualified pension and retirement plans with respect
to AMT) to invest in the same underlying mutual fund. Although neither we nor
Penn Series, AMT, American Century Variable Portfolios, VIP Fund, VIP Fund II
or Morgan Stanley currently perceives or anticipates any such disadvantage, the
Boards of Directors of Penn Series, American Century Variable Portfolios and
Morgan Stanley, respectively, and the Boards of Trustees of AMT, VIP Fund and
VIP Fund II, respectively, will monitor events to determine whether any
material conflict between variable annuity policyowners and variable life
policyowners (and also qualified pension and retirement plans with respect to
AMT) arises.
Material conflicts could result from such things as: (1) changes in state
insurance laws; (2) changes in federal income tax law; (3) changes in the
investment management of any Fund or of Penn Series, AMT, American Century
Variable Portfolios, VIP Fund, VIP Fund II and Morgan Stanley, respectively; or
(4) differences between voting instructions given by variable annuity
policyowners and those given by variable life policyowners. In the event of a
material irreconcilable conflict, we will take the steps necessary to protect
our variable annuity and variable life policyowners. This could include
discontinuance of investment in a Fund.
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SUBSTITUTION OF SECURITIES
If investment in a Subaccount should no longer be possible or, if in our
judgment, becomes inappropriate to the purposes of the Policies, or, if in our
judgment, investment in another subaccount or insurance company separate
account is in the interest of Owners, we may substitute another subaccount or
insurance company separate account. No substitution may take place without
notice to Owners and prior approval of the SEC and insurance regulatory
authorities, to the extent required by the 1940 Act and applicable law.
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VOTING RIGHTS
We are the legal owner of shares held by the Subaccounts and as such have the
right to vote on all matters submitted to shareholders of the Funds. However,
as required by law, we will vote shares held in the Subaccounts at regular and
special meetings of shareholders of the Funds in accordance with instructions
received from Owners with Policy Value in the Subaccounts. Should the
applicable federal securities laws, regulations or interpretations thereof
change so as to permit us to vote shares of the Funds in our own right, we may
elect to do so.
To obtain voting instructions from Owners, before a meeting we will send
Owners voting instruction material, a voting instruction form and any other
related material. The number of shares held by each Subaccount for which an
Owner may give voting instructions is currently determined by dividing the
portion of the Owner's Policy Value in the Subaccount by the net asset value of
one share of the applicable Fund. Fractional votes will be counted. The number
of votes for which an Owner may give instructions will be determined as of a
date chosen by Penn Mutual but not more than 90 days prior to the meeting of
shareholders. Shares held by a Subaccount for which no timely instructions are
received will be voted by Penn Mutual in the same proportion as those shares
for which voting instructions are received.
We may, if required by state insurance officials, disregard Owner voting
instructions if such instructions would require shares to be voted so as to
cause a change in sub-classification or investment objectives of one or more of
the Funds, or to approve or disapprove an investment advisory agreement. In
addition, we may under certain circumstances disregard voting instructions that
would require changes in the investment policy or investment adviser of one or
more of the Funds, provided that we reasonably disapprove of such changes in
accordance with applicable federal regulations. If we ever disregard voting
instructions, we will advise Owners of that action and of our reasons for such
action in the next semiannual report. Finally, we reserve the right to modify
the manner in which we calculate the weight to be given to pass-through voting
instructions where such a change is necessary to comply with current federal
regulations or the current interpretation thereof.
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PREMIUMS AND ALLOCATIONS
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APPLYING FOR A POLICY
If you want to purchase a Policy, you must complete an application and submit
it to one of our authorized agents. You also must pay an initial premium at
least equal to the minimum required. See "Premiums," below. Policy coverage
will not become effective until the initial premium in good order is received
at our Office.
We require satisfactory evidence of the insurability of both Insureds, which
may include a medical examination of each or one of the Insureds. Generally, we
will issue a Policy covering two proposed Insureds if neither is less than 20
years old nor more than 80 years old, and if there is no more than 30 years
difference in their ages, provided that evidence of insurability satisfies our
underwriting rules. Acceptance of an application depends on our underwriting
rules, and we reserve the right to reject an application for any reason.
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FREE LOOK RIGHT TO CANCEL POLICY
You may cancel your Policy for a refund of premium during your "free-look"
period. This period expires 10 days after you receive your Policy, 45 days
after your application is signed, or 10 days after we mail or deliver a Notice
of Right of Withdrawal, whichever is latest. If you decide to cancel the
Policy, you must return it by mail or delivery to us or to our authorized agent
who sold it. Immediately after mailing or delivery, the Policy will be deemed
void from the beginning. We will refund premiums paid within seven days after
we receive the Policy.
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PREMIUMS
The minimum initial premium required depends on a number of factors, such as
the ages, sexes and rate classes of the proposed Insureds, the desired
Specified Amount, any supplemental benefits and the planned premiums you
propose to make. The initial premium must be at least equal to two No-Lapse
Premiums. See "Planned Premiums," below. Sample minimum initial premiums are
shown in Appendix A.
Additional premiums may be paid in any amount and at any time, subject to the
following limits. First, a premium must be at least $25 and must be sent to our
Office. We may require satisfactory evidence of insurability before accepting
any premium which results in an increase in the net amount at risk (defined on
page 16).
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<PAGE>
Second, we reserve the right to limit total premiums paid in a Policy Year to
the planned premiums selected (see "Planned Premiums," below). We will refund
any portion of any premium which is determined to be in excess of the premium
limit established by law to qualify a Policy as a policy for life insurance.
(The amount refunded will be the excess premium plus any gain attributable to
the excess premium.) In addition, we will monitor Policies and will attempt to
notify the Owner on a timely basis if his or her Policy is in jeopardy of
becoming a modified endowment contract under the Internal Revenue Code. See
"Tax Considerations," page 29.
Lastly, no premium will be accepted after the Maturity Date.
PLANNED PREMIUMS. When applying for a Policy, you select a plan for paying
level premiums at specified intervals, e.g., monthly, semi-annually or
annually, until the Maturity Date. You are not required to pay premiums in
accordance with this plan; rather, you can pay more or less than planned or
skip a planned premium entirely. You can change the amount and frequency of
planned premiums whenever you want by sending written notice to our Office.
However, we reserve the right to limit the amount of a premium or the total
premiums paid, as discussed above. We will send you reminder notices for
planned premiums, unless you have arranged to pay planned premiums by pre-
authorized check.
FIVE-YEAR GUARANTEE. We guarantee that a Policy will remain in force during
the first five Policy Years, regardless of the sufficiency of the Net Cash
Surrender Value, if the total premiums paid less any partial surrenders is
greater than or equal to the amount determined by multiplying the No-Lapse
Premium for the Policy by the number of months the Policy has been in force.
The No-Lapse Premium is a benchmark monthly premium calculated for each Policy
based on the ages, sexes and rate class of the Insureds, the requested
Specified Amount and any supplemental benefits. The No-Lapse Premium for your
Policy generally will be less than the monthly amount of planned premiums you
select to pay. The Five-Year guarantee will not apply if the Net Cash Surrender
Value becomes insufficient because of excessive Indebtedness. See "Loan
Repayment; Effect if Not Repaid," page 21.
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PREMIUMS TO PREVENT LAPSE
Failure to pay planned premiums will not necessarily cause a Policy to lapse.
Conversely, paying all planned premiums will not necessarily guarantee that a
Policy will not lapse (except when the Five-Year Guarantee is in effect).
Rather, whether a Policy lapses depends on whether its Net Cash Surrender Value
is insufficient to cover the Monthly Deduction (see page 16) when due.
If the Net Cash Surrender Value on a Monthly Anniversary is less than the
amount of the Monthly Deduction to be deducted on that date and the Five-Year
Guarantee is not in effect, the Policy will be in default and a grace period
will begin. This could happen if investment experience has been sufficiently
unfavorable that it has resulted in a decrease in the Net Cash Surrender Value
or the Net Cash Surrender Value has decreased because insufficient premiums
have been paid to offset the Monthly Deduction.
GRACE PERIOD. If your Policy goes into default, you will be allowed a 61-day
grace period to pay a premium sufficient to cover the Monthly Deduction. We
will send notice of the amount required to be paid during the grace period
("grace period premium") to your last known address and to any assignee of
record. The grace period will begin when the notice is sent. Your Policy will
remain in effect during the grace period. If the last surviving Insured (or
both Insureds) should die during the grace period before the grace period
premium is paid, the Death Benefit will still be payable to the Beneficiary,
although the amount paid will reflect a reduction for the Monthly Deductions
due on or before the date of the last surviving Insured's death. See "Amount of
Death Benefit," page 20. If the grace period premium has not been paid before
the grace period ends, your Policy will lapse. It will have no value and no
benefits will be payable. See "Reinstatement," page 29.
A grace period also may begin if Indebtedness becomes excessive. See "Loan
Repayment; Effect if not Repaid," page 21.
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NET PREMIUM ALLOCATIONS
In the application, you specify the percentage of a Net Premium to be
allocated to each Subaccount and the Fixed Account. The sum of your allocations
must equal 100% and each allocation percentage must be a whole number. However,
until the free look period expires, all Net Premiums received are invested in
the Subaccount investing in the Penn Series Money Market Fund (the "Money
Market Subaccount"). At the end of this period (which for this purpose is
assumed to begin 3 days after we issue your Policy), the Policy Value in the
Money Market Subaccount is transferred to and allocated to the Accounts based
on the premium allocation percentages in the application. See "Determining the
Policy Value," page 19.
The Net Premium allocation percentages specified in the application will
apply to subsequent premiums until you change them. You can change the
allocation percentages at any time, provided they equal 100% and each is a
whole number, by sending written notice to our Office. The change will apply to
all premiums received with or after our receipt of your notice.
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CREDITING PREMIUMS
The initial Net Premium will be credited to the Policy as of the Valuation
Date the first premium is received at our office. A planned premium or
unplanned premium not requiring additional underwriting will be credited to the
Policy and the resulting Net Premium will be invested as requested on the
Valuation Date the premium was received by our Office. However, any premium
requiring additional underwriting will be allocated to the Money Market
Subaccount until underwriting has been completed and the premium has been
accepted. When accepted, the Policy Value in the Money Market Subaccount
attributable to the resulting Net Premium will be credited to the Policy and
allocated to the Subaccounts and Fixed Account as requested. If an additional
premium is rejected, we will return the premium, without any adjustment for
investment experience.
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TRANSFERS
You may transfer Policy Value among the Subaccounts and Fixed Account subject
to the following rules, some of which depend on whether Policy Value is to be
transferred from a Subaccount or the Fixed Account. Transfers to or from a
Subaccount will be based on values at the end of the Valuation Period in which
the transfer request is received at our Office. You may request transfers by
calling our Office. The Company will not be liable for following transfer
instructions communicated by telephone that we reasonably believe to be
genuine. We require certain identifying information to process a telephone
transfer.
Transfers may not be requested until the end of the free-look period (see
page 12). A transfer will take effect on the date the request is received at
our Office. We may, however, defer transfers under the same conditions that we
may delay payment of proceeds. See "When Proceeds are Paid," page 28. There is
no limit on the number of transfers that may be made. However, after 12
transfers have been made during a Policy Year, we reserve the right to impose a
$10 transfer charge on subsequent transfers. No transfer charge will be made if
the Specified Amount exceeds $4,999,999. See "Transfer Charge," page 17.
SUBACCOUNT TRANSFER RULES. Transfers among Subaccounts and from
Subaccounts to the Fixed Account may be made at any time. The minimum
amount of Policy Value that may be transferred from a Subaccount is $250
or, if less, the full amount held in the Subaccount. If less than the full
amount of Policy Value in a Subaccount is being transferred from the
Subaccount, the amount remaining must be at least $250.
FIXED ACCOUNT TRANSFER RULES. Policy Value held in the Fixed Account may
be transferred to a Subaccount or Subaccounts only during the 30-day period
following the end of each Policy Year. The amount transferred must be at
least $250, or if less, the Policy Value held in the Fixed Account. If the
amount transferred is less than the Policy Value then held in the Fixed
Account, at least $250 must remain in the Fixed Account. See "Deductions,
Surrenders and Transfers from the Fixed Account," page 16, for additional
rules and limits for the Fixed Account.
The transfer rules described above do not apply to transfers made under a
dollar cost averaging or asset rebalancing program.
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DOLLAR COST AVERAGING PROGRAM
You may elect a dollar cost averaging program for the allocation of your
Policy Value among the Subaccounts and the Fixed Account ("accounts"). A dollar
cost averaging program allows you to authorize in advance monthly transfers of
set dollar amounts from the Money Market Subaccount to one or more other
accounts.
The main objective of dollar cost averaging is to shield investments from
short term price fluctuations. Since the same dollar amount is transferred to
selected accounts each month, more accumulation units are purchased in a
Subaccount when their value is low, and fewer accumulation units are purchased
when their value is high. As a result, a lower than average cost of purchasing
accumulation units may be achieved over the long term. This plan of investing
allows Owners to take advantage of investment fluctuations, but does not assure
a profit or protect against a loss in declining markets.
SELECTING DOLLAR COST AVERAGING. You may select a dollar cost averaging
program when you apply for the Policy or at a later date by contacting our Home
Office. You specify the accounts to which amounts will be transferred and the
percentage to be allocated to each Account. To begin a program, the planned
premium for that year must be $600 and the amount to be transferred each month
must be at least $50.
OPERATION OF THE PROGRAM. Transfers will be made on the 15th of each month.
Transfers will continue until the earliest of the following:
. We receive a written or telephone request to stop making transfers.
. There no longer is sufficient Policy Value in the Money Market Subaccount
to make the specified transfer.
. The Policy is in a grace period.
. We receive notice that the last surviving Insured has died.
Transfers under a dollar cost averaging program are not counted for purposes
of the transfer rules discussed above.
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ASSET REBALANCING
You may elect an asset rebalancing program for your Policy Value. Policy
Value allocated to the accounts can be expected to increase or decrease at
different rates. An asset rebalancing program automatically reallocates your
Policy Value among the accounts each quarter to return the allocation to the
original allocation percentages you specify. Asset rebalancing is intended to
transfer Policy Value from those accounts that have increased in value to those
that have declined, or not increased as much, in value. Over time, this method
of investing may help an Owner "buy low and sell high," although there can be
no assurance that this objective will be achieved. Asset rebalancing does not
guarantee profits, nor does it assure that an Owner will not have losses.
SELECTING ASSET REBALANCING. You may select an asset rebalancing program when
you apply for the Policy or at a later date by contacting our Home Office. You
specify the accounts to be included in the program, and the percentage of
Policy Value to be allocated to each specified account. Each allocation
percentage must be a whole number. You can elect to have your entire Policy
Value rebalanced among the specified accounts each quarter, or limit the
program to the Policy Value in specified accounts on each rebalancing date
(e.g., to restore a 60/40 ratio for Policy Value in the Value Equity Subaccount
and Quality Bond Subaccount on each rebalancing date). The minimum Policy Value
to start an asset rebalancing program is $1,000. If a dollar cost averaging
program is in effect, Policy Value in the Money Market Subaccount may not be
included in an asset rebalancing program.
OPERATION OF THE PROGRAM. Effective on the last day of each calendar quarter,
we will transfer Policy Value among the accounts to the extent necessary to
return the allocation to your specifications. Asset rebalancing will continue
until we receive a written or telephone request at our Home Office to
terminate.
Transfers made under an asset rebalancing program are not counted for
purposes of the transfer rules described above.
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FIXED ACCOUNT
BECAUSE OF EXEMPTIVE AND EXCLUSIONARY PROVISIONS, INTERESTS IN THE FIXED
ACCOUNT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 NOR HAS THE
FIXED ACCOUNT BEEN REGISTERED AS AN INVESTMENT COMPANY UNDER THE INVESTMENT
COMPANY ACT OF 1940. ACCORDINGLY, NEITHER THE FIXED ACCOUNT NOR ANY INTERESTS
THEREIN ARE SUBJECT TO THE PROVISIONS OF THESE ACTS AND, AS A RESULT, THE STAFF
OF THE SECURITIES AND EXCHANGE COMMISSION HAS NOT REVIEWED THE DISCLOSURE IN
THIS PROSPECTUS RELATING TO THE FIXED ACCOUNT. THE DISCLOSURE REGARDING THE
FIXED ACCOUNT MAY, HOWEVER, BE SUBJECT TO CERTAIN GENERALLY APPLICABLE
PROVISIONS OF THE FEDERAL SECURITIES LAWS RELATING TO THE ACCURACY AND
COMPLETENESS OF STATEMENTS MADE IN PROSPECTUSES.
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FIXED ACCOUNT
The Fixed Account consists of assets owned by Penn Mutual with respect to the
Policies, other than those held in the Separate Account. It is part of our
general account assets. Our general account assets are used to support our
insurance and annuity obligations other than those funded by separate accounts.
Subject to applicable law, we have sole discretion over the investment of the
assets of the Fixed Account. The Policy Loan Account is part of the Fixed
Account.
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INTEREST CREDITED ON POLICY VALUE IN THE FIXED ACCOUNT
Net Premiums allocated to the Fixed Account and Policy Value transferred from
the Subaccounts to the Fixed Account are credited to the Fixed Account Value.
The Fixed Account Value also includes the portion of Policy Value transferred
to the Policy Loan Account as collateral for policy loans. We will credit
interest on these amounts at rates we determine in our sole discretion, but in
no event will interest credited on these amounts be less than an effective rate
of at least 4% per year, compounded annually.
However, if at the time of an allocation or transfer to the Fixed Account, we
are crediting a rate of interest higher than 4%, the higher rate will apply to
the amount from the date of its allocation or transfer to the Fixed Account
through to the end of the twelve-month period beginning on the first day of the
calendar month in which the allocation or transfer was made. If a higher rate
of interest is credited, different rates of interest may apply to amounts
allocated or transferred at different times, and different rates of interest
may apply to amounts held in a Policy Loan Account than to the remaining
portion of Policy Value held in the Fixed Account. ANY INTEREST CREDITED ON
POLICY VALUE IN THE FIXED ACCOUNT IN EXCESS OF THE GUARANTEED MINIMUM RATE OF
4% PER YEAR WILL BE DETERMINED IN OUR SOLE DISCRETION.
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CALCULATING FIXED ACCOUNT VALUE
The Fixed Account Value is calculated daily. See "Fixed Account Value," page
19.
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DEDUCTIONS, SURRENDERS AND TRANSFERS FROM THE FIXED ACCOUNT
Amounts allocated to the Fixed Account at different times, whether from Net
Premiums or transfers, may be credited with different rates of interest.
Whenever a charge is deducted from Policy Value in the Fixed Account, or an
amount is withdrawn from the Policy Value in the Fixed Account to satisfy a
partial surrender, transfer or policy loan request, the charge or withdrawal
will be taken first from the amount most recently allocated to the Fixed
Account, then the amount next most recently allocated, and so forth. See page
14 for limits and restrictions on transfers of Policy Value from the Fixed
Account.
If there is any Policy Value in the Policy Loan Account, it is not available
for transfers, partial surrenders or policy loans, nor are any charges deducted
from this portion of Policy Value. Amounts are transferred to or from the
Policy Loan Account only when policy loans are taken or repayments made. If an
amount is transferred from the Policy Loan Account to the remaining portion of
the Fixed Account Value, it will be treated as a new allocation to the Fixed
Account and will be credited with interest at the rate then in effect for Fixed
Account allocations. See "Policy Loan Account," page 21.
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PAYMENTS FROM THE FIXED ACCOUNT
We may defer payment of proceeds from the Fixed Account for a partial
surrender, full surrender or policy loan request for up to six months from the
date we receive the written request. However, we will not defer payment of a
partial surrender or policy loan requested to pay a premium due on a Penn
Mutual policy. If a payment from the Fixed Account is deferred for 30 days or
more, it will bear interest at a rate of 3% per year compounded annually while
it is deferred.
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CHARGES AND DEDUCTIONS
- --------------------------------------------------------------------------------
PREMIUM CHARGE
We deduct a charge from each premium. This charge is 7.5% of premiums and is
deducted from a premium before allocating the resulting Net Premium to the
Policy Value. It consists of a 2.5% charge for premium taxes, with the
remaining 5.0% a sales charge. An additional sales charge is deducted on
surrender of a Policy during the first 16 Policy Years. See "Surrender Charge,"
page 18.
The 2.5% premium tax charge reimburses us for state premium taxes associated
with the Policies. We expect to pay state premium taxes at an average rate for
all states of approximately 2.5% of premiums.
The 5.0% sales charge partially compensates us for the expenses of selling
and distributing the Policies, including paying sales commissions, printing
prospectuses, preparing sales literature and paying for other promotional
activities. We may reduce the sales charge portion of the premium charge, and
currently, the sales charge is reduced to 3.0% (corresponding to a total
premium charge of 5.5%) of premiums received after the first 15 Policy Years.
We will notify you before your fifteenth Policy Year if the sales charge on
your Policy will remain at 5.0% after your fifteenth Policy Year.
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DAILY MORTALITY AND EXPENSE RISK CHARGE
We deduct a daily charge from assets in the Subaccounts attributable to the
Policies. This charge does not apply to Fixed Account Value. The charge is at
an annual rate of 0.90% of assets. Currently, we reduce the charge to 0.60%
after the fifteenth Policy Year. We will notify you if we change our intention
to reduce the charge after the fifteenth Policy Year. We may realize a profit
from this charge.
The mortality risk we assume is that the Insureds on the Policies may die
sooner than anticipated and that therefore Penn Mutual will pay an aggregate
amount of death benefits greater than anticipated. The expense risk we assume
is that expenses incurred in issuing and administering the Policies and the
Separate Account will exceed the amounts realized from the administrative
charges assessed against the Policies.
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MONTHLY DEDUCTION
On the Issue Date and each Monthly Anniversary, we deduct the Monthly
Deduction from the Policy Value. The amount deducted on the Issue Date is for
the number of policy months that have elapsed since the Policy Date. The
Monthly Deduction consists of (1) insurance charges ("Cost of Insurance
Charge"), (2) administrative charges (the "Monthly Expense Charge"), and (3)
any charges for additional benefits added by supplemental agreement to a Policy
("Supplemental Benefit Charges"), as described below. The Monthly Deduction is
deducted from the Subaccounts and the Fixed Account pro rata on the basis of
the portion of Policy Value in each account. See "Deductions, Surrenders and
Transfers from the Fixed Account," page 16, for applicable rules.
16
<PAGE>
COST OF INSURANCE CHARGE. This charge compensates us for providing insurance
coverage. The charge depends on a number of variables and therefore will vary
from Policy to Policy and from Monthly Anniversary to Monthly Anniversary. For
any Policy the cost of insurance on a Monthly Anniversary is calculated by
multiplying (a) the base cost of insurance rate for the Insureds by (b) the
net amount at risk under the Policy for that Monthly Anniversary.
The net amount at risk for a Monthly Anniversary is the difference between
the Basic Death Benefit (see page 19) for a Policy (as adjusted to take into
account assumed monthly earnings at an annual rate of 4%) and the Policy
Value, as calculated on that Monthly Anniversary before the Monthly Deduction
is taken.
The base cost of insurance rate for a Policy is based on the Policy Year and
on the Attained Ages, sexes and rate class of the Insureds, and therefore
varies from time to time. We place the Insureds in a rate class when we issue
the Policy, based on our underwriting of the application. We currently place
Insureds in the following rate classes, based on our underwriting: a smoker or
nonsmoker standard rate class, a preferred underwriting class, or a rate class
involving a higher mortality risk (a "substandard class").
We guarantee that the cost of insurance rates used to calculate the monthly
cost of insurance charge will not exceed the maximum cost of insurance rates
set forth in the Policies. The guaranteed rates for standard classes are based
on the 1980 Commissioner's Standard Ordinary Mortality Tables, Age Nearest
Birthday ("1980 CSO Tables"). The guaranteed rates for substandard classes are
based on multiples or additives of the 1980 CSO Tables. Our current cost of
insurance rates may be less than the guaranteed rates. Our current cost of
insurance rates will be determined based on our expectations as to future
mortality, investment, expense and persistency experience, and may change from
time to time. Cost of insurance rates (whether guaranteed or current) for
Insureds in a nonsmoker standard class are lower than guaranteed rates for
Insureds of the same age and sex in a smoker standard class. Cost of insurance
rates (whether guaranteed or current) for Insureds in a nonsmoker or smoker
standard class are generally lower than guaranteed rates for Insureds of the
same age and sex and smoking status in a substandard class.
LEGAL CONSIDERATIONS RELATING TO SEX-DISTINCT PREMIUMS AND BENEFITS.
Mortality tables for the Policies generally distinguish between males and
females. Thus, premiums and benefits under Policies covering males and females
of the same age will generally differ. We do, however, also offer Policies
based on unisex mortality tables if required by state law. Employers and
employee organizations considering purchase of a Policy should consult their
legal advisors to determine whether purchase of a Policy based on sex-distinct
actuarial tables is consistent with Title VII of the Civil Rights Act of 1964
or other applicable law. Upon request, we may offer Policies with unisex
mortality tables to such prospective purchasers.
MONTHLY EXPENSE CHARGE. This charge compensates us for administrative
expenses associated with the Policies and the Separate Account. These expenses
relate to premium billing and collection, recordkeeping, processing of death
benefit claims, Policy loans and Policy changes, reporting and overhead costs,
processing applications and establishing Policy records. The Monthly Expense
Charge is the aggregate of the following:
. a flat charge of $15.00 per month (currently only $5.00 per month after
the first Policy Year; we will notify you before it is increased); and
. for the first 12 policy months after the Policy Date, a charge based on
the Initial Specified Amount ($0.20 per $1,000 of Initial Specified
Amount per month).
Except for the monthly charge (which is reduced after the first Policy Year
but may be later increased to $15.00), these charges are guaranteed not to
increase over the life of the Policy. We do not anticipate making any profit
on the Monthly Expense Charge.
SUPPLEMENTAL BENEFIT CHARGES. See "Supplemental Benefits," page 29.
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TRANSFER CHARGE
We reserve the right to impose a $10 transfer charge on any transfer of
Policy Value among the Subaccounts and/or Fixed Account in excess of the 12
free transfers permitted each Policy Year. We will notify you before imposing
the charge. No transfer charge will be made if the Specified Amount exceeds
$4,999,999. If the charge is imposed, it will be deducted from the amount
requested to be transferred before allocation to the new account(s). If an
amount is being transferred from more than one account, the transfer charge
will be deducted proportionately from the amount being transferred from each
account. This charge, if imposed, will reimburse us for administrative
expenses incurred in effecting transfers. We do not anticipate making any
profit on this charge.
17
<PAGE>
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SURRENDER CHARGE
If the Policy is surrendered during the first 16 Policy Years, we will
deduct a surrender charge in calculating the surrender proceeds payable. The
surrender charge consists of a sales charge component and administrative
charge component. The surrender charge is determined by the following formula:
the sum of (a) plus (b), multiplied by (c) where:
(a) = 25% of premiums paid on the Policy, up to the Surrender Charge
Premium (described below);
(b) = an administrative charge based on the Initial Specified Amount and
the younger Insured's Attained Age on the Policy Date (ranging from
$6 at Attained Age 20 to $14 at Attained Age 60 and over, per $1,000
of Initial Specified Amount--see Appendix B); and
(c) = the applicable surrender factor for the Policy Year during which the
surrender is made (see table below).
<TABLE>
<CAPTION>
SURRENDER FACTOR
SURRENDER DURING POLICY YEAR APPLIED TO (C) IN FORMULA
----------------------------------------------------------------------------
<S> <C>
1st through 7th 1.00
----------------------------------------------------------------------------
8th .90
----------------------------------------------------------------------------
9th .80
----------------------------------------------------------------------------
10th .70
----------------------------------------------------------------------------
11th .60
----------------------------------------------------------------------------
12th .50
----------------------------------------------------------------------------
13th .40
----------------------------------------------------------------------------
14th .30
----------------------------------------------------------------------------
15th .20
----------------------------------------------------------------------------
16th .10
----------------------------------------------------------------------------
17th and later 0
----------------------------------------------------------------------------
</TABLE>
Under this formula, the surrender charge declines by 10% each Policy Year
after the seventh, to $0 by the 17th Policy Year so that, after the 16th
Policy Year, there is no surrender charge. For Policies issued to New York
residents, see Appendix D. The Surrender Charge Premium is calculated
separately for each Policy. Sample surrender charge premiums are set forth in
Appendix B.
The surrender charge consists of a sales charge component and an
administrative charge component. The sales charge component is to reimburse us
for some of the expenses incurred in the distribution of the Policies. We also
deduct a sales charge from each premium. See "Premium Charge," page 16. The
sales charge component of the surrender charge, together with the sales charge
included in the premium charge, may be insufficient to recover distribution
expenses related to the sale of the Policies. Unrecovered expenses are borne
by our general assets which may include profits, if any, from the mortality
and expense risk charge. See "Daily Mortality and Expense Risk Charge," page
16.
The administrative charge component of the surrender charge is designed to
cover the administrative expenses associated with underwriting and issuing the
Policy, including the costs of processing applications, conducting medical
exams, determining insurability and the Insureds' rate class, and establishing
Policy records, as well as the administrative costs of processing surrender
requests. We do not anticipate making any profit on the administrative charge
component of the surrender charge.
- -------------------------------------------------------------------------------
PARTIAL SURRENDER CHARGE
We will deduct an administrative charge upon a partial surrender. This
charge is the lesser of 2% of the amount surrendered or $25. This charge will
be deducted from the Policy Value in addition to the amount requested to be
surrendered and will be considered to be part of the partial surrender amount.
See page 13 for rules for allocating the deduction. We do not anticipate
making a profit on this charge.
- -------------------------------------------------------------------------------
FUND EXPENSES
The value of the net assets of the Separate Account reflect the investment
advisory fees and other expenses incurred by the Funds. See the prospectuses
for Penn Series, AMT, American Century Variable Portfolios, VIP Fund, VIP Fund
II and Morgan Stanley.
18
<PAGE>
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HOW YOUR POLICY VALUES VARY
There is no guaranteed minimum Policy Value or Net Cash Surrender Value. These
values will vary with the investment experience of the Subaccounts and/or the
daily crediting of interest in the Fixed Account, and will depend on the
allocation of Policy Value. If the Net Cash Surrender Value on a Monthly
Anniversary is less than the amount of the Monthly Deduction to be deducted on
that date (see page 16) and the Five-Year Guarantee is not then in effect, the
Policy will be in default and a grace period will begin. See "Five-Year
Guarantee," page 13, and "Grace Period," page 13.
- --------------------------------------------------------------------------------
DETERMINING THE POLICY VALUE
On the Policy Date the Policy Value is equal to the initial Net Premium. If
the Policy Date and the Issue Date are the same day, the Policy Value is equal
to the initial Net Premium, less the Monthly Deduction. On each Valuation Date
thereafter, the Policy Value is the aggregate of the Variable Accumulation
Values in the Subaccounts and the Fixed Account Value credited to the Policy.
The Policy Value will vary to reflect the performance of the Subaccounts to
which amounts have been allocated, interest credited on amounts allocated to
the Fixed Account, charges, transfers, withdrawals, policy loans and policy
loan repayments.
VARIABLE ACCUMULATION VALUES. When you allocate an amount to a Subaccount,
either by Net Premium allocation or transfer of Policy Value, your Policy is
credited with accumulation units in that Subaccount. The number of accumulation
units is determined by dividing the amount allocated to the Subaccount by the
Subaccount's accumulation unit value for the Valuation Date when the allocation
is effected.
The number of Subaccount accumulation units credited to your Policy will
increase when Net Premiums are allocated to the Subaccount, amounts are
transferred to the Subaccount and loan repayments are credited to the
Subaccount. The number of Subaccount accumulation units credited to a Policy
will decrease when the allocated portion of the Monthly Deduction is taken from
the Subaccount, a policy loan is taken from the Subaccount, an amount is
transferred from the Subaccount, or a partial surrender, including the partial
surrender charge, is taken from the Subaccount.
ACCUMULATION UNIT VALUES. A Subaccount's accumulation unit value varies to
reflect the investment experience of the underlying Fund, and may increase or
decrease from one Valuation Date to the next. The accumulation unit value for
each Subaccount was arbitrarily set at $10 when the Subaccount was established.
For each Valuation Period after the date of establishment, the accumulation
unit value is determined by multiplying the value of an accumulation unit for a
Subaccount for the prior valuation period by the net investment factor for the
Subaccount for the current valuation period.
NET INVESTMENT FACTOR. The net investment factor is an index used to measure
the investment performance of a Subaccount from one Valuation Period to the
next. It is based on the change in net asset value of the Fund shares held by
the Subaccount, and reflects any dividend or capital gain distributions on Fund
shares and the deduction of the daily mortality and expense risk charge (see
page 16).
FIXED ACCOUNT VALUE. On any Valuation Date, the Fixed Account Value of a
Policy is the total of all Net Premiums allocated to the Fixed Account, plus
any amounts transferred to the Fixed Account, plus interest credited on such
Net Premiums and transferred amounts, less the amount of any transfers from the
Fixed Account, less the amount of any partial surrenders, including the partial
surrender charges, taken from the Fixed Account, and less the pro rata portion
of the Monthly Deduction deducted from the Fixed Account. If there have been
any policy loans, the Fixed Account Value is further adjusted to reflect the
amount in the Policy Loan Account held in the Fixed Account, including
transfers to and from the Policy Loan Account as loans are taken and repayments
are made, and interest credited on the Policy Loan Account.
- --------------------------------------------------------------------------------
NET POLICY VALUE
The Net Policy Value on a Valuation Date is the Policy Value less
Indebtedness on that date.
- --------------------------------------------------------------------------------
CASH SURRENDER VALUE
The Cash Surrender Value on a Valuation Date is the Policy Value reduced by
any surrender charge that would be assessed if the Policy were surrendered on
that date. The Cash Surrender Value is used to calculate the Loan Value and to
determine whether Indebtedness is excessive (see page 21). The Loan Value is
90% of the Cash Surrender Value.
19
<PAGE>
- --------------------------------------------------------------------------------
NET CASH SURRENDER VALUE
The Net Cash Surrender Value on a Valuation Date is equal to the Net Policy
Value reduced by any surrender charge that would be imposed if the Policy were
surrendered on that date. The Net Cash Surrender Value is used to calculate the
amount available for partial surrenders. It is the amount received upon a full
surrender of the Policy.
- --------------------------------------------------------------------------------
DEATH BENEFIT AND CHANGES IN SPECIFIED AMOUNT
As long as the Policy remains in force, we will pay the Death Benefit upon
receipt at our Office of satisfactory proof of the deaths of both Insureds. The
Death Benefit will be paid in a lump sum generally within seven days after
receipt of such proof (see "When Proceeds Are Paid," page 28) or, if elected,
under a payment option (see "Payment Options," page 22). The Death Benefit will
be paid to the Beneficiary. See "Selecting and Changing the Beneficiary," page
21.
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AMOUNT OF DEATH BENEFIT
The Death Benefit is equal to the sum of the Basic Death Benefit on the date
of the last surviving Insured's death, plus any dividend payable on that date
(see "Dividends," page 28), plus any supplemental benefits provided by rider,
minus any Indebtedness on that date and, if the date of death occurred during a
grace period, minus the past due Monthly Deductions. Under certain
circumstances, the amount of the Death Benefit may be further adjusted. See
"Incontestability," "Suicide Exclusion" and "Misstatement of Age or Sex," page
28.
If part or all of the Death Benefit is paid in one sum, Penn Mutual will pay
interest on this sum from the date of the last surviving Insured's death to the
date of payment. We determine the interest rate, but it will not be less than a
rate of 3% per year compounded annually.
- --------------------------------------------------------------------------------
BASIC DEATH BENEFIT AND SPECIFIED AMOUNT OPTIONS
The Owner may choose one of two Specified Amount Options, which will
determine the Basic Death Benefit. Under Option 1, the Basic Death Benefit is
the greater of (a) the Specified Amount or (b) the Policy Value on the date of
the last surviving Insured's death, multiplied by the applicable net single
premium factor (described below). Under Option 2, the Basic Death Benefit is
the greater of (a) the Specified Amount plus the Policy Value on the date of
the last surviving Insured's death, or (b) the Policy Value on that date
multiplied by the applicable net single premium factor.
If investment performance is favorable the amount of the Basic Death Benefit
may increase. However, under Option 1, the Basic Death Benefit ordinarily will
not change for several years to reflect any favorable investment performance
and may not change at all, whereas under Option 2, the Basic Death Benefit will
vary directly with the investment performance of the Policy Value. To see how
and when investment performance may begin to affect the Basic Death Benefit,
please see the illustrations beginning on page 23.
Net single premium factors are based on the Insureds' sexes and rate classes
and the attained ages on the date of calculation. The factor decreases each
Policy Anniversary as the Insureds' ages increase. A table of net single
premium factors as of each Policy Anniversary is included in the Policy. A
table showing illustrative net single premium factors is included in Appendix
C.
- --------------------------------------------------------------------------------
SPECIFIED AMOUNT
The Initial Specified Amount is set at the time the Policy is issued. You may
decrease the Initial Specified Amount from time to time, as discussed below.
You also may change the Specified Amount Option, as discussed below.
- --------------------------------------------------------------------------------
CHANGES IN SPECIFIED AMOUNT OPTION
You may change the Specified Amount Option on your Policy subject to the
following rules. After any change, the Specified Amount must be at least
$200,000. No more than one change in the Specified Amount Option may be made in
any Policy Year and no change may be made during the first Policy Year. The
effective date of the change will be the Monthly Anniversary that coincides
with or next follows the Valuation Date when we receive the request for the
change. If you request a change from Option 1 to Option 2, we may require
satisfactory evidence of insurability. If the evidence of insurability
indicates a different rate class for the Insureds, the requested change will
not be allowed.
20
<PAGE>
When a change from Option 1 to Option 2 is made, the Specified Amount after
the change is effected will be equal to the Specified Amount before the change
less the Policy Value on the effective date of the change. When a change from
Option 2 to Option 1 is made, the Specified Amount after the change will be
equal to the Specified Amount before the change is effected plus the Policy
Value on the effective date of the change.
- --------------------------------------------------------------------------------
CHANGES IN SPECIFIED AMOUNT
After the first Policy Year, you may request a decrease in the Specified
Amount, subject to the following conditions. No change will be permitted that
would result in your Policy's Death Benefit not being excludable from gross
income due to not satisfying the requirements of Section 7702 of the Internal
Revenue Code.
Any decrease in the Specified Amount must be at least $10,000, and the
Specified Amount after the decrease must be at least $200,000. A decrease in
Specified Amount will become effective on the Monthly Anniversary that
coincides with or next follows our receipt of a request at our Office.
The Specified Amount may increase as a result of a change in Specified Amount
Option. See "Change in Specified Amount Option," above for applicable rules.
- --------------------------------------------------------------------------------
SELECTING AND CHANGING THE BENEFICIARY
You select a Beneficiary in your application. You may later change the
Beneficiary in accordance with the terms of the Policy. If there is no
surviving Beneficiary when a death benefit is payable, the Owner (or the
Owner's estate) will be the Beneficiary.
- --------------------------------------------------------------------------------
CASH BENEFITS
- --------------------------------------------------------------------------------
POLICY LOANS
You may borrow up to the Loan Value of your Policy at any time by submitting
a written request to our Office. Policy loans will be processed as of the date
your written request is received and loan proceeds generally will be sent to
you within seven days. See "When Proceeds Are Paid," page 28, and "Payments
from the Fixed Account," page 16. The Loan Value is 90% of your Cash Surrender
Value. Outstanding policy loans reduce the amount of the Loan Value available
for new loans. Loans under a Policy classified as a modified endowment contract
may be subject to adverse tax consequences, including a 10% penalty. See
"Distributions from Policies Classified as Modified Endowment Contracts," page
30.
INTEREST. We will charge interest daily on any outstanding policy loan at an
annual rate of 5.0%. Interest is due and payable at the end of each Policy Year
while a policy loan is outstanding. If interest is not paid when due, the
amount of the interest is added to the loan and becomes part of the outstanding
policy loan.
INDEBTEDNESS. Unrepaid policy loans (including unpaid interest added to the
loan) plus accrued interest not yet due equals the Indebtedness.
LOAN REPAYMENT; EFFECT IF NOT REPAID. You may repay all or part of your
Indebtedness at any time while an Insured is living and the Policy is in force.
Loan repayments must be sent to our Office and will be credited as of the date
received. If the Death Benefit becomes payable while a policy loan is
outstanding, the Indebtedness will be deducted in calculating the Death
Benefit. If the Indebtedness exceeds the Cash Surrender Value on any Valuation
Date, the Policy will be in default. We will send you, and any assignee of
record, notice of the default. You will have a 61-day grace period to submit a
sufficient payment to avoid termination. The notice will specify the amount
that must be repaid to prevent termination. If your Policy terminates because
of excessive Indebtedness, it cannot be reinstated.
POLICY LOAN ACCOUNT. When a policy loan is made, an amount equal to the loan
proceeds is withdrawn from the Policy Value in the Subaccounts and Fixed
Account (other than in the Policy Loan Account). This withdrawal is made pro
rata on the basis of Policy Value in each account unless you direct a different
allocation when requesting the loan. The amount withdrawn is then transferred
to the Policy Loan Account in the Fixed Account and will become part of the
Fixed Account Value. Conversely, when a loan is repaid, an amount equal to the
repayment will be transferred from the Policy Loan Account and allocated to the
Subaccounts and Fixed Account as you direct when submitting the repayment. If
you provide no direction, the amount will be allocated in accordance with your
then effective Net Premium allocation percentages. Thus, a loan or loan
repayment will have no immediate effect on the Policy Value, but other Policy
Values, such as the Net Policy Value and Net Cash Surrender Value, will be
reduced or increased immediately by the amount transferred to or from the
Policy Loan Account.
The amount in the Policy Loan Account will be credited with interest at a
minimum guaranteed annual rate of 4.0%. We may in our discretion credit
interest on this amount at a rate greater than 4%. Thus, the maximum net cost
of a loan is 1.0% per
21
<PAGE>
year (the difference between the rate of interest we charge on Policy loans and
the amount we credit on the equivalent amount held in the Policy Loan Account).
We currently intend to credit 4.0% on the amount held in the Policy Loan
Account during the first 10 Policy Years (a net loan cost of 1.0%), and 4.75%
after the first 10 Policy Years (a net loan cost of 0.25%).
EFFECT OF POLICY LOAN. A policy loan, whether or not repaid, will have a
permanent effect on the Death Benefit and Policy values because the investment
results of the Subaccounts of the Separate Account and current interest rates
credited on Policy Value in the Fixed Account will apply only to the non-loaned
portion of the Policy Value. The longer the loan is outstanding, the greater
the effect is likely to be. Depending on the investment results of the
Subaccounts or credited interest rates for the Fixed Account while the policy
loan is outstanding, the effect could be favorable or unfavorable. Policy loans
may increase the potential for lapse if investment results of the Subaccounts
are less than anticipated. Also, policy loans could, particularly if not
repaid, make it more likely than otherwise for a Policy to terminate. See "Tax
Considerations," page 29, for a discussion of adverse tax consequences if a
Policy lapses with policy loans outstanding.
- --------------------------------------------------------------------------------
SURRENDERING THE POLICY FOR NET CASH SURRENDER VALUE
You may surrender your Policy at any time for its Net Cash Surrender Value by
submitting a written request to our Office. We may require return of the
Policy. A surrender charge may apply. See "Surrender Charge," page 18. A
surrender request will be processed as of the date your written request and all
required documents are received and generally will be paid within seven days.
See "When Proceeds are Paid," page 28 and "Payment from the Fixed Account, page
16. The Net Cash Surrender Value may be taken in one sum or it may be applied
to a payment option. See "Payment Options," page 22. Your Policy will terminate
and cease to be in force if it is surrendered for one sum. It cannot later be
reinstated.
- --------------------------------------------------------------------------------
PARTIAL SURRENDERS
You may make partial surrenders under your Policy subject to the following
conditions. You must submit a written request to our Office. The Net Cash
Surrender Value must exceed $1,000 after the partial surrender is deducted from
the Policy Value. No more than four partial surrenders may be made during a
Policy Year, and each partial surrender must be at least $250. During the first
five Policy Years, no partial surrender may be made that would reduce the
Specified Amount to less than $200,000. An administrative charge will be
assessed on a partial surrender. See "Partial Surrender Charge," page 18. This
charge will be deducted from your Policy Value along with the amount requested
to be withdrawn and will be considered part of the partial surrender (together,
the "partial surrender amount"). Policy values will be reduced by the partial
surrender amount.
When you request a partial surrender, you can direct how the partial
surrender amount will be deducted from your Policy Value in the Subaccounts and
the Fixed Account, provided that the minimum amount remaining in an account as
a result of the deduction is $250. If you provide no directions, the partial
surrender amount will be deducted from your Policy Value in the accounts on a
pro rata basis. See "Deductions, Surrenders and Transfers from the Fixed
Account," page 16. If Specified Amount Option 1 is in effect, the Specified
Amount will also be reduced by the partial surrender amount.
Partial surrender requests will be processed as of the date your written
request is received, and generally will be paid within seven days. See "When
Proceeds Are Paid," page 28, and "Payments from the Fixed Account," page 16.
- --------------------------------------------------------------------------------
MATURITY BENEFIT
The Maturity Date is the Policy Anniversary nearest the younger Insured's
100th birthday. If the Policy is still in force on the Maturity Date, the
Maturity Benefit will be paid to you. The Maturity Benefit is equal to the Net
Policy Value on the Maturity Date. Upon the written request of the Owner, this
policy will continue in force beyond the Maturity Date. Thereafter, the Death
Benefit will be the Net Policy Value.
- --------------------------------------------------------------------------------
PAYMENT OPTIONS
The Policy offers a wide variety of optional ways of receiving proceeds
payable under the Policy, such as on surrender, death or maturity, other than
in a lump sum. Any agent authorized to sell this Policy can explain these
options upon request. None of these options vary with the investment
performance of a separate account because they are all forms of fixed-benefit
annuities.
22
<PAGE>
- --------------------------------------------------------------------------------
ILLUSTRATIONS OF POLICY VALUES, NET CASH SURRENDER VALUES, DEATH BENEFITS AND
ACCUMULATED PREMIUMS
The following tables have been prepared to show how certain values under a
hypothetical Policy change with investment performance over an extended period
of time. The tables illustrate how Policy Values, Net Cash Surrender Values and
Death Benefits under a Policy covering two Insureds of given ages on the Issue
Date, would vary over time if planned premiums were paid annually and the
return on the assets in the selected Funds were a uniform gross annual rate of
0%, 6% and 12%. The values would be different from those shown if the returns
averaged 0%, 6% or 12% but fluctuated over and under those averages throughout
the years shown. The tables also show planned premiums accumulated at 5%
interest. The hypothetical investment rates of return are illustrative only and
should not be deemed a representation of past or future investment rates of
return. Actual rates of return for a particular Policy may be more or less than
the hypothetical investment rates of return and will depend on a number of
factors including the investment allocations made by an Owner, prevailing rates
and rates of inflation.
The tables reflect the fact that the net investment return on the assets held
in the Subaccounts is lower than the gross after tax return of the selected
Funds. The tables assume an average annual expense ratio of .85% of the average
daily net assets of the Funds available under the Policies. This average annual
expense ratio is based on the expense ratios of each of the Funds for the last
fiscal year. For information on Fund expenses, see the prospectuses for the
Funds accompanying this prospectus.
In addition, the tables also reflect the daily charge against Separate
Account assets attributable to the Policies for Penn Mutual's assumption of
mortality and expense risks, which is equivalent to an effective annual charge
of 0.90% of assets and currently is reduced to 0.60% of assets after the
fifteenth Policy Year. After deduction of Fund expenses and the mortality and
expense risk charge, the illustrated gross annual investment rates of return of
0%, 6% and 12% would correspond to approximate net annual rates of -1.75%,
4.25% and 10.25%, respectively, and -1.45%, 4.55% and 10.55%, respectively, at
current rates after the fifteenth Policy Year.
The tables also reflect the deduction of the Monthly Expense Charge and the
Monthly Cost of Insurance Charge for the hypothetical Insureds. Our current
cost of insurance charges and the higher guaranteed maximum cost of insurance
charges we have the contractual right to charge are reflected in separate
tables on each of the following pages. All the tables reflect the fact that no
charges for Federal or state income taxes are currently made against the
Separate Account and assume no Indebtedness or charges for supplemental
benefits.
The illustrations are based on our sex distinct rates for standard
nonsmokers. Upon request, we will furnish a comparable illustration based upon
the proposed Insureds' individual circumstances. Such illustrations may assume
different hypothetical rates of return than those illustrated in the following
tables.
23
<PAGE>
- -------------------------------------------------------------------------------
ILLUSTRATION OF POLICY VALUES
PENN MUTUAL LIFE INSURANCE COMPANY
MALE ISSUE AGE: 56 NON-SMOKER
FEMALE ISSUE AGE: 53 NON-SMOKER
$4,000 ANNUAL PREMIUM
$300,000 SPECIFIED AMOUNT
DEATH BENEFIT OPTION 1
USING GUARANTEED COST OF INSURANCE RATES
<TABLE>
<CAPTION>
0% HYPOTHETICAL 6% HYPOTHETICAL 12% HYPOTHETICAL
PREMIUMS GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN
ACCUMULATED ------------------------ ------------------------ -------------------------
END OF AT NET CASH NET CASH NET CASH
POLICY 5% INTEREST POLICY SURRENDER DEATH POLICY SURRENDER DEATH POLICY SURRENDER DEATH
YEAR PER YEAR VALUE VALUE BENEFIT VALUE VALUE BENEFIT VALUE VALUE BENEFIT
- ------ ----------- ------ --------- ------- ------ --------- ------- ------- --------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 4,200 2,730 0 300,000 2,923 0 300,000 3,116 0 300,000
2 8,610 6,096 1,502 300,000 6,675 2,081 300,000 7,278 2,684 300,000
3 13,241 9,365 4,771 300,000 10,548 5,954 300,000 11,828 7,234 300,000
4 18,103 12,532 7,938 300,000 14,540 9,946 300,000 16,797 12,203 300,000
5 23,208 15,590 10,996 300,000 18,648 14,053 300,000 22,220 17,626 300,000
6 28,568 18,532 13,938 300,000 22,867 18,272 300,000 28,137 23,543 300,000
7 34,196 21,348 16,754 300,000 27,191 22,597 300,000 34,588 29,993 300,000
8 40,106 24,027 19,892 300,000 31,612 27,477 300,000 41,615 37,480 300,000
9 46,312 26,551 22,876 300,000 36,116 32,441 300,000 49,265 45,589 300,000
10 52,827 28,901 25,685 300,000 40,687 37,471 300,000 57,584 54,368 300,000
15 90,630 37,016 36,097 300,000 63,637 62,719 300,000 111,261 110,342 300,000
20 138,877 34,976 34,976 300,000 83,160 83,160 300,000 193,687 193,687 314,644
25 200,454 9,515 9,515 300,000 88,169 88,169 300,000 316,457 316,457 450,111
30 279,043 0 0 0 51,021 51,021 300,000 487,837 487,837 625,547
</TABLE>
(1) Assumes that no policy loans have been made.
(2) Guaranteed values reflect guaranteed cost of insurance rates, a monthly
administrative charge of $15.00 per month, and a mortality and expense
risk charge of 0.90% of assets.
(3) Net investment returns are calculated as the hypothetical gross investment
returns less all charges and deductions shown in the prospectus.
(4) Assumes that the premium is paid at the beginning of each policy year.
Values would be different if the premiums are paid with a different
frequency or in different amounts.
- -------------------------------------------------------------------------------
THE HYPOTHETICAL INVESTMENT RATES OF RETURN SHOWN ABOVE AND ELSEWHERE IN THIS
PROSPECTUS ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF
PAST OR FUTURE INVESTMENT RATES OF RETURN. ACTUAL RATES OF RETURN MAY BE MORE
OR LESS THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS INCLUDING THE
INVESTMENT ALLOCATIONS MADE BY AN OWNER, PREVAILING RATES AND RATES OF
INFLATION. THE DEATH BENEFIT AND CASH VALUE FOR A POLICY WOULD BE DIFFERENT
FROM THOSE SHOWN IF THE ACTUAL RATES OF RETURN AVERAGED 0%, 6% OR 12% OVER A
PERIOD OF YEARS BUT ALSO FLUCTUATED ABOVE OR BELOW THOSE AVERAGES FOR
INDIVIDUAL POLICY YEARS. NO REPRESENTATION CAN BE MADE BY THE COMPANY OR THE
FUND THAT THESE HYPOTHETICAL RATES OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR
OR SUSTAINED OVER ANY PERIOD OF TIME.
24
<PAGE>
- -------------------------------------------------------------------------------
ILLUSTRATION OF POLICY VALUES
PENN MUTUAL LIFE INSURANCE COMPANY
MALE ISSUE AGE: 61 NON-SMOKER
FEMALE ISSUE AGE: 57 NON-SMOKER
$7,000 ANNUAL PREMIUM
$300,000 SPECIFIED AMOUNT
DEATH BENEFIT OPTION 1
USING GUARANTEED COST OF INSURANCE RATES
<TABLE>
<CAPTION>
0% HYPOTHETICAL 6% HYPOTHETICAL 12% HYPOTHETICAL
PREMIUMS GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN
ACCUMULATED ------------------------ ------------------------- ---------------------------
END OF AT NET CASH NET CASH NET CASH
POLICY 5% INTEREST POLICY SURRENDER DEATH POLICY SURRENDER DEATH POLICY SURRENDER DEATH
YEAR PER YEAR VALUE VALUE BENEFIT VALUE VALUE BENEFIT VALUE VALUE BENEFIT
- ------ ----------- ------ --------- ------- ------- --------- ------- ------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 7,350 5,442 595 300,000 5,800 954 300,000 6,159 1,313 300,000
2 15,068 11,438 6,591 300,000 12,518 7,672 300,000 13,642 8,796 300,000
3 23,171 17,254 12,408 300,000 19,444 14,598 300,000 21,813 16,967 300,000
4 31,679 22,879 18,033 300,000 26,575 21,729 300,000 30,731 25,885 300,000
5 40,613 28,300 23,454 300,000 33,903 29,057 300,000 40,459 35,612 300,000
6 49,994 33,500 28,654 300,000 41,419 36,572 300,000 51,063 46,217 300,000
7 59,844 38,456 33,610 300,000 49,106 44,260 300,000 62,617 57,771 300,000
8 70,186 43,141 38,780 300,000 56,948 52,586 300,000 75,201 70,840 300,000
9 81,045 47,529 43,652 300,000 64,925 61,048 300,000 88,911 85,034 300,000
10 92,448 51,585 48,193 300,000 73,018 69,625 300,000 103,853 100,460 300,000
15 158,602 65,452 64,483 300,000 114,409 113,440 300,000 202,296 201,326 337,194
20 243,035 61,209 61,209 300,000 154,109 154,109 300,000 349,220 349,220 506,958
25 350,794 16,945 16,945 300,000 187,284 187,284 300,000 555,909 555,909 724,442
30 488,326 0 0 0 208,656 208,656 300,000 836,815 836,815 1,007,898
</TABLE>
(1) Assumes that no policy loans have been made.
(2) Guaranteed values reflect guaranteed cost of insurance rates, a monthly
administrative charge of $15.00 per month, and a mortality and expense
risk charge of 0.90% of assets.
(3) Net investment returns are calculated as the hypothetical gross investment
returns less all charges and deductions shown in the prospectus.
(4) Assumes that the premium is paid at the beginning of each policy year.
Values would be different if the premiums are paid with a different
frequency or in different amounts.
- -------------------------------------------------------------------------------
THE HYPOTHETICAL INVESTMENT RATES OF RETURN SHOWN ABOVE AND ELSEWHERE IN THIS
PROSPECTUS ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF
PAST OR FUTURE INVESTMENT RATES OF RETURN. ACTUAL RATES OF RETURN MAY BE MORE
OR LESS THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS INCLUDING THE
INVESTMENT ALLOCATIONS MADE BY AN OWNER, PREVAILING RATES AND RATES OF
INFLATION. THE DEATH BENEFIT AND CASH VALUE FOR A POLICY WOULD BE DIFFERENT
FROM THOSE SHOWN IF THE ACTUAL RATES OF RETURN AVERAGED 0%, 6% OR 12% OVER A
PERIOD OF YEARS BUT ALSO FLUCTUATED ABOVE OR BELOW THOSE AVERAGES FOR
INDIVIDUAL POLICY YEARS. NO REPRESENTATION CAN BE MADE BY THE COMPANY OR THE
FUND THAT THESE HYPOTHETICAL RATES OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR
OR SUSTAINED OVER ANY PERIOD OF TIME.
25
<PAGE>
- -------------------------------------------------------------------------------
ILLUSTRATION OF POLICY VALUES
PENN MUTUAL LIFE INSURANCE COMPANY
MALE ISSUE AGE: 61 NON-SMOKER
FEMALE ISSUE AGE: 57 NON-SMOKER
$7,000 ANNUAL PREMIUM
$300,000 SPECIFIED AMOUNT
DEATH BENEFIT OPTION 1
USING CURRENT COST OF INSURANCE RATES
<TABLE>
<CAPTION>
0% HYPOTHETICAL 6% HYPOTHETICAL 12% HYPOTHETICAL
PREMIUMS GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN
ACCUMULATED ------------------------ ------------------------- -----------------------------
END OF AT NET CASH NET CASH NET CASH
POLICY 5% INTEREST POLICY SURRENDER DEATH POLICY SURRENDER DEATH POLICY SURRENDER DEATH
YEAR PER YEAR VALUE VALUE BENEFIT VALUE VALUE BENEFIT VALUE VALUE BENEFIT
- ------ ----------- ------ --------- ------- ------- --------- ------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 7,350 5,446 600 300,000 5,805 959 300,000 6,164 1,318 300,000
2 15,068 11,576 6,730 300,000 12,661 7,815 300,000 13,790 8,943 300,000
3 23,171 17,538 12,692 300,000 19,747 14,900 300,000 22,134 17,288 300,000
4 31,679 23,328 18,481 300,000 27,064 22,218 300,000 31,263 26,417 300,000
5 40,613 28,937 24,091 300,000 34,615 29,769 300,000 41,252 36,406 300,000
6 49,994 34,356 29,510 300,000 42,396 37,549 300,000 52,177 47,331 300,000
7 59,844 39,575 34,728 300,000 50,406 45,559 300,000 64,128 59,282 300,000
8 70,186 44,584 40,222 300,000 58,647 54,285 300,000 77,208 72,847 300,000
9 81,045 49,377 45,500 300,000 67,123 63,246 300,000 91,536 87,659 300,000
10 92,448 53,941 50,548 300,000 75,834 72,442 300,000 107,243 103,851 300,000
15 158,602 73,750 72,781 300,000 123,895 122,926 300,000 212,947 211,977 354,947
20 243,035 89,686 89,686 300,000 184,506 184,506 300,000 386,664 386,664 561,315
25 350,794 93,805 93,805 300,000 258,103 258,103 336,351 658,999 658,999 858,785
30 488,326 69,406 69,406 300,000 341,256 341,256 411,024 1,072,598 1,072,598 1,291,886
</TABLE>
(1) Assumes that no policy loans have been made.
(2) Current values reflect current cost of insurance rates, a monthly
administrative charge of $15.00 in year 1 and $5.00 thereafter, and a
mortality and expense risk charge of 0.90% of assets in years 1-15 and
0.60% thereafter.
(3) Net investment returns are calculated as the hypothetical gross investment
returns less all charges and deductions shown in the prospectus.
(4) Assumes that the premium is paid at the beginning of each policy year.
Values would be different if the premiums are paid with a different
frequency or in different amounts.
- -------------------------------------------------------------------------------
THE HYPOTHETICAL INVESTMENT RATES OF RETURN SHOWN ABOVE AND ELSEWHERE IN THIS
PROSPECTUS ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF
PAST OR FUTURE INVESTMENT RATES OF RETURN. ACTUAL RATES OF RETURN MAY BE MORE
OR LESS THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS INCLUDING THE
INVESTMENT ALLOCATIONS MADE BY AN OWNER, PREVAILING RATES AND RATES OF
INFLATION. THE DEATH BENEFIT AND CASH VALUE FOR A POLICY WOULD BE DIFFERENT
FROM THOSE SHOWN IF THE ACTUAL RATES OF RETURN AVERAGED 0%, 6% OR 12% OVER A
PERIOD OF YEARS BUT ALSO FLUCTUATED ABOVE OR BELOW THOSE AVERAGES FOR
INDIVIDUAL POLICY YEARS. NO REPRESENTATION CAN BE MADE BY THE COMPANY OR THE
FUND THAT THESE HYPOTHETICAL RATES OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR
OR SUSTAINED OVER ANY PERIOD OF TIME.
26
<PAGE>
- -------------------------------------------------------------------------------
ILLUSTRATION OF POLICY VALUES
PENN MUTUAL LIFE INSURANCE COMPANY
MALE ISSUE AGE: 56 NON-SMOKER
FEMALE ISSUE AGE: 53 NON-SMOKER
$4,000 ANNUAL PREMIUM
$300,000 SPECIFIED AMOUNT
DEATH BENEFIT OPTION 1
USING CURRENT COST OF INSURANCE RATES
<TABLE>
<CAPTION>
0% HYPOTHETICAL 6% HYPOTHETICAL 12% HYPOTHETICAL
PREMIUMS GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN
ACCUMULATED ------------------------ ------------------------- -------------------------
END OF AT NET CASH NET CASH NET CASH
POLICY 5% INTEREST POLICY SURRENDER DEATH POLICY SURRENDER DEATH POLICY SURRENDER DEATH
YEAR PER YEAR VALUE VALUE BENEFIT VALUE VALUE BENEFIT VALUE VALUE BENEFIT
- ------ ----------- ------ --------- ------- ------- --------- ------- ------- --------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 4,200 2,732 0 300,000 2,925 0 300,000 3,118 0 300,000
2 8,610 6,223 1,629 300,000 6,806 2,212 300,000 7,414 2,820 300,000
3 13,241 9,622 5,028 300,000 10,822 6,228 300,000 12,118 7,524 300,000
4 18,103 12,926 8,332 300,000 14,971 10,377 300,000 17,267 12,673 300,000
5 23,208 16,127 11,533 300,000 19,252 14,658 300,000 22,898 18,304 300,000
6 28,568 19,223 14,628 300,000 23,664 19,070 300,000 29,056 24,462 300,000
7 34,196 22,206 17,612 300,000 28,206 23,612 300,000 35,789 31,195 300,000
8 40,106 25,071 20,936 300,000 32,876 28,742 300,000 43,150 39,016 300,000
9 46,312 27,810 24,134 300,000 37,671 33,996 300,000 51,197 47,522 300,000
10 52,827 30,413 27,197 300,000 42,586 39,370 300,000 59,993 56,778 300,000
15 90,630 40,917 39,998 300,000 68,688 67,769 300,000 117,993 117,075 300,000
20 138,877 48,021 48,021 300,000 99,511 99,511 300,000 214,374 214,374 348,249
25 200,454 49,264 49,264 300,000 134,650 134,650 300,000 369,638 369,638 525,752
30 279,043 34,655 34,655 300,000 170,943 170,943 300,000 612,471 612,471 785,364
</TABLE>
(1) Assumes that no policy loans have been made.
(2) Current values reflect current cost of insurance rates, a monthly
administrative charge of $15.00 in year 1 and $5.00 thereafter, and a
mortality and expense risk charge of 0.90% of assets in years 1-15 and
0.60% thereafter.
(3) Net investment returns are calculated as the hypothetical gross investment
returns less all charges and deductions shown in the prospectus.
(4) Assumes that the premium is paid at the beginning of each policy year.
Values would be different if the premiums are paid with a different
frequency or in different amounts.
- -------------------------------------------------------------------------------
THE HYPOTHETICAL INVESTMENT RATES OF RETURN SHOWN ABOVE AND ELSEWHERE IN THIS
PROSPECTUS ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF
PAST OR FUTURE INVESTMENT RATES OF RETURN. ACTUAL RATES OF RETURN MAY BE MORE
OR LESS THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS INCLUDING THE
INVESTMENT ALLOCATIONS MADE BY AN OWNER, PREVAILING RATES AND RATES OF
INFLATION. THE DEATH BENEFIT AND CASH VALUE FOR A POLICY WOULD BE DIFFERENT
FROM THOSE SHOWN IF THE ACTUAL RATES OF RETURN AVERAGED 0%, 6% OR 12% OVER A
PERIOD OF YEARS BUT ALSO FLUCTUATED ABOVE OR BELOW THOSE AVERAGES FOR
INDIVIDUAL POLICY YEARS. NO REPRESENTATION CAN BE MADE BY THE COMPANY OR THE
FUND THAT THESE HYPOTHETICAL RATES OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR
OR SUSTAINED OVER ANY PERIOD OF TIME.
27
<PAGE>
- --------------------------------------------------------------------------------
OTHER POLICY BENEFITS AND PROVISIONS
- --------------------------------------------------------------------------------
RIGHT TO CONVERT TO A FIXED BENEFIT POLICY
At any time within the first 24 policy months, you may transfer Policy Value
in the Subaccounts to the Fixed Account and thereby convert your Policy to a
last survivor flexible premium adjustable non-variable life insurance policy.
Thereafter the benefits for your Policy will not vary with the investment
experience of a separate account. Premiums paid thereafter will be allocated
automatically to the Fixed Account. The conversion must be elected within 24
months from the Policy Date. No evidence of insurability will be required. The
Policy will provide the same amount of death benefit or the same net amount at
risk, whichever you elect, as was in effect immediately prior to the
conversion. All Indebtedness must be paid prior to the conversion.
- --------------------------------------------------------------------------------
DIVIDENDS
The Policies are participating policies in that they are eligible to
participate in Penn Mutual's surplus. However, we do not anticipate that any
dividends will be paid on the Policies. If dividends are paid, you will have
the option of having them added to your Policy Value or paid to you in cash.
- --------------------------------------------------------------------------------
INCONTESTABILITY
We will not contest the Policy with respect to each Insured after it has been
in force during that Insured's lifetime for two years from the Issue Date. Any
increase in the Death Benefit will be incontestable with respect to statements
made in the evidence of insurability for that change in Specified Amount Option
after the increase has been in force during the life of an Insured for two
years after the effective date of the increase.
- --------------------------------------------------------------------------------
SUICIDE EXCLUSION
If either Insured dies by suicide within two years after the Issue Date,
while sane or insane, the Death Benefit will be limited to the premiums paid
less any Indebtedness and any partial surrenders.
- --------------------------------------------------------------------------------
MISSTATEMENT OF AGE OR SEX
If either Insured's age or sex has been misstated in the Policy, the Death
Benefit under the Policy will be the amount which would have been provided by
the most recent Cost of Insurance Charge at the correct ages and sexes.
- --------------------------------------------------------------------------------
WHEN PROCEEDS ARE PAID
We will ordinarily pay any Death Benefit, loan proceeds or partial or full
surrender proceeds within seven days after receipt at our Office of all the
documents required for such a payment. Other than the Death Benefit, which is
determined as of the date of death, the amount will be determined as of the
date of receipt of required documents. However, we may delay making a payment
or processing a transfer request if (1) the disposal or valuation of the
Separate Account's assets is not reasonably practicable because the New York
Stock Exchange is closed for other than a regular holiday or weekend, trading
is restricted by the SEC, or the SEC declares that an emergency exists; or (2)
the SEC by order permits postponement of payment to protect Penn Mutual's
policy owners. See also "Payments from the Fixed Account," page 16.
- --------------------------------------------------------------------------------
REPORTS TO POLICY OWNERS
Each year you will be sent a report showing the current Policy values,
premiums paid and deductions made since the last report, any outstanding policy
loans, and any additional premiums permitted under your Policy. You will also
be sent an annual and a semi-annual report for the Separate Account and for
each Fund underlying a Subaccount to which you have allocated Policy Value, as
required by the 1940 Act. In addition, when you pay premiums (other than by
pre-authorized check), or if you take out a policy loan, transfer amounts among
the Accounts or make partial surrenders, you will receive a written
confirmation of these transactions.
28
<PAGE>
- --------------------------------------------------------------------------------
ASSIGNMENT
The Policy may be assigned in accordance with its terms on a form provided by
us. We will not be deemed to know of an assignment unless we receive a copy of
it at our Office. We assume no responsibility for the validity or sufficiency
of any assignment.
- --------------------------------------------------------------------------------
REINSTATEMENT
The Policy may be reinstated within five years after lapse, subject to
compliance with certain conditions, including the payment of a necessary
premium and submission of satisfactory evidence of insurability. See your
Policy for further information.
- --------------------------------------------------------------------------------
SUPPLEMENTAL BENEFITS
The following supplemental benefits are available and may be added to your
Policy. There are monthly charges for these benefits that are in addition to
the Cost of Insurance and Monthly Expense Charges described above. (See
"Monthly Deduction," page 16). If any of these benefits are added to your
Policy, monthly charges for the supplemental benefits will be deducted from
your Policy Value as part of the Monthly Deduction.
FLEXIBLE PERIOD SINGLE LIFE TERM RIDER - provides term insurance covering
the named insured for the designated period.
POLICY SPLIT OPTION - permits the policy to be split into two fixed
benefit (nonvariable) policies upon the issuance of a final divorce decree
relating to the two Insureds or a change in federal estate tax law that
results in the inability to defer estate taxes until the death of the last
surviving Insured.
ESTATE GROWTH BENEFIT - provides for automatic annual increase of 3% or
6% of the Initial Specified Amount.
CHANGE OF INSURED - permits a change in one insured so long as the new
insured has the same insurable relationship to the remaining insured as did
the insured being replaced.
SUPPLEMENTAL TERM INSURANCE - provides additional death benefit payable
on the death of the last surviving Insured if the death occurs during the
term of the Policy.
GUARANTEED CONTINUATION OF POLICY - guarantees that the Policy will
remain in force and a death benefit will be payable regardless of the
sufficiency of the net Cash Surrender Value.
Additional rules and limits apply to these supplemental benefits. All
supplemental benefits may not be available in your state. Please ask your
authorized Penn Mutual agent for further information or contact our Office.
- --------------------------------------------------------------------------------
FEDERAL INCOME TAX CONSIDERATIONS
- --------------------------------------------------------------------------------
INTRODUCTION
The following summary provides a general description of the Federal income
tax considerations associated with the Policy and does not purport to be
complete or to cover all situations. This discussion is not intended as tax
advice. Counsel or other competent tax advisors should be consulted for more
complete information. This discussion is based on Penn Mutual's understanding
of the present Federal income tax laws as they are currently interpreted by the
Internal Revenue Service (the "IRS"). No representation is made as to the
likelihood of continuation of the present Federal income tax laws or of the
current interpretations by the IRS.
- --------------------------------------------------------------------------------
TAX STATUS OF THE POLICY
In order to qualify as a life insurance contract for federal tax purposes,
the Policy must meet the definition of a life insurance contract which is set
forth in Section 7702 of the Internal Revenue Code of 1986, as amended (the
"Code"). The manner in which Section 7702 should be applied to certain features
of the Policy offered in this Prospectus is not directly addressed by Section
7702 or any guidance issued to date under Section 7702. Nevertheless, Penn
Mutual believes it is reasonable to conclude that the Policy will meet the
Section 7702 definition of a life insurance contract. In the absence of final
regulations or other pertinent interpretations of Section 7702, however, there
is necessarily some uncertainty as to whether a Policy will meet the statutory
life insurance contract definition, particularly if it insures a substandard
risk. If a Contract were determined not to be a life insurance contract for
purposes of Section 7702, such contract would not provide most of the tax
advantages normally provided by a life insurance contract.
29
<PAGE>
If it is subsequently determined that a Policy does not satisfy Section 7702,
Penn Mutual may take whatever steps are appropriate and reasonable to attempt
to cause such a Policy to comply with Section 7702. For these reasons, Penn
Mutual reserves the right to restrict Policy transactions as necessary to
attempt to qualify it as a life insurance contract under Section 7702.
Section 817(h) of the Code requires that the investments of each Subaccount
of the Separate Account must be "adequately diversified" in accordance with
Treasury regulations in order for the Policy to qualify as a life insurance
contract under Section 7702 of the Code (discussed above). The Separate
Account, through the Funds, intends to comply with the diversification
requirements prescribed in Treas. Reg. (S) 1.817-5, which affect how the Funds'
assets are to be invested. Penn Mutual believes that the Separate Account will
thus meet the diversification requirement, and Penn Mutual will monitor
continued compliance with this requirement.
The IRS has stated in published rulings that a variable contract owner will
be considered the owner of separate account assets if the contract owner
possesses incidents of ownership in those assets, such as the ability to
exercise investment control over the assets. In circumstances where the
variable contract owner is considered the owner of separate account assets,
income and gain from the assets would be includable in the variable contract
owner's gross income. In connection with the issuance of regulations on the
phrase "adequate diversification," the Treasury Department announced that
guidance would be given, by way of regulation or ruling, on the "extent to
which policyholders may direct their investments to particular subaccounts
without being treated as owners of underlying assets." As of the date of this
prospectus, no such guidance had been issued.
The following discussion assumes that the Policy will qualify as a life
insurance contract for Federal income tax purposes.
- --------------------------------------------------------------------------------
TAX TREATMENT OF POLICY BENEFITS
IN GENERAL. Penn Mutual believes that the proceeds and cash value increases
of a Policy should be treated in a manner consistent with a fixed-benefit life
insurance policy for Federal income tax purposes. Thus, the Death Benefit under
the Policy should be excludable from the gross income of the Beneficiary under
Section 101(a)(1) of the Code.
Depending on the circumstances, the exchange of a Policy, the receipt of a
Policy in an exchange, a change in the Policy's Death Benefit Option, a Policy
loan, a partial withdrawal, a surrender, a change in ownership, a change of
insured, an adjustment of face amount, or an assignment of the Policy may have
Federal income tax consequences. A person considering any such transaction
should consult a tax adviser before effecting the transaction. In addition,
Federal, state and local transfer, and other tax consequences of ownership or
receipt of Policy proceeds depend on the circumstances of each Owner or
Beneficiary.
Generally, the Owner will not be deemed to be in constructive receipt of the
Policy Value, including increments thereof, until there is a distribution. The
tax consequences of distributions from, and loans taken from or secured by, a
Policy depend on whether the Policy is classified as a "Modified Endowment
Contract." Upon a complete surrender or lapse of a Policy or when benefits are
paid at a Policy's maturity date, whether a Policy is or is not a Modified
Endowment Contract, if the amount received plus the amount of indebtedness
exceeds the total investment in the Policy, the excess will generally be
treated as ordinary income subject to tax.
MODIFIED ENDOWMENT CONTRACTS. The Internal Revenue Code establishes a class
of life insurance contracts designated as "Modified Endowment Contracts," which
applies to Policies entered into or materially changed after June 20, 1988.
Due to the Policy's flexibility, classification as a Modified Endowment
Contract will depend on the individual circumstances of each Policy. In
general, a Policy will be a Modified Endowment Contract if the accumulated
premiums paid at any time during the first seven Policy Years exceeds the sum
of the net level premiums which would have been paid on or before such time if
the Policy provided for paid-up future benefits after the payment of seven
level annual premiums. The determination of whether a Policy will be a Modified
Endowment Contract after a material change generally depends upon the
relationship of the Death Benefit and Policy Value at the time of such change
and the additional premiums paid in the seven years following the material
change. At the time a premium is credited which would cause the Policy to
become a Modified Endowment Contract, Penn Mutual will notify the Owner that
unless a refund of the excess premium (with interest) is requested by the
Owner, the Policy will become a Modified Endowment Contract. The Owner will
have 30 days after receiving such notification to request the refund.
The rules relating to whether a Policy will be treated as a Modified
Endowment Contract are extremely complex and cannot be adequately described in
the limited confines of this summary. Therefore, a current or prospective Owner
should consult with a competent advisor to determine whether a policy
transaction will cause the Policy to be treated as a Modified Endowment
Contract.
DISTRIBUTIONS FROM POLICIES CLASSIFIED AS MODIFIED ENDOWMENT CONTRACTS.
Policies classified as Modified Endowment Contracts will be subject to the
following tax rules: First, all distributions, including distributions upon
surrender and partial withdrawals from such a Policy are treated as ordinary
income subject to tax up to the amount equal to the excess (if any)
30
<PAGE>
of the Policy Value immediately before the distribution over the investment in
the Policy (described below) at such time. Second, loans taken from or secured
by, such a Policy are treated as distributions from such a Policy and taxed
accordingly. Past due loan interest that is added to the loan amount will be
treated as a loan. Third, a 10 percent additional income tax is imposed on the
portion of any distribution from, or loan taken from or secured by, such a
Policy that is included in income except where the distribution or loan is made
on or after the Owner attains age 59 1/2, is attributable to the Owner's
becoming totally and permanently disabled, or is part of a series of
substantially equal periodic payments for the life (or life expectancy) of the
Owner or the joint lives (or joint life expectancies) of the Owner and the
Owner's Beneficiary.
DISTRIBUTIONS FROM POLICIES NOT CLASSIFIED AS MODIFIED ENDOWMENT CONTRACTS.
Distributions from a Policy that is not a Modified Endowment Contract, are
generally treated as first recovering the investment in the Policy (described
below) and then, only after the return of all such investment in the Policy, as
distributing taxable income. An exception to this general rule occurs in the
case of a decrease in the Policy's Death Benefit or any other change that
reduces benefits under the Policy in the first 15 years after the Policy is
issued and that results in a cash distribution to the Owner in order for the
Policy to continue complying with the Section 7702 definitional limits. Such a
cash distribution will be taxed in whole or in part as ordinary income (to the
extent of any gain in the Policy) under rules prescribed in Section 7702.
Loans from, or secured by, a Policy that is not a Modified Endowment Contract
are not treated as distributions. Instead, such loans are treated as
indebtedness of the Owner.
Finally, neither distributions (including distributions upon surrender) nor
loans from, or secured by, a Policy that is not a Modified Endowment Contract
are subject to the 10 percent additional tax.
POLICY LOAN INTEREST. Generally, personal interest paid on a loan under a
Policy which is owned by an individual is not deductible. In addition, interest
on any loan under a Policy owned by a taxpayer and covering the life of any
individual will generally not be tax deductible. The deduction of interest on
Policy loans may also be subject to the restrictions of Section 264 of the
Code. An Owner should consult a tax adviser before deducting any interest paid
in respect of a policy loan.
INVESTMENT IN THE POLICY. Investment in the Policy means: (i) the aggregate
amount of any premiums or other consideration paid for a Policy, minus (ii) the
aggregate amount received under the Policy which is excluded from gross income
of the Owner (except that the amount of any loan from, or secured by, a Policy
that is a Modified Endowment Contract, to the extent such amount is excluded
from gross income, will be disregarded), plus (iii) the amount of any loan
from, or secured by, a Policy that is a Modified Endowment Contract to the
extent that such amount is included in the gross income of the Owner.
MULTIPLE POLICIES. All Modified Endowment Contracts that are issued by Penn
Mutual (or its affiliates) to the same Owner during any calendar year are
treated as one Modified Endowment Contract for purposes of determining the
amount includable in the gross income under Section 72(e) of the Code.
TAXATION OF POLICY SPLIT. The Policy Split Option Rider permits a Policy to
be split into two other life policies upon the occurrence of a divorce of the
joint insureds or certain changes in federal estate tax law. A policy split
could have adverse tax consequences; for example, it is not clear whether a
policy split will be treated as a nontaxable exchange under Section 1031
through 1043 of the Code. If a policy split is not treated as a nontaxable
exchange, a split could result in the recognition of taxable income in an
amount up to any gain in the Policy at the time of the split. In addition, it
is not clear whether, in all circumstances, the individual contracts that
result from a policy split would be treated as life insurance contracts for
federal income tax purposes and, if so treated, whether the individual
contracts would be classified as modified endowment contracts. Before you
exercise rights provided by the policy split option, it is important that you
consult with a competent tax advisor regarding the possible consequences of a
policy split.
OTHER TAX CONSIDERATIONS. The transfer of the Policy or the designation of a
Beneficiary may have federal, state, and/or local transfer and inheritance tax
consequences, including the imposition of gift, estate and generation-skipping
transfer taxes. For example, the transfer of the Policy to, or the designation
as beneficiary of, or the payment of proceeds to, a person who is assigned to a
generation which is two or more generations below the generation of the Owner,
may have generation skipping transfer tax considerations under Section 2601 of
the Code.
The individual situation of each Owner or Beneficiary will determine the
extent, if any, to which federal, state and local transfer taxes may be
imposed. Consult with your tax adviser for specific information in connection
with these taxes.
- --------------------------------------------------------------------------------
CHARGE FOR PENN MUTUAL'S TAXES
At the present time, Penn Mutual makes no charge for any federal, state or
local taxes (other than premium taxes) that it incurs that may be attributable
to the Separate Account or Fixed Account or to the Policies. Penn Mutual,
however, reserves the right to impose a charge in the future for any such tax
or other economic burden resulting from the application of tax laws that it
determines to be properly attributable to the Accounts or to the Policies.
31
<PAGE>
- --------------------------------------------------------------------------------
OTHER INFORMATION ABOUT THE POLICIES AND PENN MUTUAL
- --------------------------------------------------------------------------------
SALE OF THE POLICIES
Hornor, Townsend & Kent, Inc. ("HTK"), a wholly-owned subsidiary of Penn
Mutual, acts as a principal underwriter of the Policies. HTK also acts as
principal underwriter for Penn Mutual Variable Annuity Account III, a separate
account also established by Penn Mutual and for PIA Variable Annuity Account I,
a separate account established by The Penn Insurance and Annuity Company, a
wholly-owned subsidiary of Penn Mutual. HTK is a registered broker-dealer under
the Securities Exchange Act of 1934 and a member of the National Association of
Securities Dealers, Inc. Regulatory approvals are being sought so that the
Policy can be offered in all states. The Policy is sold by certain registered
representatives of HTK who are also appointed and licensed as insurance agents.
The Policy may also be offered through insurance and securities brokers who
have lawfully qualified to sell the Policies. Registered representatives may be
paid commissions on a Policy they sell based on premiums paid in amounts up to
50% of first year premiums, 2% on premiums paid during the second through
fifteenth Policy Years, and 1.2% on premiums paid after the first fifteen
Policy Years. Registered representatives may also be paid commissions of up to
0.25% of Policy Value. Other allowances and overrides also may be paid.
Registered representatives who meet certain productivity and profitability
standards may be eligible for additional compensation.
For 1997, 1996 and 1995, Penn Mutual received premium payments on the Policy
in the approximate amount of $11,042,761, $4,580,00 and $477,000, respectively,
and compensated HTK in the approximate amounts of $73,474, $34,139 and $3,100,
respectively, for its services as principal underwriter.
32
<PAGE>
- --------------------------------------------------------------------------------
PENN MUTUAL TRUSTEES AND OFFICERS
Penn Mutual is managed by a board of trustees. The following table sets forth
the name, address and principal occupations during the past five years of each
of Penn Mutual's trustees.
BOARD OF TRUSTEES
<TABLE>
<CAPTION>
POSITION WITH PRINCIPAL OCCUPATION
NAME AND ADDRESS PENN MUTUAL DURING PAST FIVE YEARS
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
Robert E. Chappell Chairman of the Chairman of the Board and Chief Executive Officer (since
The Penn Mutual Life Board and Chief December 1996), President and Chief Executive Officer
Insurance Company Executive Officer (April 1995-December 1996), President and Chief Operating
Philadelphia, PA 19172 Officer, The Penn Mutual Life Insurance Company (January
1994 to April 1995); Executive Vice President, PNC Bank
Corp. (January 1992 to December 1993); Chairman of the
Board (June 1991 to January 1992) and Chairman, President
and Chief Executive Officer, Provident National Bank
(prior thereto).
- -------------------------------------------------------------------------------------------------------
Daniel J. Toran President, Chief President and Chief Operating Officer (since January
The Penn Mutual Life Operating Officer 1997), Executive Vice President, The Penn Mutual Life
Insurance Company and Trustee Insurance Company (May 1996-January 1997), Executive Vice
Philadelphia, PA 19172 President, The New England Mutual Life Insurance Company
(prior thereto).
- -------------------------------------------------------------------------------------------------------
Julia Chang Bloch Trustee Visiting Professor, Institute of International Relations
1743 22nd Street, NW in Beijing, China, and distinguished adviser, American
Washington, DC 20008 Studies Center (April 1998 to present); President, US-
Japan Foundation (July 1996 to March 1998); Group
Executive Vice President, Bank America NT & SA (June 1993
to June 1996).
- -------------------------------------------------------------------------------------------------------
James A. Hagen Trustee Retired (since May 1996), Chairman of the Board, Conrail,
2040 Montrose Lane Inc. (prior thereto).
Wilmington, NC 28405
- -------------------------------------------------------------------------------------------------------
Philip E. Lippincott Trustee Retired (since April 1994), Chairman and Chief Executive
4301 Bayberry Drive Officer, Scott Paper Company (prior thereto).
Avalon, NJ 08202
- -------------------------------------------------------------------------------------------------------
John F. McCaughan Trustee President, Betz Dearborn Foundation (since March 1996),
Betz Dearborn Foundation Chairman of the Board, Betz Laboratories, Inc. (prior
200 Witmer Road thereto).
Horsham, PA 19044
- -------------------------------------------------------------------------------------------------------
Alan B. Miller Trustee Chairman and President, Universal Health Services, Inc.
367 S. Gulph Road
King of Prussia, PA
19406
- -------------------------------------------------------------------------------------------------------
Edmond F. Notebaert Trustee President and Chief Executive Officer, The Children's
34th and Civic Hospital of Philadelphia (since 1987).
Center Boulevard
Philadelphia, PA 19104
- -------------------------------------------------------------------------------------------------------
Robert H. Rock Trustee President, MLR Holdings, LLC (since 1987).
1845 Walnut Street --
9th Floor
Philadelphia, PA 19103
- -------------------------------------------------------------------------------------------------------
Norman T. Wilde, Jr. Trustee President and Chief Executive Officer, Janney Montgomery
1801 Market Street Scott Inc. (a securities broker/dealer and subsidiary of
Philadelphia, PA 19103 The Penn Mutual Life Insurance Company).
- -------------------------------------------------------------------------------------------------------
Wesley S. Williams, Jr., Trustee Partner, Covington & Burling (law firm).
Esq.
1201 Pennsylvania Ave.,
N.W.
P.O. Box 7566
Washington, D.C. 20004
- -------------------------------------------------------------------------------------------------------
</TABLE>
33
<PAGE>
The following table sets forth the names, addresses and principal occupations
during the past five years of the senior officers of Penn Mutual (other than
officers who are members of Penn Mutual's Board of Trustees).
SENIOR OFFICERS
<TABLE>
<CAPTION>
NAME PRINCIPAL OCCUPATION DURING PAST FIVE YEARS
- -------------------------------------------------------------------------------
<C> <S>
John M. Albanese Senior Vice President, Customer Service and Information
The Penn Mutual Life Systems (since June 1997), Vice President, Information
Insurance Company Systems Application (prior thereto), The Penn Mutual
Philadelphia, PA 19172 Life Insurance Company.
- -------------------------------------------------------------------------------
Michael A. Biondolillo Senior Vice President, Human Resources (since June
The Penn Mutual Life 1997); Corporate Vice President and General Manager,
Insurance Company Human Resources and Quality MG Industries, America
Philadelphia, PA 19172 (prior thereto).
- -------------------------------------------------------------------------------
Nancy S. Brodie Executive Vice President and Chief Financial Officer
The Penn Mutual Life (since December 1995), Senior Vice President and Chief
Insurance Company Financial Officer (January 1994 to December 1995), Vice
Philadelphia, PA 19172 President and Controller (prior thereto), The Penn
Mutual Life Insurance Company.
- -------------------------------------------------------------------------------
Larry L. Mast Executive Vice President, The Penn Mutual Life
The Penn Mutual Life Insurance Company (May 1997 to present). Formerly
Insurance Company Senior Vice President, Lafayette Life Insurance
Philadelphia, PA 19172 Company (September 1994 to May 1997); Vice President,
Security Benefit Insurance Company (May 1993 to
September 1994); Vice President, Home Life Insurance
Company (July 1990 to May 1993); Agency Manager, The
Equitable Life Insurance Company (August 1978 to July
1990).
- -------------------------------------------------------------------------------
Nina M. Mulrooney General Auditor (since November 1991), Vice President,
The Penn Mutual Life Market Conduct (since December 1997), Assistant Vice
Insurance Company President, Corporate Accounting and Controls, The Penn
Philadelphia, PA 19172 Mutual Life Insurance Company (prior thereto).
- -------------------------------------------------------------------------------
Harold E. Maude, Jr. Senior Vice President, Independence Financial Network
The Penn Mutual Life (since July 1996), Vice President, Independence
Insurance Company Financial Network (prior thereto), The Penn Mutual Life
Philadelphia, PA 19172 Insurance Company.
- -------------------------------------------------------------------------------
Peter M. Sherman Senior Vice President and Chief Investment Officer
The Penn Mutual Life (since May 1996), Vice President, Investments (January
Insurance Company 1996 to April 1996), Vice President, Fixed Income
Philadelphia, PA 19172 Portfolio Management, The Penn Mutual Life Insurance
Company (prior thereto); President, Independence
Capital Management, Inc. (an investment advisory
organization and subsidiary of Penn Mutual).
- -------------------------------------------------------------------------------
</TABLE>
STATE REGULATION
Penn Mutual is subject to regulation by the Department of Insurance of the
Commonwealth of Pennsylvania, which periodically examines our financial
condition and operations. We are also subject to the insurance laws and
regulations of all jurisdictions where we do business. The Policy described in
this prospectus has been filed with and, where required, approved by, insurance
officials in those jurisdictions where it is sold.
We are required to submit annual statements of our operations, including
financial statements, to the insurance departments of the various jurisdictions
where we do business to determine solvency and compliance with applicable
insurance laws and regulations.
- --------------------------------------------------------------------------------
ADDITIONAL INFORMATION
A registration statement under the Securities Act of 1933 has been filed with
the SEC relating to the offering described in this prospectus. This prospectus
does not include all the information set forth in the registration statement.
The omitted information may be obtained at the SEC's principal office in
Washington, D.C. by paying the SEC's prescribed fees.
34
<PAGE>
- --------------------------------------------------------------------------------
EXPERTS
The financial statements of the Subaccounts and Penn Mutual at December 31,
1997 and for the year ended December 31, 1997 appearing in this prospectus and
registration statement have been audited by Ernst & Young LLP, independent
auditors, as set forth in their report thereon appearing elsewhere herein, and
are included in reliance upon such report given upon the authority of such firm
as experts in accounting and auditing.
Actuarial matters included in this prospectus have been examined by Peter R.
Schaefer, F.S.A., M.A.A.A., Actuary of Penn Mutual, whose opinion is filed as
an exhibit to the Registration Statement.
- --------------------------------------------------------------------------------
LITIGATION
No litigation is pending that would have a material effect upon the
Subaccounts or Penn Mutual.
- --------------------------------------------------------------------------------
LEGAL MATTERS
Morgan, Lewis & Bockius, LLP of Philadelphia, Pennsylvania, has provided
advice on certain matters relating to the federal securities laws and the
offering of the Policies.
- --------------------------------------------------------------------------------
FINANCIAL STATEMENTS
The financial statements of the Subaccounts and of Penn Mutual appear on the
following pages. The financial statements of Penn Mutual should be
distinguished from any financial statements of the Subaccounts and should be
considered only as bearing upon Penn Mutual's ability to meet its obligations
under the Policies.
35
<PAGE>
- --------------------------------------------------------------------------------
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
THE PENN MUTUAL LIFE INSURANCE COMPANY AND CONTRACT OWNERS OF PENN MUTUAL
VARIABLE LIFE ACCOUNT I--CORNERSTONE VUL II/VARIABLE ESTATE MAX
We have audited the accompanying statement of assets and liabilities of Penn
Mutual Variable Life Account I--Cornerstone VUL II/Variable Estate Max (VUL
II/VMAX) (comprising, respectively, Money Market Fund, Quality Bond Fund, High
Yield Bond Fund, Growth Equity Fund, Value Equity Fund, Flexibly Managed Fund,
Small Capitalization Fund, International Equity 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, 1997 and the related statement of operations and
changes in net assets for the year then ended. These financial statements are
the responsibility of the management of VUL II/VMAX. Our responsibility is to
express an opinion on these financial statements based on our audit. The
financial statements of Penn Mutual Variable Life Account I--Cornerstone VUL
II/Variable Estate Max for the year or period ended December 31, 1996, were
audited by other auditors whose report dated April 7, 1997, expressed an
unqualified opinion on those statements.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the 1997 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 Life Account I--Cornerstone
VUL II/Variable Estate Max at December 31, 1997, the results of their
operations and changes in their net assets for the year or period then ended in
conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
Philadelphia, Pennsylvania
March 30, 1998
36
<PAGE>
- --------------------------------------------------------------------------------
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE PENN MUTUAL LIFE INSURANCE COMPANY AND CONTRACT OWNERS OF PENN MUTUAL
VARIABLE LIFE ACCOUNT I - CORNERSTONE VUL II/VARIABLE ESTATE MAX:
We have audited the accompanying statement of changes in net assets of Penn
Mutual Variable Life Account I--Cornerstone VUL II/Variable Estate Max (VUL
II/VMAX) (comprising, respectively, Money Market Fund, Quality Bond Fund, High
Yield Bond Fund, Growth Equity Fund, Value Equity Fund, Flexibly Managed Fund,
Small Capitalization Fund, International Equity Fund, Balanced Portfolio,
Limited Maturity Bond Portfolio, Capital Appreciation Portfolio (formerly TCI
Growth Portfolio), Equity Income Portfolio, Growth Portfolio, and Asset Manager
Portfolio) for the year ended December 31, 1996. This financial statement is
the responsibility of the management of VUL II/VMAX. Our responsibility is to
express an opinion on this financial statement based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. Our
procedures included confirmation of securities owned as of December 31, 1996 by
correspondence with the transfer agents. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe
that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above presents fairly, in
all material respects, the changes in net assets of Penn Mutual Variable Life
Account I--Cornerstone VUL II/Variable Estate Max for the year ended December
31, 1996, in conformity with generally accepted accounting principles.
/s/ Coopers & Lybrand L.L.P.
Coopers & Lybrand L.L.P.
2400 Eleven Penn Center
Philadelphia, Pennsylvania
April 7, 1997
37
<PAGE>
- ----------------------------------------------------
THIS PAGE LEFT INTENTIONALLY BLANK
38
<PAGE>
- -------------------------------------------------------------------------------
PENN MUTUAL VARIABLE LIFE ACCOUNT I - CORNERSTONE VUL II/VARIABLE ESTATE MAX
STATEMENT OF ASSETS AND LIABILITIES - DECEMBER 31, 1997
<TABLE>
<CAPTION>
MONEY MARKET MONEY MARKET QUALITY BOND
TOTAL FUND+(A) FUND+(B) FUND+
----------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
INVESTMENT IN COMMON STOCK:
Number of shares........... -- 4,945,084 362,088 204,213
Identified cost............ $83,307,290 $4,945,084 $362,088 $2,119,059
ASSETS:
Investments at value....... $88,098,086 $4,945,084 $362,088 $2,082,969
Dividends receivable....... 23,924 22,122 1,802 0
LIABILITIES:
Due to (from) The Penn Mu-
tual Life Insurance Compa-
ny........................ 257 (13,004) (8,997) 614
----------- ---------- -------- ----------
NET ASSETS.................. $88,121,753 $4,980,210 $372,887 $2,082,355
=========== ========== ======== ==========
Variable life accumulation
units...................... -- 446,454 33,421 169,503
Accumulation unit values.... -- $ 11.15 $ 11.16 $ 12.29
- -------------------------------------------------------------------------------
PENN MUTUAL VARIABLE LIFE ACCOUNT I - CORNERSTONE VUL II/VARIABLE ESTATE MAX
STATEMENT OF OPERATIONS - FOR THE YEAR ENDED DECEMBER 31, 1997
<CAPTION>
MONEY MARKET MONEY MARKET QUALITY BOND
TOTAL FUND+(A) FUND+(B) FUND+
----------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends.................. $ 1,638,444 $ 192,245 $ 55,680 $ 115,325
EXPENSE:
Mortality and expense risk
charges................... 525,485 34,779 10,102 10,607
----------- ---------- -------- ----------
Net investment income
(loss).................... 1,112,959 157,466 45,578 104,718
----------- ---------- -------- ----------
REALIZED AND UNREALIZED
GAINS (LOSSES) ON INVEST-
MENTS:
Realized gains (losses)
from redemption of fund
shares.................... 2,320 0 0 270
Capital gains distribu-
tions..................... 3,311,701 0 0 847
----------- ---------- -------- ----------
Net realized gains from in-
vestment transactions..... 3,314,021 0 0 1,117
Net change in unrealized
appreciation (deprecia-
tion) of investments...... 4,019,321 0 0 (10,075)
----------- ---------- -------- ----------
Net realized and unrealized
gains (losses) on invest-
ments..................... 7,333,342 0 0 (8,958)
----------- ---------- -------- ----------
NET INCREASE (DECREASE) IN
NET ASSETS RESULTING FROM
OPERATIONS................. $ 8,446,301 $ 157,466 $ 45,578 $ 95,760
=========== ========== ======== ==========
</TABLE>
- -----------------------
+ Investment in Penn Series Funds, Inc.
++ Investment in Neuberger&Berman Advisers Management Trust
+++ Investment in American Century Variable Portfolios, Inc. (TCI Portfolios,
Inc.'s name changed to American Century Variable Portfolios, Inc. as of
May 1, 1997)
++++ Investment in Fidelity Investments' Variable Insurance Products Funds I
and II
+++++ Investment in Morgan Stanley Universal Funds, Inc.
(a) Represents only the Cornerstone VUL II product
(b) Represents only the Variable Estate Max product
(c) For the period May 1, 1997 (date fund first became available for
investment to contract owners) to December 31, 1997
The accompanying notes are an integral part of these financial statements.
39
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FLEXIBLY SMALL INTERNATIONAL
HIGH YIELD BOND GROWTH EQUITY VALUE EQUITY MANAGED CAPITALIZATION EQUITY
FUND+ FUND+ FUND+ FUND+ FUND+ FUND+
--------------- ------------- ------------ ----------- -------------- -------------
<S> <C> <C> <C> <C> <C>
203,901 66,208 613,303 1,047,054 286,879 374,070
$1,950,747 $1,592,467 $12,554,205 $20,512,029 $3,833,145 $6,068,732
$1,941,141 $1,613,488 $13,829,984 $20,763,091 $4,139,661 $6,033,755
0 0 0 0 0 0
568 369 3,858 5,262 1,207 1,736
---------- ---------- ----------- ----------- ---------- ----------
$1,940,573 $1,613,119 $13,826,126 $20,757,829 $4,138,454 $6,032,019
========== ========== =========== =========== ========== ==========
140,271 93,188 747,308 1,393,191 255,430 420,142
$ 13.83 $ 17.31 $ 18.50 $ 14.90 $ 16.20 $ 14.36
- -------------------------------------------------------------------------------------
<CAPTION>
FLEXIBLY SMALL INTERNATIONAL
HIGH YIELD BOND GROWTH EQUITY VALUE EQUITY MANAGED CAPITALIZATION EQUITY
FUND+ FUND+ FUND+ FUND+ FUND+ FUND+
--------------- ------------- ------------ ----------- -------------- -------------
<S> <C> <C> <C> <C> <C>
$ 149,716 $ 5,657 $ 167,295 $ 580,494 $ 19,389 $ 184,903
9,568 8,562 80,608 123,568 23,878 37,874
---------- ---------- ----------- ----------- ---------- ----------
140,148 (2,905) 86,687 456,926 (4,489) 147,029
---------- ---------- ----------- ----------- ---------- ----------
209 131 (825) 530 1,356 3,110
0 160,541 748,050 1,185,099 244,367 199,783
---------- ---------- ----------- ----------- ---------- ----------
209 160,672 747,225 1,185,629 245,723 202,893
(3,013) 28,601 1,011,600 225,788 245,812 (55,680)
---------- ---------- ----------- ----------- ---------- ----------
(2,804) 189,273 1,758,825 1,411,417 491,535 147,213
---------- ---------- ----------- ----------- ---------- ----------
$ 137,344 $ 186,368 $ 1,845,512 $ 1,868,343 $ 487,046 $ 294,242
========== ========== =========== =========== ========== ==========
</TABLE>
40
<PAGE>
- -------------------------------------------------------------------------------
PENN MUTUAL VARIABLE LIFE ACCOUNT I - CORNERSTONE VUL II/VARIABLE ESTATE MAX
STATEMENT OF ASSETS AND LIABILITIES - DECEMBER 31, 1997
<TABLE>
<CAPTION>
EMERGING LIMITED
GROWTH BALANCED MATURITY BOND PARTNERS
FUND+ PORTFOLIO++ PORTFOLIO++ PORTFOLIO++
---------- ----------- ------------- --------------
<S> <C> <C> <C> <C>
INVESTMENT IN COMMON
STOCK:
Number of shares......... 95,353 72,246 38,108 89,345
Identified cost.......... $1,331,804 $1,178,141 $529,796 $1,800,214
ASSETS:
Investments at value..... $1,225,289 $1,285,970 $538,091 $1,840,517
Dividends receivable..... 0 0
LIABILITIES:
Due to (from) The Penn
Mutual Life Insurance
Company................. 333 362 156 502
---------- ---------- -------- ----------
NET ASSETS................ $1,224,956 $1,285,608 $537,935 $1,840,015
========== ========== ======== ==========
Variable life accumulation
units.................... 88,517 90,306 46,429 147,909
Accumulation unit values.. 13.84 $ 14.24 $ 11.59 $ 12.44
- --------------------------------------------------------------------------------
PENN MUTUAL VARIABLE LIFE ACCOUNT I - CORNERSTONE VUL II/VARIABLE ESTATE MAX
STATEMENT OF OPERATIONS - FOR THE YEAR ENDED DECEMBER 31, 1997
<CAPTION>
EMERGING LIMITED
GROWTH BALANCED MATURITY BOND PARTNERS
FUND+(C) PORTFOLIO++ PORTFOLIO++ PORTFOLIO++(C)
---------- ----------- ------------- --------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends................ $ 0 $ 10,740 $ 16,034 $ 0
EXPENSE:
Mortality and expense
risk charges............ 2,277 7,970 3,159 2,928
---------- ---------- -------- ----------
Net investment income
(loss).................. (2,277) 2,770 12,875 (2,928)
---------- ---------- -------- ----------
REALIZED AND UNREALIZED
GAINS (LOSSES) ON
INVESTMENTS:
Realized gains (losses)
from redemption of fund
shares.................. (80) 626 42 199
Capital gains distribu-
tions................... 92,677 27,565 0 0
---------- ---------- -------- ----------
Net realized gains from
investment transactions. 92,597 28,191 42 199
Net change in unrealized
appreciation (deprecia-
tion) of investments.... (106,515) 104,999 6,507 40,303
---------- ---------- -------- ----------
Net realized and
unrealized gains (loss-
es) on investments...... (13,918) 133,190 6,549 40,502
---------- ---------- -------- ----------
NET INCREASE (DECREASE) IN
NET ASSETS RESULTING FROM
OPERATIONS............... $ (16,195) $ 135,960 $ 19,424 $ 37,574
========== ========== ======== ==========
</TABLE>
- -----------------------
+ Investment in Penn Series Funds, Inc.
++ Investment in Neuberger&Berman Advisers Management Trust
+++ Investment in American Century Variable Portfolios, Inc. (TCI Portfolios,
Inc.'s name changed to American Century Variable Portfolios, Inc. as of
May 1, 1997)
++++ Investment in Fidelity Investments' Variable Insurance Products Funds I
and II
+++++ Investment in Morgan Stanley Universal Funds, Inc.
(a) Represents only the Cornerstone VUL II product
(b) Represents only the Variable Estate Max product
(c) For the period May 1, 1997 (date fund first became available for
investment to contract owners) to December 31, 1997
The accompanying notes are an integral part of these financial statements.
41
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CAPITAL EMERGING
APPRECIATION EQUITY INCOME GROWTH ASSET MANAGER INDEX 500 MARKETS EQUITY
PORTFOLIO+++ PORTFOLIO++++ PORTFOLIO++++ PORTFOLIO++++ PORTFOLIO++++ PORTFOLIO+++++
------------ ------------- ------------- ------------- ---------------- -----------------
<S> <C> <C> <C> <C> <C>
272,694 400,866 307,213 91,398 13,275 59,600
$2,872,230 $8,344,591 $ 9,742,557 $1,467,510 1,452,531 $650,360
$2,639,682 $9,733,015 $11,397,610 $1,646,080 1,518,541 $562,030
0 0 0 0
735 2,628 2,906 458 400 164
---------- ---------- ----------- ---------- ---------- --------
$2,638,947 $9,730,387 $11,394,704 $1,645,622 $1,518,141 $561,866
========== ========== =========== ========== ========== ========
241,426 566,358 661,219 108,398 124,531 62,460
$ 10.93 $ 17.18 $ 17.23 $ 15.18 $ 12.19 $ 9.00
- ------------------------------------------------------------------------------------------
<CAPTION>
CAPITAL EMERGING
APPRECIATION EQUITY INCOME GROWTH ASSET MANAGER INDEX 500 MARKETS EQUITY
PORTFOLIO+++ PORTFOLIO++++ PORTFOLIO++++ PORTFOLIO++++ PORTFOLIO++++(C) PORTFOLIO+++++(C)
------------ ------------- ------------- ------------- ---------------- -----------------
<S> <C> <C> <C> <C> <C>
$ 0 $ 71,519 $ 37,734 $ 28,044 $ 0 $ 3,669
19,266 59,222 74,199 12,024 3,726 1,168
---------- ---------- ----------- ---------- ---------- --------
(19,266) 12,297 (36,465) 16,020 (3,726) 2,501
---------- ---------- ----------- ---------- ---------- --------
(365) 2,481 (6,023) (51) 660 50
37,706 359,580 168,905 70,349 0 16,232
---------- ---------- ----------- ---------- ---------- --------
37,341 362,061 162,882 70,298 660 16,282
(97,199) 1,102,313 1,429,320 118,879 66,010 (88,329)
---------- ---------- ----------- ---------- ---------- --------
(59,858) 1,464,374 1,592,202 189,177 66,670 (72,047)
---------- ---------- ----------- ---------- ---------- --------
$ (79,124) $1,476,671 $ 1,555,737 $ 205,197 $ 62,944 $(69,546)
========== ========== =========== ========== ========== ========
</TABLE>
42
<PAGE>
- --------------------------------------------------------------------------------
PENN MUTUAL VARIABLE LIFE ACCOUNT I - CORNERSTONE VUL II/VARIABLE ESTATE MAX
STATEMENT OF CHANGES IN NET ASSETS - FOR THE YEARS ENDED DECEMBER 31, 1997 AND
1996
<TABLE>
<CAPTION>
MONEY MARKET MONEY MARKET
TOTAL FUND+(A) FUND+(B)
------------------------ -------------------------- ------------------------
1997 1996 1997 1996 1997 1996
----------- ----------- ------------ ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
OPERATIONS:
Net investment income
(loss)................ $ 1,112,959 $ 458,348 $ 157,466 $ 78,569 $ 45,578 $ 17,308
Net realized gains
(losses) from
investment
transactions.......... 3,314,021 920,133 0 0 0 0
Net change in
unrealized
appreciation
(depreciation) of
investments........... 4,019,321 785,327 0 0 0 0
----------- ----------- ------------ ------------ ----------- -----------
Net increase (decrease)
in net assets resulting
from operations........ 8,446,301 2,163,808 157,466 78,569 45,578 17,308
----------- ----------- ------------ ------------ ----------- -----------
VARIABLE LIFE
ACTIVITIES:
Purchase payments under
variable life
contracts............. 55,697,302 29,546,396 20,916,165 15,559,938 6,413,648 2,858,896
Surrender benefits..... (1,174,373) (253,954) (86,743) (13,953) (8,112) 0
Net transfers.......... (405,105) (350,840) (17,728,339) (13,489,878) (6,792,690) (2,006,542)
Contract administration
charges............... (2,458,161) (1,438,914) (252,624) (205,795) (97,636) (50,964)
Cost of insurance...... (5,418,402) (2,256,403) (676,258) (408,772) (53,902) (17,733)
Net increase (decrease)
in net assets resulting
from variable life
activities............. 46,241,261 25,246,285 2,172,201 1,441,540 (538,692) 783,657
----------- ----------- ------------ ------------ ----------- -----------
Total increase
(decrease) in net
assets............... 54,687,562 27,410,093 2,329,667 1,520,109 (493,114) 800,965
NET ASSETS:
Beginning of year...... 33,434,191 6,024,098 2,650,543 1,130,434 866,001 65,036
----------- ----------- ------------ ------------ ----------- -----------
END OF YEAR............ $88,121,753 $33,434,191 $ 4,980,210 $ 2,650,543 $ 372,887 $ 866,001
=========== =========== ============ ============ =========== ===========
<CAPTION>
QUALITY HIGH YIELD GROWTH
BOND FUND+ BOND FUND+ EQUITY FUND+
------------------------ -------------------------- ------------------------
1997 1996 1997 1996 1997 1996
----------- ----------- ------------ ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
OPERATIONS:
Net investment income
(loss)................ $ 104,718 $ 32,261 $ 140,148 $ 34,567 $ (2,905) $ (34)
Net realized gains
(losses) from
investment
transactions.......... 1,117 94 209 360 160,672 36,254
Net change in
unrealized
appreciation
(depreciation) of
investments........... (10,075) (24,231) (3,013) (2,192) 28,601 (2,111)
----------- ----------- ------------ ------------ ----------- -----------
Net increase (decrease)
in net assets resulting
from operations........ 95,760 8,124 137,344 32,735 186,368 34,109
----------- ----------- ------------ ------------ ----------- -----------
VARIABLE LIFE
ACTIVITIES:
Purchase payments under
variable life
contracts............. 890,922 154,180 520,416 165,686 568,104 152,803
Surrender benefits..... (12,865) (2,649) (20,623) (2,074) (28,906) (842)
Net transfers.......... 676,550 336,072 934,696 262,002 658,612 181,764
Contract administration
charges............... (34,370) (13,801) (44,688) (18,004) (53,485) (16,807)
Cost of insurance...... (79,717) (22,987) (89,890) (29,457) (93,538) (26,209)
Net increase (decrease)
in net assets resulting
from variable life
activities............. 1,440,520 450,815 1,299,911 378,153 1,050,787 290,709
----------- ----------- ------------ ------------ ----------- -----------
Total increase
(decrease) in net
assets............... 1,536,280 458,939 1,437,255 410,888 1,237,155 324,818
NET ASSETS:
Beginning of year...... 546,075 87,136 503,318 92,430 375,964 51,146
----------- ----------- ------------ ------------ ----------- -----------
END OF YEAR............ $ 2,082,355 $ 546,075 $ 1,940,573 $ 503,318 $ 1,613,119 $ 375,964
=========== =========== ============ ============ =========== ===========
</TABLE>
- -----------------------
+ Investment in Penn Series Funds, Inc.
++ Investment in Neuberger&Berman Advisers Management Trust
+++ Investment in American Century Variable Portfolios, Inc. (TCI Portfolios,
Inc.'s name changed to American Century Variable Portfolios, Inc. as of May
1, 1997)
++++ Investment in Fidelity Investments' Variable Insurance Products Funds I
and II
+++++ Investment in Morgan Stanley Universal Funds, Inc.
(a) Represents only the Cornerstone VUL II product
(b) Represents only the Variable Estate Max product
(c) For the period May 1, 1997 (date fund first became available for investment
to contract owners) to December 31, 1997
The accompanying notes are an integral part of these financial statements.
43
<PAGE>
- --------------------------------------------------------------------------------
PENN MUTUAL VARIABLE LIFE ACCOUNT I - CORNERSTONE VUL II/VARIABLE ESTATE MAX
STATEMENT OF CHANGES IN NET ASSETS - FOR THE YEARS ENDED DECEMBER 31, 1997 AND
1996 (CONT'D.)
<TABLE>
<CAPTION>
VALUE FLEXIBLY SMALL CAPITALIZATION
EQUITY FUND+ MANAGED FUND+ FUND+
----------------------- ----------------------- ----------------------
1997 1996 1997 1996 1997 1996
----------- ---------- ----------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
OPERATIONS:
Net investment income
(loss)................ $ 86,687 $ 32,188 $ 456,926 $ 222,428 $ (4,489) $ 1,545
Net realized gains
(losses) from
investment
transactions.......... 747,225 195,982 1,185,629 340,134 245,723 49,124
Net change in
unrealized
appreciation
(depreciation) of
investments........... 1,011,600 264,271 225,788 61,997 245,812 62,662
----------- ---------- ----------- ---------- ---------- ----------
Net increase (decrease)
in net assets resulting
from operations........ 1,845,512 492,441 1,868,343 624,559 487,046 113,331
----------- ---------- ----------- ---------- ---------- ----------
VARIABLE LIFE
ACTIVITIES:
Purchase payments under
variable life
contracts............. 4,401,455 1,360,144 8,035,953 2,664,444 1,267,983 498,674
Surrender benefits..... (150,408) (32,419) (271,011) (74,122) (66,999) (13,130)
Net transfers.......... 4,059,918 2,385,789 4,819,106 4,216,930 1,510,388 660,016
Contract administration
charges............... (345,537) (141,826) (511,660) (285,785) (129,639) (52,877)
Cost of insurance...... (758,061) (226,508) (1,257,150) (469,401) (222,701) (78,480)
----------- ---------- ----------- ---------- ---------- ----------
Net increase (decrease)
in net assets resulting
from variable life
activities............. 7,207,367 3,345,180 10,815,238 6,052,066 2,359,032 1,014,203
----------- ---------- ----------- ---------- ---------- ----------
Total increase
(decrease) in net
assets................ 9,052,879 3,837,621 12,683,581 6,676,625 2,846,078 1,127,534
NET ASSETS:
Beginning of year...... 4,773,247 935,626 8,074,248 1,397,623 1,292,376 164,842
----------- ---------- ----------- ---------- ---------- ----------
END OF YEAR............ $13,826,126 $4,773,247 $20,757,829 $8,074,248 $4,138,454 $1,292,376
=========== ========== =========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
INTERNATIONAL EMERGING BALANCED LIMITED MATURITY
EQUITY FUND+ GROWTH FUND+ PORTFOLIO++ BOND PORTFOLIO++
---------------------- ------------ -------------------- ------------------
1997 1996 1997(C) 1997 1996 1997 1996
---------- ---------- ------------ ---------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATIONS:
Net investment income
(loss)................ $ 147,029 $ 72,792 $ (2,277) $ 2,770 $ 758 $ 12,875 $ 3,899
Net realized gains
(losses) from
investment
transactions.......... 202,893 110,126 92,597 28,191 20,701 42 (33)
Net change in
unrealized
appreciation
(depreciation) of
investments........... (55,680) 13,930 (106,515) 104,999 2,836 6,507 898
---------- ---------- ---------- ---------- -------- -------- --------
Net increase (decrease)
in net assets resulting
from operations........ 294,242 196,848 (16,195) 135,960 24,295 19,424 4,764
---------- ---------- ---------- ---------- -------- -------- --------
VARIABLE LIFE
ACTIVITIES:
Purchase payments under
variable life
contracts............. 2,252,060 861,883 193,901 427,494 360,163 106,557 89,190
Surrender benefits..... (91,280) (17,014) (8,966) (15,147) (6,240) (8,158) (135)
Net transfers.......... 1,590,138 1,483,081 1,102,775 330,277 120,901 237,622 103,331
Contract administration
charges............... (190,691) (102,391) (13,674) (33,976) (28,971) (9,698) (5,179)
Cost of insurance...... (364,231) (144,055) (32,885) (83,916) (46,800) (27,506) (11,238)
---------- ---------- ---------- ---------- -------- -------- --------
Net increase (decrease)
in net assets resulting
from variable life
activities............. 3,195,996 2,081,504 1,241,151 624,732 399,053 298,817 175,969
---------- ---------- ---------- ---------- -------- -------- --------
Total increase
(decrease) in net
assets................ 3,490,238 2,278,352 1,224,956 760,692 423,348 318,241 180,733
NET ASSETS:
Beginning of year...... 2,541,781 263,429 0 524,916 101,568 219,694 38,961
---------- ---------- ---------- ---------- -------- -------- --------
END OF YEAR............ $6,032,019 $2,541,781 $1,224,956 $1,285,608 $524,916 $537,935 $219,694
========== ========== ========== ========== ======== ======== ========
</TABLE>
- -----------------------
+ Investment in Penn Series Funds, Inc.
++ Investment in Neuberger & Berman Advisers Management Trust
+++ Investment in American Century Variable Portfolios, Inc. (TCI Portfolios,
Inc.'s name changed to American Century Variable Portfolios, Inc. as of May
1, 1997)
++++ Investment in Fidelity Investments' Variable Insurance Products Funds I
and II
+++++ Investment in Morgan Stanley Universal Funds, Inc.
(a) Represents only the Cornerstone VUL II product
(b) Represents only the Variable Estate Max product
(c) For the period May 1, 1997 (date fund first became available for investment
to contract owners) to December 31, 1997
The accompanying notes are an integral part of these financial statements.
44
<PAGE>
- --------------------------------------------------------------------------------
PENN MUTUAL VARIABLE LIFE ACCOUNT I - CORNERSTONE VUL II/VARIABLE ESTATE MAX
STATEMENT OF CHANGES IN NET ASSETS - FOR THE YEAR ENDED DECEMBER 31, 1997
(CONT'D.)
<TABLE>
<CAPTION>
PARTNERS CAPITAL APPRECIATION EQUITY INCOME
PORTFOLIO++ PORTFOLIO+++ PORTFOLIO++++
----------- ---------------------- ----------------------
1997(C) 1997 1996 1997 1996
----------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
OPERATIONS:
Net investment income
(loss)................ $ (2,928) $ (19,266) $ (8,636) $ 12,297 $ (14,588)
Net realized gains
(losses) from
investment
transactions.......... 199 37,341 68,566 362,061 30,042
Net change in
unrealized
appreciation
(depreciation) of
investments........... 40,303 (97,199) (135,169) 1,102,313 253,509
---------- ---------- ---------- ---------- ----------
Net increase (decrease)
in net assets resulting
from operations........ 37,574 (79,124) (75,239) 1,476,671 268,963
---------- ---------- ---------- ---------- ----------
VARIABLE LIFE
ACTIVITIES:
Purchase payments under
variable life
contracts............. 264,833 1,110,343 840,551 2,992,198 1,456,967
Surrender benefits..... (14,104) (48,960) (20,881) (126,180) (31,547)
Net transfers.......... 1,604,570 327,335 798,967 2,506,134 1,764,383
Contract administration
charges............... (20,145) (75,326) (98,540) (228,765) (144,237)
Cost of insurance...... (32,713) (188,005) (137,884) (522,767) (222,108)
---------- ---------- ---------- ---------- ----------
Net increase (decrease)
in net assets resulting
from variable life
activities............. 1,802,441 1,125,387 1,382,213 4,620,620 2,823,458
---------- ---------- ---------- ---------- ----------
Total increase
(decrease) in net
assets................. 1,840,015 1,046,263 1,306,974 6,097,291 3,092,421
NET ASSETS:
Beginning of year...... 0 1,592,684 285,710 3,633,096 540,675
---------- ---------- ---------- ---------- ----------
END OF YEAR............ $1,840,015 $2,638,947 $1,592,684 $9,730,387 $3,633,096
========== ========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
EMERGING
GROWTH ASSET MANAGER INDEX 500 MARKETS EQUITY
PORTFOLIO++++ PORTFOLIO++++ PORTFOLIO++++ PORTFOLIO+++++
----------------------- -------------------- ------------- --------------
1997 1996 1997 1996 1997(C) 1997(C)
----------- ---------- ---------- -------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
OPERATIONS:
Net investment income
(loss)................ $ (36,465) $ (20,955) $ 16,020 $ 6,246 $ (3,726) $ 2,501
Net realized gains
(losses) from
investment
transactions.......... 162,882 62,545 70,298 6,238 660 16,282
Net change in
unrealized
appreciation
(depreciation) of
investments........... 1,429,320 235,591 118,879 53,336 66,010 (88,329)
----------- ---------- ---------- -------- ---------- --------
Net increase (decrease)
in net assets resulting
from operations........ 1,555,737 277,181 205,197 65,820 62,944 (69,546)
----------- ---------- ---------- -------- ---------- --------
VARIABLE LIFE
ACTIVITIES:
Purchase payments under
variable life
contracts............. 4,149,071 2,213,494 528,410 309,383 510,305 147,484
Surrender benefits..... (168,493) (34,941) (26,997) (4,007) (13,767) (6,654)
Net transfers.......... 1,816,139 2,566,211 382,011 266,133 1,045,038 514,615
Contract administration
charges............... (339,058) (246,323) (39,694) (27,414) (28,311) (9,184)
Cost of insurance...... (747,390) (356,315) (114,855) (58,456) (58,068) (14,849)
----------- ---------- ---------- -------- ---------- --------
Net increase (decrease)
in net assets resulting
from variable life
activities............. 4,710,269 4,142,126 728,875 485,639 1,455,197 631,412
----------- ---------- ---------- -------- ---------- --------
Total increase
(decrease) in net
assets................. 6,266,006 4,419,307 934,072 551,459 1,518,141 561,866
NET ASSETS:
Beginning of year...... 5,128,698 709,391 711,550 160,091 0 0
----------- ---------- ---------- -------- ---------- --------
END OF YEAR............ $11,394,704 $5,128,698 $1,645,622 $711,550 $1,518,141 $561,866
=========== ========== ========== ======== ========== ========
</TABLE>
- -----------------------
+ Investment in Penn Series Funds, Inc.
++ Investment in Neuberger & Berman Advisers Management Trust
+++ Investment in American Century Variable Portfolios, Inc. (TCI Portfolios,
Inc.'s name changed to American Century Variable Portfolios, Inc. as of May
1, 1997)
++++ Investment in Fidelity Investments' Variable Insurance Products Funds I
and II
+++++ Investment in Morgan Stanley Universal Funds, Inc.
(a) Represents only the Cornerstone VUL II product
(b) Represents only the Variable Estate Max product
(c) For the period May 1, 1997 (date fund first became available for investment
to contract owners) to December 31, 1997
The accompanying notes are an integral part of these financial statements.
45
<PAGE>
- ----------------------------------------------------
THIS PAGE LEFT INTENTIONALLY BLANK
46
<PAGE>
- -------------------------------------------------------------------------------
PENN MUTUAL VARIABLE LIFE ACCOUNT I - CORNERSTONE VUL II/VARIABLE ESTATE MAX
NOTES TO FINANCIAL STATEMENTS - DECEMBER 31, 1997
- -------------------------------------------------------------------------------
NOTE 1.
The significant accounting policies of Penn Mutual Variable Life Account
I--Cornerstone VUL II/Variable Estate Max sub-accounts (Cornerstone
II/Estate Max) are as follows:
For presentation purposes the Cornerstone VUL II and Variable Estate Max
products are presented in one financial statement.
GENERAL - Cornerstone II/Estate Max were established by The Penn Mutual
Life Insurance Company (Penn Mutual) under the provisions of the
Pennsylvania Insurance Law. Cornerstone II/ Estate Max is registered under
the Investment Company Act of 1940, as amended, as a unit investment trust.
Cornerstone II/Estate Max offers units to variable life contract owners to
provide for the accumulation of value and for the payment of benefits.
Contract owners may borrow up to a specific amount depending on their
policy value at any time by submitting a written request for a policy loan.
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, 1997 and the reported
amounts from operations and contract transactions during 1997 and 1996.
Actual results could differ from those estimates.
INVESTMENTS - Assets of Cornerstone II/Estate Max 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 Fund, Small Capitalization Fund, and Emerging Markets Fund;
Neuberger&Berman Advisers Management Trust (AMT): Limited Maturity Bond,
Balanced Portfolio and
- -------------------------------------------------------------------------------
NOTE 2.
For the years ended December 31, 1997 and 1996, shares of the respective
funds and portfolios were as follows:
<TABLE>
<CAPTION>
MONEY MARKET QUALITY BOND HIGH YIELD GROWTH EQUITY
FUND+ FUND+ BOND FUND+ FUND+
------------------------ -------------------- -------------------- --------------------
1997 1996 1997 1996 1997 1996 1997 1996
----------- ----------- ---------- -------- ---------- -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Shares purchased........ 17,970,016 12,518,440 179,649 56,687 143,944 60,481 46,870 17,079
Shares received from re-
investment of:
Net investment income.. 192,245 118,022 11,306 3,407 15,727 4,135 232 76
Capital gains distribu-
tion.................. 0 0 83 0 0 0 6,588 1,691
----------- ----------- ---------- -------- ---------- -------- ---------- --------
Total shares acquired... 18,162,261 12,636,462 191,038 60,094 159,671 64,616 53,690 18,846
Shares redeemed......... (16,443,350) (10,154,039) (41,445) (13,985) (12,271) (19,068) (5,005) (3,881)
----------- ----------- ---------- -------- ---------- -------- ---------- --------
Net increase in shares
owned.................. 1,718,911 2,482,423 149,593 46,109 147,400 45,548 48,685 14,965
Shares owned, beginning
of year................ 3,588,261 1,105,838 54,620 8,511 56,501 10,953 17,523 2,558
----------- ----------- ---------- -------- ---------- -------- ---------- --------
Shares owned, end of
year................... 5,307,172 3,588,261 204,213 54,620 203,901 56,501 66,208 17,523
=========== =========== ========== ======== ========== ======== ========== ========
Cost of shares acquired. $18,162,261 $12,636,462 $1,983,133 $626,412 $1,558,426 $585,899 $1,335,940 $413,350
Proceeds from shares re-
deemed................. $16,443,350 $10,154,039 $ 436,556 $143,226 $ 117,903 $173,086 $ 127,231 $ 86,303
</TABLE>
<TABLE>
<CAPTION>
EMERGING LIMITED CAPITAL
GROWTH BALANCED MATURITY BOND PARTNERS APPRECIATION
FUND+ PORTFOLIO++ PORTFOLIO++ PORTFOLIO++ PORTFOLIO+++
---------- ------------------ ------------------ ----------- ----------------------
1997(A) 1997 1996 1997 1996 1997(A) 1997 1996
---------- -------- -------- -------- -------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Shares purchased........ 89,036 45,002 35,598 24,145 23,930 90,770 141,336 133,027
Shares received from re-
investment of:
Net investment income.. 0 686 233 1,200 368 0 0 0
Capital gains distribu-
tion.................. 7,212 1,761 1,296 0 0 0 4,261 6,448
---------- -------- -------- -------- -------- ---------- ---------- ----------
Total shares acquired... 96,248 47,449 37,127 25,345 24,298 90,770 145,597 139,475
Shares redeemed......... (895) (8,183) (9,945) (2,877) (11,307) (1,425) (28,478) (7,594)
---------- -------- -------- -------- -------- ---------- ---------- ----------
Net increase in shares
owned.................. 95,353 39,266 27,182 22,468 12,991 89,345 117,119 131,881
Shares owned, beginning
of year................ 0 32,980 5,798 15,640 2,649 0 155,575 23,694
---------- -------- -------- -------- -------- ---------- ---------- ----------
Shares owned, end of
year................... 95,353 72,246 32,980 38,108 15,640 89,345 272,694 155,575
========== ======== ======== ======== ======== ========== ========== ==========
Cost of shares acquired. $1,343,770 $792,822 $582,671 $351,584 $337,832 $1,829,036 $1,433,785 $1,523,998
Proceeds from shares re-
deemed................. $ 11,886 $137,524 $162,966 $ 39,786 $157,920 $ 29,021 $ 289,724 $ 81,197
</TABLE>
- -----------------------
The cost of net redemptions is determined on a last-in, first-out basis.
(a) For the period May 1, 1997 (date funds became available for investment to
contractholders) to December 31, 1997
+ Investment in Penn Series Funds, Inc.
++ Investment in Neuberger&Berman Advisers Management Trust
+++ Investment in American Century Variable Portfolios, Inc. (TCI Portfolios,
Inc.'s name changed to American Century Variable Portfolios, Inc. as of
May 1, 1997)
++++ Investment in Fidelity Investments' Variable Insurance Products Funds I
and II
+++++ Investment in Morgan Stanley Universal Funds, Inc.
47
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NOTE 1., CONT'D.
Partners Portfolio; 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 Universal Funds Inc. (MS): Emerging Markets
Equity Portfolio. Penn Series, AMT, ACI, Fidelity, and MS are open-end
diversified investment companies. The investments 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.
FEDERAL INCOME TAXES - Penn Mutual is taxed under federal law as a life
insurance company. Cornerstone II/ Estate Max 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 Cornerstone
II/Estate Max.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SMALL INTERNATIONAL
VALUE EQUITY FLEXIBLY MANAGED CAPITALIZATION EQUITY
FUND+ FUND+ FUND+ FUND+
- ---------------------- ----------------------- ---------------------- ----------------------
1997 1996 1997 1996 1997 1996 1997 1996
- ---------- ---------- ----------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
342,984 192,908 565,437 342,661 176,644 114,111 322,058 171,806
7,419 2,691 29,274 13,860 1,344 556 11,463 5,335
33,173 10,049 59,763 18,080 16,935 3,801 12,386 7,106
- ---------- ---------- ----------- ---------- ---------- ---------- ---------- ----------
383,576 205,648 654,474 374,601 194,923 118,468 345,907 184,247
(17,389) (16,010) (38,372) (23,982) (11,068) (30,486) (134,703) (39,588)
- ---------- ---------- ----------- ---------- ---------- ---------- ---------- ----------
366,187 189,638 616,102 350,619 183,855 87,982 211,204 144,659
247,116 57,478 430,952 80,333 103,024 15,042 162,866 18,207
- ---------- ---------- ----------- ---------- ---------- ---------- ---------- ----------
613,303 247,116 1,047,054 430,952 286,879 103,024 374,070 162,866
========== ========== =========== ========== ========== ========== ========== ==========
$8,428,696 $3,863,030 $13,231,770 $7,070,311 $2,758,570 $1,430,164 $5,819,080 $2,884,014
$ 383,769 $ 290,587 $ 771,037 $ 455,369 $ 156,965 $ 368,391 $2,275,089 $ 618,269
</TABLE>
<TABLE>
<CAPTION>
ASSET EMERGING
EQUITY INCOME GROWTH MANAGER INDEX 500 MARKETS EQUITY
PORTFOLIO++++ PORTFOLIO++++ PORTFOLIO++++ PORTFOLIO++++ PORTFOLIO+++++
- ---------------------- ---------------------- ------------------ ------------- ---------------
1997 1996 1997 1996 1997 1996 1997(A) 1997(A)
- ---------- ---------- ---------- ---------- -------- -------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
229,498 167,613 153,300 145,505 53,030 37,160 14,070 59,519
3,612 56 1,196 92 1,818 456 0 404
18,161 1,654 5,352 2,307 4,559 376 0 1,790
- ---------- ---------- ---------- ---------- -------- -------- ---------- ---------
251,271 169,323 159,848 147,904 59,407 37,992 14,070 61,713
(23,201) (24,588) (17,368) (7,468) (10,047) (6,094) (795) (2,113)
- ---------- ---------- ---------- ---------- -------- -------- ---------- ---------
228,070 144,735 142,480 140,436 49,360 31,898 13,275 59,600
172,796 28,061 164,733 24,297 42,038 10,140 0 0
- ---------- ---------- ---------- ---------- -------- -------- ---------- ---------
400,866 172,796 307,213 164,733 91,398 42,038 13,275 59,600
========== ========== ========== ========== ======== ======== ========== =========
$5,493,990 $3,317,836 $5,422,091 $4,408,108 $982,357 $596,147 $1,541,327 $ 676,035
$ 499,663 $ 477,046 $ 577,552 $ 221,841 $166,816 $ 98,446 $ 89,456 $ 25,725
</TABLE>
48
<PAGE>
- --------------------------------------------------------------------------------
PENN MUTUAL VARIABLE LIFE ACCOUNT I - CORNERSTONE VUL II/VARIABLE ESTATE MAX
NOTES TO FINANCIAL STATEMENTS - DECEMBER 31, 1997 (CONT'D)
- --------------------------------------------------------------------------------
NOTE 3.
Operations are charged for mortality and expense risks assumed by Penn
Mutual as determined daily at a current annual rate guaranteed never to
exceed 0.90%, of the average value of Cornerstone II/Estate Max.
On the date of issue and on each monthly anniversary a monthly deduction is
made from the policy value. The monthly deduction consists of (1) insurance
charges (2) administrative charges and (3) any charges for additional
benefits added by supplemental agreements to a policy. See original policy
documents for specific charges assessed.
If a policy is surrendered within the first 11 years in Cornerstone VUL II
or the first 13 years for Variable Estate Max, a contingent deferred sales
charge and/or contingent deferred administrative charge will be assessed.
These charges will be deducted before any surrender proceeds are paid. See
original policy document for specific charges assessed.
49
<PAGE>
- --------------------------------------------------------------------------------
REPORT OF INDEPENDENT ACCOUNTANTS
THE BOARD OF TRUSTEES
THE PENN MUTUAL LIFE INSURANCE COMPANY
PHILADELPHIA, PENNSYLVANIA
We have audited the accompanying consolidated balance sheet of The Penn Mutual
Life Insurance Company and subsidiaries as of December 31, 1997 and the related
consolidated income statement, statement of changes in equity and statement of
cash flows for the year then ended. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audit. The
financial statements of the Company as of December 31, 1996 and for each of the
two years in the period ended December 31, 1996 were audited by other auditors
whose report dated January 31, 1997 expressed an unqualified opinion on those
statements and included an explanatory paragraph that disclosed the Company's
adoption of several accounting principles which were not previously required to
be adopted. These changes are described in Note 1 to the financial statements.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the 1997 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,
1997, and the results of their operations and their cash flows for the year
then ended, in conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
Philadelphia, Pennsylvania
January 30, 1998
50
<PAGE>
- --------------------------------------------------------------------------------
REPORT OF INDEPENDENT ACCOUNTANTS
THE BOARD OF TRUSTEES OF
THE PENN MUTUAL LIFE INSURANCE COMPANY
PHILADELPHIA, PENNSYLVANIA
We have audited the accompanying consolidated balance sheet of The Penn Mutual
Life Insurance Company as of December 31, 1996 and the related consolidated
income statements, changes in equity and statement of cash flows for the two
years in the period ended December 31, 1996. 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 generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial condition of The
Penn Mutual Life Insurance Company as of December 31, 1996, and the results of
their operations and their cash flows for the two years in the period ended
December 31, 1996, in conformity with generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, in 1996 the
Company adopted Financial Accounting Standards Board Interpretation No. 40 (FIN
40) and Statement of Financial Accounting Standards No. 120 (SFAS 120), which
required implementation of several accounting pronouncements not previously
adopted. The effects of adopting FIN 40 and SFAS 120 were retroactively applied
to the Company's previously issued financial statements, consistent with the
implementation guidance of those standards.
/s/ Coopers & Lybrand L.L.P.
Coopers & Lybrand L.L.P.
2400 Eleven Penn Center
Philadelphia, Pennsylvania
January 31, 1997
51
<PAGE>
- --------------------------------------------------------------------------------
THE PENN MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
(in thousands)
ASSETS
Debt securities, at fair value........................... $5,427,652 $5,214,788
Equity securities, at fair value......................... 12,502 16,745
Mortgage loans on real estate............................ 52,996 124,914
Real estate, net of accumulated depreciation............. 22,358 97,805
Policy loans............................................. 642,989 656,073
Short-term investments................................... 43,470 37,515
Other invested assets.................................... 88,928 94,369
---------- ----------
TOTAL INVESTMENTS....................................... 6,290,895 6,242,209
Cash and cash equivalents................................ 37,064 37,314
Investment income due and accrued........................ 103,072 103,132
Deferred acquisition costs............................... 384,542 412,595
Amounts recoverable from reinsurers...................... 63,211 58,882
Broker/dealer receivables................................ 526,797 449,150
Other assets............................................. 92,203 85,382
Separate account assets.................................. 1,869,094 1,368,384
---------- ----------
TOTAL ASSETS............................................ $9,366,878 $8,757,048
========== ==========
LIABILITIES
Reserves for payment of future policy benefits........... $2,770,015 $2,782,621
Other policyholder funds................................. 2,973,434 3,053,412
Policyholders' dividends payable......................... 35,273 35,395
Broker/dealer payables................................... 333,104 303,089
Accrued income tax payable:
Current................................................. 17,476 25,487
Deferred................................................ 75,096 35,783
Other liabilities........................................ 283,666 282,501
Separate account liabilities............................. 1,869,094 1,368,384
---------- ----------
TOTAL LIABILITIES....................................... 8,357,158 7,886,672
---------- ----------
EQUITY
Unrealized gains/(losses) on investment securities, net
of taxes and amortization of deferred acquisition costs. 152,009 85,730
Retained earnings........................................ 857,711 784,646
---------- ----------
TOTAL EQUITY............................................ 1,009,720 870,376
---------- ----------
TOTAL LIABILITIES AND EQUITY........................... $9,366,878 $8,757,048
========== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
52
<PAGE>
- --------------------------------------------------------------------------------
THE PENN MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED INCOME STATEMENTS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31, 1997 1996 1995
- --------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C>
REVENUES
Premium and annuity considerations.......... $ 195,220 $ 199,821 $ 187,907
Policy fee income........................... 102,398 89,349 80,652
Net investment income....................... 460,206 475,315 489,773
Net realized capital gains/(losses)......... 9,655 (10,078) 14,112
Broker/dealer fees and commissions.......... 290,005 241,068 200,223
Other income................................ 11,851 11,544 31,646
---------- ---------- ----------
TOTAL REVENUE.............................. 1,069,335 1,007,019 1,004,313
---------- ---------- ----------
BENEFITS AND EXPENSES
Benefits paid to policyholders and
beneficiaries.............................. 480,234 462,412 486,559
Policyholder dividends...................... 67,412 67,596 69,807
Increase/(decrease) in liability for future
policy benefits............................ (11,972) 42,652 38,038
General expenses............................ 202,731 178,554 186,204
Broker/dealer sales expense................. 160,730 132,724 109,492
Amortization of deferred acquisition costs.. 43,223 46,137 36,794
---------- ---------- ----------
TOTAL BENEFITS AND EXPENSES................ 942,358 930,075 926,894
---------- ---------- ----------
INCOME BEFORE INCOME TAXES................. 126,977 76,944 77,419
---------- ---------- ----------
Income taxes:
Current.................................... 50,061 37,944 11,740
Deferred................................... 3,851 (9,919) (33,179)
---------- ---------- ----------
NET INCOME................................. $ 73,065 $ 48,919 $ 98,858
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
53
<PAGE>
- --------------------------------------------------------------------------------
THE PENN MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
<TABLE>
<CAPTION>
UNREALIZED
APPRECIATION
(DEPRECIATION)
OF INVESTMENT RETAINED TOTAL
FOR THE YEARS ENDED DECEMBER 31, SECURITIES EARNINGS EQUITY
- --------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C>
BALANCE AT JANUARY 1, 1995.................. $(57,212) $636,869 $ 579,657
Net income for 1995........................ -- 98,858 98,858
Unrealized appreciation of securities...... 216,153 -- 216,153
-------- -------- ----------
BALANCE AT DECEMBER 31, 1995................ 158,941 735,727 894,668
Net income for 1996........................ -- 48,919 48,919
Unrealized depreciation of securities...... (73,211) -- (73,211)
-------- -------- ----------
BALANCE AT DECEMBER 31, 1996................ 85,730 784,646 870,376
Net income for 1997........................ -- 73,065 73,065
Unrealized appreciation of securities...... 66,279 -- 66,279
-------- -------- ----------
BALANCE AT DECEMBER 31, 1997................ $152,009 $857,711 $1,009,720
======== ======== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
54
<PAGE>
- --------------------------------------------------------------------------------
THE PENN MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31, 1997 1996 1995
- ----------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income................................ $ 73,065 $ 48,919 $ 98,858
Adjustments to reconcile net income to net
cash provided by operations:
Capitalization of policy acquisition
costs................................... (64,427) (60,234) (52,147)
Amortization of deferred acquisition
costs................................... 43,223 46,137 36,794
Policy fees on universal life and invest-
ment contracts.......................... (104,342) (89,349) (80,652)
Interest credited on universal life and
investment contracts.................... 160,417 171,051 186,549
Depreciation and amortization............ 18,682 11,613 13,260
Premiums due and other receivables....... (7,291) (105) (2,219)
Realized capital (gains)/losses.......... (9,655) 10,078 (14,112)
(Increase)/decrease in accrued investment
income.................................. 60 6,474 7,880
(Increase)/decrease in amounts due from
reinsurers.............................. (4,329) (14,200) 9,994
(Increase)/decrease in net broker dealer
receivables............................. (47,632) 296 (37,142)
Increase/(decrease) in future policy ben-
efit reserves........................... (13,358) 58,697 9,276
Increase/(decrease) in claims payable.... -- -- (16,322)
Increase/(decrease) in income tax pay-
able.................................... (4,526) 7,798 (59,512)
Other, net............................... (6,693) 39,625 (5,232)
----------- ----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVI-
TIES................................... 33,194 236,800 95,273
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Sale of investments:
Debt securities available for sale....... 1,235,274 927,905 1,201,541
Equity securities........................ 20,374 25,413 153,985
Real estate.............................. 87,875 40,209 20,461
Other.................................... 14,355 15,284 10,834
Maturity and other principal repayments:
Debt securities available for sale....... 472,474 278,290 276,806
Equity securities........................ -- -- 1,992
Mortgage loans........................... 61,813 156,643 138,396
Cost of investments acquired:
Debt securities available for sale....... (1,772,007) (1,427,048) (1,448,184)
Equity securities........................ (15,268) (11,752) (80,999)
Mortgage loans........................... 0 (36,155) (115,047)
Real estate.............................. (15,600) (8,542) (15,428)
Other.................................... (15,503) (8,789) (8,420)
Change in policy loans, net............... 13,084 1,234 (18,708)
(Increase)/decrease in short-term
investments, net......................... (5,955) 51,290 (80,740)
Purchases of furniture and equipment, net. (4,116) (6,449) (5,369)
----------- ----------- -----------
NET CASH (USED)/PROVIDED BY INVESTING
ACTIVITIES............................. 76,800 (2,467) 31,120
----------- ----------- -----------
</TABLE>
- CONTINUED -
The accompanying notes are an integral part of the consolidated financial
statements.
55
<PAGE>
- --------------------------------------------------------------------------------
THE PENN MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31, 1997 1996 1995
- ----------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Deposits for universal life and investment
contracts...................................... $ 653,233 $ 625,816 $ 602,956
Withdrawals from universal life and investment
contracts...................................... (552,311) (567,697) (608,416)
Transfers to separate accounts.................. (236,008) (269,735) (114,332)
Issuance/(repayment) of debt.................... 24,842 (18,424) 1,354
--------- --------- ---------
NET CASH USED BY FINANCING ACTIVITIES......... (110,244) (230,040) (118,438)
--------- --------- ---------
NET DECREASE IN CASH AND CASH EQUIVALENTS..... (250) 4,293 7,955
CASH AND CASH EQUIVALENTS
Beginning of the year.......................... 37,314 33,021 25,066
--------- --------- ---------
End of the year................................ $ 37,064 $ 37,314 $ 33,021
========= ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Income Taxes................................... $ 54,507 $ 20,228 $ 46,286
Interest Paid.................................. 1,384 939 5,239
</TABLE>
See Note 2 for information on unrealized gains and losses and a 1996 non-cash
transaction related to mortgage loans.
The accompanying notes are an integral part of the consolidated financial
statements.
56
<PAGE>
- -------------------------------------------------------------------------------
THE PENN MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS OF DOLLARS)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
ORGANIZATION AND BASIS OF PRESENTATION
The Penn Mutual Life Insurance Company (the "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 generally accepted accounting principles and include the
accounts of The Penn Mutual Life Insurance Company, its wholly owned life
insurance subsidiary, The Penn Insurance and Annuity Company ("PIA"), and non-
insurance subsidiaries (principally broker/dealer, investment advisory and
real estate 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.
ACCOUNTING CHANGES
As of January 1, 1996, the Company adopted Financial Accounting Standards
Board Interpretation No. 40 (FIN 40), "Applicability of Generally Accepted
Accounting Principles to Mutual Life Insurance and Other Enterprises", as
amended by Statement of Financial Accounting Standards (SFAS) No. 120,
"Accounting and Reporting by Mutual Life Insurance Enterprises for Certain
Long-Duration Participating Contracts". The initial effect of applying these
pronouncements has been reported retroactively, as of January 1, 1993. SFAS
No. 120 requires financial statements referred to as prepared in accordance
with generally accepted accounting principles (GAAP) to apply all applicable
authoritative GAAP pronouncements. Prior to the adoption of SFAS No. 120,
statutory financial statements were permitted to be referred to as being
prepared in accordance with GAAP. The significant GAAP authoritative
pronouncements requiring initial application were as follows:
. SFAS No. 60, "Accounting and Reporting by Insurance Enterprises",
. SFAS No. 87, "Employers' Accounting for Pensions",
. SFAS No. 94, "Consolidation of All Majority-Owned Subsidiaries",
. SFAS No. 97, "Accounting and Reporting by Insurance Enterprises for Certain
Long Duration Contracts and for Realized Gains and Losses from the Sale of
Investments",
. SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than
Pensions" ,
. SFAS No. 109, "Accounting for Income Taxes",
. SFAS No. 113, "Accounting and Reporting for Reinsurance of Short-Duration
and Long-Duration Contracts",
. Statement of Position (SOP) 95-1, "Accounting for Certain Insurance
Activities of Mutual Life Insurance Enterprises".
The cumulative effect of applying SFAS No. 120 and FIN 40 primarily consists
of the initial deferral of acquisition costs, the establishment of deferred
taxes, the change in methodology for insurance reserves, and the elimination
of the statutory asset valuation reserve and interest maintenance reserve and
the establishment of investment valuation allowances. In connection with the
adoption of FIN 40, the Company also adopted SFAS No. 115, "Accounting for
Certain Debt and Equity Securities" as of January 1, 1994.
57
<PAGE>
- --------------------------------------------------------------------------------
THE PENN MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(IN THOUSANDS OF DOLLARS)
As a result of the change in accounting principles, net income as previously
reported, has been restated as follows:
<TABLE>
<CAPTION>
1995
---------
<S> <C>
Net income, as previously reported.............................. $ 729
Add adjustments for the cumulative effect on prior years
Deferred acquisition costs..................................... 15,353
Policy reserves................................................ (12,079)
Deferred taxes................................................. 32,341
Investment reserves............................................ 46,640
Other, net..................................................... 15,874
Total.......................................................... 98,129
---------
Net income, as adjusted......................................... $ 98,858
=========
As a result of the change in accounting principles, equity, as previously
reported has been restated as follows:
<CAPTION>
1995
---------
<S> <C>
Balance at beginning of year, as previously reported............ $ 315,321
---------
Add adjustments for the cumulative effect on prior years of
applying retroactively the new basis of accounting
Deferred acquisition costs..................................... 466,446
Policy reserves................................................ (67,526)
Deferred taxes................................................. (527)
Investment reserves............................................ 13,651
Unrealized gains/(losses)...................................... (145,759)
Other, net..................................................... (1,949)
---------
Total.......................................................... 264,336
---------
Balance at beginning of year, as adjusted....................... 579,657
---------
Net income...................................................... 98,858
Net change in unrealized gains/(losses) on investment
securities..................................................... 216,153
---------
315,011
---------
Balance at end of year.......................................... $ 894,668
=========
</TABLE>
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 through a separate component of equity.
Interest on debt securities is credited to income as it is earned.
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 permanent based on an analysis of discounted future cash
flows. Properties held for sale are carried at the lower of
58
<PAGE>
- --------------------------------------------------------------------------------
THE PENN MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(IN THOUSANDS OF DOLLARS)
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 joint venture real estate partnerships,
which are valued on the equity basis, and 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. Unrealized gains and losses, net of
appropriate taxes and amortization of deferred acquisition costs, are accounted
for as a separate component of equity.
The Company utilizes various financial instruments, such as interest rate swaps
and financial futures, to hedge against interest rate fluctuation. These
instruments are recorded 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 $44,329 and $40,671 at December 31,
1997 and 1996, respectively. Related depreciation and amortization expense was
$8,183, $7,510 and $6,914 for the years ended December 31, 1997, 1996 and 1995,
respectively.
Goodwill represents the excess of the cost of the businesses acquired over the
fair value of their net assets. These costs are amortized on a straight-line
basis over not more than 40 years and are included in other assets in the
Consolidated Balance Sheets. Unamortized goodwill amounted to $16,932 and
$17,740 at December 31, 1997 and 1996 respectively. Goodwill amortization was
$808, $909 and $907 for 1997, 1996 and 1995, 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, 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.
59
<PAGE>
- --------------------------------------------------------------------------------
THE PENN MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(IN THOUSANDS OF DOLLARS)
SEPARATE ACCOUNTS
Separate Account assets and liabilities represent segregated funds administered
and invested by the Company primarily for the benefit of variable life
insurance policyholders and annuity and pension contractholders, including
certain of the Company's benefit plans. The value of the assets in the Separate
Accounts reflects the actual investment performance of the respective accounts
and is not guaranteed by the Company. The carrying value for Separate Account
assets and liabilities approximates the estimated fair value of the underlying
assets.
INSURANCE LIABILITIES AND REVENUE RECOGNITION
Participating Traditional Life and Life Contingent Annuity Products
Future policy benefits include reserves for participating traditional life
insurance and life contingent annuity products and are established in amounts
adequate to meet the estimated future obligations of the policies in force.
Liabilities for participating traditional life products are computed using the
net level premium method, using assumptions for investment yields, mortality,
morbidity and withdrawals, which are consistent with the dividend fund interest
rate and mortality rates used in calculating cash surrender values. Interest
rate assumptions used in the calculation of the liabilities for participating
traditional life products ranged from 2.25% to 4.5%. Premiums are recognized as
income when due. Death and surrender benefits are reported in expense as
incurred.
Liabilities for life contingent annuity products are computed by estimating
future benefits and expenses. Assumptions are based on Company experience
projected at the time of policy issue, with provision for adverse deviations.
Interest rate assumptions range from 2.25% to 13.25%. Premiums are recognized
as income as they are received. Death and surrender benefits are reported in
expense as incurred.
Universal Life Products and Other Annuity Products
Other policyholder funds represent liabilities for universal life and
investment-type annuity products. The liabilities for these products are based
on the contract account value which consists of deposits received from
customers and investment earnings on the account value, less administrative and
expense charges. The liability for universal life products is also reduced by
mortality charges. Liabilities for the non-life contingent annuity products are
computed by estimating future benefits and expenses. Assumptions are based on
Company experience projected at the time of policy issue. Interest rate
assumptions range from 2.0% to 11.25%.
Contract charges assessed against account value for universal life and
investment-type annuities are reflected as policy fee income in revenue.
Interest credited to account values and universal life benefit claims in excess
of fund values are reflected as benefit expense.
Policyholders' Dividends
The majority of the Company's insurance products have been issued on a
participating basis. As of December 31, 1997, participating insurance expressed
as a percentage of insurance in force is 91%, and as a percentage of premium
income is 80%. 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,
1997.
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.
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.
60
<PAGE>
- --------------------------------------------------------------------------------
THE PENN MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(IN THOUSANDS OF DOLLARS)
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.
RECLASSIFICATIONS
Certain 1996 and 1995 amounts have been reclassified to conform with 1997
presentation.
NOTE 2 - INVESTMENTS:
DEBT SECURITIES
The following tables summarize the Company's investment in debt securities,
including redeemable preferred stocks. All debt securities are classified as
available for sale and are carried at estimated fair value. Amortized cost is
net of cumulative writedowns for other than temporary declines in value of
$1,208 and $1,390 as of December 31, 1997 and 1996, respectively.
<TABLE>
<CAPTION>
DECEMBER 31, 1997
-------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
U.S. Treasury securities and U.S.
Government and agency securities.. $ 107,539 $ 6,302 $ -- $ 113,841
States and political subdivisions.. 12,085 569 -- 12,654
Foreign governments................ 20,397 3,049 -- 23,446
Corporate securities............... 2,854,234 218,145 6,748 3,065,631
Mortgage and other asset-backed se-
curities.......................... 2,133,758 76,160 757 2,209,161
---------- -------- ------ ----------
Total bonds........................ 5,128,013 304,225 7,505 5,424,733
Redeemable preferred stocks........ 3,085 -- 166 2,919
---------- -------- ------ ----------
TOTAL............................. $5,131,098 $304,225 $7,671 $5,427,652
========== ======== ====== ==========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1996
-------------------------------------------
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.. $ 42,928 $ 653 $ -- $ 43,581
States and political subdivisions.. 477 21 -- 498
Foreign governments................ 20,333 2,038 -- 22,371
Corporate securities............... 2,819,418 134,505 11,911 2,942,012
Mortgage and other asset-backed se-
curities.......................... 2,192,353 27,135 16,471 2,203,017
---------- -------- ------- ----------
Total bonds........................ 5,075,509 164,352 28,382 5,211,479
Redeemable preferred stocks........ 3,575 -- 266 3,309
---------- -------- ------- ----------
TOTAL............................. $5,079,084 $164,352 $28,648 $5,214,788
========== ======== ======= ==========
</TABLE>
61
<PAGE>
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THE PENN MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(IN THOUSANDS OF DOLLARS)
The following tables summarize the amortized cost and estimated fair value of
debt securities, including redeemable preferred stocks, by contractual
maturity.
<TABLE>
<CAPTION>
DECEMBER 31, 1997
---------------------
AMORTIZED ESTIMATED
COST FAIR VALUE
---------- ----------
<S> <C> <C>
Maturity:
Within one year.......................................... $ 241,759 $ 240,871
After one year through five years........................ 606,900 620,792
After five years through ten years....................... 613,951 644,749
After ten years through twenty years..................... 428,492 495,854
After twenty years....................................... 1,103,153 1,213,305
Mortgage and other asset-backed securities............... 2,133,758 2,209,162
---------- ----------
Total bonds............................................. 5,128,013 5,424,733
Redeemable preferred stocks.............................. 3,085 2,919
---------- ----------
TOTAL.................................................. $5,131,098 $5,427,652
========== ==========
</TABLE>
Expected maturities may differ from contractual maturities because certain
borrowers have the right to call or prepay obligations with or without call or
prepayment penalties. Mortgage and other asset-backed securities are presented
separately in the maturity schedule due to the potential for prepayment. The
weighted average life of these securities is 7.8 years.
At December 31, 1997, the Company held $2,209,162 in mortgage and other asset-
backed securities. The structured securities portfolio consists of commercial
and residential mortgage pass-through holdings totaling $1,961,662 and
securities backed by credit card receivables, auto loans, home equity and
manufactured housing loans totaling $247,500. These securities follow a
structured principal repayment schedule and are of high credit quality.
Securities totaling $1,810,481 are rated AAA and include $27,854 of interest
only tranches that were retained from the securitization of the Company's
mortgage loan portfolio.
At December 31, 1997, the largest industry concentration of the Company's
portfolio was investments in the finance industry of $734,428, representing 14%
of the total debt portfolio.
Effective November 30, 1995, the Company adopted the implementation guidance
contained in the Financial Accounting Series Special Report, "A Guide to
Implementation of Statement 115 on Accounting for Certain Investments in Debt
and Equity Securities." As a result of adopting this guidance, the Company
reclassified all of its held-to-maturity securities to available-for-sale based
upon a reassessment of the appropriateness of the classifications of all
securities held at that time. The amortized cost and net unrealized gain of the
securities reclassified were $546,834 and $47,348 respectively, at November 30,
1995.
Proceeds during 1997, 1996 and 1995 from sales of available for sale securities
were $1,235,274, $927,905 and $1,201,541, respectively. Gross gains and gross
losses realized on those sales were $21,799 and $8,990, respectively during
1997, $15,932 and $6,899, respectively during 1996 and $62,216 and $10,201,
respectively during 1995. The change in net unrealized gains and losses on debt
securities classified as available for sale included as a separate component of
equity was $160,850, $(149,259) and $438,883 for 1997, 1996 and 1995,
respectively.
The Company's investment portfolio of debt securities is predominantly
comprised of investment grade securities. At December 31, 1997 and 1996, debt
securities with amortized cost totaling $198,943 and $184,719, respectively,
were less than investment grade. At December 31, 1997 and 1996, the Company did
not hold any securities which are either in default as to principal and/or
interest payments, are to be restructured pursuant to commenced negotiations or
are in situations where the borrowers went into bankruptcy subsequent to
acquisition (collectively, "problem debt securities"). The Company did not hold
any debt securities which were non-income producing for the preceding twelve
months as of December 31, 1997 and 1996.
EQUITY SECURITIES
During 1997, 1996 and 1995, the proceeds from sales of equity securities
amounted to $20,374, $25,413 and $153,985, respectively. The gross gains and
gross losses realized on those sales were $975 and $558, $1,369 and $247, and
$9,604 and $3,753, for 1997, 1996 and 1995, respectively.
62
<PAGE>
- --------------------------------------------------------------------------------
THE PENN MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(IN THOUSANDS OF DOLLARS)
MORTGAGE LOANS
On August 29, 1996, the Company securitized the majority of its mortgage loan
portfolio by transferring the loans to a trust which qualifies as a REMIC (Real
Estate Mortgage Investment Conduit) under the Internal Revenue Code. Prior to
transferring the loans with a principal value of $781,564 and a book value of
$780,942, the loans were written down to a fair market value of $755,559, and
the related reserve of $25,285 was released. The trust issued sixteen classes
of Commercial Mortgage Pass-Through Certificates with a total par value of
$781,564. The certificates evidence the entire beneficial ownership interest in
the trust. The cash flow from the mortgages will be used to repay the
certificates over an average life of 4.28 years. The actual date on which the
principal amount of the notes may be paid in full could be substantially
earlier or later based on performance of the mortgages. The cash flows of the
assets of the trust will be the sole source of payments on the notes. The
Company has not guaranteed these certificates or the mortgage loans held by the
trust. As a result of this transaction, the Company recognized a loss of $98
upon the transfer of the mortgages to the trust, representing the difference
between the fair market value of the certificates and the book value of the
mortgage loans transferred to the trust.
The Company retained the highest quality classes of certificates with a par
value of $715,126 and a fair market value of $734,326 at the time of the
securitization. As of December 31, 1997, the par value and fair value of these
securities was $570,130 and $597,248, respectively. The Company sold the lowest
rated classes of certificates with a par value of $66,438 and a fair market
value of $24,838.
The mortgage loans which were not included in the securitization and were
retained by the Company had a book value of $171,555 with a related reserve of
$21,907 and an estimated fair value of $153,405 on the date of the
securitization. Loans which the Company intended to dispose of within a period
of 6 to 24 months were written down to their estimated net realizable value.
These loans had a book value of $99,817 and an estimated net realizable value
of $81,310 at the time of the securitization. The writedown of $18,507 was
fully offset by a release in mortgage loss reserve. As of December 31, 1997,
the Company held $12,368 of these loans. The Company intended to hold mortgage
loans with a book value of $71,738 on the date of the securitization, through
their remaining terms. As of December 31, 1997, the Company continued to hold
$44,428 of these mortgages. The Company discontinued the origination of
commercial mortgage loans in 1996.
The following tables summarize the carrying value of mortgage loans, by
property type and geographic concentration, at December 31.
<TABLE>
<CAPTION>
1997 1996
------- --------
<S> <C> <C>
Property Type
Office buildings............................................. $20,012 $ 51,510
Retail....................................................... 7,862 39,090
Dwellings.................................................... 25,237 33,540
Other........................................................ 3,685 4,174
Valuation allowance.......................................... (3,800) (3,400)
------- --------
TOTAL....................................................... $52,996 $124,914
======= ========
</TABLE>
<TABLE>
<CAPTION>
1997 1996
------- --------
<S> <C> <C>
Geographic Concentration
Northeast.................................................... $23,313 $ 49,438
Midwest...................................................... 5,922 22,920
South........................................................ 12,502 20,717
West......................................................... 15,059 35,239
Valuation allowance.......................................... (3,800) (3,400)
------- --------
TOTAL....................................................... $52,996 $124,914
======= ========
</TABLE>
63
<PAGE>
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THE PENN MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(IN THOUSANDS OF DOLLARS)
The following table presents changes in the mortgage loan valuation allowance
for the years presented:
<TABLE>
<CAPTION>
1997 1996
------ -------
<S> <C> <C>
Balance at January 1............................................ $3,400 $47,192
Provision....................................................... 400 --
Charge offs..................................................... -- (43,792)
------ -------
BALANCE AT DECEMBER 31......................................... $3,800 $ 3,400
====== =======
</TABLE>
As of December 31, 1997 and 1996, the Company's mortgage loan portfolio
contained $0 and $15,726, respectively, of loans delinquent over 60 days or in
foreclosure. As of December 31, 1997 and 1996, there were no non-income
producing mortgage loans for the preceding twelve months.
During 1997, the Company did not restructure the terms of any outstanding
mortgages. During 1996, the Company restructured the terms of outstanding
mortgages with a carrying value of $4,000. As of December 31, 1997 and 1996,
the mortgage loan portfolio included $2,834 and $7,110, 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 $298 and $893 in 1997 and 1996,
respectively. Gross interest income from these loans included in net investment
income totaled $262 and $674 in 1997 and 1996, respectively.
At December 31, 1997, the recorded investment in loans that are considered to
be impaired was $12,368 that, as a result of write-downs, do not have a
valuation allowance. The average recorded investment in impaired loans during
the year ended December 31, 1997 was approximately $38,096. During 1997, $1,454
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.
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Investment.................................................... $19,999 $33,386
Properties held for sale...................................... 7,828 73,260
Less: valuation allowance (5,469) (8,841)
------- -------
TOTAL........................................................ $22,358 $97,805
======= =======
</TABLE>
At December 31, 1997 and 1996, accumulated depreciation on real estate amounted
to $6,498 and $38,781, respectively. Depreciation expense on real estate
totaled $5,709, $6,488 and $10,091 for the years ended December 31, 1997, 1996
and 1995, respectively. During 1997, the Company sold its largest real estate
investment for $65,007 cash to an unrelated buyer. At the date of the sale,
this property had a carrying value of $61,914, net of related reserves,
resulting in a gain of $3,093. During 1996, the Company wrote down the
statement value of this property by $16,000 to its estimated fair value, based
on changes in future valuation assumptions.
OTHER
Investments on deposit with regulatory authorities as required by law were
$7,106 and $7,085 at December 31, 1997 and 1996, respectively.
As of December 31, 1997 and 1996, the Company's investments included $597,248
and $725,806, respectively, of the tranches retained from the 1996
securitization of the Company's commercial mortgage loan portfolio. These
investments represented 59% and 86% of equity at December 31, 1997 and 1996,
respectively.
64
<PAGE>
- --------------------------------------------------------------------------------
THE PENN MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(IN THOUSANDS OF DOLLARS)
NOTE 3 - INVESTMENT INCOME AND CAPITAL GAINS:
The following table summarizes the sources of investment income, excluding
investment gains/(losses), for the year ended December 31.
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Debt securities..................................... $390,852 $356,669 $331,644
Equity securities................................... 1,371 1,313 2,602
Mortgages........................................... 12,098 62,454 99,109
Real estate......................................... 17,519 24,143 31,661
Policy loans........................................ 40,921 40,580 41,762
Short-term investments.............................. 2,426 6,052 3,934
Other invested assets............................... 21,268 14,665 18,016
Cash and cash equivalents........................... 2 44 34
-------- -------- --------
Gross investment income............................. 486,457 505,920 528,762
Less: Investment expenses.......................... 26,251 30,605 38,989
-------- -------- --------
Investment income, net.............................. $460,206 $475,315 $489,773
======== ======== ========
</TABLE>
The following table summarizes net realized capital gains/(losses) on
investments for the year ended December 31. Net realized capital gains/(losses)
include decreases in valuation allowances of $3,154, $44,164 and $2,463 in
1997, 1996 and 1995, respectively.
<TABLE>
<CAPTION>
1997 1996 1995
------- -------- -------
<S> <C> <C> <C>
Debt securities..................................... $12,991 $ 10,412 $51,873
Equity securities................................... 417 1,122 6,652
Mortgage loans...................................... 280 (2,821) (2,799)
Real estate......................................... (684) (22,356) (41,617)
Other............................................... (811) 3,565 3
Amortization of deferred acquisition costs.......... (2,538) -- --
------- -------- -------
Realized gains/(losses)............................. $ 9,655 $(10,078) $14,112
======= ======== =======
</TABLE>
The following table summarizes the change in unrealized gains and losses for
investments carried at fair value for the year ended December 31.
<TABLE>
<CAPTION>
1997 1996 1995
-------- --------- --------
<S> <C> <C> <C>
Unrealized Gains/(Losses):
Debt securities.................................. $160,850 $(149,259) $438,883
Equity securities................................ 408 (582) 2,340
Other............................................ (14,581) (1,545) 11,190
-------- --------- --------
146,677 (151,386) 452,413
-------- --------- --------
Less:
Deferred policy acquisition costs................ (45,043) 38,324 (116,992)
Deferred income taxes............................ (35,355) 39,851 (119,268)
-------- --------- --------
Net change in unrealized gains/(losses).......... $ 66,279 $ (73,211) $216,153
======== ========= ========
</TABLE>
65
<PAGE>
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THE PENN MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(IN THOUSANDS OF DOLLARS)
NOTE 4 - FAIR VALUE INFORMATION:
The following table summarizes the carrying value and estimated fair value of
the Company's financial instruments as of December 31, 1997 and 1996.
<TABLE>
<CAPTION>
1997 1996
------------------------- -------------------------
CARRYING VALUE FAIR VALUE CARRYING VALUE FAIR VALUE
-------------- ---------- -------------- ----------
<S> <C> <C> <C> <C>
FINANCIAL ASSETS:
Debt securities
Available for sale........ $5,427,652 $5,427,652 $5,214,788 $5,214,788
Equity securities
Common stock.............. 3,051 3,051 660 660
Non-redeemable preferred
stocks................... 9,451 9,451 16,085 16,085
Mortgage loans............. 52,996 57,224 124,914 131,577
Policy loans............... 642,989 606,681 656,073 634,291
Cash & cash equivalents.... 37,064 37,064 37,314 37,314
Short-term investments..... 43,470 43,470 37,515 37,515
Separate account assets.... 1,869,094 1,869,094 1,368,384 1,368,384
Other invested assets...... 88,928 88,928 94,369 94,369
FINANCIAL LIABILITIES:
Investment-type contracts
Individual annuities...... $1,225,192 $1,260,639 $1,281,965 $1,317,257
Guaranteed investment con-
tracts................... 59,809 61,456 111,224 112,247
Other group annuities..... 147,061 148,257 161,889 163,524
Other policyholder funds.. 1,541,372 1,541,372 1,498,334 1,498,334
---------- ---------- ---------- ----------
Total policyholder funds. 2,973,434 3,011,724 3,053,412 3,091,362
Policyholders' dividends
payable................... 35,273 35,273 35,395 35,395
Separate account
liabilities............... 1,869,094 1,869,094 1,368,384 1,368,384
</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 value
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 negotiated in an actual sale.
The fair values of the Company's liabilities for individual annuities,
guaranteed investment contracts and certain group annuities are estimated by
discounting the cash flows associated with the contracts, using an interest
rate currently offered for similar contracts with maturities similar to those
remaining for the contracts being valued. The statement value for certain of
the other group annuities approximates their fair value due to the nature of
the contracts. The statement values of other policyholder funds, policyholders'
dividends payable and separate account liabilities approximate their fair
values.
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
66
<PAGE>
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THE PENN MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(IN THOUSANDS OF DOLLARS)
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, 1997 and
1996, the Company had interest rate swaps with aggregate notional amounts equal
to $105,000 and $115,000, respectively, with average unexpired terms of 19 and
29 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 $5,164 and $0, respectively at December 31, 1997 and $7,605 and
$0, respectively, at December 31, 1996. 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 credit worthiness 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 $155,356 and $0 as of December 31, 1997
and 1996, respectively.
NOTE 5 - INCOME TAXES:
The Company follows the asset and liability method of accounting for income
taxes whereby current and deferred tax assets and liabilities are recognized
utilizing currently enacted tax laws and rates. Deferred taxes are adjusted to
reflect tax rates at which future tax liabilities or assets are expected to be
settled or realized.
Deferred income taxes reflect the impact for financial statement reporting
purposes of temporary differences between the financial statement carrying
amounts and tax bases of assets and liabilities. The significant temporary
differences that give rise to the deferred tax assets and liabilities at
December 31 relate to the following:
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
DEFERRED TAX ASSETS
Future policy benefits...................................... $ 88,172 $ 83,327
Dividend award.............................................. 11,970 12,005
Allowances for investment losses............................ 3,667 8,411
Employee benefit liabilities................................ 27,979 27,113
Other....................................................... 23,467 27,530
-------- --------
Total deferred tax asset................................... 155,255 158,386
-------- --------
DEFERRED TAX LIABILITIES
Deferred acquisition costs.................................. 127,495 124,660
Real estate................................................. (1,261) 299
Unrealized gains............................................ 81,553 48,233
Other....................................................... 22,564 20,977
-------- --------
Total deferred tax liability............................... 230,351 194,169
-------- --------
Net deferred tax liability.................................. $ 75,096 $ 35,783
======== ========
</TABLE>
67
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THE PENN MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(IN THOUSANDS OF DOLLARS)
The federal income taxes attributable to consolidated net income are different
from the amounts determined by multiplying consolidated net income before
federal income taxes by the expected federal income tax rate. The difference
between the amount of tax at the U.S. federal income tax rate of 35% and the
consolidated tax provision is summarized as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- --------
<S> <C> <C> <C>
Tax expense at 35%................................ $44,442 $26,930 $ 27,096
Increase/(decrease) in income taxes resulting
from:
Differential earnings amount..................... 6,942 500 3,878
Resolution of tax issues......................... -- -- (57,000)
Other............................................ 2,528 595 4,587
------- ------- --------
Federal income tax expense/(benefit).............. $53,912 $28,025 $(21,439)
======= ======= ========
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.
In 1995, the Company settled various tax issues with the IRS, including an
issue surrounding the tax treatment of certain traditional life insurance
policy updates. As a result of these settlements, the 1995 federal income tax
expense was decreased in the Income Statement by approximately $57,000, which
included $22,300 of interest, net of tax.
The Internal Revenue Service has examined the Company's income tax returns
through the year 1990 and is currently examining years 1991 through 1994.
Management believes that an adequate provision has been made for potential
assessments.
NOTE 6 - BENEFIT PLANS:
The Company maintains qualified and non-qualified defined benefit pension plans
covering substantially all of its employees. The plans are non-contributory and
provide pension benefits based on years of service and average annual
compensation (measured over 60 consecutive months of highest earnings in a 120-
month period). Contributions are determined by using the Projected Unit Credit
Method. The total pension expense related to these plans amounted to $5,917,
$5,963 and $5,054 in 1997, 1996 and 1995, respectively.
The Company's funding policy for its qualified defined benefit plans is to
contribute an amount between the minimum required contribution and the maximum
deductible amount in accordance with the Internal Revenue Code. The following
table summarizes the components of net periodic pension cost for the Company's
qualified defined benefit plans:
<CAPTION>
1997 1996 1995
------- ------- --------
<S> <C> <C> <C>
Service cost...................................... $ 2,161 $ 2,506 $ 1,827
Interest cost on projected benefit obligation..... 4,050 3,540 2,909
Actual return on assets........................... (4,925) (3,095) (5,515)
Net amortization and deferrals.................... 2,367 919 3,736
------- ------- --------
Net periodic pension cost......................... $ 3,653 $ 3,870 $ 2,957
======= ======= ========
</TABLE>
68
<PAGE>
- --------------------------------------------------------------------------------
THE PENN MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(IN THOUSANDS OF DOLLARS)
The following table summarizes the funded status of the Company's qualified
defined benefit plans:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Actuarial present value of benefit obligation:
Vested.......................................... $ 44,964 $ 32,572 $ 29,744
Non-vested...................................... 924 935 763
-------- -------- --------
Accumulated benefit obligation................... 45,888 33,507 30,507
Provision for future salary increases............ 16,769 15,162 17,147
-------- -------- --------
Projected benefit obligation..................... 62,657 48,669 47,654
Plan assets at fair value........................ (42,783) (37,938) (34,067)
-------- -------- --------
Projected benefit obligation in excess of plan
assets.......................................... 19,874 10,731 13,587
Unrecognized prior service cost.................. (178) (203) (228)
Unrecognized net (gain) loss from past
experience...................................... (9,605) (2,430) (6,859)
Unrecognized net asset obligation at transition.. (1,288) (1,609) (1,931)
-------- -------- --------
Accrued pension cost at December 31.............. $ 8,803 $ 6,489 $ 4,569
======== ======== ========
The assumptions used to measure the actuarial present value of the projected
benefit obligation were:
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Discount rate.................................... 7.00% 7.50% 7.00%
Expected long-term rate of return on plan assets. 8.00% 8.00% 8.00%
Salary scale..................................... 5.50% 5.50% 5.50%
</TABLE>
The qualified defined benefit pension plan's assets are held in trust and
administered under a participatory group annuity contract issued by the Company
with assets invested in various separate accounts of the Company. A non-
participatory annuity contract issued by the Company funds benefits accrued
prior to 1986.
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. At December 31, 1997, 1996 and 1995, the expense recognized
for these plans was $8,345, $6,092 and $5,083, respectively. The estimated fair
value of the defined contribution plans' assets were $229,378, $201,679 and
$176,832, respectively.
The Company also provides certain medical, life insurance and other welfare
benefits (postretirement benefits) for retired employees and full-time agents.
Substantially all employees and full-time agents become eligible for these
benefits if they reach retirement age while working for the Company and have at
least 10 years of service. Employees retiring after January 1, 1993 receive a
defined dollar benefit under the medical plan. The Company continues to fund
postretirement benefit costs on a pay-as-you-go basis.
69
<PAGE>
- --------------------------------------------------------------------------------
THE PENN MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(IN THOUSANDS OF DOLLARS)
The following table sets forth the postretirement benefits plan's status,
reconciled to amounts recognized in the Company's Consolidated Balance Sheet
and Income Statements at December 31.
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Actuarial present value of accumulated
postretirement benefit obligation:
Retirees.......................................... $22,638 $21,301 $32,473
Fully eligible active plan participants........... 2,707 2,547 2,826
Other active plan participants.................... 6,068 5,710 5,672
------- ------- -------
Total............................................ 31,413 29,558 40,971
Plan assets at fair value.......................... -- -- --
------- ------- -------
Accumulated postretirement benefits obligation in
excess of plan assets............................. 31,413 29,558 40,971
Unrecognized prior service cost.................... -- -- --
Unrecognized net gain from past experience......... 13,730 16,261 5,129
------- ------- -------
Accrued postretirement benefits cost............... $45,143 $45,819 $46,100
======= ======= =======
Net periodic postretirement benefits cost includes
the following components:
Service cost...................................... 393 434 355
Interest cost on accumulated postretirement bene-
fits obligation.................................. 2,182 2,206 2,910
Actual return on assets........................... -- -- --
Net amortization and deferral..................... (1,060) (815) (573)
------- ------- -------
Net periodic postretirement benefits cost.......... $ 1,515 $ 1,825 $ 2,692
======= ======= =======
</TABLE>
At December 31, 1997, the assumed health care cost trend rate used in measuring
the accumulated postretirement benefit obligation was 8.5% in 1998, grading to
5.0% in the year 2004. The weighted-average discount rate used in determining
the accumulated postretirement benefit obligation was 7.00% at December 31,
1997. At December 31, 1996, the assumed health care cost trend rate used in
measuring the accumulated postretirement benefit obligation was 8.5% in 1997,
grading to 5.0% in the year 2004. The weighted-average discount rate used in
determining the accumulated postretirement benefit obligation was 7.5% at
December 31, 1996. At December 31, 1995, the assumed health care cost trend
rate used in measuring the accumulated postretirement benefit obligation was
9.0% in 1996, grading to 5.0% in the year 2004. The weighted-average discount
rate used in determining the accumulated postretirement benefit obligation was
7.0% at December 31, 1995.
If the health care cost trend rate was increased by one percentage point for
each future year, the accumulated postretirement benefit obligation as of
December 31, 1997 would increase by $1,948. The effect of this change on the
sum of the service cost and interest cost, before taxes, would be an increase
of $136.
70
<PAGE>
- --------------------------------------------------------------------------------
THE PENN MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(IN THOUSANDS OF DOLLARS)
NOTE 7 - REINSURANCE:
The Company has assumed and ceded reinsurance on certain life and annuity
contracts under various agreements. Reinsurance permits recovery of a portion
of losses from reinsurers, although the Company remains primarily liable as the
direct insurer on all risks reinsured. The Company evaluates the financial
strength of potential reinsurers and continually monitors the financial
condition of present reinsurers to ensure that amounts due from reinsurers are
collectable. 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, 1997:
Life Insurance in Force.......... $31,027,764 $5,217,856 $4,620,599 $31,625,021
Premiums......................... 190,754 11,189 6,723 195,220
Benefits......................... 330,432 14,293 26,916 317,809
Reserves......................... 5,741,456 1,993 59,322 5,684,127
DECEMBER 31, 1996:
Life Insurance in Force.......... $30,057,996 $5,420,951 $3,186,567 $32,292,380
Premiums......................... 196,897 12,745 9,821 199,821
Benefits......................... 293,270 16,466 16,808 292,928
Reserves......................... 5,833,970 2,063 56,632 5,779,401
</TABLE>
During 1995, the Company had gross premiums of $184,362, assumed premiums of
$13,453 and ceded premiums of $9,908 and gross benefits of $303,911, assumed
benefits of $13,265 and ceded benefits of $14,700.
Reinsurance receivables with a carrying value of $50,617 and $50,522 were
associated with a single reinsurer at December 31, 1997 and 1996, respectively.
During 1995, the Company recaptured the portion of its disability income
business that was previously reinsured under a quota share and excess
reinsurance agreement with the Monarch Life Insurance Company ("Monarch"). As a
result of this recapture, approximately $21,200 of cash and policyholder
reserves were transferred to the Company from Monarch.
NOTE 8 - COMMITMENTS AND CONTINGENCIES:
The Company and its subsidiaries are respondents in a number of proceedings,
some of which involve extra-contractual damage in addition to other damages. In
addition, insurance companies are subject to assessments, up to statutory
limits, by state guaranty funds for losses of policyholders of insolvent
insurance companies. In the opinion of management, the outcome of the
proceedings and assessments are not likely to have a material adverse effect on
the financial position of the Company.
The Company, in the ordinary course of business, extends commitments relating
to its investment activities. As of December 31, 1997, the Company had
outstanding commitments totaling $38,326 relating to these investment
activities. The fair value of these commitments approximates the face amount.
NOTE 9 - STATUTORY INFORMATION:
State insurance regulatory authorities prescribe or permit statutory accounting
practices for calculating net income and capital and surplus which differ in
certain respects from generally accepted accounting principles (GAAP). The
significant differences relate to deferred acquisition costs, which are charged
to expenses as incurred; federal income taxes, which reflect amounts that are
currently taxable; and benefit reserves, which are determined using prescribed
mortality, morbidity and interest assumptions, and which, when considered in
light of the assets supporting these reserves, adequately provide for
obligations under policies and contracts. In addition, the recording of
impairments in the value of investments generally lags recognition under GAAP.
The combined insurance companies' statutory capital and surplus at December 31,
1997 and 1996 was $435,861 and $379,774, respectively. The combined insurance
companies' net income, determined in accordance with statutory accounting
practices, for the years ended December 31, 1997, 1996 and 1995, was $63,615,
$25,905 and $729, respectively.
71
<PAGE>
- --------------------------------------------------------------------------------
THE PENN MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(IN THOUSANDS OF DOLLARS)
NOTE 10 - BUSINESS SEGMENT INFORMATION:
The operations of the Company are conducted principally through two business
units: Insurance and Broker-Dealer. The insurance operations offer a diverse
portfolio of life insurance products and both individual and group annuity
products. The Broker-Dealer operations provide broad financial and investment
services.
Assets are held directly by each business unit in amounts necessary to both
fund liabilities and to provide a margin to cover business risks.
The table below summarizes the information concerning the business units:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
REVENUES
Insurance...................................... $ 778,179 $ 765,210 $ 803,276
Broker-Dealer.................................. 291,156 241,809 201,037
---------- ---------- ----------
TOTAL......................................... $1,069,335 $1,007,019 $1,004,313
========== ========== ==========
PRETAX INCOME
Insurance...................................... $ 84,722 $ 43,765 $ 53,337
Broker-Dealer.................................. 42,255 33,178 24,082
---------- ---------- ----------
TOTAL......................................... $ 126,977 $ 76,943 $ 77,419
========== ========== ==========
<CAPTION>
DECEMBER 31,
---------------------
1997 1996
---------- ----------
<S> <C> <C>
IDENTIFIABLE ASSETS
Insurance...................................... $8,784,570 $8,259,309
Broker-Dealer.................................. 582,308 497,739
---------- ----------
TOTAL......................................... $9,366,878 $8,757,048
========== ==========
</TABLE>
72
<PAGE>
- --------------------------------------------------------------------------------
APPENDIX A
- --------------------------------------------------------------------------------
MINIMUM INITIAL ANNUAL PREMIUMS
The following table shows for Insureds of varying ages, the minimum initial
annual premium for a Policy with a Basic Death Benefit of $1,000,000. The table
assumes the Insureds will be placed in a nonsmoker class and that no
supplemental benefits will be added to the base Policy.
<TABLE>
<CAPTION>
MINIMUM INITIAL ANNUAL
AGE OF MALE AGE OF FEMALE PREMIUM
-----------------------------------------------------------------------------------
<S> <C> <C>
35 35 $2,802
-----------------------------------------------------------------------------------
40 45 $3,224
-----------------------------------------------------------------------------------
45 45 $3,296
-----------------------------------------------------------------------------------
50 45 $3,376
-----------------------------------------------------------------------------------
55 45 $3,462
-----------------------------------------------------------------------------------
55 55 $4,248
-----------------------------------------------------------------------------------
60 58 $4,687
-----------------------------------------------------------------------------------
65 70 $7,146
-----------------------------------------------------------------------------------
70 62 $6,391
-----------------------------------------------------------------------------------
</TABLE>
A-1
<PAGE>
- --------------------------------------------------------------------------------
APPENDIX B
- --------------------------------------------------------------------------------
ADMINISTRATIVE SURRENDER CHARGES PER $1,000 OF INITIAL SPECIFIED AMOUNT
<TABLE>
<CAPTION>
ATTAINED AGE OF YOUNGER CHARGE PER EACH $1,000 OF
INSURED ON POLICY DATE INITIAL SPECIFIED AMOUNT
----------------------------------------------------------------------------
<S> <C>
20-29 $ 6.00
----------------------------------------------------------------------------
30-39 $ 8.00
----------------------------------------------------------------------------
40-49 $10.00
----------------------------------------------------------------------------
50-59 $12.00
----------------------------------------------------------------------------
60-over $14.00
----------------------------------------------------------------------------
</TABLE>
SAMPLE SURRENDER CHARGE PREMIUMS FOR $1,000,000 SPECIFIED AMOUNT
(NS = NONSMOKER; S = SMOKER)
<TABLE>
<CAPTION>
AGE OF SMOKING AGE OF SMOKING MAXIMUM SURRENDER
MALE STATUS FEMALE STATUS CHARGE PREMIUM
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
50 NS 45 NS $ 9,254
---------------------------------------------------------------------------------------
65 NS 65 NS $29,399
---------------------------------------------------------------------------------------
55 S 55 S $16,280
---------------------------------------------------------------------------------------
55 S 45 NS $10,392
---------------------------------------------------------------------------------------
45 NS 45 S $ 9,040
---------------------------------------------------------------------------------------
35 NS 35 NS $ 5,364
---------------------------------------------------------------------------------------
70 NS 62 S $25,370
---------------------------------------------------------------------------------------
40 S 45 S $ 9,044
---------------------------------------------------------------------------------------
65 S 70 NS $31,204
---------------------------------------------------------------------------------------
60 NS 58 NS $16,885
---------------------------------------------------------------------------------------
</TABLE>
B-1
<PAGE>
- --------------------------------------------------------------------------------
APPENDIX C
- --------------------------------------------------------------------------------
ILLUSTRATIVE NET SINGLE PREMIUM FACTORS
For a Policy Issued to a Male Nonsmoker, age 65, standard underwriting class
and Female, Nonsmoker, age 65, standard underwriting class.
<TABLE>
<S> <C> <C> <C>
65 2.2464 83 1.2787
----------------------------------------------------------------------------------------------------------
66 2.1200 84 1.2557
----------------------------------------------------------------------------------------------------------
67 2.0406 85 1.2348
----------------------------------------------------------------------------------------------------------
68 1.9656 86 1.2159
----------------------------------------------------------------------------------------------------------
69 1.8949 87 1.1987
----------------------------------------------------------------------------------------------------------
70 1.8283 88 1.1831
----------------------------------------------------------------------------------------------------------
71 1.7657 89 1.1686
----------------------------------------------------------------------------------------------------------
72 1.7068 90 1.1550
----------------------------------------------------------------------------------------------------------
73 1.6517 91 1.1421
----------------------------------------------------------------------------------------------------------
74 1.6002 92 1.1295
----------------------------------------------------------------------------------------------------------
75 1.5523 93 1.1171
----------------------------------------------------------------------------------------------------------
76 1.5080 94 1.1044
----------------------------------------------------------------------------------------------------------
77 1.4670 95 1.0913
----------------------------------------------------------------------------------------------------------
78 1.4290 96 1.0778
----------------------------------------------------------------------------------------------------------
79 1.3940 97 1.0643
----------------------------------------------------------------------------------------------------------
80 1.3615 98 1.0520
----------------------------------------------------------------------------------------------------------
81 1.3316 99 1.0321
----------------------------------------------------------------------------------------------------------
82 1.3040
----------------------------------------------------------------------------------------------------------
</TABLE>
C-1
<PAGE>
- --------------------------------------------------------------------------------
APPENDIX D
- --------------------------------------------------------------------------------
POLICIES ISSUED TO NEW YORK RESIDENTS
For Policies issued to New York residents, the surrender charge declines
during the 6th through the 14th Policy Years so that no surrender charge is
deductible during the 15th and later Policy Years. The surrender factors used
to calculate the surrender charge for such Policies are as follows:
<TABLE>
<CAPTION>
SURRENDER FACTOR
SURRENDER DURING APPLIED TO (C) IN
POLICY YEAR FORMULA ON PAGE
----------------------------------------------------------------------------
<S> <C>
1st through 5th 1.00
----------------------------------------------------------------------------
6th .90
----------------------------------------------------------------------------
7th .80
----------------------------------------------------------------------------
8th .70
----------------------------------------------------------------------------
9th .60
----------------------------------------------------------------------------
10th .50
----------------------------------------------------------------------------
11th .40
----------------------------------------------------------------------------
12th .30
----------------------------------------------------------------------------
13th .20
----------------------------------------------------------------------------
14th .10
----------------------------------------------------------------------------
15th 0
----------------------------------------------------------------------------
</TABLE>
D-1
<PAGE>
PART II
<PAGE>
UNDERTAKING TO FILE REPORTS
Subject to the terms and conditions of Section 15(d) of the Securities
Exchange Act of 1934, the undersigned Registrant hereby undertakes to file with
the Securities and Exchange Commission such supplementary and periodic
information, documents and reports as may be prescribed by any rule or
regulation of the Commission heretofore or hereafter duly adopted pursuant to
authority conferred in that section.
The undersigned Registrant represents that the fees and charges deducted
under the Last Survivor Flexible Premium Adjustable Variable Life Insurance
Policy, in the aggregate, are reasonable in relation to the services, the
expenses expected to be incurred, and the risks assumed by the Registrant.
UNDERTAKING PURSUANT TO RULE 484 UNDER THE SECURITIES ACT OF 1933
Section 6.2 of the By-laws of The Penn Mutual Life Insurance Company ("Penn
Mutual" or the "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 the Form
N-4 Registration Statement of Penn Mutual Variable Annuity Account III filed in
April 1990 (File No. 2-77283).
Pennsylvania law (15 Pa. C.S.A. (S)(S) 1741-1750) authorizes Pennsylvania
corporations to provide indemnification to directors, officers and other
persons.
Penn Mutual owns a directors and officers liability insurance policy
covering liabilities that trustees and officers of Penn Mutual and its
subsidiaries may incur in acting as trustees and officers.
Insofar as indemnification for liability arising under the Securities Act
of 1933 (the "Act") 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
II-1
<PAGE>
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.
II-2
<PAGE>
REPRESENTATION PURSUANT TO SECTION 26(e)(2)(A)
OF THE INVESTMENT COMPANY ACT OF 1940
Registrant represents that the fees and charges debuted under the Last
Survivor Flexible Premium Adjustable Variable Life Insurance Policy, in the
aggregate, are reasonable in relation to the services rendered, the expenses
expected to be incurred, and the risks assumed by the Registrant.
CONTENTS OF REGISTRATION STATEMENT
This Registration Statement comprises the following papers and documents:
The facing sheet.
The prospectus consisting of 72 pages.
Undertaking to File Reports.
Rule 484 Undertaking.
Representation.
Section 26(e)(2)(A)
The signatures.
Written consents of the following persons:
(a) Ernst & Young, LLP
(b) Coopers & Lybrand LLP
(c) Morgan, Lewis & Bockius LLP
The following exhibits:
1. Copies of all exhibits which would be required by paragraph A of the
instructions as to exhibits in Form N-8B-2 if a Registration Statement on
that Form were currently being filed.
A(1) (a) Resolution of the Board of Trustees of The Penn Mutual
Life Insurance Company establishing the Penn Mutual
Variable Life Account I./a/
A(2) Not Applicable.
A(3) (a)(1) Distribution Agreement between The Penn Mutual Life
Insurance Company and Hornor, Townsend & Kent,
Inc./b/
(a)(2) Sales Support Agreement between The Penn Mutual Life
Insurance Company and Hornor, Townsend & Kent,
Inc./b/
(b)(1) Agent's Agreement./b/
(b)(2) Broker-Dealer Selling Agreement/b/
II-3
<PAGE>
(b)(3) Companion Broker-Dealer Selling Agreement and
Corporate Insurance Agent Selling Agreement./b/
(c) Schedule of Sales Commissions./h/
A(4) Not Applicable.
A(5) (a)(1) Specimen Last Survivor Flexible Premium Adjustable
Variable Life Insurance Policy (Sex Distinct)./b/
(a)(2) Specimen Last Survivor Flexible Premium Adjustable
Variable Life Insurance Policy (Unisex)./b/
(a)(3) Specimen Last Survivor Flexible Premium Adjustable
Variable Life Insurance Policy (New York)./b/
(b)(1) Flexible Period Single Life Supplemental Term
Insurance Agreement (Sex Distinct)./b/
(b)(2) Flexible Period Single Life Supplemental Term
Insurance Agreement (Unisex)./b/
(b)(3) Flexible Period Single Life Supplemental Term
Insurance Agreement (New York)./b/
(c)(1) Policy Split Option Agreement./b/
(c)(2) Policy Split Option Agreement (New York)./b/
(d) Estate Growth Benefit Agreement./b/
(e)(1) Supplemental Exchange Agreement./b/
(e)(2) Supplemental Exchange Agreement (New York)./b/
(f)(1) Supplemental Term Insurance Agreement (Sex
Distinct)./b/
(f)(2) Supplemental Term Insurance Agreement (Unisex)./b/
(f)(3) Supplemental Term Insurance Agreement (New York)./b/
(g)(1) Guaranteed Continuation of Policy Agreement (Sex
Distinct)./b/
(g)(2) Guaranteed Continuation of Policy Agreement
(Unisex)./b/
A(6) (a) Charter of The Penn Mutual Life Insurance Company./c/
(b) By-Laws of The Penn Mutual Life Insurance Company./d/
A(7) Not Applicable.
A(8) (a) Agreement between The Penn Mutual Life Insurance
Company and Penn Series Funds, Inc./b/
(b)(1) Agreement between The Penn Mutual Life Insurance
Company and Neuberger & Berman Advisers Management
Trust./e/
(b)(2) Assignment and Modification Agreement between
Neuberger & Berman Management Incorporated, Neuberger
& Berman Advisers Management Trust and The Penn Mutual
Life Insurance Company. /f/
(b)(3) Amendment to Agreement between The Penn Mutual Life
Insurance Company and Neuberger & Berman Advisers
Management Trust is incorporated herein by reference
to Form S-6 Registration Statement (File No. 33-54662)
for Penn Mutual Variable Life Account I Post-Effective
Amendment No. 5 filed on April 25, 1997.
II-4
<PAGE>
(c) Agreement between The Penn Mutual Life Insurance
Company and TCI Portfolios, Inc. (renamed American
Century Variable Portfolios, Inc. effective May 1,
1997)./e/
(d) Agreement between The Penn Mutual Life Insurance
Company and Variable Insurance Products Fund./b/
(e) Agreement between The Penn Mutual Life Insurance
Company and Variable Insurance Products Fund II./b/
(f) Agreement between The Penn Mutual Life Insurance
Company and Morgan Stanley Universal Funds, Inc./g/
A(9) Not applicable.
A(10) (a) Application form for Last Survivor Flexible Premium
Adjustable Variable Life Insurance./e/
(b) Supplemental application form for Last Survivor
Flexible Premium Adjustable Variable Life
Insurance./b/
A(11) Memorandum describing issuance, transfer and redemption
procedures./b/
2. Opinion and consent of C. Ronald Rubley, Esq., as to the legality of the
securities being registered./b/
3. Opinion and Consent of Peter R. Schaefer, FSA, MAAA, as to actuarial
matters pertaining to the securities being registered./f/
4. (a) Consent of Ernst & Young, LLP*
(b) Consent of Coopers & Lybrand LLP*
(c) Consent of Morgan, Lewis & Bockius LLP*
5. Powers of Attorney of Robert E. Chapell, James A. Hagen, Phillip E.
Lippincott, John F. McCaughan, Alan B. Miller, Daniel J. Toran, Norman T.
Wilde, Jr., Wesley S. Williams, Jr. and Nancy S. Brodie/i/
Powers of Attorney of Edmond F. Notebaert and Robert H. Rock
- -----------------------
* Filed herewith.
/a/ Filed as exhibit and incorporated herein by reference to the Form S-6
Registration Statement (File No. 33-11883) for Penn Mutual Variable Life
Account I filed on February 10, 1987.
/b/ Filed as an exhibit and incorporated herein by reference to Pre-
Effective Amendment No. 1 to this Form S-6 Registration Statement filed on
April 13, 1995.
/c/ Incorporated herein by reference to Exhibit 6(a) to Post-Effective
Amendment No. 10 to Form N-4 Registration Statement (File No. 2-77283) for
Penn Mutual Variable Annuity Account III filed in April 1988.
/d/ Incorporated herein by reference to Post-Effective Amendment No. 12 to
the Form N-4 Registration Statement (File No. 2-77283) of Penn Mutual
Variable Annuity Account III filed on April 30, 1990.
/e/ Incorporated herein by reference to Pre-Effective Amendment No. 1 to
the Form S-6 Registration Statement (File No. 33-54662) for Penn Mutual
Variable Life Account I filed on March 22, 1993.
II-5
<PAGE>
/f/ Filed as an exhibit and incorporated herein by reference to Post-Effective
Amendment No. 1 to this Form S-6 Registration Statement filed on April 29,
1996.
/g/ Filed as an exhibit and incorporated herein by reference to Post-Effective
Amendment No. 22 to Form N-4 Registration Statement (File No. 2-77283) for
Penn Mutual Variable Annuity Account III filed on April 29, 1997.
/h/ Filed as exhibit and incorporated herein by reference to Post-Effective
Amendment No. 2 to this Form S-6 Registration Statement of Penn Mutual
Variable Life Account I filed on April 29, 1997.
/i/ Filed as exhibits and incorporated herein by reference to Post-Effective
Amendment No. 2 to this Form S-6 Registration Statement of Penn Mutual
Variable Life Account I filed on April 29, 1997.
II-6
<PAGE>
SIGNATURES
On its behalf and on behalf of Penn Mutual Variable Life Account I,
Pursuant to the requirements of the Securities Act of 1933, The Penn Mutual Life
Insurance Company certifies that it meets the requirements of Securities Act
Rule 485(b) for effectiveness of this Registration Statement and has duly caused
this Post-Effective Amendment No. 4 to the Registration Statement to be signed
on its behalf by the undersigned thereunto duly authorized, and its seal to be
hereunto affixed and attested, all in the Township of Horsham and the
Commonwealth of Pennsylvania, on the 17th day of April, 1998.
[SEAL] The Penn Mutual Life Insurance Company
on its behalf and on behalf of Penn
Mutual Variable Life Account I
Attest: /s/ LAURA M. RITZKO By: /s/ ROBERT E. CHAPPELL
------------------- ----------------------------------------
Robert E. Chappell
Chairman of the Board of Trustees
And Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this Post-
Effective Amendment No. 4 to the Registration Statement has been signed below by
the following persons in the capacities indicated on the 17th day of April,
1998.
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
*PHILIP E. LIPPINCOTT Trustee
*JOHN F. McCAUGHAN Trustee
*ALAN B. MILLER Trustee
*EDMOND F. NOTEBAERT Trustee
*ROBERT H. ROCK Trustee
*DANIEL J. TORAN Trustee
<PAGE>
*NORMAN T. WILDE, JR. Trustee
*WESLEY S. WILLIAMS, JR. Trustee
*By /s/ ROBERT E. CHAPPELL
---------------------------------------
Robert E. Chappell, attorney-in-fact
II-8
<PAGE>
Exhibit Index List
------------------
Ex-99.B 3. Opinion and Consent of Peter R. Schaefer, FSA, MAAA
Ex-99.B 4. (a) Consent of Ernst & Young, LLP
Ex-99.B 4. (b) Consent of Coopers & Lybrand LLP
Ex-99.B 4. (c) Consent of Morgan, Lewis & Bockius LLP
Ex-99.B 5. Powers of Attorney of Edmond F. Notebaert and Robert H. Rock
II-9
<PAGE>
Exhibit 3
April 20, 1998
Board of Trustees
The Penn Mutual Life Insurance Company
Independence Square
Philadelphia, PA 19172
Re: Last Survivor Flexible Premium Adjustable Variable Life Insurance Policies
To the Board of Trustees:
This opinion is furnished in connection with the filing of Post-Effective
Amendment No. 4 to Penn Mutual's Registration Statement on Form S-6 (the
"Registration Statement") covering last survivor flexible premium adjustable
variable life insurance policies ("Policies" or "Policy") to be issued by The
Penn Mutual Life Insurance Company (the "Company") (S.E.C. file No. 33-87276).
The Prospectus included in the Registration Statement describes the Policies.
The Policy forms were reviewed under my direction, and I am familiar with the
Registration Statement and Exhibits thereto. In my opinion:
1. Using the interest rate and cost of insurance tables guaranteed in the
Policy, current cost of insurance rates cannot be established at levels
such that the "sales load," as defined in paragraph (c)(4) of Rule 6e-3T
under the Investment Company Act of 1940, would exceed 9 percent of any
premium payment.
2. The illustrations of Policy Values, Net Cash Surrender Values, Death
Benefits and Accumulated Premiums included in the Registration Statement
and based on the assumptions stated in the illustrations, are consistent
with the provisions of the Policy. The rate structure of the Policy has
not been designed so as to make the relationship between premiums and
benefits, as shown in the illustrations, appear more favorable to a
prospective purchaser of a Policy for the ages and sexes shown, than to
prospective purchasers of a Policy for other ages and sex.
3. The tables of minimum initial premiums, administrative surrender charges
and applicable percentages, included in the appendices to the Prospectus
which forms part of the Registration Statement, are consistent with the
provisions of the Policy.
I hereby consent to the use of this opinion as an exhibit to the Registration
Statement and to the use of my name relating to actuarial matters under the
heading "Experts" in the Prospectus.
Very truly yours,
/s/ Peter R. Schaefer
---------------------
Peter R. Schaefer, F.S.A., M.A.A.A.
Actuary
<PAGE>
Exhibit 4.(a)
Consent of Ernst & Young LLP, Independent Auditors
We consent to the reference to our firm under the caption "Experts" in the
Prospectus, and to the use of our report dated January 30, 1998 accompanying the
financial statements of The Penn Mutual Life Insurance Company for the year
ended December 31, 1997, and to the use of our report dated March 30, 1998
accompanying the financial statements of Penn Mutual Variable Life Account I -
Cornerstone VUL II/Variable Estate Max for the year ended December 31, 1997 in
the Post-Effective Amendment Number 4 to Registration Statement Number 33-87276
on Form S-6 and the related Prospectus of Penn Mutual Variable Life Account I -
Variable Estate Max.
/s/ Ernst & Young LLP
Philadelphia, Pennsylvania
April 20, 1998
<PAGE>
Exhibit 4.(b)
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the following with respect to Post-Effective Amendment No.
4 to the Registration Statement on Form S-6 (File No. 33-87276), filed on behalf
of The Penn Mutual Life Insurance Company and Penn Mutual Variable Life Account
I under the Securities Act of 1933.
1. The inclusion of our report dated January 31, 1997 on our audits of
the consolidated financial statements of The Penn Mutual Life
Insurance Company as of December 31, 1996 and for the two years in the
period ended December 31, 1996.
2. The inclusion of our report dated April 7, 1997 on our audit of the
financial statement of Penn Mutual Variable Life Account I -
Cornerstone VUL II/Variable Estate Max for the year ended December 31,
1996.
3. The reference to our Firm under the heading of "Experts" in the
Registration Statement.
/s/ Coopers & Lybrand L.L.P.
Coopers & Lybrand L.L.P.
2400 Eleven Penn Center
Philadelphia, Pennsylvania
April 20, 1998
<PAGE>
Exhibit 4.(c)
2000 One Logan Square Morgan, Lewis
Philadelphia, PA 19103-6993 & Bockius LLP
215-963-5000 Counselors At Law
Fax: 215-963-5299
April 20, 1998
Board of Trustees
The Penn Mutual Life Insurance Company
Philadelphia, PA 19172
Re: Penn Mutual Variable Life Account I
-----------------------------------
SEC Registration No. 33-87276
-----------------------------
Dear Ladies and Gentlemen:
We hereby consent to the reference of our name under the caption "Legal Matters"
in the Prospectus filed as part of this Post-Effective Amendment No. 4. 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
- -------------------------------
Morgan, Lewis & Bockius LLP
<PAGE>
Exhibit 5.
The Penn Mutual Life Insurance Company
Power of Attorney
-----------------
Edmond F. Notebaert, whose signature appears below, does hereby constitute
and appoint Robert E. Chappell and Daniel J. Toran, and each of them severally,
his true and lawful attorneys and agents, with power of substitution and
resubstitution, to do any and all acts and things and to execute any and all
instruments which said attorney and agents, and each of them, may deem necessary
or advisable or which may be required to enable The Penn Mutual Life Insurance
Company (the "Company") to comply with the Investment Company Act of 1940 and
the Securities Act of 1933, as amended, and any rules, regulations or
requirements of the Securities and Exchange Commission in respect thereof, in
connection with the filing and effectiveness of the Company's Registration
Statement on Form S-6 (SEC Registration No. 33-87276) pursuant to such Acts,
including specifically, but without limiting the generality of the foregoing,
the power and authority to sign in the name and on behalf of the undersigned as
a trustee and/or officer of the Company such Registration Statement and any and
all amendments and supplements to such Registration Statement filed with the
Securities and Exchange Commission under said Acts, and any other instruments or
documents related thereto, and the undersigned does hereby ratify and confirm
all that said attorneys and agents, and each of them, shall do or cause to be
done by virtue hereof.
Date: April 17, 1998 /s/ EDMOND F. NOTEBAERT
--------------------------
Edmond F. Notebaert
<PAGE>
The Penn Mutual Life Insurance Company
Power of Attorney
-----------------
Robert H. Rock, whose signature appears below, does hereby constitute and
appoint Robert E. Chappell and Daniel J. Toran, and each of them severally, his
true and lawful attorneys and agents, with power of substitution and
resubstitution, to do any and all acts and things and to execute any and all
instruments which said attorney and agents, and each of them, may deem necessary
or advisable or which may be required to enable The Penn Mutual Life Insurance
Company (the "Company") to comply with the Investment Company Act of 1940 and
the Securities Act of 1933, as amended, and any rules, regulations or
requirements of the Securities and Exchange Commission in respect thereof, in
connection with the filing and effectiveness of the Company's Registration
Statement on Form S-6 (SEC Registration No. 33-87276) pursuant to such Acts,
including specifically, but without limiting the generality of the foregoing,
the power and authority to sign in the name and on behalf of the undersigned as
a trustee and/or officer of the Company such Registration Statement and any and
all amendments and supplements to such Registration Statement filed with the
Securities and Exchange Commission under said Acts, and any other instruments or
documents related thereto, and the undersigned does hereby ratify and confirm
all that said attorneys and agents, and each of them, shall do or cause to be
done by virtue hereof.
Date: April 17, 1998 /s/ ROBERT H. ROCK
-------------------
Robert H. Rock
