<PAGE>
PROSPECTUS
FOR
CORNERSTONE VUL III
a flexible premium adjustable variable life insurance policy
issued by
THE PENN MUTUAL LIFE INSURANCE COMPANY
and funded through
PENN MUTUAL VARIABLE LIFE ACCOUNT I
The Penn Mutual Life Insurance Company
Philadelphia, PA 19172
800-523-0650
The Policy provides life insurance and a cash surrender value that
varies with the investment performance of one or more of the funds set forth
below. These and other Policy provisions are described in this Prospectus.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
<S> <C>
PENN SERIES FUNDS, INC. MANAGER
Growth Equity Fund Independence Capital Management, Inc.
Value Equity Fund OpCap Advisors
Small Capitalization Fund OpCap Advisors
Emerging Growth Fund RS Investment Management, Inc.
Flexibly Managed Fund T. Rowe Price Associates, Inc.
International Equity Fund Vontobel USA, Inc.
Quality Bond Fund Independence Capital Management, Inc.
High Yield Bond Fund T. Rowe Price Associates, Inc.
Money Market Fund Independence Capital Management, Inc.
- ------------------------------------------------------------------------------------------------------------------------
NEUBERGER BERMAN ADVISORS MANAGEMENT TRUST MANAGER
Balanced Portfolio Neuberger Berman Management Incorporated
Limited Maturity Bond Portfolio Neuberger Berman Management Incorporated
Partners Fund Portfolio Neuberger Berman Management Incorporated
- ------------------------------------------------------------------------------------------------------------------------
FIDELITY INVESTMENTS' VARIABLE INSURANCE PRODUCTS FUND MANAGER
Equity-Income Portfolio Fidelity Management and Research Company
Growth Portfolio Fidelity Management and Research Company
- ------------------------------------------------------------------------------------------------------------------------
FIDELITY INVESTMENTS' VARIABLE INSURANCE PRODUCTS FUND II MANAGER
Asset Manager Portfolio Fidelity Management and Research Company
Index 500 Portfolio Fidelity Management and Research Company
- ------------------------------------------------------------------------------------------------------------------------
MORGAN STANLEY DEAN WITTER UNIVERSAL FUNDS, INC. MANAGER
Emerging Markets Equity (International) Portfolio Morgan Stanley Dean Witter Investment
Management Inc.
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
PLEASE NOTE THAT THE SECURITIES AND EXCHANGE COMMISSION ("SEC") HAS NOT
APPROVED OR DISAPPROVED THESE SECURITIES, OR DETERMINED IF THIS PROSPECTUS IS
TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
July 1, 1999
<PAGE>
GUIDE TO READING THIS PROSPECTUS
This prospectus contains information that you should know before you
buy the Policy or exercise any of your rights under the Policy. The purpose of
this prospectus is to provide information on the essential features and
provisions of the Policy and the investment options available under the Policy.
Your rights and obligations under the Policy are determined by the language of
the Policy itself. When you receive your Policy, read it carefully.
The prospectus is arranged as follows:
o The first section is called "Basic Information". It is in a question
and answer format. We suggest you read the Basic Information section
before reading any other section of the prospectus.
o The next section contains illustrations of a hypothetical Policy that
help clarify how the Policy works. The "Illustrations" section start on
page 28.
o After the Illustrations section is the "Additional Information"
section. It gives additional information about Penn Mutual, Penn Mutual
Variable Life Account I and the Policy. It generally does not repeat
information that is in the Basic Information section. A table of
contents for the Additional Information section appears on page 45.
o The financial statements for Penn Mutual and Penn Mutual Variable Life
Account I follow the Additional Information section. They start on page
61.
o Appendices A and B are after the financial statements. The Appendices
are referred to in the Basic Information section. They provide specific
information and examples to help you understand how the Policy works.
**********
THE PROSPECTUSES OF THE FUNDS THAT ACCOMPANY THIS PROSPECTUS CONTAINS
IMPORTANT INFORMATION THAT YOU SHOULD KNOW ABOUT THE INVESTMENTS THAT MAY BE
MADE UNDER THE POLICY. YOU SHOULD READ THE RELEVANT PROSPECTUS(ES) CAREFULLY
BEFORE YOU INVEST.
6
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BASIC INFORMATION
This part of the prospectus provides answers to basic questions that
may be asked about the Policy. Here are the page numbers where the questions and
answers appear.
Question Page
- -------- ----
What Is the Policy?..................................................... 8
Who Owns the Policy?.................................................... 8
What Payments Must Be Made Under the Policy?............................ 9
How Will the Value of the Policy Change Over Time?...................... 11
What Are the Fees and Charges Under the Policy?......................... 12
What Are the Fees and Expenses Paid by the Investment Funds?............ 16
Are There Other Charges That Penn Mutual Could Deduct in the Future?.... 17
How Can I Change My Policy's Investment Allocations?.................... 18
What Is a Policy Loan?.................................................. 19
How Can I Withdraw Money from My Policy?................................ 19
What Is the Timing of Transactions Under the Policy?.................... 20
How Much Life Insurance Does the Policy Provide?........................ 21
Can I Change Insurance Coverage Under My Policy?........................ 22
What Are the Supplemental Benefit Riders That I Can Buy?................ 23
Do I Have the Right to Cancel My Policy?................................ 25
Can I Choose Different Payout Options Under My Policy? ................. 25
How Is the Policy Treated for Federal Income Tax Purposes?.............. 25
How Do I Communicate With Penn Mutual?.................................. 26
How Does Penn Mutual Communicate With Me?............................... 27
7
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WHAT IS THE POLICY?
The Policy provides life insurance on you or another individual you
name. The value of your Policy will increase or decrease based upon the
performance of the investment options you choose. The death benefit may also
increase or decrease based on investment performance. In addition, the Policy
allows you to allocate a part of your policy value to a fixed interest option
where the value will accumulate interest.
You will have several options under the Policy. Here are some major
ones:
o Determine when and how much you pay to us under the Policy
o Determine when and how much to allocate your policy value to the
investment options
o Borrow from your Policy
o Change the beneficiary who will receive the death benefit
o Change the amount of insurance protection
o Change the death benefit option you have selected under your Policy
o Surrender or partially surrender your Policy for all or part of its net
cash surrender value
o Choose the form in which you would like the death benefit or other
proceeds paid out from your Policy
Most of these options are subject to limits that are explained later in
this prospectus.
If you want to purchase a Policy, you must complete an application and
submit it to one of our authorized agents. We require satisfactory evidence of
insurability, which may include a medical examination of the proposed insured.
We evaluate the information provided in accordance with our underwriting rules
and then decide whether to accept or not accept the application.
The maturity date of a Policy is the policy anniversary nearest the
insured's 100th birthday. If the Policy is still in force on the maturity date,
a maturity benefit will be paid. The maturity benefit is equal to the policy
value less any policy loan on the maturity date. Upon written request of the
owner, the policy will continue in force beyond the maturity date.
Thereafter, the death benefit will be the net policy value.
WHO OWNS THE POLICY?
You decide who owns the Policy when you apply for it. The owner of the
Policy is the person who can exercise most of the rights under the Policy, such
as the right to choose the death benefit option, the beneficiary, the investment
options, and the right to surrender the Policy.
8
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Whenever we have used the term "you" in this prospectus, we have assumed that
the reader is the owner or the person who has whatever right or privilege we are
discussing.
WHAT PAYMENTS MUST BE MADE UNDER THE POLICY?
PREMIUM PAYMENTS
Amounts you pay to us under your Policy are called "premiums" or
"premium payments." The amount we require as your first premium depends on a
number of factors, such as age, sex, rate classification, the amount of
insurance specified in the application, and any supplemental benefits. Sample
minimum initial premiums are shown in Appendix A at the end of this prospectus.
Within limits, you can make premium payments when you wish. That is why the
Policy is called a "flexible premium" Policy.
Additional premiums may be paid in any amount and at any time. A
premium must be at least $25. We may require satisfactory evidence of
insurability before accepting any premium which increases our net amount of
risk.
We reserve the right to limit total premiums paid in a policy year to
the planned premiums you select in your application. If you have chosen to
qualify your Policy as life insurance under the Guideline Premium\Cash Value
Corridor Test of the Internal Revenue Code, federal tax law limits the amount of
premium payments you may make in relation to the amount of life insurance
provided under the Policy. We will not accept or retain a premium payment that
exceeds the maximum permitted under federal tax law.
If you make a premium payment that exceeds certain other limits imposed
under federal tax law, you could incur a penalty on the amount you take out of
the Policy. We will monitor the Policy and will attempt to notify you on a
timely basis if you are about to exceed this limit is in jeopardy of becoming a
"modified endowment contract" under the Code. See HOW MUCH LIFE INSURANCE DOES
THE POLICY PROVIDE? and HOW IS THE POLICY TREATED FOR FEDERAL INCOME TAX
PURPOSES? below.
PLANNED PREMIUMS
The Policy Specifications page of your Policy will show the "planned
premium" for the Policy. You choose this amount in the Policy application. We
will send a premium reminder notice to you based upon the planned premium that
you specified in your application. You also chose in your application how often
to pay planned premiums -- annually, semi-annually, quarterly or monthly. You
are not required to pay the planned premium as long as your Policy has
sufficient net cash surrender value to pay Policy charges. You need only pay
enough premium to maintain net cash surrender value sufficient to pay Policy
charges. See THREE YEAR NO-LAPSE FEATURE and LAPSE AND REINSTATEMENT below.
9
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WAYS TO PAY PREMIUMS
If you pay premiums by check or money order, they must be drawn on a
U.S. bank in U.S. dollars and made payable to The Penn Mutual Life Insurance
Company. Premiums after the first must be sent to our office.
We will also accept premiums:
o by wire or by exchange from another insurance company,
o via an electronic funds transfer program (any owner interested in
making monthly premium payments must use this method), or
o if we agree to it, through a salary deduction plan with your employer.
You can obtain information on these other methods of premium payment by
contacting your Penn Mutual representative or by contacting our office.
THREE YEAR NO-LAPSE FEATURE
Your Policy will remain in force during the first three policy years,
regardless of investment performance and your net cash surrender value, if
(a) the total premiums you have paid, less any partial surrenders
you made,
equal or exceeds
(b) the "no-lapse premium" specified in your Policy, multiplied by
the number of months the Policy has been in force.
If you increase the specified amount of insurance under your Policy
during the first three policy years, we will extend the three year no-lapse
provision to three years after the effective date of the increase.
The "no-lapse premium" will generally be less than the monthly
equivalent of the planned premium you specified.
The three year no-lapse feature will not apply if the amount borrowed
under your Policy results in excessive indebtedness. See WHAT IS A POLICY LOAN?
later in this section.
LAPSE AND REINSTATEMENT
If the net cash surrender value of your Policy is not sufficient to pay
Policy charges, and the three-year no-lapse feature is not in effect, we will
notify you of how much premium you will need to pay to keep the Policy in force.
You will have a 61 day "grace period" to make that payment. If you don't pay at
least the required amount by the end of the grace period, your Policy will
terminate (i.e., lapse). All coverage under the Policy will then cease.
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If you die during the grace period, we will pay the death benefit to
your beneficiary less any unpaid Policy charges and outstanding policy loan.
If the Policy terminates, you can reinstate it within five years from
the beginning of the grace period if the insured is alive. You will have to
provide evidence that the insured person still meets our requirements for
issuing insurance. You will also have to pay a minimum amount of premium and be
subject to the other terms and conditions applicable to reinstatements, as
specified in the Policy.
PREMIUMS UPON AN INCREASE IN THE SPECIFIED AMOUNT.
If you increase the specified amount of insurance, you may wish to pay
an additional premium or make a change in planned premiums. We will notify you
if an additional premium or a change in planned premiums is necessary.
HOW WILL THE VALUE OF THE POLICY CHANGE OVER TIME?
From each premium payment you make, we deduct a premium charge. We
allocate the rest to the investment options you have selected (except, in some
states, the net first will be invested in the Penn Series Money Market Fund
during the free look period).
Your policy value, which is allocated (or transferred) to the variable
investment options, will vary with the investment performance of the underlying
investment funds.
The amount you allocate to the fixed interest option will earn interest
at a rate we declare from time to time. We guarantee that this rate will be at
least 3%. The current declared rate will appear in the annual statement we will
send to you. If you want to know what the current declared rate is, simply call
or write to us. Amounts you allocate to the fixed interest option will not be
subject to the mortality and expense risk charge described later in this
section. Your policy value will be affected by deductions we make from your
Policy for policy charges.
At any time, your policy value is equal to:
o the net premiums you have paid,
o plus or minus the investment results in the part of your policy value
allocated to the variable investment options,
o plus interest credited to the amount in the part of your policy value
(if any) allocated to the fixed interest option,
o minus policies charges we deduct, and
o minus partial surrenders you have made.
If you borrow money under your Policy, other factors affect your policy
value. See WHAT IS A POLICY LOAN? later in this section.
11
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For more information on policy values and the variable and fixed
investment options, see MORE INFORMATION ABOUT POLICY VALUES in the ADDITIONAL
INFORMATION section of this prospectus.
WHAT ARE THE FEES AND CHARGES UNDER THE POLICY?
PREMIUM CHARGE
o Premium Charge - 7.5% (currently reduced to 5.75% for all premiums paid
in excess of the maximum surrender charge) is deducted from premium
payments before allocation to the investment options. It consists of
3.5% to cover state premium taxes and the federal income tax burden
(DAC tax) that we expect will result from the receipt of premiums and
4% (currently reduced to 2.25% for all premiums paid in excess of the
maximum surrender charge) to partially compensate us for the expense of
selling and distributing the Policies. State premium taxes range from
0.5% to 3.5%; some states do not impose premium taxes. We will notify
you in advance if we change our current rates.
MONTHLY DEDUCTIONS
o Insurance Charge - A monthly charge for the cost of insurance
protection. The amount of insurance risk we assume varies from Policy
to Policy and from month to month. The insurance charge therefore also
varies. To determine the charge for a particular month, we multiply the
amount of insurance for which we are at risk by a cost of insurance
rate based upon an actuarial table. The table in your Policy will show
the maximum cost of insurance rates that we can charge. The cost of
insurance rates that we currently apply are generally less than the
maximum rates shown in your Policy. The table of rates we use will vary
by attained age and the insurance risk characteristics. We place
insureds in a rate class when we issue the Policy, based on our
examination of information bearing on insurance risk. Regardless of the
table used, cost of insurance rates generally increase each year that
you own your Policy, as the insured's attained age increases. We
currently place people we insure in the following rate classes: a
smoker, nonsmoker or preferred nonsmoker rate class, or a rate class
involving a higher mortality risk (a "substandard class"). Insureds age
19 and under are placed in a rate class that does not distinguish
between smoker and nonsmoker. They are assigned to a smoker class at
age 20 unless they have provided satisfactory evidence that they
qualify for a nonsmoker class. When an increase in the specified amount
of insurance is requested, we determine whether a different rate will
apply to the increase. The charge is deducted pro-rata from your
variable investment and fixed interest accounts.
o Administrative Charge - A monthly charge to help cover our
administrative costs. This charge has two parts: (1) a flat dollar
charge of up to $9 (currently, the flat charge is $8 - we will notify
you in advance if we change our current rates); and (2) for the first
12 months after the policy date, a charge based on the initial
specified amount of insurance ($0.10 per $1,000 per month of initial
specified amount of insurance), and for the first 12 months after an
increase in the specified amount of insurance, a charge based on the
increase ($0.10 per $1,000 increase in the specified amount of
insurance). Administrative expenses relate to premium billing and
collection, recordkeeping,
12
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processing of death benefit claims, policy loans and Policy changes,
reporting and overhead costs, processing applications and establishing
Policy records. We do not anticipate making any profit from this
charge. The charge is deducted pro-rata from your variable investment
and fixed interest accounts.
o Optional Supplemental benefit charges - Monthly charges for any
optional supplemental insurance benefits that are added to the Policy
by means of a rider.
13
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DAILY MORTALITY AND EXPENSE RISK CHARGE
We deduct a daily charge from your policy value which is allocated to
the variable investment options. The charge does not apply to fixed interest
option. It is guaranteed not to exceed 0.90% for the duration of the policy. Our
current charge is 0.45%. We will notify you in advance if we change our current
rates. We may realize a profit from this charge, and if we do, it will be added
to our surplus.
The mortality risk we assume is the risk that the persons we insure may
die sooner than anticipated and that Penn Mutual will pay an aggregate amount of
death benefits greater than anticipated. The expense risk we assume is the risk
that expenses incurred in issuing and administering the policies and the
Separate Account will exceed the amount we charge for administration.
TRANSFER CHARGE
We reserve the right to impose a $10 charge on any transfer of policy
value among investment funds and/or the fixed interest option if the transfer
exceeds 12 transfers in a policy year. We will notify policy owners in advance
if we decide to impose the charge. We will not impose a charge on any transfer
made under dollar cost averaging or asset rebalancing. Also, we will not impose
a charge on any transfer which exceeds $4,999,999.
SURRENDER CHARGE
If you surrender your Policy within the first 11 policy years or within
11 years of an increase in the specified amount of insurance under your Policy,
we will deduct a surrender charge from your policy value.
With respect to a surrender within the first 11 policy years, the
surrender charge equals (a) plus (b), multiplied by (c), where:
(a) = 25% of the lesser of (i) the sum of all premiums paid and (ii)
the maximum surrender charge premium (which is an amount calculated
separately for each Policy);
(b) = an administrative charge based on the initial amount of insurance
and the Insured's age at the issue date (ranging from $1.00 up to
attained age 9 to $7.00 at age 60 and over, per $1,000 of initial
specified amount of insurance); and
(c) = the applicable surrender factor from the table below in which the
policy year is determined.
With respect to a surrender within 11 years of an increase in the
specified amount of insurance under your Policy, the surrender charge is based
on the amount of the increase and on the attained age of the insured at the time
of the increase. The charge equals (a) multiplied by (b), where:
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(a) = an administrative charge based on the increase in the initial
amount of insurance and the insured's attained age on the effective
date of the increase (ranging from $1.00 up to attained age 9 to $7.00
at attained age 60 and over, per $1,000 of increase in initial
specified amount of insurance; and
(b) = the applicable surrender factor from the table below, assuming
for this purpose only that the first policy year commences with the
policy year in which the increase in specified amount of insurance
becomes effective.
SURRENDER DURING POLICY YEAR SURRENDER FACTOR
------------------------------------------------------------
1st through 7th 1.00
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8th .80
------------------------------------------------------------
9th .60
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10th .40
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11th .20
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12th and later 0
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If the Policy is surrendered within the first 11 policy years, 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. The sales charge
component, together with the sales charge component of the premium charge, may
be insufficient to recover distribution expenses related to the sale of the
Policies. Our unrecovered sales expenses are paid for from our surplus. The
administrative charge component covers administrative expenses associated with
underwriting and issuing the Policy, including the costs of processing
applications, conducting medical exams, determining insurability and the
insured's rate class, and creating and maintaining Policy records, as well as
the administrative costs of processing surrender requests.
If the Policy is surrendered after the first 11 years, but within 11
years of an increase in the specified amount of insurance, the surrender charge
consists solely of an administrative charge for administrative expenses
associated with the increase in the specified amount of insurance.
We do not anticipate making any profit on the administrative charge
component of the surrender charge.
PARTIAL SURRENDER CHARGE
If you partially surrender your Policy, we will deduct the lesser of
$25 or 2% of the amount surrendered. The charge will be deducted from the
available net cash surrender value and will be considered part of the partial
surrender. We also do not anticipate making a profit on this charge.
15
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WHAT ARE THE FEES AND EXPENSES PAID BY THE INVESTMENT FUNDS?
The following tables show the fees and expenses paid by the investment
funds.
PENN SERIES FUNDS, INC. (A)
UNDERLYING FUND ANNUAL EXPENSES (AS A % OF PORTFOLIO AVERAGE NET ASSETS)
<TABLE>
<CAPTION>
Management Administrative Total
Fees and Corporate Accounting Other Fund
(after waiver) Service Fees Fees Expenses Expenses
-------------- ------------ ---- -------- --------
<S> <C> <C> <C> <C> <C>
Growth Equity ............... 0.45% 0.15% 0.07% 0.09% 0.76%
Value Equity ................ 0.50% 0.15% 0.06% 0.05% 0.76%
Small Capitalization ........ 0.50% 0.15% 0.08% 0.09% 0.82%
Emerging Growth (b) ......... 0.80% 0.15% 0.10% 0.10% 1.15%
Flexibly Managed ............ 0.50% 0.15% 0.05% 0.06% 0.76%
International Equity ........ 0.75% 0.15% 0.08% 0.10% 1.08%
Quality Bond ................ 0.45% 0.15% 0.08% 0.09% 0.77%
High Yield Bond ............. 0.50% 0.15% 0.08% 0.09% 0.82%
Money Market ................ 0.40% 0.15% 0.08% 0.09% 0.72%
</TABLE>
- ----------------------
(A) THESE EXPENSES ARE FOR THE LAST FISCAL YEAR.
(B) THE TOTAL EXPENSES OF THE EMERGING GROWTH FUND WOULD HAVE BEEN 1.21%. IF THE
INVESTMENT ADVISER AND ADMINISTRATOR OF THAT FUND HAD NOT WAIVED PART OF THEIR
FEES.
- --------------------------------------------------------------------------------
NEUBERGER BERMAN ADVISERS MANAGEMENT TRUST (A)
UNDERLYING FUND ANNUAL EXPENSES (AS A % OF PORTFOLIO AVERAGE NET ASSETS)
<TABLE>
<CAPTION>
Management,
Advisory and
Administration Other Total Fund
Fees Expenses Expenses
-------------- -------- ----------
<S> <C> <C> <C>
Limited Maturity Bond ................ 0.65% 0.11% 0.76%
Balanced ............................. 0.85% 0.18% 1.03%
Partners Fund ........................ 0.80% 0.04% 0.84%
</TABLE>
- ----------------------
(A) NEUBERGER BERMAN ADVISERS MANAGEMENT TRUST (THE "TRUST") IS DIVIDED INTO
PORTFOLIOS ("PORTFOLIOS"). EACH PORTFOLIO INVESTS IN A CORRESPONDING SERIES
("SERIES") OF THE TRUST. THIS TABLE SHOWS THE CURRENT EXPENSES PAID BY EACH
PORTFOLIO AND THE PORTFOLIO'S SHARE OF THE CURRENT EXPENSES OF ITS SERIES. SEE
"EXPENSES" IN THE TRUST'S PROSPECTUS.
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FIDELITY INVESTMENTS' VARIABLE INSURANCE PRODUCTS FUND (A) UNDERLYING FUND
ANNUAL EXPENSES (AS A % OF PORTFOLIO AVERAGE NET ASSETS)
Management Other Total Fund
Fee Expenses Expenses
---------- -------- ----------
Equity-Income.......... 0.50% 0.07% 0.57%
Growth................. 0.60% 0.06% 0.66%
- ----------------------
(A) THESE EXPENSES ARE FOR THE LAST FISCAL YEAR. SOME OF THE BROKERAGE
COMMISSIONS PAID BY THE FUND REDUCED THE EXPENSES SHOWN IN THIS TABLE. WITHOUT
THIS REDUCTION, TOTAL EXPENSES WOULD HAVE BEEN 0.58% FOR THE EQUITY INCOME
PORTFOLIO AND 0.68% FOR THE GROWTH PORTFOLIO.
- --------------------------------------------------------------------------------
FIDELITY INVESTMENTS' VARIABLE INSURANCE PRODUCTS FUND II
UNDERLYING FUND ANNUAL EXPENSES (AS A % OF PORTFOLIO AVERAGE NET ASSETS)
Management Fee Other Total Fund
(After Waiver) Expenses Expenses
-------------- -------- --------
Asset Manager (a)........... 0.55% 0.08% 0.63%
Index 500 (b)............... 0.24% 0.04% 0.28%
- ----------------------
(A) THE EXPENSES PRESENTED ARE FOR THE LAST FISCAL YEAR. SOME OF THE BROKERAGE
COMMISSIONS PAID BY THE FUND REDUCED THE EXPENSES SHOWN IN THIS TABLE. WITHOUT
THIS REDUCTION, TOTAL EXPENSES WOULD HAVE BEEN 0.64% FOR THE ASSET MANAGER
PORTFOLIO.
(B) THESE EXPENSES ARE FOR THE LAST FISCAL YEAR. IF THE FUND'S INVESTMENT
ADVISER HAD NOT VOLUNTARILY WAIVED PART OF ITS FEE, TOTAL EXPENSES WOULD HAVE
BEEN 0.35% FOR THE INDEX 500 PORTFOLIO.
- --------------------------------------------------------------------------------
MORGAN STANLEY DEAN WITTER UNIVERSAL FUNDS, INC.
UNDERLYING FUND ANNUAL EXPENSES (AS A % OF PORTFOLIO AVERAGE NET ASSETS)
Management Other Total Fund
Fee Expenses Expenses
---------- -------- ----------
Emerging Markets Equity
(International)..... 1.25% 0.50% 1.75%
- --------------------------------------------------------------------------------
ARE THERE OTHER CHARGES THAT PENN MUTUAL COULD DEDUCT IN THE FUTURE?
We currently make no charge against policy values to pay federal income
taxes on investment gains. However, we reserve the right to do so in the event
there is a change in the tax laws. We currently do not expect that any such
charge will be necessary.
Under current laws, we may incur state and local taxes (in addition to
premium taxes) in several states. At present, these taxes are not significant.
If there is a material change in applicable state or local tax laws, we reserve
the right to make such deductions for such taxes.
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HOW CAN I CHANGE MY POLICY'S INVESTMENT ALLOCATIONS?
FUTURE PREMIUM PAYMENTS
You may change the investment allocation for future premium payments at
any time. You make your original allocation in the application for your Policy.
The percentages you select for allocating premium payments must be in whole
numbers and must equal 100% in total.
TRANSFERS AMONG EXISTING INVESTMENT OPTIONS
You may also transfer amounts from one investment option to another,
and to and from the fixed interest option. To do so, you must tell us how much
to transfer, either as a percentage or as a specific dollar amount. Transfers
are subject to the following conditions:
o the minimum amount that may be transferred is $250 (or the amount held
under the investment options from which you are making the transfer, if
less);
o if less than the full amount held under an investment option is
transferred, the amount remaining under the investment option must be
at least $250;
o we may defer transfers under certain conditions;
o transfers may not be made during the free look period;
o transfers may be made from the fixed interest option only during the 30
day period following the end of each policy year.
DOLLAR COST AVERAGING
This program automatically makes monthly transfers from the money
market variable investment option to one or more of the other investment options
and to the fixed interested option. You choose the investment options and the
dollar amount and timing of the transfers. The program is designed to reduce the
risks that result from market fluctuations. It does this by spreading out the
allocation of your money to investment options over a longer period of time.
This allows you to reduce the risk of investing most of your money at a time
when market prices are high. The success of this strategy depends on market
trends. The program allows owners to take advantage of investment fluctuations,
but does not assume a profit or protect against lows in a declining market. To
begin the program, the planned premium for the year must be $600 and the amount
transferred each month must be at least $50. You may discontinue the program at
any time.
ASSET REBALANCING
This program automatically reallocates your policy value among the
variable investment options in accordance with the proportions you originally
specified. Over time, variations in investment results will change the
allocation percentage. On a quarterly basis, the rebalancing program will
periodically transfer your policy value among the variable investment options to
18
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reestablish the percentages you had chosen. Rebalancing can result in
transferring amounts from a variable investment option with relatively higher
investment performance to one with relatively lower investment performance. The
minimum policy value to start the program is $1,000. If you also have a dollar
cost averaging program in effect, the portion of your policy value invested in
the Money Market Fund may not be included in the Rebalancing Program. You may
discontinue the program at any time.
WHAT IS A POLICY LOAN?
You may borrow up to 90% of your cash surrender value. The minimum
amount you may borrow is $250.
Interest charged on a policy loan is 4.0% and is payable at the end of
each policy year. If interest is not paid when due, it is added to the loan. A
policy loan does not reduce your policy value. An amount equivalent to the loan
is withdrawn from the variable investment options and the fixed interest option
on a prorated basis (unless you designate a different withdrawal allocation when
you request the loan) and is transferred to a special loan account. Amounts
withdrawn from the investment options cease to participate in the investment
experience of the options. The special loan account is guaranteed to earn
interest at 3.0% during the first ten policy years and 3.75% thereafter. With
the interest we credit to the special loan account, the net cost of the policy
loan is 1% during the first ten policy years and 0.25% thereafter.
You may repay all or part of a loan at any time. Upon repayment, an
amount equal to the repayment will be transferred from the special loan account
to the investment options you specify. If you do not specify the allocation for
the repayment, the amount will be allocated in accordance with your current
standing allocation instructions.
If your Policy lapses (see WHAT PAYMENTS MUST BE PAID UNDER THE
POLICY?) and you have a loan outstanding under the Policy, you may have to pay
federal income tax on the amount of the loan, to the extent there is gain in the
Policy. See FEDERAL INCOME TAX CONSIDERATIONS in the ADDITIONAL INFORMATION
section of this prospectus.
The amount of any loan outstanding under your Policy on the death of
the surviving insured will reduce the amount of the death benefit by the amount
of such loan.
If you want a payment to us to be used as a loan repayment, you must
include instructions to that effect. Otherwise, all payments will be assumed to
be premium payments.
HOW CAN I WITHDRAW MONEY FROM MY POLICY?
FULL SURRENDER
You may surrender your Policy in full at any time. If you do, we will
pay you the policy value, less any policy loan outstanding and less any
surrender charge that then applies. This is called your "net cash surrender
value." You must return your Policy when you request a full surrender.
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<PAGE>
PARTIAL SURRENDER
You may partially surrender your Policy for net cash surrender value,
subject to the following conditions:
o the net cash surrender value remaining in the Policy after the partial
surrender must exceed $1,000;
o no more than four partial surrenders may be made in a policy year;
o each partial surrender must be at least $250;
o a partial surrender may not be made from an investment option if the
amount remaining under the option is less than $250;
o during the first five policy years, the partial surrender may not
reduce the specified amount of insurance under your Policy to less than
$50,000.
If you elected the Option 1 insurance coverage (see HOW MUCH INSURANCE
DOES MY POLICY PROVIDE? below), a partial surrender may reduce your specific
amount of insurance.
If you have increased the initial specified amount, any reduction will
be applied to the most recent increase.
WHAT IS THE TIMING OF TRANSACTIONS UNDER THE POLICY?
We will ordinarily pay any death benefit, loan proceeds or partial or
full surrender proceeds, and will make transfers among the investment options
and the fixed interest option, within seven days after receipt at our office of
all the documents required for completion of the transaction. Other than the
death benefit, which is determined as of the date of death, transactions will be
based on values at the end of the valuation period in which we receive all
required instructions and necessary documentation. A valuation period is the
period commencing with the close of the New York Stock Exchange and ending at
the close of the next succeeding business day of the New York Stock Exchange.
A planned premium and an unplanned premium which does not require
evaluation of additional insurance risk will be credited to the Policy and the
net premium will be allocated to the designated investment options based on
values at the end of the valuation period in which we receive the premium.
Any premium requiring evaluation of additional insurance risk will be
allocated to the Penn Series money market investment option until our evaluation
has been completed and the premium has been accepted. When accepted, the net
premium will be allocated to the investment options you have designated.
We may defer making a payment or transfer from a variable account
investment option if (1) the disposal or valuation of the Separate Account's
assets is not reasonably practicable
20
<PAGE>
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 our Policy owners.
We may also defer making a payment or transfer from the fixed interest
option 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 interest option is deferred for 30 days or more, it will bear interest at
a rate of 3% per year compounded annually while it is deferred.
HOW MUCH LIFE INSURANCE DOES THE POLICY PROVIDE?
In your application for the Policy, you will tell us how much life
insurance coverage you want on the life of the insured. This is called the
"specified amount" of insurance. The minimum specified amount of insurance that
you can purchase is $50,000.
DEATH BENEFIT OPTIONS
When the insured dies, we will pay the beneficiary the death benefit
less the amount of any outstanding loan. We offer two different types of death
benefits payable under the Policy. You choose which one you want in the
application. They are:
o Option 1 - The death benefit is the greater of (a) the specified amount
of insurance or (b) the "applicable percentage" of the policy value on
the date of the insured's death.
o Option 2 - The death benefit is the greater of (a) the specified amount
of insurance PLUS your policy value on the date of death, or (b) the
"applicable percentage" of the policy value on the date of the
insured's death.
The "applicable percentages" depend on the life insurance qualification
test you chose on the application. If you chose the Guideline Premium Test/Cash
Value Corridor Test, the "applicable percentage" is 250% when the insured has
attained age 40 or less and decreases to 100% when the insured attains age 100.
For the Cash Value Accumulation Test, the "applicable percentages" will vary by
attained age and the insurance risk characteristics. A table showing "sample
applicable percentages" is included as Appendix B.
If the investment performance of the variable account investment
options you have chosen is favorable, the amount of the death benefit may
increase. However, under Option 1, favorable investment performance will not
ordinarily increase the death benefit for several years and may not increase it
at all, whereas under Option 2, the 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 death benefit, see the Illustrations section
of this prospectus.
Assuming favorable investment performance, the death benefit under
Option 2 will tend to be higher than the death benefit under Option 1. On the
other hand, the monthly insurance charge will be higher under Option 2 to
compensate us for the additional insurance risk we take.
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<PAGE>
Because of that, the policy value will tend to be higher under Option 1 than
under Option 2 for the same premium payments.
IRC QUALIFICATION
For a Policy to be treated as a life insurance contract under the
Internal Revenue Code, it must pass one of two tests -- a cash value
accumulation test or a guideline premium/cash value corridor test. At the time
of issuance of the Policy, you choose which test you want to be applied. It may
not thereafter be changed. If you do not chose the test to be applied to your
Policy, the Guideline Premium/Cash Value Corridor Test will be applied.
o Cash Value Accumulation Test - Under the terms of the Policy, the
policy value may not at any time exceed the net single premium cost (at
any such time) for the benefits promised under the Policy.
o Guideline Premium/Cash Value Corridor Test - The Policy must at all
times satisfy a guideline premium requirement AND a cash value corridor
requirement. Under the GUIDELINE PREMIUM REQUIREMENT, the sum of the
premiums paid under the policy may not at any time exceed the greater
of the guideline single premium or the sum of the guideline level
premiums, for the benefits promised under the Policy. Under the CASH
VALUE CORRIDOR requirement, the death benefit at any time must be equal
to or greater than the applicable percentage of policy value specified
in the Internal Revenue Code.
The Cash Value Accumulation Test does not limit the amount of premiums
that may be paid under the Policy. If you desire to pay premiums in excess of
those permitted under the Guideline Premium/Cash Value Corridor Test, you should
consider electing to have your Policy qualify under the Cash Value Accumulation
Test. However, any premium that would increase the net amount at risk is subject
to evidence of insurability satisfactory to us. Required increases in the
minimum death benefit due to growth in the policy value will generally be
greater under the Cash Value Accumulation Test than under the Guideline
Premium/Cash Value Corridor Test.
The Guideline Premium/Cash Value Corridor Test limits the amount of
premium that may be paid under the Policy. If you do not desire to pay premiums
in excess of those permitted Guideline Premium/Cash Value Corridor Test
limitations, you should consider electing to have your Policy qualify under the
Guideline Premium/Cash Value Corridor Test.
CAN I CHANGE INSURANCE COVERAGE UNDER MY POLICY?
CHANGE OF DEATH BENEFIT OPTION
You may change your insurance coverage from Option 1 to Option 2 and
vice-versa, subject to the following conditions:
o after the change, the specified amount of insurance must be at least
$50,000;
o no change may be made in the first policy year and no more than one
change may be made in any policy year;
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<PAGE>
o if you request a change from Option 1 to Option 2, we may request
evidence of insurability; if a different rate class is indicated for
the insureds, the requested change will not be allowed.
CHANGES IN SPECIFIED AMOUNT OF INSURANCE
You may increase the specified amount of insurance, subject to the
following conditions:
o you must submit an application along with evidence of insurability
acceptable to Penn Mutual;
o you must return your policy so we can amend it to reflect the increase;
o no change may be made if it would cause the Policy not to qualify as
insurance under federal income tax law.
If you increase the specified amount within the first three policy
years, the three year no lapse period will be extended.
You may decrease the specified amount of insurance, subject to the
following conditions:
o no change may be made in the first policy year;
o no change may be made if it would cause the Policy not to qualify as
insurance under federal income tax law;
o no decrease may be made within one year of an increase in the specified
amount;
o any decrease in the specified amount of insurance must be at least
$5,000 and the specified amount after the decrease must be at least
$50,000.
TAX CONSEQUENCES
See FEDERAL INCOME TAX CONSIDERATIONS in the ADDITIONAL INFORMATION
section of this Prospectus to learn about possible tax consequences of changing
your insurance coverage under the Policy.
WHAT ARE THE SUPPLEMENTAL BENEFIT RIDERS THAT I CAN BUY?
We offer supplemental benefit riders that may be added to your Policy.
There are monthly charges for the riders, in addition to the charges described
above. If any of these riders are added to your Policy, monthly charges for the
supplemental benefits will be deducted from your policy value as part of the
monthly deduction.
23
<PAGE>
ADDITIONAL INSURED TERM INSURANCE. Provides a death benefit payable on
the death of an additional insured. More than one rider can be added to
your Policy. There is no cash value for this benefit.
ACCIDENTAL DEATH BENEFIT. Provides a death benefit payable if the
Insured's death results from certain accidental causes. There is no
cash value for this benefit.
BUSINESS ACCOUNTING BENEFIT. For Policies sold in certain corporate
markets, the rider provides enhanced early year surrender values.
CHILDREN'S TERM INSURANCE. Provides a death benefit payable on the
death of a covered child. More than one child can be covered. There is
no cash value for this benefit.
DISABILITY WAIVER OF MONTHLY DEDUCTION. Provides for the waiver of the
monthly deductions upon total disability of the insured.
DISABILITY WAIVER OF MONTHLY DEDUCTION AND DISABILITY MONTHLY PREMIUM
DEPOSIT. Provides for the waiver of the monthly deductions and payment
of stipulated premiums upon total disability of the Insured. If Option
1 is in effect at the time this benefit becomes effective, it will be
changed to Option 2.
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.
GUARANTEED OPTION TO EXTEND MATURITY DATE. Allows the owner to extend
the maturity date of the Policy, subject to conditions and limitations.
GUARANTEED OPTION TO INCREASE SPECIFIED AMOUNT. Allows the owner to
increase the specified amount without evidence of insurability.
RETURN OF PREMIUM SUPPLEMENTAL TERM INSURANCE. Provides term insurance
which will not be less than the amount of all premiums paid up to the
most recent policy month. It is only available on policies that provide
an Option 1 death benefit. There is no cash value for this benefit.
SUPPLEMENTAL TERM INSURANCE. Provides a death benefit payable on the
death of the primary insured. There is no cash value for this benefit.
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 representative for further information or contact our
office.
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<PAGE>
DO I HAVE THE RIGHT TO CANCEL MY POLICY?
You have the right to cancel your Policy within 10 days (or longer in
some states). This is referred to as the "free look" period. To cancel your
Policy, simply deliver or mail the Policy to our office or to our representative
who delivered the Policy to you.
In most states, you will receive a refund of your policy value as of
the date of cancellation plus the premium charge and the monthly deductions. The
date of cancellation will be the date we receive the Policy.
In some states, you will receive a refund of any premiums you have
paid. In these states money held under your Policy will be allocated to the Penn
Series Money Market investment option during the "free look" period. At the end
of the period, the money will be transferred to the investment options you have
chosen.
CAN I CHOOSE DIFFERENT PAYOUT OPTIONS UNDER MY POLICY?
CHOOSING A PAYOUT OPTION
You may choose to receive proceeds from the Policy as a single sum.
This includes proceeds that become payable because of death or full surrender.
Alternatively, you can elect to have proceeds of $5,000 or more applied to any
of a number of other payment options as set forth in your Policy. Periodic
payments may not be less than $50 each.
CHANGING A PAYMENT OPTION
You can change the payment option at any time before the proceeds are
payable. If you have not made a choice, the payee may change the payment option
within the period specified in the Policy. The person entitled to the proceeds
may elect a payment option as set forth in the Policy.
TAX IMPACT
There may be tax consequences to you or your beneficiary depending upon
which payment option is chosen. You should consult a qualified tax adviser
before making that choice.
HOW IS THE POLICY TREATED FOR FEDERAL INCOME TAX PURPOSES?
Death benefits paid under life insurance policies are not subject to
income tax. Investment gains from your Policy are not subject to income tax as
long as we do not pay them out to you.
Assuming your Policy is not treated as a "modified endowment contract"
under federal income tax law, distributions from the Policy are generally
treated as first recovering the investments in the Policy and then, only after
the return of all investment in the Policy, as receiving taxable income. Amounts
borrowed under the Policy also are not generally subject to federal income tax
at the time of the borrowing.
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<PAGE>
However, some of the tax rules change if your Policy is found to be a
"modified endowment contract." This can happen if you have paid more than a
certain amount of premiums in relation to the insurance provided under the
Policy. Under those circumstances, additional taxes and penalties may be payable
for Policy distributions and loans.
For further information about the qualifications of the Policy as life
insurance under federal tax law and the tax consequences of owning a Policy, see
FEDERAL INCOME TAX CONSIDERATIONS in the ADDITIONAL INFORMATION section of this
prospectus.
HOW DO I COMMUNICATE WITH PENN MUTUAL?
GENERAL RULES
You may mail all checks and money orders for premium payments to The
Penn Mutual Life Insurance Company, P.O. Box 7460, Philadelphia, Pennsylvania,
19101-7460, or express all checks and money orders to The Penn Mutual Life
Insurance Company, Receipts Processing C3V, 600 Dresher Road, Horsham,
Pennsylvania, 19044.
Certain requests pertaining to your Policy must be made in writing and
be signed and dated by you. They include the following:
o policy loans in excess of $5,000, and full and partial surrenders
o change of death benefit option
o changes in specified amount of insurance
o change of beneficiary
o election of payment option for Policy proceeds
o tax withholding elections
o grant of telephone transaction privileges to third parties
You should mail or express these requests to our office. You should
also send notice of the insured person's death and related documentation to our
office. Communications are not treated as "received" until such time as they are
arrived at our office in proper form. Any communication that arrives after the
close of our business day, or on a day that is not a business day, will be
considered "received" by us on the next following business day. Our business day
currently closes at 5:00 p.m. Eastern Standard Time, but special circumstances
(such as suspension of trading on a major exchange) may dictate an earlier
closing time.
We have special forms that must be used for a number of the requests
mentioned above. You can obtain these forms from your Penn Mutual representative
or by calling our office 800- 523-0650. Each communication to us must include
your name, your Policy number and the name of the insured person. We cannot
process any request that doesn't include this required information.
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<PAGE>
TELEPHONE TRANSACTIONS
You may request transfers among investment options by calling our
office. In addition, if you complete a special authorizing form, you may
authorize your Penn Mutual agent or other third person to act on your behalf in
giving us telephone transfer instructions. We will not be liable for following
transfer instructions communicated by telephone that we reasonably believe to be
genuine. We may require certain identifying information to process a telephone
transfer.
The policies are not designed for professional market timing
organizations or other entities that use programmed and frequent transfers among
investment options. For reasons such as that, we reserve the right to change our
telephone transaction policies or procedures at any time. We also reserve the
right to suspend or terminate the privilege altogether.
HOW DOES PENN MUTUAL COMMUNICATE WITH ME?
At least each year we will send to you a report showing your current
policy values, premiums paid and deductions made since the last report, any
outstanding policy loans, and any additional premiums permitted under your
Policy. We will also send to you 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 borrow money under your
policy, transfer amounts among the investment options or make partial
surrenders, we will send a written confirmation to you.
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<PAGE>
ILLUSTRATIONS
The tables on the following pages show how 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 the insured of a given age 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 daily charge against the investments for the
mortality and expense risks we assume, which is equivalent to an effective
annual charge of 0.45% of assets at the current rate and 0.90% at the maximum
guaranteed rate. In addition, the tables assume an average annual expense ratio
of 0.84% of the underlying investment funds available under the Policies. The
average annual expense ratio is based on the expense ratios of the funds for
their last fiscal year. In the absence of certain voluntary waivers of fees and
limitations on expenses, the average annual expense ratios of the investment
funds would have been 0.85%. We expect the fee waivers and expense limitations
to continue past the end of the current year. If they were discontinued and
expenses increased, the values in the illustration would be lower. For
information on fund expenses, see WHAT ARE THE FEES AND EXPENSES PAID BY THE
INVESTMENT FUNDS? in the BASIC INFORMATION section of this prospectus.
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 -1.29%%, 4.71% and
10.71%, respectively, at current rates, and and -1.74%, 4.26% and 10.26%,
respectively, at guaranteed rates.
The tables also reflect the deduction of the monthly administrative
charge and the monthly cost of insurance charge for the hypothetical insured
persons. 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 the following pages.
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.
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ILLUSTRATION OF POLICY VALUES
PENN MUTUAL LIFE INSURANCE COMPANY
MALE ISSUE AGE: 35 NON-SMOKER
$750 ANNUAL PREMIUM
$75,000 SPECIFIED AMOUNT
DEATH BENEFIT OPTION 1
LIFE INSURANCE QUALIFICATION TEST - GUIDELINE PREMIUM
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>
1 788 388 0 75,000 420 0 75,000 452 0 75,000
2 1,614 866 403 75,000 958 496 75,000 1,055 592 75,000
3 2,483 1,331 868 75,000 1,515 1,052 75,000 1,715 1,252 75,000
4 3,394 1,783 1,320 75,000 2,090 1,628 75,000 2,438 1,976 75,000
5 4,351 2,222 1,759 75,000 2,686 2,224 75,000 3,232 2,770 75,000
6 5,357 2,648 2,186 75,000 3,304 2,841 75,000 4,105 3,642 75,000
7 6,412 3,061 2,599 75,000 3,942 3,480 75,000 5,064 4,602 75,000
8 7,520 3,458 3,088 75,000 4,600 4,230 75,000 6,115 5,745 75,000
9 8,683 3,834 3,556 75,000 5,273 4,996 75,000 7,265 6,987 75,000
10 9,905 4,190 4,005 75,000 5,964 5,779 75,000 8,524 8,339 75,000
15 16,993 5,625 5,625 75,000 9,660 9,660 75,000 16,910 16,910 75,000
20 26,039 6,369 6,369 75,000 13,726 13,726 75,000 30,459 30,459 75,000
25 37,585 6,234 6,234 75,000 18,140 18,140 75,000 53,079 53,079 75,000
30 52,321 4,591 4,591 75,000 22,544 22,544 75,000 91,010 91,010 111,032
</TABLE>
(1) Assumes that no policy loans have been made.
(2) Current values reflect current cost of insurance rates, a monthly
administrative charge of $8.00 in all years and a mortality and expense
risk charge of 0.45% of assets in all years.
(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.
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<PAGE>
ILLUSTRATION OF POLICY VALUES
PENN MUTUAL LIFE INSURANCE COMPANY
MALE ISSUE AGE: 35 NON-SMOKER
$1,200 ANNUAL PREMIUM
$75,000 SPECIFIED AMOUNT
DEATH BENEFIT OPTION 2
LIFE INSURANCE QUALIFICATION TEST - GUIDELINE PREMIUM
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 1,260 806 343 75,806 863 401 75,863 921 459 75,921
2 2,583 1,696 1,233 76,696 1,865 1,403 76,865 2,042 1,579 77,042
3 3,972 2,567 2,104 77,567 2,906 2,444 77,906 3,274 2,812 78,274
4 5,431 3,418 2,956 78,418 3,988 3,526 78,988 4,631 4,168 79,631
5 6,962 4,251 3,789 79,251 5,113 4,650 80,113 6,124 5,661 81,124
6 8,570 5,065 4,603 80,065 6,283 5,820 81,283 7,768 7,306 82,768
7 10,259 5,860 5,398 80,860 7,499 7,036 82,499 9,580 9,117 84,580
8 12,032 6,632 6,262 81,632 8,758 8,388 83,758 11,571 11,201 86,571
9 13,893 7,377 7,099 82,377 10,060 9,782 85,060 13,759 13,481 88,759
10 15,848 8,095 7,910 83,095 11,405 11,220 86,405 16,162 15,977 91,162
15 27,189 11,238 11,238 86,238 18,797 18,797 93,797 32,252 32,252 107,252
20 41,663 13,508 13,508 88,508 27,319 27,319 102,319 58,106 58,106 133,106
25 60,136 14,712 14,712 89,712 36,989 36,989 111,989 99,899 99,899 174,899
30 83,713 14,231 14,231 89,231 47,305 47,305 122,305 167,280 167,280 242,280
</TABLE>
(1) Assumes that no policy loans have been made.
(2) Current values reflect current cost of insurance rates, a monthly
administrative charge of $8.00 in all years and a mortality and expense
risk charge of 0.45% of assets in all years.
(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.
30
<PAGE>
ILLUSTRATION OF POLICY VALUES
PENN MUTUAL LIFE INSURANCE COMPANY
MALE ISSUE AGE: 35 NON-SMOKER
$750 ANNUAL PREMIUM
$75,000 SPECIFIED AMOUNT
DEATH BENEFIT OPTION 1
LIFE INSURANCE QUALIFICATION TEST -CASH VALUE ACCUMULATION
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>
1 788 388 0 75,000 420 0 75,000 452 0 75,000
2 1,614 866 403 75,000 958 496 75,000 1,055 592 75,000
3 2,483 1,331 868 75,000 1,515 1,052 75,000 1,715 1,252 75,000
4 3,394 1,783 1,320 75,000 2,090 1,628 75,000 2,438 1,976 75,000
5 4,351 2,222 1,759 75,000 2,686 2,224 75,000 3,232 2,770 75,000
6 5,357 2,648 2,186 75,000 3,304 2,841 75,000 4,105 3,642 75,000
7 6,412 3,061 2,599 75,000 3,942 3,480 75,000 5,064 4,602 75,000
8 7,520 3,458 3,088 75,000 4,600 4,230 75,000 6,115 5,745 75,000
9 8,683 3,834 3,556 75,000 5,273 4,996 75,000 7,265 6,987 75,000
10 9,905 4,190 4,005 75,000 5,964 5,779 75,000 8,524 8,339 75,000
15 16,993 5,625 5,625 75,000 9,660 9,660 75,000 16,910 16,910 75,000
20 26,039 6,369 6,369 75,000 13,726 13,726 75,000 30,459 30,459 75,000
25 37,585 6,234 6,234 75,000 18,140 18,140 75,000 52,449 52,449 105,661
30 52,321 4,591 4,591 75,000 22,544 22,544 75,000 86,778 86,778 152,807
</TABLE>
(1) Assumes that no policy loans have been made.
(2) Current values reflect current cost of insurance rates, a monthly
administrative charge of $8.00 in all years and a mortality and expense
risk charge of 0.45% of assets in all years.
(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.
31
<PAGE>
ILLUSTRATION OF POLICY VALUES
PENN MUTUAL LIFE INSURANCE COMPANY
MALE ISSUE AGE: 35 NON-SMOKER
$1,200 ANNUAL PREMIUM
$75,000 SPECIFIED AMOUNT
DEATH BENEFIT OPTION 2
LIFE INSURANCE QUALIFICATION TEST -CASH VALUE ACCUMULATION
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 1,260 806 343 75,806 863 401 75,863 921 459 75,921
2 2,583 1,696 1,233 76,696 1,865 1,403 76,865 2,042 1,579 77,042
3 3,972 2,567 2,104 77,567 2,906 2,444 77,906 3,274 2,812 78,274
4 5,431 3,418 2,956 78,418 3,988 3,526 78,988 4,631 4,168 79,631
5 6,962 4,251 3,789 79,251 5,113 4,650 80,113 6,124 5,661 81,124
6 8,570 5,065 4,603 80,065 6,283 5,820 81,283 7,768 7,306 82,768
7 10,259 5,860 5,398 80,860 7,499 7,036 82,499 9,580 9,117 84,580
8 12,032 6,632 6,262 81,632 8,758 8,388 83,758 11,571 11,201 86,571
9 13,893 7,377 7,099 82,377 10,060 9,782 85,060 13,759 13,481 88,759
10 15,848 8,095 7,910 83,095 11,405 11,220 86,405 16,162 15,977 91,162
15 27,189 11,238 11,238 86,238 18,797 18,797 93,797 32,252 32,252 107,252
20 41,663 13,508 13,508 88,508 27,319 27,319 102,319 58,104 58,104 135,450
25 60,136 14,712 14,712 89,712 36,989 36,989 111,989 99,312 99,312 200,067
30 83,713 14,231 14,231 89,231 47,305 47,305 122,305 163,625 163,625 288,127
</TABLE>
(1) Assumes that no policy loans have been made.
(2) Current values reflect current cost of insurance rates, a monthly
administrative charge of $8.00 in all years and a mortality and expense
risk charge of 0.45% of assets in all years.
(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.
32
<PAGE>
ILLUSTRATION OF POLICY VALUES
PENN MUTUAL LIFE INSURANCE COMPANY
FEMALE ISSUE AGE: 45 NON-SMOKER
$1,500 ANNUAL PREMIUM
$125,000 SPECIFIED AMOUNT
DEATH BENEFIT OPTION 1
LIFE INSURANCE QUALIFICATION TEST - GUIDELINE PREMIUM
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 1,575 802 0 125,000 867 0 125,000 932 0 125,000
2 3,229 1,737 750 125,000 1,923 936 125,000 2,118 1,131 125,000
3 4,965 2,630 1,643 125,000 3,000 2,013 125,000 3,401 2,415 125,000
4 6,788 3,486 2,499 125,000 4,101 3,114 125,000 4,796 3,809 125,000
5 8,703 4,304 3,317 125,000 5,227 4,240 125,000 6,313 5,327 125,000
6 10,713 5,080 4,093 125,000 6,376 5,389 125,000 7,965 6,978 125,000
7 12,824 5,825 4,838 125,000 7,558 6,571 125,000 9,774 8,787 125,000
8 15,040 6,537 5,748 125,000 8,775 7,986 125,000 11,758 10,969 125,000
9 17,367 7,212 6,620 125,000 10,023 9,431 125,000 13,933 13,341 125,000
10 19,810 7,850 7,456 125,000 11,305 10,910 125,000 16,321 15,926 125,000
15 33,986 10,333 10,333 125,000 18,121 18,121 125,000 32,267 32,267 125,000
20 52,079 11,324 11,324 125,000 25,487 25,487 125,000 58,241 58,241 125,000
25 75,170 10,260 10,260 125,000 33,183 33,183 125,000 102,169 102,169 125,000
30 104,641 6,314 6,314 125,000 40,952 40,952 125,000 177,345 177,345 189,759
</TABLE>
(1) Assumes that no policy loans have been made.
(2) Current values reflect current cost of insurance rates, a monthly
administrative charge of $8.00 in all years and a mortality and expense
risk charge of 0.45% of assets in all years.
(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.
33
<PAGE>
ILLUSTRATION OF POLICY VALUES
PENN MUTUAL LIFE INSURANCE COMPANY
FEMALE ISSUE AGE: 45 NON-SMOKER
$2,100 ANNUAL PREMIUM
$125,000 SPECIFIED AMOUNT
DEATH BENEFIT OPTION 2
LIFE INSURANCE QUALIFICATION TEST - GUIDELINE PREMIUM
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 2,205 1,357 370 126,357 1,456 469 126,456 1,555 568 126,555
2 4,520 2,838 1,851 127,838 3,126 2,140 128,126 3,428 2,441 128,428
3 6,951 4,267 3,280 129,267 4,842 3,855 129,842 5,466 4,479 130,466
4 9,504 5,647 4,660 130,647 6,608 5,621 131,608 7,691 6,704 132,691
5 12,184 6,979 5,992 131,979 8,425 7,438 133,425 10,122 9,135 135,122
6 14,998 8,259 7,272 133,259 10,291 9,304 135,291 12,776 11,789 137,776
7 17,953 9,497 8,510 134,497 12,219 11,232 137,219 15,686 14,700 140,686
8 21,056 10,692 9,902 135,692 14,210 13,420 139,210 18,880 18,091 143,880
9 24,314 11,837 11,245 136,837 16,260 15,668 141,260 22,380 21,788 147,380
10 27,734 12,936 12,541 137,936 18,373 17,978 143,373 26,221 25,826 151,221
15 47,581 17,537 17,537 142,537 29,769 29,769 154,769 51,707 51,707 176,707
20 72,910 20,321 20,321 145,321 42,352 42,352 167,352 92,065 92,065 217,065
25 105,238 20,733 20,733 145,733 55,655 55,655 180,655 156,267 156,267 281,267
30 146,498 18,092 18,092 143,092 68,905 68,905 193,905 259,037 259,037 384,037
</TABLE>
(1) Assumes that no policy loans have been made.
(2) Current values reflect current cost of insurance rates, a monthly
administrative charge of $8.00 in all years and a mortality and expense
risk charge of 0.45% of assets in all years.
(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.
34
<PAGE>
ILLUSTRATION OF POLICY VALUES
PENN MUTUAL LIFE INSURANCE COMPANY
FEMALE ISSUE AGE: 45 NON-SMOKER
$1,500 ANNUAL PREMIUM
$125,000 SPECIFIED AMOUNT
DEATH BENEFIT OPTION 1
LIFE INSURANCE QUALIFICATION TEST-CASH VALUE ACCUMULATION
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 1,575 802 0 125,000 867 0 125,000 932 0 125,000
2 3,229 1,737 750 125,000 1,923 936 125,000 2,118 1,131 125,000
3 4,965 2,630 1,643 125,000 3,000 2,013 125,000 3,401 2,415 125,000
4 6,788 3,486 2,499 125,000 4,101 3,114 125,000 4,796 3,809 125,000
5 8,703 4,304 3,317 125,000 5,227 4,240 125,000 6,313 5,327 125,000
6 10,713 5,080 4,093 125,000 6,376 5,389 125,000 7,965 6,978 125,000
7 12,824 5,825 4,838 125,000 7,558 6,571 125,000 9,774 8,787 125,000
8 15,040 6,537 5,748 125,000 8,775 7,986 125,000 11,758 10,969 125,000
9 17,367 7,212 6,620 125,000 10,023 9,431 125,000 13,933 13,341 125,000
10 19,810 7,850 7,456 125,000 11,305 10,910 125,000 16,321 15,926 125,000
15 33,986 10,333 10,333 125,000 18,121 18,121 125,000 32,267 32,267 125,000
20 52,079 11,324 11,324 125,000 25,487 25,487 125,000 58,241 58,241 125,000
25 75,170 10,260 10,260 125,000 33,183 33,183 125,000 100,869 100,869 172,721
30 104,641 6,314 6,314 125,000 40,952 40,952 125,000 168,319 168,319 254,433
</TABLE>
(1) Assumes that no policy loans have been made.
(2) Current values reflect current cost of insurance rates, a monthly
administrative charge of $8.00 in all years and a mortality and expense
risk charge of 0.45% of assets in all years.
(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.
35
<PAGE>
ILLUSTRATION OF POLICY VALUES
PENN MUTUAL LIFE INSURANCE COMPANY
FEMALE ISSUE AGE: 45 NON-SMOKER
$2,100 ANNUAL PREMIUM
$125,000 SPECIFIED AMOUNT
DEATH BENEFIT OPTION 2
LIFE INSURANCE QUALIFICATION TEST-CASH VALUE ACCUMULATION
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 2,205 1,357 370 126,357 1,456 469 126,456 1,555 568 126,555
2 4,520 2,838 1,851 127,838 3,126 2,140 128,126 3,428 2,441 128,428
3 6,951 4,267 3,280 129,267 4,842 3,855 129,842 5,466 4,479 130,466
4 9,504 5,647 4,660 130,647 6,608 5,621 131,608 7,691 6,704 132,691
5 12,184 6,979 5,992 131,979 8,425 7,438 133,425 10,122 9,135 135,122
6 14,998 8,259 7,272 133,259 10,291 9,304 135,291 12,776 11,789 137,776
7 17,953 9,497 8,510 134,497 12,219 11,232 137,219 15,686 14,700 140,686
8 21,056 10,692 9,902 135,692 14,210 13,420 139,210 18,880 18,091 143,880
9 24,314 11,837 11,245 136,837 16,260 15,668 141,260 22,380 21,788 147,380
10 27,734 12,936 12,541 137,936 18,373 17,978 143,373 26,221 25,826 151,221
15 47,581 17,537 17,537 142,537 29,769 29,769 154,769 51,707 51,707 176,707
20 72,910 20,321 20,321 145,321 42,352 42,352 167,352 92,065 92,065 217,065
25 105,238 20,733 20,733 145,733 55,655 55,655 180,655 156,267 156,267 281,267
30 146,498 18,092 18,092 143,092 68,905 68,905 193,905 258,988 258,988 391,490
</TABLE>
(1) Assumes that no policy loans have been made.
(2) Current values reflect current cost of insurance rates, a monthly
administrative charge of $8.00 in all years and a mortality and expense
risk charge of 0.45% of assets in all years.
(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.
36
<PAGE>
ILLUSTRATION OF POLICY VALUES
PENN MUTUAL LIFE INSURANCE COMPANY
MALE ISSUE AGE: 35 NON-SMOKER
$750 ANNUAL PREMIUM
$75,000 SPECIFIED AMOUNT
DEATH BENEFIT OPTION 1
LIFE INSURANCE QUALIFICATION TEST - GUIDELINE PREMIUM
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>
1 788 361 0 75,000 392 0 75,000 424 0 75,000
2 1,614 800 338 75,000 888 426 75,000 981 518 75,000
3 2,483 1,224 762 75,000 1,398 935 75,000 1,587 1,125 75,000
4 3,394 1,633 1,170 75,000 1,922 1,459 75,000 2,248 1,785 75,000
5 4,351 2,025 1,563 75,000 2,458 1,995 75,000 2,968 2,505 75,000
6 5,357 2,401 1,938 75,000 3,008 2,545 75,000 3,751 3,289 75,000
7 6,412 2,758 2,295 75,000 3,569 3,106 75,000 4,604 4,141 75,000
8 7,520 3,097 2,727 75,000 4,142 3,772 75,000 5,533 5,163 75,000
9 8,683 3,416 3,139 75,000 4,727 4,449 75,000 6,546 6,268 75,000
10 9,905 3,716 3,531 75,000 5,323 5,138 75,000 7,650 7,465 75,000
15 16,993 4,867 4,867 75,000 8,434 8,434 75,000 14,880 14,880 75,000
20 26,039 5,261 5,261 75,000 11,618 11,618 75,000 26,191 26,191 75,000
25 37,585 4,400 4,400 75,000 14,404 14,404 75,000 44,236 44,236 75,000
30 52,321 1,442 1,442 75,000 15,978 15,978 75,000 74,122 74,122 90,429
</TABLE>
(1) Assumes that no policy loans have been made.
(2) Guaranteed values reflect guaranteed cost of insurance rates, a monthly
administrative charge of $9.00 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.
37
<PAGE>
ILLUSTRATION OF POLICY VALUES
PENN MUTUAL LIFE INSURANCE COMPANY
MALE ISSUE AGE: 35 NON-SMOKER
$1,200 ANNUAL PREMIUM
$75,000 SPECIFIED AMOUNT
DEATH BENEFIT OPTION 2
LIFE INSURANCE QUALIFICATION TEST - GUIDELINE PREMIUM
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 1,260 769 307 75,769 825 363 75,825 882 419 75,882
2 2,583 1,609 1,146 76,609 1,772 1,309 76,772 1,942 1,480 76,942
3 3,972 2,425 1,962 77,425 2,750 2,288 77,750 3,103 2,641 78,103
4 5,431 3,218 2,756 78,218 3,761 3,299 78,761 4,374 3,912 79,374
5 6,962 3,988 3,525 78,988 4,805 4,342 79,805 5,764 5,302 80,764
6 8,570 4,732 4,270 79,732 5,881 5,419 80,881 7,285 6,822 82,285
7 10,259 5,451 4,988 80,451 6,989 6,527 81,989 8,947 8,485 83,947
8 12,032 6,143 5,773 81,143 8,131 7,761 83,131 10,766 10,396 85,766
9 13,893 6,808 6,531 81,808 9,306 9,028 84,306 12,755 12,478 87,755
10 15,848 7,446 7,261 82,446 10,514 10,329 85,514 14,932 14,747 89,932
15 27,189 10,170 10,170 85,170 17,037 17,037 92,037 29,284 29,284 104,284
20 41,663 11,937 11,937 86,937 24,237 24,237 99,237 51,717 51,717 126,717
25 60,136 12,249 12,249 87,249 31,604 31,604 106,604 86,552 86,552 161,552
30 83,713 10,353 10,353 85,353 38,177 38,177 113,177 140,460 140,460 215,460
</TABLE>
(1) Assumes that no policy loans have been made.
(2) Guaranteed values reflect guaranteed cost of insurance rates, a monthly
administrative charge of $9.00 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.
38
<PAGE>
ILLUSTRATION OF POLICY VALUES
PENN MUTUAL LIFE INSURANCE COMPANY
MALE ISSUE AGE: 35 NON-SMOKER
$750 ANNUAL PREMIUM
$75,000 SPECIFIED AMOUNT
DEATH BENEFIT OPTION 1
LIFE INSURANCE QUALIFICATION TEST -CASH VALUE ACCUMULATION
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>
1 788 361 0 75,000 392 0 75,000 424 0 75,000
2 1,614 800 338 75,000 888 426 75,000 981 518 75,000
3 2,483 1,224 762 75,000 1,398 935 75,000 1,587 1,125 75,000
4 3,394 1,633 1,170 75,000 1,922 1,459 75,000 2,248 1,785 75,000
5 4,351 2,025 1,563 75,000 2,458 1,995 75,000 2,968 2,505 75,000
6 5,357 2,401 1,938 75,000 3,008 2,545 75,000 3,751 3,289 75,000
7 6,412 2,758 2,295 75,000 3,569 3,106 75,000 4,604 4,141 75,000
8 7,520 3,097 2,727 75,000 4,142 3,772 75,000 5,533 5,163 75,000
9 8,683 3,416 3,139 75,000 4,727 4,449 75,000 6,546 6,268 75,000
10 9,905 3,716 3,531 75,000 5,323 5,138 75,000 7,650 7,465 75,000
15 16,993 4,867 4,867 75,000 8,434 8,434 75,000 14,880 14,880 75,000
20 26,039 5,261 5,261 75,000 11,618 11,618 75,000 26,191 26,191 75,000
25 37,585 4,400 4,400 75,000 14,404 14,404 75,000 44,067 44,067 88,775
30 52,321 1,442 1,442 75,000 15,978 15,978 75,000 71,049 71,049 125,110
</TABLE>
(1) Assumes that no policy loans have been made.
(2) Guaranteed values reflect guaranteed cost of insurance rates, a monthly
administrative charge of $9.00 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.
39
<PAGE>
ILLUSTRATION OF POLICY VALUES
PENN MUTUAL LIFE INSURANCE COMPANY
MALE ISSUE AGE: 35 NON-SMOKER
$1,200 ANNUAL PREMIUM
$75,000 SPECIFIED AMOUNT
DEATH BENEFIT OPTION 2
LIFE INSURANCE QUALIFICATION TEST -CASH VALUE ACCUMULATION
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 1,260 769 307 75,769 825 363 75,825 882 419 75,882
2 2,583 1,609 1,146 76,609 1,772 1,309 76,772 1,942 1,480 76,942
3 3,972 2,425 1,962 77,425 2,750 2,288 77,750 3,103 2,641 78,103
4 5,431 3,218 2,756 78,218 3,761 3,299 78,761 4,374 3,912 79,374
5 6,962 3,988 3,525 78,988 4,805 4,342 79,805 5,764 5,302 80,764
6 8,570 4,732 4,270 79,732 5,881 5,419 80,881 7,285 6,822 82,285
7 10,259 5,451 4,988 80,451 6,989 6,527 81,989 8,947 8,485 83,947
8 12,032 6,143 5,773 81,143 8,131 7,761 83,131 10,766 10,396 85,766
9 13,893 6,808 6,531 81,808 9,306 9,028 84,306 12,755 12,478 87,755
10 15,848 7,446 7,261 82,446 10,514 10,329 85,514 14,932 14,747 89,932
15 27,189 10,170 10,170 85,170 17,037 17,037 92,037 29,284 29,284 104,284
20 41,663 11,937 11,937 86,937 24,237 24,237 99,237 51,717 51,717 126,717
25 60,136 12,249 12,249 87,249 31,604 31,604 106,604 86,364 86,364 173,983
30 83,713 10,353 10,353 85,353 38,177 38,177 113,177 138,274 138,274 243,485
</TABLE>
(1) Assumes that no policy loans have been made.
(2) Guaranteed values reflect guaranteed cost of insurance rates, a monthly
administrative charge of $9.00 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.
40
<PAGE>
ILLUSTRATION OF POLICY VALUES
PENN MUTUAL LIFE INSURANCE COMPANY
FEMALE ISSUE AGE: 45 NON-SMOKER
$1,500 ANNUAL PREMIUM
$125,000 SPECIFIED AMOUNT
DEATH BENEFIT OPTION 1
LIFE INSURANCE QUALIFICATION TEST - GUIDELINE PREMIUM
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 1,575 742 0 125,000 805 0 125,000 868 0 125,000
2 3,229 1,597 610 125,000 1,775 788 125,000 1,961 974 125,000
3 4,965 2,414 1,427 125,000 2,762 1,775 125,000 3,141 2,154 125,000
4 6,788 3,190 2,203 125,000 3,765 2,778 125,000 4,416 3,429 125,000
5 8,703 3,925 2,938 125,000 4,784 3,797 125,000 5,796 4,809 125,000
6 10,713 4,617 3,630 125,000 5,815 4,828 125,000 7,288 6,301 125,000
7 12,824 5,262 4,275 125,000 6,857 5,870 125,000 8,901 7,914 125,000
8 15,040 5,858 5,068 125,000 7,907 7,117 125,000 10,645 9,856 125,000
9 17,367 6,398 5,806 125,000 8,958 8,365 125,000 12,530 11,937 125,000
10 19,810 6,883 6,488 125,000 10,010 9,615 125,000 14,569 14,174 125,000
15 33,986 8,448 8,448 125,000 15,261 15,261 125,000 27,768 27,768 125,000
20 52,079 8,162 8,162 125,000 20,102 20,102 125,000 48,313 48,313 125,000
25 75,170 4,260 4,260 125,000 22,734 22,734 125,000 81,030 81,030 125,000
30 104,641 0 0 0 20,337 20,337 125,000 137,155 137,155 146,756
</TABLE>
(1) Assumes that no policy loans have been made.
(2) Guaranteed values reflect guaranteed cost of insurance rates, a monthly
administrative charge of $9.00 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.
41
<PAGE>
ILLUSTRATION OF POLICY VALUES
PENN MUTUAL LIFE INSURANCE COMPANY
FEMALE ISSUE AGE: 45 NON-SMOKER
$2,100 ANNUAL PREMIUM
$125,000 SPECIFIED AMOUNT
DEATH BENEFIT OPTION 2
LIFE INSURANCE QUALIFICATION TEST - GUIDELINE PREMIUM
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 2,205 1,284 297 126,284 1,380 393 126,380 1,476 490 126,476
2 4,520 2,669 1,682 127,669 2,947 1,960 127,947 3,236 2,249 128,236
3 6,951 4,003 3,016 129,003 4,552 3,565 129,552 5,148 4,161 130,148
4 9,504 5,284 4,298 130,284 6,195 5,208 131,195 7,224 6,237 132,224
5 12,184 6,512 5,526 131,512 7,876 6,889 132,876 9,480 8,493 134,480
6 14,998 7,683 6,696 132,683 9,592 8,605 134,592 11,929 10,942 136,929
7 17,953 8,795 7,809 133,795 11,341 10,355 136,341 14,589 13,602 139,589
8 21,056 9,845 9,056 134,845 13,121 12,331 138,121 17,476 16,686 142,476
9 24,314 10,826 10,234 135,826 14,923 14,331 139,923 20,605 20,013 145,605
10 27,734 11,737 11,343 136,737 16,749 16,355 141,749 24,000 23,605 149,000
15 47,581 15,240 15,240 140,240 26,194 26,194 151,194 45,944 45,944 170,944
20 72,910 16,567 16,567 141,567 35,678 35,678 160,678 79,250 79,250 204,250
25 105,238 14,029 14,029 139,029 43,040 43,040 168,040 128,562 128,562 253,562
30 146,498 5,618 5,618 130,618 45,154 45,154 170,154 201,004 201,004 326,004
</TABLE>
(1) Assumes that no policy loans have been made.
(2) Guaranteed values reflect guaranteed cost of insurance rates, a monthly
administrative charge of $9.00 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.
42
<PAGE>
ILLUSTRATION OF POLICY VALUES
PENN MUTUAL LIFE INSURANCE COMPANY
FEMALE ISSUE AGE: 45 NON-SMOKER
$1,500 ANNUAL PREMIUM
$125,000 SPECIFIED AMOUNT
DEATH BENEFIT OPTION 1
LIFE INSURANCE QUALIFICATION TEST -CASH VALUE ACCUMULATION
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 1,575 742 0 125,000 805 0 125,000 868 0 125,000
2 3,229 1,597 610 125,000 1,775 788 125,000 1,961 974 125,000
3 4,965 2,414 1,427 125,000 2,762 1,775 125,000 3,141 2,154 125,000
4 6,788 3,190 2,203 125,000 3,765 2,778 125,000 4,416 3,429 125,000
5 8,703 3,925 2,938 125,000 4,784 3,797 125,000 5,796 4,809 125,000
6 10,713 4,617 3,630 125,000 5,815 4,828 125,000 7,288 6,301 125,000
7 12,824 5,262 4,275 125,000 6,857 5,870 125,000 8,901 7,914 125,000
8 15,040 5,858 5,068 125,000 7,907 7,117 125,000 10,645 9,856 125,000
9 17,367 6,398 5,806 125,000 8,958 8,365 125,000 12,530 11,937 125,000
10 19,810 6,883 6,488 125,000 10,010 9,615 125,000 14,569 14,174 125,000
15 33,986 8,448 8,448 125,000 15,261 15,261 125,000 27,768 27,768 125,000
20 52,079 8,162 8,162 125,000 20,102 20,102 125,000 48,313 48,313 125,000
25 75,170 4,260 4,260 125,000 22,734 22,734 125,000 80,870 80,870 138,475
30 104,641 0 0 0 20,337 20,337 125,000 130,324 130,324 196,999
</TABLE>
(1) Assumes that no policy loans have been made.
(2) Guaranteed values reflect guaranteed cost of insurance rates, a monthly
administrative charge of $9.00 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.
43
<PAGE>
ILLUSTRATION OF POLICY VALUES
PENN MUTUAL LIFE INSURANCE COMPANY
FEMALE ISSUE AGE: 45 NON-SMOKER
$2,100 ANNUAL PREMIUM
$125,000 SPECIFIED AMOUNT
DEATH BENEFIT OPTION 2
LIFE INSURANCE QUALIFICATION TEST -CASH VALUE ACCUMULATION
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 2,205 1,284 297 126,284 1,380 393 126,380 1,476 490 126,476
2 4,520 2,669 1,682 127,669 2,947 1,960 127,947 3,236 2,249 128,236
3 6,951 4,003 3,016 129,003 4,552 3,565 129,552 5,148 4,161 130,148
4 9,504 5,284 4,298 130,284 6,195 5,208 131,195 7,224 6,237 132,224
5 12,184 6,512 5,526 131,512 7,876 6,889 132,876 9,480 8,493 134,480
6 14,998 7,683 6,696 132,683 9,592 8,605 134,592 11,929 10,942 136,929
7 17,953 8,795 7,809 133,795 11,341 10,355 136,341 14,589 13,602 139,589
8 21,056 9,845 9,056 134,845 13,121 12,331 138,121 17,476 16,686 142,476
9 24,314 10,826 10,234 135,826 14,923 14,331 139,923 20,605 20,013 145,605
10 27,734 11,737 11,343 136,737 16,749 16,355 141,749 24,000 23,605 149,000
15 47,581 15,240 15,240 140,240 26,194 26,194 151,194 45,944 45,944 170,944
20 72,910 16,567 16,567 141,567 35,678 35,678 160,678 79,250 79,250 204,250
25 105,238 14,029 14,029 139,029 43,040 43,040 168,040 128,562 128,562 253,562
30 146,498 5,618 5,618 130,618 45,154 45,154 170,154 201,004 201,004 326,004
</TABLE>
(1) Assumes that no policy loans have been made.
(2) Guaranteed values reflect guaranteed cost of insurance rates, a monthly
administrative charge of $9.00 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.
44
<PAGE>
ADDITIONAL INFORMATION
This section of the prospectus provides information about Penn Mutual, Penn
Mutual Variable Life Account I, the investment funds and the Policy.
Contents of this Section Page
The Penn Mutual Life Insurance Company................................46
Year 2000.............................................................46
Penn Mutual Variable Life Account I...................................46
The Funds.............................................................48
More Information About Policy Values..................................51
Federal Income Tax Considerations.....................................53
Sale of Policies......................................................56
Penn Mutual Trustee and Officers......................................56
State Regulation......................................................59
Registration Statement................................................59
Experts...............................................................59
Litigation............................................................59
Independent Auditors..................................................60
Legal Matters.........................................................60
Financial Statements..................................................60
Appendix A...........................................................A-1
- Sample Minimum Initial Premiums
Appendix B...........................................................B-1
- Applicable Percentages Under Guideline Value/Cash Value
Corridor Test
- Sample Applicable Percentages Under the Cash Value Accumulation
Life Insurance Qualification Test
45
<PAGE>
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 600
Dresher Road, Horsham, Pennsylvania, 19044, a suburb of Philadelphia. Our
mailing address is The Penn Mutual Life Insurance Company, Philadelphia,
Pennsylvania, 19172.
YEAR 2000
The services we provide, as well as services provided by other companies,
organizations and governmental entities generally, depend on the smooth
functioning of computer systems. Many computer systems in use today cannot
recognize the Year 2000, and may return to 1900 or some other date after
December 31, 1999. If not corrected, these systems could fail or create
erroneous results. We began addressing the Year 2000 problem actively in 1996.
The effort involves assessing all of our computers, computer programs, and
related equipment, making necessary changes, and assuring that all systems
process dates correctly. We believe that we have designed and implemented an
efficient process for identifying what needs to be changed. Although we cannot
give assurance that we will have no Year 2000 problem, we expect our computer
systems to perform satisfactorily in the Year 2000.
Penn Mutual and the mutual funds that serve as investment options for the
Separate Account have relationships with investment advisers, broker-dealers,
transfer agents, custodians, and other service providers. We are contacting the
funds and their vendors and service providers to obtain reasonable assurances
that such service providers have taken appropriate measures to address the Year
2000 problem. Where practicable, we will assess and attempt to mitigate risks
that the businesses and organizations upon which we depend are not Year 2000
compliant. We cannot, however, give assurance that failure of these firms to
complete adequate preparations in a timely manner will not have an adverse
effect on the Contracts.
The Year 2000 Information and Readiness Disclosure Act passed by Congress
in 1998 encourages businesses and other organizations to provide information
about the readiness of their computer systems. The Act also provides certain
protections to these organizations against potential liability for what they say
about their readiness. We specifically designate the information about our
readiness as readiness disclosure under the protections of the Act.
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. 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.
46
<PAGE>
Net premiums received under the Policy and under other variable life
insurance policies are allocated to subaccounts of the Separate Account for
investment in shares of investment funds. They are allocated in accordance with
instructions from Policy owners
Income, gains and losses, realized or unrealized, in a subaccount are
credited or charged without regard to any other income, gains or losses of Penn
Mutual. Assets equal to the reserves and other contract liabilities with respect
to the investments held in 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.
If investment in a shares of a fund 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 fund is in the interest of owners, we may
substitute another fund. 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.
VOTING SHARES OF THE FUNDS
We are the legal owner of shares of the funds 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 Separate Account at regular and special
meetings of shareholders of the funds in accordance with instructions received
from owners. 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 for which an owner may give voting
instructions is currently determined by dividing the portion of the owner's
policy value allocated to the Separate Account 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 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.
47
<PAGE>
THE FUNDS
Penn Series Funds, Inc., Neuberger Berman Advisors Management Trust,
Fidelity Investments' Variable Insurance Products Fund, Fidelity Investments'
Variable Insurance Products Fund II and Morgan Stanley Dean Witter Universal
Funds, Inc. 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 objective of each of the Funds available as investment
options under the Policy is set forth below. There is, of course, no assurance
that these objectives will be met.
PENN SERIES -- GROWTH EQUITY FUND -- long-term growth of capital and
increase of future income.
PENN SERIES -- VALUE EQUITY FUND -- maximize total return (capital
appreciation and income).
PENN SERIES -- SMALL CAPITALIZATION FUND -- capital appreciation.
PENN SERIES -- EMERGING GROWTH FUND -- capital appreciation.
PENN SERIES -- FLEXIBLY MANAGED FUND -- maximize total return (capital
appreciation and income).
PENN SERIES -- INTERNATIONAL EQUITY FUND -- capital appreciation.
PENN SERIES -- QUALITY BOND FUND -- highest income over the long term
consistent with the preservation of principal.
PENN SERIES -- HIGH YIELD BOND FUND -- high current income.
PENN SERIES -- MONEY MARKET FUND -- preserve capital, maintain liquidity
and achieve the highest possible level of current income consistent
therewith.
NEUBERGER BERMAN -- LIMITED MATURITY BOND PORTFOLIO -- the highest current
income consistent with low risk to principal and liquidity; a secondary
objective -- enhance 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.
NEUBERGER BERMAN -- BALANCED PORTFOLIO -- long-term capital growth and
reasonable current income without undue risk to principal.
NEUBERGER BERMAN -- PARTNERS PORTFOLIO -- capital growth; 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.
48
<PAGE>
FIDELITY INVESTMENTS' VIP FUND -- EQUITY-INCOME PORTFOLIO -- 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.
FIDELITY INVESTMENTS' VIP FUND -- GROWTH PORTFOLIO -- capital appreciation.
FIDELITY INVESTMENTS' VIP FUND II -- ASSET MANAGER PORTFOLIO -- high total
return with reduced risk over the long-term.
FIDELITY INVESTMENTS' VIP FUND II -- INDEX 500 PORTFOLIO -- 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 DEAN WITTER UNIVERSAL FUNDS, INC. -- EMERGING MARKETS EQUITY
(INTERNATIONAL) PORTFOLIO -- long term capital appreciation.
THE MANAGERS
INDEPENDENCE CAPITAL MANAGEMENT, INC. ("Independence Capital Management"),
of Horsham, Pennsylvania, is investment adviser to each of the Penn Series
Funds.
T. ROWE PRICE ASSOCIATES, INC., of Baltimore, Maryland, is investment
sub-adviser to the Penn Series Flexibly Managed Fund and Penn Series High Yield
Bond Fund.
OPCAP ADVISORS (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., 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, of New York, New York, is the
investment adviser to each series of Advisers Managers Trust underlying the
Neuberger Berman Limited Maturity Bond Portfolio, the Neuberger Berman Balanced
Portfolio and the Neuberger Berman Partner 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
49
<PAGE>
Portfolio. These subsidiaries are Fidelity Management & Research (U.K.) Inc.
and Fidelity Management & Research (Far East) Inc.
MORGAN STANLEY DEAN WITTER INVESTMENT MANAGEMENT INC. ("Morgan Stanley Dean
Witter"), 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, Neuberger Berman,
Fidelity Investments' VIP Fund, Fidelity Investments' VIP Fund II and Morgan
Stanley Dean Witter governing the Separate Account's investment in those Funds.
The advisers to Fidelity Investments' VIP Fund, Fidelity Investments' VIP Fund
II and Morgan Stanley Dean Witter Portfolios, or their affiliates, compensate
Penn Mutual for administrative and other services rendered in making shares of
the portfolios available under the Policies.
The shares of Penn Series, Neuberger Berman, Fidelity Investments' VIP
Fund, Fidelity Investments' VIP Fund II and Morgan Stanley Dean Witter 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 Neuberger
Berman, Fidelity Investments' VIP Fund, Fidelity Investments' VIP Fund II and
Morgan Stanley Dean Witter are also sold to separate accounts of other insurance
companies, and may also be sold 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) to invest in the same underlying mutual
fund. Although neither we nor Penn Series, Neuberger Berman, Fidelity
Investments' VIP Fund, Fidelity Investments' VIP Fund II or Morgan Stanley Dean
Witter currently perceives or anticipates any such disadvantage, the Boards of
Directors of Penn Series and Morgan Stanley Dean Witter, respectively, and the
Boards of Trustees of Neuberger Berman, Fidelity Investments' VIP Fund and
Fidelity Investments' 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 Neuberger Berman) 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, Neuberger Berman, Fidelity
Investments' VIP Fund, Fidelity Investments' VIP Fund II and Morgan Stanley Dean
Witter, 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.
50
<PAGE>
MORE INFORMATION ABOUT POLICY VALUES
On the policy date (the date from which policy years and monthly
anniversaries are measured), the policy value is equal to the initial net
premium. If the policy date and the policy issue date (the date the policy is
issued) are the same day, the policy value is equal to the initial net premium,
less the monthly deduction.
On each valuation date (each day the New York Stock Exchange and our office
is open for business) thereafter, the policy value is the aggregate of the
Policy's variable account values and the fixed interest account value. The
policy value will vary to reflect the variable account values, interest credited
to the fixed interest account, policy charges, transfers, partial surrenders,
policy loans and policy loan repayments.
51
<PAGE>
VARIABLE ACCOUNT VALUES
When you allocate an amount to a variable account investment option,
either by net premium allocation or transfer, your Policy is credited with
accumulation units. The number of accumulation units is determined by dividing
the amount allocated to the variable account investment option by the variable
account's accumulation unit value for the valuation period in which the
allocation was made.
The number of accumulation units credited to your Policy for a variable
account investment option will increase when net premiums are allocated to the
variable account, amounts are transferred to the variable account and loan
repayments are credited to the variable account. The number of accumulation
units will decrease when the allocated portion of the monthly deduction is taken
from the variable account, a policy loan is taken from the variable account, an
amount is transferred from the variable account or a partial surrender is made
from the variable account (including the partial surrender charge).
ACCUMULATION UNIT VALUES
An accumulation unit value varies to reflect the investment experience of
the underlying investment fund in which the Policy is invested and the mortality
and expense risk charge assessed against the investment, and may increase or
decrease from one valuation date to the next. The accumulation unit value of
each subaccount of the Separate Account that invests in a fund 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.
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 taken from the fixed account (including the
partial surrender charges), 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 special
loan account, including transfers to and from the special loan account as loans
are taken and repayments are made, and interest credited on the policy special
loan account.
52
<PAGE>
NET POLICY VALUE
The net policy value on a valuation date is the policy value less the
amount of any policy loan 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.
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 to you for full or partial surrenders.
FEDERAL INCOME TAX CONSIDERATIONS
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
To qualify as a life insurance contract for federal income 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 Policy 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.
If it is subsequently determined that a Policy does not satisfy Section
7702, we may take whatever steps that are appropriate and reasonable to comply
with Section 7702. For these reasons, we reserve the right to restrict Policy
transactions as necessary to attempt to qualify it as a life insurance contract
under Section 7702.
53
<PAGE>
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. ss. 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 in 1984 that guidance would
be given, by way of regulation or ruling, on the "extent to which Policyholders
may direct their investments to particular subaccounts without being treated as
owners of underlying assets." As of the date of this Prospectus, no ruling or
regulation has been issued.
The following discussion assumes that the Policy qualifies as a life
insurance contract for federal income tax purposes.
We believe 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.
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, we will notify you that unless a refund of the excess premium (with
interest) is requested, your Policy will become a modified endowment contract.
You will have 30 days after receiving such notification to request the refund.
54
<PAGE>
All policies that we or our affiliate issues to the same owner during any
calendar year, which are treated as modified endowment contracts, 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.
The rules relating to whether a Policy will be treated as a modified
endowment contract are complex and make it impracticable to adequately describe
in the limited confines of this summary. Therefore, you may wish to 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 a modified endowment contract 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) 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
55
<PAGE>
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.
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.
SALE OF 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. The Policy is sold by registered representatives of HTK
who are also appointed and licensed as insurance agents. The Policy may also be
offered through other insurance and securities brokers. Registered
representatives may be paid commissions on a Policy they sell based on premiums
paid in amounts up to 53.5% of first year premiums, 3% 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.
PENN MUTUAL TRUSTEES AND OFFICERS
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<PAGE>
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.
<TABLE>
<CAPTION>
BOARD OF TRUSTEES
Position with
Name and Address Penn Mutual Principal Occupation During Past Five Years
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Robert E. Chappell Chairman of the Chairman of the Board and Chief Executive Officer
The Penn Mutual Life Board (since December 1996), President and Chief Executive
Insurance Company and Chief Officer (April 1995-December 1996), President and
Philadelphia, PA 19172 Executive Chief Operating Officer, (January 1994 to April
Officer 1995), The Penn Mutual Life Insurance Company.
- ---------------------------------------------------------------------------------------------------------------------------------
Daniel J. Toran President, Chief President and Chief Operating Officer (since January
The Penn Mutual Life Operating Officer 1997), Executive Vice President, (May 1996-January
Insurance Company and Trustee 1997), The Penn Mutual Life Insurance Company;
Philadelphia, PA 19172 Executive Vice President, The New England Mutual
Life Insurance Company (prior thereto).
- ------------------------------------------------------------------------------------------------------------------------------------
Julia Chang Bloch Trustee Visiting Professor, Institute of International
1743 22nd Street, NW Relations in Beijing, China, and distinguished
Washington, DC 20008 adviser, American 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,
2040 Montrose Lane Conrail, Inc. (prior thereto).
Wilmington, NC 28405
- ------------------------------------------------------------------------------------------------------------------------------------
Philip E. Lippincott Trustee Retired (since April 1994), Chairman and Chief
4301 Bayberry Drive Executive Officer, Scott Paper Company (prior
Avalon, NJ 08202 thereto).
- ------------------------------------------------------------------------------------------------------------------------------------
John F. McCaughan Trustee Retired Chairman (since 1996), Chairman of the Board
921 Pebble Hill Road (prior thereto), Betz Laboratories, Inc.
Doylestown, PA 18901
- ------------------------------------------------------------------------------------------------------------------------------------
Alan B. Miller Trustee Chairman and President, Universal Health Services,
367 S. Gulph Road Inc.
King of Prussia, PA
19406
- ------------------------------------------------------------------------------------------------------------------------------------
Edmond F. Notebaert Trustee President and Chief Executive Officer, The
34th Children's Hospital of Philadelphia (since 1987).
and Civic Center Blvd.
Philadelphia, PA 19104
- ------------------------------------------------------------------------------------------------------------------------------------
Robert H. Rock Trustee President, MLR Holdings, LLC (since 1987).
9th Floor
1845 Walnut Street -
Philadelphia, PA 19103
- ------------------------------------------------------------------------------------------------------------------------------------
Norman T. Wilde, Jr. Trustee President and Chief Executive Officer, Janney
1801 Market Street Montgomery Scott Inc. (a securities broker/dealer
Philadelphia, PA 19103 and subsidiary of The Penn Mutual Life Insurance
Company).
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
57
<PAGE>
<TABLE>
<CAPTION>
Position with
Name and Address Penn Mutual Principal Occupation During Past Five Years
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Wesley S. Williams, Jr., Trustee Partner, Covington & Burling (law firm).
Esq.
1201 Pennsylvania Ave.,
NW
P.O. Box 7566
Washington, D.C. 20004
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
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
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
John M. Albanese Senior Vice President, Customer Service and Information Systems (since June 1997), Vice
The Penn Mutual Life President, Information Systems Application (prior thereto), The Penn Mutual Life
Insurance Company Insurance Company.
Philadelphia, PA 19172
- ------------------------------------------------------------------------------------------------------------------------------------
Michael A. Biondolillo Senior Vice President, Human Resources (since June 1997); Corporate Vice President and
The Penn Mutual Life General Manager, Human Resources and Quality MG Industries, America (prior thereto).
Insurance Company
Philadelphia, PA 19172
- ------------------------------------------------------------------------------------------------------------------------------------
Nancy S. Brodie Executive Vice President and Chief Financial Officer (since December 1995), Senior Vice
The Penn Mutual Life President and Chief Financial Officer (prior thereto), The Penn Mutual Life Insurance
Insurance Company Company.
Philadelphia, PA 19172
- -----------------------------------------------------------------------------------------------------------------------------------
Larry L. Mast Executive Vice President, The Penn Mutual Life Insurance Company (May 1997 to present).
The Penn Mutual Life Formerly Senior Vice President, Lafayette Life Insurance Company (September 1994 to May
Insurance Company 1997); Vice President, Security Benefit Insurance Company (May 1993 to September 1994);
Philadelphia, PA 19172 Vice President, Home Life Insurance Company (July 1990 to May 1993); Agency Manager,
The Equitable Life Insurance Company (August 1978 to July 1990).
- ------------------------------------------------------------------------------------------------------------------------------------
Harold E. Maude, Jr. Senior Vice President, Independence Financial Network (since July 1996), Vice
The Penn Mutual Life President, Independence Financial Network (prior thereto), The Penn Mutual Life
Insurance Company Insurance Company.
Philadelphia, PA 19172
- ------------------------------------------------------------------------------------------------------------------------------------
Nina M. Mulrooney General Auditor (since November 1991), Vice President, Market Conduct (since December
The Penn Mutual Life 1997), Assistant Vice President, Corporate Accounting and Controls (prior thereto), The
Insurance Company Penn Mutual Life Insurance Company.
Philadelphia, PA 19172
- ------------------------------------------------------------------------------------------------------------------------------------
Peter M. Sherman Executive Vice President (since December 1998), Chief Investment Officer (since May
The Penn Mutual Life 1996), Senior Vice President (May 1996 to December 1996), Vice President, Investments
Insurance Company (January 1996 to April 1996), Vice President, Fixed Income Portfolio Management (prior
Philadelphia, PA 19172 thereto), The Penn Mutual Life Insurance Company; President, Independence Capital
Management, Inc. (an investment advisory organization and subsidiary of Penn Mutual).
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
58
<PAGE>
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.
REGISTRATION STATEMENT
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.
EXPERTS
Actuarial matters included in this prospectus have been examined by Edward
S. Attarian, FSA, MAAA, Actuary, 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.
59
<PAGE>
INDEPENDENT AUDITORS
The consolidated financial statements of The Penn Mutual Life Insurance
Company at December 31, 1998 and 1997, and for each of the three years ended
December 31, 1998, and the financial statements of Penn Mutual Variable Life
Account I of The Penn Mutual Life Insurance Company at December 31, 1998, and
for each of the two years ended December 31, 1998, appearing in this Prospectus
and Registration Statement have been audited by Ernst & Young LLP, independent
auditors, as set forth in their reports thereon appearing elsewhere herein, and
are included in reliance upon such reports given on the authority of such firm
as experts in accounting and auditing.
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 Penn Mutual Variable Life Account I and the
consolidated financial statements of The Penn Mutual Life Insurance Company
appear on the following pages. The consolidated financial statements of The Penn
Mutual Life Insurance Company should be considered only as bearing upon Penn
Mutual's ability to meet its obligations under the Policies.
New subaccounts of Penn Mutual Variable Life Account I have been
established under the Policies subsequent to December 31, 1998. No amounts were
allocated to the subaccounts as of December 31, 1998. There are, therefore, no
unit values for the subaccounts at December 31, 1998.
60
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Penn Mutual Life Insurance Company and Contract Owners of Penn Mutual
Variable Life Account I
We have audited the accompanying statement of assets and liabilities of Penn
Mutual Variable Life Account I (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, Emerging
Markets Equity Portfolio) as of December 31, 1998 and the related statement of
operations and statements of changes in net assets for the each of the periods
indicated therein. These financial statements are the responsibility of the
management of Penn Mutual Variable Life Account I. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. Our
procedures included confirmation of securities owned as of December 31, 1998,
by correspondence with the transfer agents. An audit also includes assessing
the accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe
that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of each of the portfolios
constituting the Penn Mutual Variable Life Account I at December 31, 1998, the
results of their operations and changes in their net assets for each of the
periods indicted therein, in conformity with generally accepted accounting
principles.
Philadelphia, Pennsylvania ERNST & YOUNG LLP
April 2, 1999
61
<PAGE>
- --------------------------------------------------------------------------------
PENN MUTUAL VARIABLE LIFE ACCOUNT I
STATEMENT OF ASSETS AND LIABILITIES -- DECEMBER 31, 1998
<TABLE>
<CAPTION>
MONEY QUALITY HIGH YIELD GROWTH EQUITY
TOTAL MARKET FUND++ BOND FUND++ BOND FUND++ FUND++
--------------- --------------- ------------- ------------- --------------
<S> <C> <C> <C> <C> <C>
INVESTMENT IN COMMON STOCK
Number of Shares .................... 11,334,098 638,649 861,738 489,993
Cost ................................ $235,497,972 $11,334,098 $6,652,404 $8,192,626 $11,729,650
ASSETS:
Investments at Market Value ......... $257,521,685 $11,334,098 $6,641,947 $7,919,370 $15,130,985
Dividends receivable ................ 49,116 49,116 -- -- --
LIABILITIES:
Due to (from) The Penn Mutual
Life Insurance Company ............. 221,956 (36,363) 1,424 1,812 3,933
------------ ----------- ---------- ---------- -----------
NET ASSETS ........................... $257,348,845 $11,419,577 $6,640,523 $7,917,558 $15,127,052
============ =========== ========== ========== ===========
</TABLE>
- --------------------------------------------------------------------------------
PENN MUTUAL VARIABLE LIFE ACCOUNT I
STATEMENT OF OPERATIONS -- FOR THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
MONEY QUALITY HIGH YIELD GROWTH EQUITY
TOTAL MARKET FUND++ BOND FUND++ BOND FUND++ FUND++
------------- --------------- ------------- ------------- --------------
<S> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends ............................ $ 4,222,562 $523,576 $ 294,435 $ 615,511 $ 10,136
EXPENSE:
Mortality and expense risk
charges ............................. 1,744,648 90,068 42,394 52,081 86,351
----------- -------- --------- ---------- -----------
Net investment income (loss) ......... 2,477,914 433,508 252,041 563,430 (76,215)
----------- -------- --------- ---------- -----------
REALIZED AND UNREALIZED
GAINS (LOSSES) ON
INVESTMENTS:
Realized gains (losses) from
redemption of fund shares ........... 672,191 -- 5,291 291 11,013
Capital gains distributions .......... 15,495,765 -- 198,445 -- 1,579,046
----------- -------- --------- ---------- -----------
Net realized gains from
investment transactions ............. 16,167,956 -- 203,736 291 1,590,059
Net change in unrealized
appreciation/depreciation of
investments ......................... 6,282,694 -- (14,899) (318,691) 2,350,499
----------- -------- --------- ---------- -----------
Net realized and unrealized
gains (losses) on investments ....... 22,450,650 -- 188,837 (318,400) 3,940,558
----------- -------- --------- ---------- -----------
NET INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM
OPERATIONS .......................... $24,928,564 $433,508 $ 440,878 $ 245,030 $ 3,864,343
=========== ======== ========= ========== ===========
</TABLE>
- ----------
++ Investment in Penn Series Funds, Inc.
++++ Investment in Neuberger Berman Advisers Management Trust
++++++ Investment in American Century Variable Portfolios, Inc.
++++++++ Investment in Fidelity Investments' Variable Insurance Products Funds
I and II
++++++++++ Investment in Morgan Stanley Dean Witter Universal Funds, Inc.
The accompanying notes are an integral part of these financial statements.
62
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FLEXIBLY SMALL EMERGING
VALUE EQUITY MANAGED INTERNATIONAL CAPITALIZATION GROWTH
FUND++ FUND++ EQUITY FUND++ FUND++ FUND++
- -------------- -------------- --------------- ---------------- -------------
<S> <C> <C> <C> <C>
1,585,105 3,017,417 1,218,820 650,958 340,754
$31,453,934 $56,227,637 $19,383,461 $8,691,334 $4,774,068
$35,490,505 $55,248,910 $22,401,909 $8,338,774 $5,939,334
-- -- -- -- --
8,841 12,414 5,512 1,984 1,797
----------- ----------- ----------- ---------- ----------
$35,481,664 $55,236,496 $22,396,397 $8,336,790 $5,937,537
=========== =========== =========== ========== ==========
</TABLE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FLEXIBLY SMALL EMERGING
VALUE EQUITY MANAGED INTERNATIONAL CAPITALIZATION GROWTH
FUND++ FUND++ EQUITY FUND++ FUND++ FUND++
- -------------- --------------- --------------- ---------------- ---------------
<S> <C> <C> <C> <C>
$ 441,858 $ 1,554,726 $ 206,500 $ 52,380 $ --
260,226 409,962 149,839 57,923 29,768
----------- ------------ ----------- -------- -----------
181,632 1,144,764 56,661 (5,543) (29,768)
----------- ------------ ----------- -------- -----------
289,563 246,644 250,872 (4) 9,622
2,887,717 5,538,196 719,716 135,420 790
----------- ------------ ----------- ---------- -----------
3,177,280 5,784,840 970,588 135,416 10,412
(904,321) (4,524,890) 2,087,405 (791,507) 1,277,385
----------- ------------ ----------- ---------- -----------
2,272,959 1,259,950 3,057,993 (656,091) 1,287,797
----------- ------------ ----------- ---------- -----------
$ 2,454,591 $ 2,404,714 $ 3,114,654 ($661,634) $ 1,258,029
=========== ============ =========== ========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
63
<PAGE>
- --------------------------------------------------------------------------------
PENN MUTUAL VARIABLE LIFE ACCOUNT I
STATEMENT OF ASSETS AND LIABILITIES -- DECEMBER 31, 1998 (CONT'D.)
<TABLE>
<CAPTION>
LIMITED CAPITAL
BALANCED MATURITY BOND PARTNERS APPRECIATION
PORTFOLIO++++ PORTFOLIO++++ PORTFOLIO++++ PORTFOLIO++++++
--------------- --------------- --------------- ----------------
<S> <C> <C> <C> <C>
INVESTMENT IN COMMON STOCK
Number of Shares .................... 314,303 88,920 433,797 639,216
Cost ................................ $4,865,196 $1,233,751 $8,393,609 $6,249,378
ASSETS:
Investments at Market Value ......... $5,135,714 $1,228,881 $8,211,769 $5,765,731
Dividends receivable ................ -- -- -- --
LIABILITIES:
Due to The Penn Mutual Life Insurance
Company ............................ 1,231 283 2,075 1,584
---------- ---------- ---------- ----------
NET ASSETS .......................... $5,134,483 $1,228,598 $8,209,694 $5,764,147
========== ========== ========== ==========
</TABLE>
- --------------------------------------------------------------------------------
PENN MUTUAL VARIABLE LIFE ACCOUNT I
STATEMENT OF OPERATIONS -- FOR THE YEAR ENDED DECEMBER 31, 1998 (CONT'D.)
<TABLE>
<CAPTION>
LIMITED CAPITAL
BALANCED MATURITY BOND PARTNERS APPRECIATION
PORTFOLIO++++ PORTFOLIO++++ PORTFOLIO++++ PORTFOLIO++++++
--------------- --------------- --------------- ----------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends ..................................... $ 87,653 $ 49,871 $ 15,266 $ --
EXPENSE:
Mortality and expense risk charges ............ 34,876 7,976 49,221 47,491
---------- --------- ---------- ---------
Net investment income (loss) .................. 52,777 41,895 (33,955) (47,491)
---------- --------- ---------- ---------
REALIZED AND UNREALIZED GAINS (LOSSES) ON
INVESTMENTS:
Realized gains (losses) from redemption of
fund shares .................................. (5,003) 242 5,188 (164,376)
Capital gains distributions ................... 615,658 -- 480,865 304,408
---------- --------- ---------- ---------
Net realized gains from investment transactions 610,655 242 486,053 140,032
Net change in unrealized appreciation/
depreciation of investments .................. (184,479) (13,221) (271,429) (261,202)
---------- --------- ---------- ---------
Net realized and unrealized gains (losses) on
investments .................................. 426,176 (12,979) 214,624 (121,170)
---------- --------- ---------- ---------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS .................... $ 478,953 $ 28,916 $ 180,669 ($ 168,661)
========== ========= ========== =========
</TABLE>
- ----------
++ Investment in Penn Series Funds, Inc.
++++ Investment in Neuberger Berman Advisers Management Trust
++++++ Investment in American Century Variable Portfolios, Inc.
++++++++ Investment in Fidelity Investments' Variable Insurance Products Funds
I and II
++++++++++ Investment in Morgan Stanley Dean Witter Universal Funds, Inc.
The accompanying notes are an integral part of these financial statements.
64
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
EMERGING
EQUITY INCOME GROWTH ASSET MANAGER INDEX 500 MARKETS EQUITY
PORTFOLIO++++++++ PORTFOLIO++++++++ PORTFOLIO++++++++ PORTFOLIO++++++++ PORTFOLIO++++++++++
- ------------------- ------------------- ------------------- ------------------- --------------------
<S> <C> <C> <C> <C>
781,731 636,718 204,814 104,596 253,025
$16,956,543 $21,094,184 $3,351,168 $12,706,988 $2,207,943
$19,871,602 $28,569,544 $3,719,433 $14,774,172 $1,799,007
-- -- -- -- --
5,352 7,739 948 4,001 197,389
----------- ----------- ---------- ----------- ----------
$19,866,250 $28,561,805 $3,718,485 $14,770,171 $1,601,618
=========== =========== ========== =========== ==========
</TABLE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
EMERGING
EQUITY INCOME GROWTH ASSET MANAGER INDEX 500 MARKETS EQUITY
PORTFOLIO++++++++ PORTFOLIO++++++++ PORTFOLIO++++++++ PORTFOLIO++++++++ PORTFOLIO++++++++++
- ------------------- ------------------- ------------------- ------------------- --------------------
<S> <C> <C> <C> <C>
$ 182,863 $ 80,651 $ 68,039 $ 30,625 $ 8,472
142,405 186,928 24,502 62,991 9,646
----------- ----------- --------- ----------- ---------
40,458 (106,277) 43,537 (32,366) (1,174)
----------- ----------- --------- ----------- ---------
(1,038) 33,351 (1,881) (9,976) 2,392
650,775 2,109,678 204,117 70,934 --
----------- ----------- --------- ----------- ---------
649,737 2,143,029 202,236 60,958 2,392
963,306 5,047,623 136,988 1,980,793 (276,666)
----------- ----------- --------- ----------- ---------
1,613,043 7,190,652 339,224 2,041,751 (274,274)
----------- ----------- --------- ----------- ---------
$ 1,653,501 $ 7,084,375 $ 382,761 $ 2,009,385 ($ 275,448)
=========== =========== ========= =========== =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
65
<PAGE>
- --------------------------------------------------------------------------------
PENN MUTUAL VARIABLE LIFE ACCOUNT I
STATEMENTS OF CHANGES IN NET ASSETS -- FOR THE YEARS ENDED DECEMBER 31, 1998
AND 1997
<TABLE>
<CAPTION>
TOTAL
--------------------------------
1998 1997
--------------- ---------------
<S> <C> <C>
OPERATIONS:
Net investment income (loss) .......................... $ 2,477,914 $ 2,286,799
Net realized gains (losses) from investment
transactions ......................................... $ 16,167,956 $ 6,873,413
Net change in unrealized appreciation/
depreciation of investments .......................... $ 6,282,694 $ 8,957,231
------------- ------------
Net increase (decrease) in net assets resulting from
operations ............................................ $ 24,928,564 $ 18,117,443
------------- ------------
VARIABLE LIFE ACTIVITIES:
Purchase payments ..................................... $ 96,529,479 $ 68,853,918
Death benefits ........................................ (121,041) (227,121)
Cost of Insurance ..................................... (14,082,492) (9,134,776)
Net Transfers ......................................... (3,175,599) (1,981,811)
Transfers of Policy Loans ............................. 577,625 571,227
Contract administration charges ....................... (3,850,403) (2,917,736)
Surrender benefits .................................... (5,921,782) (3,480,445)
------------- ------------
Net increase (decrease) in net assets resulting from
variable life activities .............................. 69,955,787 51,683,256
------------- ------------
Total increase (decrease) in net assets ............... 94,884,351 69,800,699
NET ASSETS:
Beginning of year ..................................... 162,464,494 92,663,795
------------- ------------
END OF YEAR ........................................... $ 257,348,845 $162,464,494
============= ============
MONEY MARKET FUND++ QUALITY BOND FUND++
---------------------------------- ----------------------------
1998 1997 1998 1997
---------------- ---------------- ------------- -------------
OPERATIONS:
Net investment income (loss) .......................... $ 433,508 $ 300,710 $ 252,041 $ 215,998
Net realized gains (losses) from investment
transactions ......................................... -- -- 203,736 7,913
Net change in unrealized appreciation/
depreciation of investments .......................... -- -- (14,899) 32,551
-------------- -------------- ---------- ----------
Net increase (decrease) in net assets resulting from
operations ............................................ 433,508 300,710 440,878 256,462
-------------- -------------- ---------- ----------
VARIABLE LIFE ACTIVITIES:
Purchase payments ..................................... 42,019,252 28,866,480 1,155,232 1,215,245
Death benefits ........................................ (2,035) -- (249) (1,336)
Cost of Insurance ..................................... (1,191,497) (872,326) (259,658) (199,435)
Net Transfers ......................................... (36,872,301) (25,581,701) 1,041,850 458,596
Transfers of Policy Loans ............................. (251) 89,746 10,440 13,339
Contract administration charges ....................... (488,180) (378,302) (42,018) (47,774)
Surrender benefits .................................... (418,927) (145,321) (105,331) (105,819)
-------------- -------------- ---------- ----------
Net increase (decrease) in net assets resulting from
variable life activities .............................. 3,046,061 1,978,576 1,800,266 1,332,816
-------------- -------------- ---------- ----------
Total increase (decrease) in net assets ............... 3,479,569 2,279,286 2,241,144 1,589,278
NET ASSETS:
Beginning of year ..................................... 7,940,008 5,660,722 4,399,379 2,810,101
-------------- -------------- ---------- ----------
END OF YEAR ........................................... $ 11,419,577 $ 7,940,008 $6,640,523 $4,399,379
============== ============== ========== ==========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
HIGH YIELD BOND FUND++ GROWTH EQUITY FUND++
---------------------------- ------------------------------
1998 1997 1998 1997
------------- ------------- --------------- -------------
<S> <C> <C> <C> <C>
OPERATIONS:
Net investment income (loss) ........................ $ 563,430 $ 374,009 ($ 76,215) ($ 23,309)
Net realized gains (losses) from investment
transactions ....................................... 291 12,914 1,590,059 811,998
Net change in unrealized appreciation/
depreciation of investments ........................ (318,691) 186,727 2,350,499 691,676
---------- ---------- ---------- ---------
Net increase (decrease) in net assets resulting from
operations .......................................... 245,030 573,650 3,864,343 1,480,365
---------- ---------- ---------- ---------
VARIABLE LIFE ACTIVITIES:
Purchase payments ................................... 1,768,367 1,004,141 2,036,864 1,437,064
Death benefits ...................................... (232) (1,457) (413) (50,472)
Cost of Insurance ................................... (377,793) (250,416) (570,484) (399,675)
Net Transfers ....................................... 1,334,768 818,234 2,177,912 596,566
Transfers of Policy Loans ........................... 8,460 2,899 15,214 29,423
Contract administration charges ..................... (95,903) (62,569) (129,899) (94,210)
Surrender benefits .................................. (220,758) (134,700) (316,681) (244,609)
---------- ---------- ---------- ---------
Net increase (decrease) in net assets resulting from
variable life activities ............................ 2,416,909 1,376,132 3,212,513 1,274,087
---------- ---------- ---------- ---------
Total increase (decrease) in net assets ............. 2,661,939 1,949,782 7,076,856 2,754,452
NET ASSETS:
Beginning of year ................................... 5,255,619 3,305,837 8,050,196 5,295,744
---------- ---------- ---------- ---------
END OF YEAR ......................................... $7,917,558 $5,255,619 $15,127,052 $8,050,196
========== ========== =========== ==========
VALUE EQUITY FUND++
--------------------------------
1998 1997
--------------- ---------------
OPERATIONS:
Net investment income (loss) ........................ $ 181,632 $ 155,892
Net realized gains (losses) from investment
transactions ....................................... 3,177,280 1,423,465
Net change in unrealized appreciation/
depreciation of investments ........................ (904,321) 2,544,660
------------ ------------
Net increase (decrease) in net assets resulting from
operations .......................................... 2,454,591 4,124,017
------------ ------------
VARIABLE LIFE ACTIVITIES:
Purchase payments ................................... 7,712,812 6,366,819
Death benefits ...................................... (3,109) (70,127)
Cost of Insurance ................................... (2,002,921) (1,349,019)
Net Transfers ....................................... 2,352,575 4,591,570
Transfers of Policy Loans ........................... 129,894 47,924
Contract administration charges ..................... (471,036) (409,821)
Surrender benefits .................................. (800,734) (498,860)
------------ ------------
Net increase (decrease) in net assets resulting from
variable life activities ............................ 6,917,481 8,678,486
------------ ------------
Total increase (decrease) in net assets ............. 9,372,072 12,802,503
NET ASSETS:
Beginning of year ................................... 26,109,592 13,307,089
------------ ------------
END OF YEAR ......................................... $ 35,481,664 $ 26,109,592
============ ============
</TABLE>
- ----------
* For the period from May 1, 1997 (date fund became available for
investment to contract owners) to December 31, 1997.
++ Investment in Penn Series Funds, Inc.
++++ Investment in Neuberger Berman Advisers Management Trust
++++++ 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 Dean Witter Universal Funds, Inc.
The accompanying notes are an integral part of these financial statements.
66
<PAGE>
- --------------------------------------------------------------------------------
PENN MUTUAL VARIABLE LIFE ACCOUNT I
STATEMENTS OF CHANGES IN NET ASSETS -- FOR THE YEARS ENDED DECEMBER 31, 1998
AND 1997 (CONT'D)
<TABLE>
<CAPTION>
FLEXIBLY MANAGED FUND++
--------------------------------
1998 1997
--------------- ---------------
<S> <C> <C>
OPERATIONS:
Net investment income (loss) ........................ $ 1,144,764 $ 949,494
Net realized gains (losses) from investment
transactions ....................................... 5,784,840 2,543,108
Net change in unrealized appreciation/
depreciation of investments ........................ (4,524,890) 1,371,189
------------ ------------
Net increase (decrease) in net assets resulting from
operations .......................................... 2,404,714 4,863,791
------------ ------------
VARIABLE LIFE ACTIVITIES:
Purchase payments ................................... 12,234,331 11,469,514
Death benefits ...................................... (17,851) (71,412)
Cost of Insurance ................................... (3,137,840) (2,384,305)
Net Transfers ....................................... 1,345,485 4,080,131
Transfers of Policy Loans ........................... 139,613 217,489
Contract administration charges ..................... (646,642) (635,429)
Surrender benefits .................................. (1,299,724) (1,056,819)
------------ ------------
Net increase (decrease) in net assets resulting from
variable life activities ............................ 8,617,372 11,619,169
------------ ------------
Total increase (decrease) in net assets ............. 11,022,086 16,482,960
NET ASSETS:
Beginning of year ................................... 44,214,410 27,731,450
------------ ------------
END OF YEAR ......................................... $ 55,236,496 $ 44,214,410
============ ============
SMALL
INTERNATIONAL EQUITY FUND++ CAPITALIZATION FUND++
-------------------------------- -----------------------------
1998 1997 1998 1997
--------------- --------------- ------------- --------------
OPERATIONS:
Net investment income (loss) ........................ $ 56,661 $ 327,027 ($ 5,543) ($ 5,769)
Net realized gains (losses) from investment
transactions ....................................... 970,588 477,764 135,416 305,901
Net change in unrealized appreciation/
depreciation of investments ........................ 2,087,405 167,910 (791,507) 335,317
------------ ----------- --------- ---------
Net increase (decrease) in net assets resulting from
operations .......................................... 3,114,654 972,701 (661,634) 635,449
------------ ----------- --------- ---------
VARIABLE LIFE ACTIVITIES:
Purchase payments ................................... 4,244,414 3,663,296 2,372,356 1,432,627
Death benefits ...................................... (15,627) (5,840) (10,571) --
Cost of Insurance ................................... (1,050,548) (773,212) (505,718) (271,482)
Net Transfers ....................................... 3,160,776 970,906 2,227,491 1,740,303
Transfers of Policy Loans ........................... 65,814 39,319 11,010 1,886
Contract administration charges ..................... (252,405) (242,507) (165,296) (137,928)
Surrender benefits .................................. (633,058) (317,635) (129,707) (87,759)
------------ ----------- --------- ---------
Net increase (decrease) in net assets resulting from
variable life activities ............................ 5,519,366 3,334,327 3,799,565 2,677,647
------------ ----------- --------- ---------
Total increase (decrease) in net assets ............. 8,634,020 4,307,028 3,137,931 3,313,096
NET ASSETS:
Beginning of year ................................... 13,762,377 9,455,349 5,198,859 1,885,763
------------ ----------- --------- ---------
END OF YEAR ......................................... $ 22,396,397 $13,762,377 $8,336,790 $5,198,859
============ =========== ========== ==========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EMERGING GROWTH
PORTFOLIO++
----------------------------
1998 1997*
------------- -------------
<S> <C> <C>
OPERATIONS:
Net investment income (loss) ....................... ($ 29,768) ($ 3,056)
Net realized gains (losses) from
investment transactions ........................... 10,412 103,234
Net change in unrealized appreciation/
depreciation of investments ....................... 1,277,385 (112,119)
--------- ---------
Net increase (decrease) in net assets resulting from
operations ......................................... 1,258,029 (11,941)
--------- ---------
VARIABLE LIFE ACTIVITIES:
Purchase payments .................................. 1,376,626 213,011
Death benefits ..................................... -- --
Cost of Insurance .................................. (270,389) (37,401)
Net Transfers ...................................... 2,271,306 1,339,220
Transfers of Policy Loans .......................... 949 1,315
Contract administration charges .................... (117,695) (14,740)
Surrender benefits ................................. (61,482) (9,271)
--------- ---------
Net increase (decrease) in net assets resulting from
variable life activities 3,199,315 1,492,134
--------- ---------
Total increase (decrease) in net assets ............ 4,457,344 1,480,193
NET ASSETS:
Beginning of year .................................. 1,480,193 --
--------- ---------
END OF YEAR ........................................ $5,937,537 $1,480,193
========== ==========
LIMITED MATURITY
BALANCED PORTFOLIO++++ BOND PORTFOLIO++++
---------------------------- ----------------------------
1998 1997 1998 1997
------------- ------------- -------------- ------------
OPERATIONS:
Net investment income (loss) ....................... $ 52,777 $ 24,109 $ 41,895 $ 19,870
Net realized gains (losses) from
investment transactions ........................... 610,655 143,065 242 1,045
Net change in unrealized appreciation/
depreciation of investments ....................... (184,479) 329,788 (13,221) 6,174
---------- ---------- ---------- ---------
Net increase (decrease) in net assets resulting from
operations ......................................... 478,953 496,962 28,916 27,089
---------- ---------- ---------- ---------
VARIABLE LIFE ACTIVITIES:
Purchase payments .................................. 1,068,630 750,229 300,887 129,943
Death benefits ..................................... (2,001) -- -- --
Cost of Insurance .................................. (278,391) (204,934) (58,968) (37,130)
Net Transfers ...................................... 526,196 21,044 318,853 195,109
Transfers of Policy Loans .......................... 83,335 8,450 5,849 136
Contract administration charges .................... (50,297) (46,472) (14,141) (10,627)
Surrender benefits ................................. (163,220) (117,124) (9,313) (20,203)
---------- ---------- ---------- ---------
Net increase (decrease) in net assets resulting from
variable life activities ........................... 1,184,252 411,193 543,167 257,228
---------- ---------- ---------- ---------
Total increase (decrease) in net assets ............ 1,663,205 908,155 572,083 284,317
NET ASSETS:
Beginning of year .................................. 3,471,278 2,563,123 656,515 372,198
---------- ---------- ---------- ---------
END OF YEAR ........................................ $5,134,483 $3,471,278 $1,228,598 $ 656,515
========== ========== ========== =========
</TABLE>
- ----------
* For the period from May 1, 1997 (date fund became available for
investment to contract owners) to December 31, 1997.
++ Investment in Penn Series Funds, Inc.
++++ Investment in Neuberger Berman Advisers Management Trust
++++++ 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 Dean Witter Universal Funds, Inc.
The accompanying notes are an integral part of these financial statements.
67
<PAGE>
- --------------------------------------------------------------------------------
PENN MUTUAL VARIABLE LIFE ACCOUNT I
STATEMENTS OF CHANGES IN NET ASSETS -- FOR THE YEARS ENDED DECEMBER 31, 1998
AND 1997 (CONT'D)
<TABLE>
<CAPTION>
PARTNERS CAPITAL APPRECIATION
PORTFOLIO++++ PORTFOLIO++++++
---------------------------- ------------------------------
1998 1997* 1998 1997
------------- ------------- --------------- -------------
<S> <C> <C> <C> <C>
OPERATIONS:
Net investment income (loss) ........................ ($ 33,955) ($ 5,104) ($ 47,491) ($ 48,298)
Net realized gains (losses) from investment
transactions ....................................... 486,053 668 140,032 97,458
Net change in unrealized appreciation/
depreciation of investments ........................ (271,429) 89,588 (261,202) (284,767)
--------- --------- ------------ ---------
Net increase (decrease) in net assets resulting from
operations .......................................... 180,669 85,152 (168,661) (235,607)
--------- --------- ------------ ---------
VARIABLE LIFE ACTIVITIES:
Purchase payments ................................... 2,301,846 386,750 1,577,063 2,020,105
Death benefits ...................................... -- -- (3,745) (1,604)
Cost of Insurance ................................... (484,655) (47,124) (342,552) (421,351)
Net Transfers ....................................... 3,388,292 2,721,133 (1,352,477) (623,011)
Transfers of Policy Loans ........................... 11,914 61,300 35,632 38,426
Contract administration charges ..................... (201,761) (21,320) (53,636) (105,328)
Surrender benefits .................................. (138,687) (33,815) (244,500) (146,305)
--------- --------- ------------ ---------
Net increase (decrease) in net assets resulting from
variable life activities ............................ 4,876,949 3,066,924 (384,215) 760,932
--------- --------- ------------ ---------
Total increase (decrease) in net assets ............. 5,057,618 3,152,076 (552,876) 525,325
NET ASSETS:
Beginning of year ................................... 3,152,076 -- 6,317,023 5,791,698
--------- --------- ------------ ---------
END OF YEAR ......................................... $8,209,694 $3,152,076 $ 5,764,147 $6,317,023
========== ========== ============ ==========
EQUITY INCOME
PORTFOLIO++++++++
--------------------------------
1998 1997
--------------- ---------------
OPERATIONS:
Net investment income (loss) ........................ $ 40,458 $ 27,835
Net realized gains (losses) from investment
transactions ....................................... 649,737 527,069
Net change in unrealized appreciation/
depreciation of investments ........................ 963,306 1,460,290
------------ -----------
Net increase (decrease) in net assets resulting from
operations .......................................... 1,653,501 2,015,194
------------ -----------
VARIABLE LIFE ACTIVITIES:
Purchase payments ................................... 4,640,276 3,478,226
Death benefits ...................................... (20,055) (417)
Cost of Insurance ................................... (1,115,035) (658,142)
Net Transfers ....................................... 2,979,305 2,552,951
Transfers of Policy Loans ........................... 25,171 7,118
Contract administration charges ..................... (297,186) (250,922)
Surrender benefits .................................. (430,380) (233,942)
------------ -----------
Net increase (decrease) in net assets resulting from
variable life activities ............................ 5,782,096 4,894,872
------------ -----------
Total increase (decrease) in net assets ............. 7,435,597 6,910,066
NET ASSETS:
Beginning of year ................................... 12,430,653 5,520,587
------------ -----------
END OF YEAR ......................................... $ 19,866,250 $12,430,653
============ ===========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
GROWTH
PORTFOLIO++++++++
-------------------------------
1998 1997
-------------- ---------------
<S> <C> <C>
OPERATIONS:
Net investment income (loss) ........................ ($ 106,277) ($ 43,860)
Net realized gains (losses) from investment
transactions ....................................... 2,143,029 304,537
Net change in unrealized appreciation/
depreciation of investments ........................ 5,047,623 2,035,646
----------- ----------
Net increase (decrease) in net assets resulting from
operations .......................................... 7,084,375 2,296,323
----------- ----------
VARIABLE LIFE ACTIVITIES:
Purchase payments ................................... 5,974,648 5,099,758
Death benefits ...................................... (45,153) (24,456)
Cost of Insurance ................................... (1,459,882) (998,857)
Net Transfers ....................................... 2,873,583 1,434,688
Transfers of Policy Loans ........................... 22,413 9,883
Contract administration charges ..................... (385,848) (376,844)
Surrender benefits .................................. (689,227) (260,882)
----------- ----------
Net increase (decrease) in net assets resulting from
variable life activities ............................ 6,290,534 4,883,290
----------- ----------
Total increase (decrease) in net assets ............. 13,374,909 7,179,613
NET ASSETS:
Beginning of year ................................... 15,186,896 8,007,283
----------- ----------
END OF YEAR ......................................... $28,561,805 $15,186,896
=========== ===========
ASSET MANAGER INDEX 500
PORTFOLIO++++++++ PORTFOLIO++++++++
---------------------------- -------------------------------
1998 1997 1998 1997*
------------- ------------- --------------- --------------
OPERATIONS:
Net investment income (loss) ........................ $ 43,537 $ 22,295 $ (32,366) ($ 4,612)
Net realized gains (losses) from investment
transactions ....................................... 202,236 93,523 60,958 (281)
Net change in unrealized appreciation/
depreciation of investments ........................ 136,988 148,479 1,980,793 86,391
---------- ---------- ----------- ---------
Net increase (decrease) in net assets resulting from
operations .......................................... 382,761 264,297 2,009,385 81,498
---------- ---------- ----------- ---------
Variable Life Activities:
Purchase payments ................................... 834,804 597,121 4,295,628 551,343
Death benefits ...................................... -- -- -- --
Cost of Insurance ................................... (216,443) (142,702) (664,534) (67,988)
Net Transfers ....................................... 807,683 466,840 7,630,497 1,438,291
Transfers of Policy Loans ........................... 1,050 1,178 9,823 1,000
Contract administration charges ..................... (49,185) (42,870) (335,545) (30,351)
Surrender benefits .................................. (115,461) (27,439) (115,742) (33,134)
---------- ---------- ----------- ---------
Net increase (decrease) in net assets resulting from
variable life activities ............................ 1,262,448 852,128 10,820,127 1,859,161
---------- ---------- ----------- ---------
Total increase (decrease) in net assets ............. 1,645,209 1,116,425 12,829,512 1,940,659
NET ASSETS:
Beginning of year ................................... 2,073,276 956,851 1,940,659 --
---------- ---------- ----------- ----------
END OF YEAR ......................................... $3,718,485 $2,073,276 $14,770,171 $1,940,659
========== ========== =========== ==========
</TABLE>
- ----------
* For the period from May 1, 1997 (date fund became available for
investment to contract owners) to December 31, 1997.
++ Investment in Penn Series Funds, Inc.
++++ Investment in Neuberger Berman Advisers Management Trust
++++++ Investment in American Century Variable Portfolios, Inc. (TCI
Portfolios, Inc.'s name changed to American Century Variable
Portfolios, Inc. as of May 1, 1997)
++++++++ Investment in Fidelity Investments' Variable Insurance Products Funds
I and II
++++++++++ Investment in Morgan Stanley Dean Witter Universal Funds, Inc.
The accompanying notes are an integral part of these financial statements.
68
<PAGE>
- --------------------------------------------------------------------------------
PENN MUTUAL VARIABLE LIFE ACCOUNT I
STATEMENTS OF CHANGES IN NET ASSETS -- FOR THE YEARS ENDED DECEMBER 31, 1998
AND 1997 (CONT'D)
<TABLE>
<CAPTION>
EMERGING MARKETS
PORTFOLIO++++++++++
------------------------------
1998 1997*
-------------- -------------
<S> <C> <C>
OPERATIONS:
Net investment income (loss) ...................... ($ 1,174) $ 3,568
Net realized gains (losses) from investment
transactions ..................................... 2,392 20,032
Net change in unrealized appreciation/
depreciation of investments ...................... (276,666) (132,269)
--------- ----------
Net increase (decrease) in net assets resulting from
operations ........................................ (275,448) (108,669)
--------- ----------
VARIABLE LIFE ACTIVITIES:
Purchase payments ................................. 615,443 172,246
Death benefits .................................... -- --
Cost of Insurance ................................. (95,184) (19,277)
Net Transfers ..................................... 612,607 797,319
Transfers of Policy Loans ......................... 1,295 396
Contract administration charges ................... (53,730) (9,722)
Surrender benefits ................................ (28,850) (6,808)
--------- ----------
Net increase (decrease) in net assets resulting from
variable life activities .......................... 1,051,581 934,154
--------- ----------
Total increase (decrease) in net assets ........... 776,133 825,485
NET ASSETS:
Beginning of year ................................. 825,485 --
--------- ----------
END OF YEAR ....................................... $1,601,618 $ 825,485
========== ==========
</TABLE>
- ----------
* For the period from May 1, 1997 (date fund became available for
investment to contract owners) to December 31, 1997.
++ Investment in Penn Series Funds, Inc.
++++ Investment in Neuberger Berman Advisers Management Trust
++++++ 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 Dean Witter Universal Funds, Inc.
The accompanying notes are an integral part of these financial statements.
69
<PAGE>
PENN MUTUAL VARIABLE LIFE ACCOUNT I
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
December 31, 1998
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES
The significant accounting policies of Penn Mutual Variable Life Account I
(Account I) are as follows:
GENERAL -- Account I was established by The Penn Mutual Life Insurance
Company (Penn Mutual) under the provisions of the Pennsylvania Insurance Law.
Account I is registered under the Investment Company Act of 1940, as amended,
as a unit investment trust. Account I offers units to variable life contract
owners to provide for the accumulation of value and for the payment of
benefits. Account I contains contracts of the Cornerstone VUL, Cornerstone VUL
II, Variable Estate Max and Momentum Builder variable life products. Contract
owners may borrow up to a specified amount depending on the 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, 1998 and the reported amounts from operations and variable life
activities during 1998 and 1997. Actual results could differ from those
estimates. Certain 1997 amounts have been reclassified to conform with 1998
presentation.
INVESTMENTS -- Assets of Account I are invested in shares of Penn Series
Funds, Inc. (Penn Series): Money Market, Quality Bond, High Yield Bond, Growth
Equity, Value Equity, Flexibly Managed, International Equity, Small
Capitalization and Emerging Growth Funds; Neuberger Berman Advisers Management
Trust (AMT): Limited Maturity Bond, Balanced and Partners Portfolios; American
Century Variable Portfolios, Inc. (ACI): Capital Appreciation Portfolio;
Fidelity Investments' Variable Insurance Products (Fidelity): Equity Income,
Growth, Asset Manager and Index 500 Portfolios; and Morgan Stanley Dean Witter
Universal Funds, Inc. (Morgan Stanley): Emerging Markets Equity Portfolio. Penn
Series, AMT, ACI, Fidelity and Morgan Stanley are open-end diversified
management investment companies. The investment in shares of these funds or
portfolios are carried at market value as determined by the underlying net
asset value of the respective funds or portfolios. Dividend income is recorded
on the ex-dividend date. Investment transactions are accounted for on a trade
date basis.
FEDERAL INCOME TAXES -- Penn Mutual is taxed under federal law as a life
insurance company. Account I is part of Penn Mutual's total operations and is
not taxed separately. Under existing federal law, no taxes are payable on
investment income and realized gains of Account I.
DIVERSIFICATION REQUIREMENTS -- Under the provisions of Section 817(h) of
the Internal Revenue Code, a variable annuity contract other than a contract
issued in connection with certain types of employee benefit plans will not be
treated as an annuity contract for federal tax purposes for any period for
which the investments of the segregated asset account on which the contract is
based are not adequately diversified. The Code provides that the "adequately
diversified" requirement may be met if the underlying investments satisfy
either a statutory safe harbor test or diversification requirements set forth
in regulations issued by the Secretary of Treasury. The Internal Revenue
Service has issued regulations under 817(h) of the Code. Penn Mutual believes
that Account I satisfies the current requirements of the regulations, and it
intends that Account I will continue to meet such requirements.
70
<PAGE>
NOTE 2. PURCHASES AND SALES OF INVESTMENTS
The following table shows aggregate cost of shares purchased and proceeds
from sales of each fund or portfolio for the year ended December 31, 1998:
PURCHASES SALES
-------------- --------------
Money Market Fund .......................... $ 36,054,655 $32,550,918
Quality Bond Fund .......................... 4,363,783 2,107,488
High Yield Bond Fund ....................... 4,563,016 1,581,939
Growth Equity Fund ......................... 6,091,870 1,363,231
Value Equity Fund .......................... 13,092,213 2,816,555
Flexibly Managed Fund ...................... 20,607,570 5,059,318
International Equity Fund .................. 17,810,109 11,263,407
Small Capitalization Fund .................. 4,456,976 527,145
Emerging Growth Fund ....................... 3,852,901 672,705
Limited Maturity Bond Portfolio ............ 797,187 211,784
Balanced Portfolio ......................... 2,576,819 728,784
Partners Portfolio ......................... 5,994,086 663,770
Capital Appreciation Portfolio ............. 1,786,184 2,077,878
Equity Income Portfolio .................... 7,326,892 852,484
Growth Portfolio ........................... 10,298,847 1,967,533
Asset Manager Portfolio .................... 1,825,283 316,669
Index 500 Portfolio ........................ 11,645,446 793,223
Emerging Markets Equity Portfolio .......... 1,534,095 284,124
------------ -----------
Total ...................................... $154,677,932 $65,838,955
============ ===========
NOTE 3. CONTRACT CHARGES
Operations are charged for mortality and expense risks assumed by Penn
Mutual as follows:
Cornerstone VUL is determined daily at a current annual rate of 0.75%
(guaranteed not to exceed 0.90%) of the average value of Cornerstone VUL;
Cornerstone VUL II is determined daily at a current annual rate guaranteed not
to exceed 0.90% of the average value of Cornerstone VUL II; Variable Estate Max
is determined daily at a current annual rate guaranteed not to exceed 0.90% of
the average value of Variable Estate Max; Momentum Builder is determined daily
at an annual rate of 0.65% of the average value of Momentum Builder.
For each Cornerstone VUL, Cornerstone VUL II and Variable Estate Max
policy, on the date of issue and each monthly anniversary, a monthly deduction
is made from the policy value. The monthly deduction consists of insurance
charges, administrative charges and any charges for additional benefits added
by supplemental agreement to a policy. See original policy documents for
specific charges assessed.
For each Momentum Builder policy, each month on the date specified in the
contract (or on the date the contract is withdrawn in full if other than the
date specified), a $4 contract administration charge, or a lesser amount under
state insurance laws, is deducted from the contract value. See original policy
documents for specific charges assessed.
If a Cornerstone VUL or Cornerstone VUL II policy is surrendered within
the first 11 years, or a Variable Estate Max policy is surrendered within the
first 13 years, a contingent deferred sales charge will be assessed. This
charge will be deducted before any surrender proceeds are paid. See original
policy documents for specific charges assessed.
71
<PAGE>
NOTE 4. UNIT VALUES
As of December 31, 1998, the accumulation Units and accumulation Unit
Values For Variable Life Account I are as follows:
ACCUMULATION ACCUMULATION
UNITS UNIT VALUE
-------------- -------------
MONEY MARKET FUND
Cornerstone VUL 180,163 $ 12.35
Cornerstone VUL II 477,687 $ 11.59
Variable Estate Max 104,128 $ 11.60
Momentum Builder 144,571 $ 16.95
QUALITY BOND FUND
Cornerstone VUL 161,612 $ 14.27
Cornerstone VUL II/Variable Estate Max 303,952 $ 13.41
Momentum Builder 10,559 $ 24.41
HIGH YIELD BOND FUND
Cornerstone VUL 185,358 $ 15.74
Cornerstone VUL II/Variable Estate Max 301,994 $ 14.37
Momentum Builder 24,304 $ 27.19
GROWTH EQUITY FUND
Cornerstone VUL 286,826 $ 28.04
Cornerstone VUL II/Variable Estate Max 239,949 $ 24.30
Momentum Builder 32,676 $ 38.33
VALUE EQUITY FUND
Cornerstone VUL 513,869 $ 24.48
Cornerstone VUL II/Variable Estate Max 1,117,950 $ 20.09
FLEXIBLY MANAGED FUND
Cornerstone VUL 1,210,608 $ 19.23
Cornerstone VUL II/Variable Estate Max 2,031,273 $ 15.67
Momentum Builder 10,945 $ 40.29
INTERNATIONAL EQUITY FUND
Cornerstone VUL 464,576 $ 19.49
Cornerstone VUL II/Variable Estate Max 789,966 $ 16.91
SMALL CAPITALIZATION FUND
Cornerstone VUL 81,463 $ 14.67
Cornerstone VUL II/Variable Estate Max 489,652 $ 14.59
EMERGING GROWTH FUND
Cornerstone VUL 44,758 $ 18.66
Cornerstone VUL II/Variable Estate Max 274,162 $ 18.61
LIMITED MATURITY BOND PORTFOLIO
Cornerstone VUL 11,610 $ 12.67
Cornerstone VUL II/Variable Estate Max 90,231 $ 11.99
BALANCED PORTFOLIO
Cornerstone VUL 138,657 $ 17.72
Cornerstone VUL II/Variable Estate Max 169,155 $ 15.83
PARTNERS PORTFOLIO
Cornerstone VUL 162,349 $ 12.88
Cornerstone VUL II/Variable Estate Max 476,249 $ 12.85
CAPITAL APPRECIATION PORTFOLIO
Cornerstone VUL 283,529 $ 10.60
Cornerstone VUL II/Variable Estate Max 218,719 $ 12.61
EQUITY INCOME PORTFOLIO
Cornerstone VUL 183,634 $ 19.11
Cornerstone VUL II/Variable Estate Max 860,589 $ 19.01
GROWTH PORTFOLIO
Cornerstone VUL 269,190 $ 23.95
Cornerstone VUL II/Variable Estate Max 928,250 $ 23.82
72
<PAGE>
ACCUMULATION ACCUMULATION
UNITS UNIT VALUE
-------------- -------------
ASSET MANAGER PORTFOLIO
Cornerstone VUL 42,834 $ 17.41
Cornerstone VUL II/Variable Estate Max 171,750 $ 17.31
INDEX 500 PORTFOLIO
Cornerstone VUL 133,377 $ 15.54
Cornerstone VUL II/Variable Estate Max 818,962 $ 15.50
EMERGING MARKETS EQUITY PORTFOLIO
Cornerstone VUL 51,104 $ 6.78
Cornerstone VUL II/Variable Estate Max 185,708 $ 6.76
73
<PAGE>
- --------------------------------------------------------------------------------
REPORT OF INDEPENDENT AUDITORS
THE BOARD OF TRUSTEES
THE PENN MUTUAL LIFE INSURANCE COMPANY
PHILADELPHIA, PENNSYLVANIA
We have audited the accompanying consolidated balance sheets of The Penn Mutual
Life Insurance Company and subsidiaries as of December 31, 1998 and 1997, and
the related consolidated income statements, statements of changes in equity,
and statements of cash flows for the years then ended. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits. The financial statements of the Company for the year ended December
31, 1996 were audited by other auditors whose report dated January 31, 1997
expressed an unqualified opinion on those statements.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of The
Penn Mutual Life Insurance Company and subsidiaries as of December 31, 1998 and
1997, and the results of their operations and their cash flows for the years
then ended, in conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
Philadelphia, Pennsylvania
January 29, 1999
74
<PAGE>
- --------------------------------------------------------------------------------
THE PENN MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1998 1997
- ------------------------------------------------------------------- ------------- -------------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Debt securities, at fair value .................................... $ 5,500,924 $5,427,652
Equity securities, at fair value .................................. 4,161 12,502
Mortgage loans on real estate ..................................... 38,828 52,996
Real estate, net of accumulated depreciation ...................... 15,791 22,358
Policy loans ...................................................... 638,376 642,989
Short-term investments ............................................ 1,024 43,470
Other invested assets ............................................. 98,571 88,928
----------- ----------
TOTAL INVESTMENTS ................................................ 6,297,675 6,290,895
Cash and cash equivalents ......................................... 24,468 37,064
Investment income due and accrued ................................. 104,208 103,072
Deferred acquisition costs ........................................ 399,742 384,542
Amounts recoverable from reinsurers ............................... 69,583 63,211
Broker/dealer receivables ......................................... 793,522 526,797
Other assets ...................................................... 94,179 92,203
Separate account assets ........................................... 2,302,937 1,869,094
----------- ----------
TOTAL ASSETS ..................................................... $10,086,314 $9,366,878
=========== ==========
LIABILITIES
Reserves for payment of future policy benefits .................... $ 2,761,319 $2,770,015
Other policyholder funds .......................................... 2,835,081 2,973,434
Policyholders' dividends payable .................................. 30,532 35,273
Broker/dealer payables ............................................ 488,783 333,104
Accrued income tax payable: .......................................
Current .......................................................... 34,853 17,476
Deferred ......................................................... 107,781 75,096
Other liabilities ................................................. 383,744 283,666
Separate account liabilities ...................................... 2,302,937 1,869,094
----------- ----------
TOTAL LIABILITIES ................................................ 8,945,030 8,357,158
----------- ----------
EQUITY
Retained earnings ................................................. 944,145 857,711
Accumulated other comprehensive income - unrealized gains ......... 197,139 152,009
----------- ----------
TOTAL EQUITY ..................................................... 1,141,284 1,009,720
----------- ----------
TOTAL LIABILITIES AND EQUITY .................................... $10,086,314 $9,366,878
=========== ==========
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
75
<PAGE>
- --------------------------------------------------------------------------------
THE PENN MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED INCOME STATEMENTS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31, 1998 1997 1996
- --------------------------------------------------------------------- ------------- ------------- -------------
(IN THOUSANDS)
<S> <C> <C> <C>
REVENUES
Premium and annuity considerations .................................. $ 171,354 $ 195,220 $ 199,821
Policy fee income ................................................... 114,681 102,398 89,349
Net investment income ............................................... 444,697 460,206 475,315
Net realized capital gains/(losses) ................................. 3,912 9,655 (10,078)
Broker/dealer fees and commissions .................................. 331,285 290,005 241,068
Other income ........................................................ 16,491 11,851 11,544
---------- ---------- ----------
TOTAL REVENUE ...................................................... 1,082,420 1,069,335 1,007,019
---------- ---------- ----------
BENEFITS AND EXPENSES
Benefits paid to policyholders and beneficiaries .................... 455,036 480,234 462,412
Policyholder dividends .............................................. 61,369 67,412 67,596
Increase/(decrease) in liability for future policy benefits ......... (12,356) (11,972) 42,652
General expenses .................................................... 211,770 202,731 178,554
Broker/dealer sales expense ......................................... 180,255 160,730 132,724
Amortization of deferred acquisition costs .......................... 42,223 43,223 46,137
---------- ---------- ----------
TOTAL BENEFITS AND EXPENSES ........................................ 938,297 942,358 930,075
---------- ---------- ----------
Income Before Income Taxes .......................................... 144,123 126,977 76,944
---------- ---------- ----------
Income taxes:
Current ............................................................ 49,509 50,061 37,944
Deferred ........................................................... 8,180 3,851 (9,919)
---------- ---------- ----------
NET INCOME ........................................................ $ 86,434 $ 73,065 $ 48,919
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
76
<PAGE>
- --------------------------------------------------------------------------------
THE PENN MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
<TABLE>
<CAPTION>
OTHER
COMPREHENSIVE RETAINED TOTAL
FOR THE YEARS ENDED DECEMBER 31, INCOME EARNINGS EQUITY
- --------------------------------------------------------------- --------------- ---------- -------------
(IN THOUSANDS)
<S> <C> <C> <C>
BALANCE AT JANUARY 1, 1996 .................................... $ 158,941 $735,727 $ 894,668
Comprehensive Income
Net income for 1996 .......................................... -- 48,919 48,919
Other comprehensive loss, net of tax .........................
Unrealized depreciation of securities, net of reclassification
adjustment .................................................. (73,211) -- (73,211)
--------- -------- ----------
Comprehensive Loss ............................................ (24,292)
----------
BALANCE AT DECEMBER 31, 1996 .................................. 85,730 784,646 870,376
Comprehensive Income
Net income for 1997 .......................................... -- 73,065 73,065
Other comprehensive income, net of tax .......................
Unrealized appreciation of securities, net of reclassification
adjustment .................................................. 66,279 -- 66,279
----------
Comprehensive Income .......................................... 139,344
--------- -------- ----------
BALANCE AT DECEMBER 31, 1997 .................................. 152,009 857,711 1,009,720
Comprehensive Income
Net income for 1998 .......................................... -- 86,434 86,434
Other comprehensive income, net of tax .......................
Unrealized appreciation of securities, net of reclassification
adjustment .................................................. 45,130 -- 45,130
----------
Comprehensive Income .......................................... 131,564
--------- -------- ----------
BALANCE AT DECEMBER 31, 1998 .................................. $ 197,139 $944,145 $1,141,284
========= ======== ==========
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
77
<PAGE>
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THE PENN MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31, 1998 1997 1996
- ------------------------------------------------------------------------- --------------- --------------- ---------------
(IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income .............................................................. $ 86,434 $ 73,065 $ 48,919
Adjustments to reconcile net income to net cash provided by operations:
Capitalization of policy acquisition costs ............................ (72,356) (64,427) (60,234)
Amortization of deferred acquisition costs ............................ 42,223 43,223 46,137
Policy fees on universal life and investment contracts ................ (120,315) (104,342) (89,349)
Interest credited on universal life and investment contracts .......... 146,081 160,417 171,051
Depreciation and amortization ......................................... 4,750 18,682 11,613
Premiums due and other receivables .................................... (1,293) (7,291) (105)
Realized capital (gains)/losses ....................................... (3,912) (9,655) 10,078
(Increase)/decrease in accrued investment income ...................... (1,136) 60 6,474
(Increase)/decrease in amounts due from reinsurers .................... (6,372) (4,329) (14,200)
Increase/(decrease) in future policy benefit reserves ................. (8,696) (13,358) 58,697
Increase/(decrease) in income tax payable ............................. 25,622 (4,526) 7,798
Other, net ............................................................ 3,805 (6,693) 39,625
------------ ------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES .......................... 94,835 80,826 236,504
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Sale of investments:
Debt securities available for sale .................................... 1,837,209 1,235,274 927,905
Equity securities ..................................................... 35,496 20,374 25,413
Real estate ........................................................... 9,937 87,875 40,209
Other ................................................................. 18,074 14,355 15,284
Maturity and other principal repayments:
Debt securities available for sale .................................... 496,283 472,474 278,290
Mortgage loans ........................................................ 2,357 61,813 156,643
Cost of investments acquired:
Debt securities available for sale .................................... (2,315,067) (1,772,007) (1,427,048)
Equity securities ..................................................... (26,390) (15,268) (11,752)
Mortgage loans ........................................................ -- -- (36,155)
Real estate ........................................................... (293) (15,600) (8,542)
Other ................................................................. (17,917) (15,503) (8,789)
Change in policy loans, net ............................................. 4,613 13,084 1,234
(Increase)/decrease in short-term investments, net ...................... 42,446 (5,955) 51,290
Purchases of furniture and equipment, net ............................... (9,446) (4,116) (6,449)
------------ ------------ ------------
NET CASH (USED)/PROVIDED BY INVESTING
ACTIVITIES ........................................................ 77,302 76,800 (2,467)
------------ ------------ ------------
</TABLE>
-continued-
The accompanying notes are an integral part of the
consolidated financial statements.
78
<PAGE>
- --------------------------------------------------------------------------------
THE PENN MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31, 1998 1997 1996
- ------------------------------------------------------------------ ------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Deposits for universal life and investment contracts ............. $ 589,070 $ 653,233 $ 625,816
Withdrawals from universal life and investment contracts ......... (605,821) (552,311) (567,697)
Transfers to separate accounts ................................... (147,708) (236,008) (269,735)
Issuance/(repayment) of debt ..................................... 90,772 24,842 (18,424)
(Increase)/decrease in net broker dealer receivables ............. (111,046) (47,632) 296
---------- ---------- ----------
NET CASH USED BY FINANCING ACTIVITIES ........................ (184,733) (157,876) (229,744)
---------- ---------- ----------
NET DECREASE IN CASH AND CASH EQUIVALENTS .................... (12,596) (250) 4,293
CASH AND CASH EQUIVALENTS ........................................
Beginning of the year .......................................... 37,064 37,314 33,021
---------- ---------- ----------
End of the year ................................................ $ 24,468 $ 37,064 $ 37,314
========== ========== ==========
</TABLE>
The accompanying notes are an intergal part of the
consolidated financial statements.
79
<PAGE>
- --------------------------------------------------------------------------------
THE PENN MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(IN THOUSANDS OF DOLLARS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
ORGANIZATION AND BASIS OF PRESENTATION
The Penn Mutual Life Insurance Company was founded and commenced business
in 1847 as a mutual life insurance company. The Company concentrates primarily
on the sale of individual life insurance and annuity products. The primary
products that the Company currently markets are traditional whole life, term
life, universal life, variable life, immediate annuities and deferred
annuities, both fixed and variable. The Company markets its products through a
network of career agents, independent agents, and independent marketing
organizations. The Company is also involved in the broker-dealer business which
offers a variety of investment products and services and is conducted through
the Company's non-insurance subsidiaries. The Company sells its products in all
fifty states and the District of Columbia. The Company is pursuing the sale of
its disability income line of business. This business had total assets of
$226,672 as of December 31, 1998 and premium and annuity considerations of
$16,739 for the year then ended.
The accompanying consolidated financial statements have been prepared in
conformity with generally accepted accounting principles and include the
accounts of The Penn Mutual Life Insurance Company, its wholly owned life
insurance subsidiary, The Penn Insurance and Annuity Company ("PIA"), and
non-insurance subsidiaries (principally broker/dealer and investment advisory
subsidiaries) (the "Company"). All significant intercompany accounts and
transactions have been eliminated in consolidation. The preparation of
financial statements requires management to make estimates and assumptions that
affect the amounts reported in the consolidated financial statements and notes
to the consolidated financial statements.
NEW ACCOUNTING PRONOUNCEMENTS
As of January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. (SFAS) 130, "Reporting Comprehensive Income." SFAS No.
130 establishes standards for the reporting and display of comprehensive income
and its components in the financial statements. The initial application of SFAS
No. 130, required the reclassification of prior-year financial statements to
reflect the components of comprehensive income.
During 1998, the Company adopted SFAS No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits," which revised disclosures
about pension and other postretirement benefit plans. As SFAS No. 132 does not
change the measurement or recognition of these plans, its adoption had no
impact on the Company's financial condition or results of operations.
In June 1998, The FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 requires all derivatives to
be recognized in the statement of financial position as either assets or
liabilities and measured at fair value. The corresponding derivative gains and
losses should be reported based on hedge relationships that exist. Changes in
the fair value of derivatives that are not designated as hedges or that do not
meet the hedge accounting criteria in SFAS No. 133, are required to be reported
in earning. SFAS No. 133 is effective for fiscal years beginning after June 15,
1999. Adoption of SFAS No. 133 is not expected to have a material effect on the
Company's financial condition or results of operations.
INVESTMENTS
Debt securities (bonds, notes, redeemable preferred stocks and
mortgage-backed securities) which might be sold prior to maturity are
classified as available for sale. These securities are carried at fair value,
with the change in unrealized gains and losses reported in other comprehensive
income. Interest on debt securities is credited to income as it is earned. Debt
securities are amortized using the scientific method. These assumptions are
consistent with the current interest rate and economic environments. The
retrospective adjustment method is used to value all securities.
Equity securities are classified as available for sale and carried at fair
value. Dividends on equity securities are credited to income on their
ex-dividend dates.
The Company regularly evaluates the carrying value of debt and equity
securities based on current economic conditions, past credit loss experience
and other circumstances of the investee. A decline in a security's fair value
that is deemed to be other than temporary is treated as a realized loss and a
reduction in the cost basis of the security.
80
<PAGE>
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THE PENN MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(IN THOUSANDS OF DOLLARS)
Mortgage loans on real estate are stated at unpaid principal balances, net
of unamortized discounts and valuation allowances. Valuation allowances on
impaired loans are based on the present value of expected future cash flows
discounted at the loan's original effective interest rate or the collateral
value if the loan is collateral dependent. However, if foreclosure is or
becomes probable, the measurement method used is collateral value.
Investment real estate, which the Company has the intent to hold, is
carried at cost less accumulated depreciation and valuation reserves. The
Company establishes valuation reserves for investment real estate when declines
in value are deemed to be other then temporary based on an analysis of
discounted future cash flows. Properties held for sale are carried at the lower
of depreciated cost or fair value less selling costs. Valuation reserves are
established for properties held for sale when the fair value less estimated
selling costs is below depreciated cost. Real estate acquired through
foreclosure is recorded at the lower of cost or fair value less estimated
selling costs at the time of foreclosure. Depreciation is calculated using the
straight-line method over the estimated useful lives of the real estate.
Policy loans are carried at the unpaid principal balances.
Short-term investments include securities purchased with a maturity date
of 90 days to less than one year. Short-term investments are valued at cost.
Other invested assets primarily include venture capital limited
partnerships which are carried at fair value.
Realized gains and losses are determined by specific identification and
are included in income on the trade date, net of amortization of deferred
acquisition costs. Unrealized gains and losses, net of appropriate taxes and
amortization of deferred acquisition costs, are accounted for as a separate
component of other comprehensive income.
The Company utilizes various financial instruments, such as interest rate
swaps, financial futures and structured notes, to hedge against interest rate
fluctuation. Most of these investments are recorded as accounting hedges using
a valuation method consistent with the valuation method of the assets hedged.
Gains and losses on these instruments are deferred and recognized in the
Consolidated Income Statements over the remaining life of the hedged security.
Changes in the fair value of these instruments are reported as unrealized gains
or losses. Realized gains or losses are recognized when the hedged securities
are sold.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash on hand, money market instruments
and other debt securities with a maturity of 90 days or less when purchased.
OTHER ASSETS
Property and equipment and leasehold improvements are stated at cost, less
accumulated depreciation and amortization. Depreciation is calculated using the
straight-line method over the estimated useful lives of the related assets.
Amortization of leasehold improvements is calculated using the straight-line
method over the lesser of the term of the leases or the estimated useful life
of the improvements. Accumulated depreciation and amortization on property and
equipment and leasehold improvements was $49,816 and $44,329 at December 31,
1998 and 1997, respectively. Related depreciation and amortization expense was
$8,586, $8,183 and $7,510 for the years ended December 31, 1998, 1997 and 1996,
respectively.
Goodwill represents the excess of the cost of the businesses acquired over
the fair value of their net assets. These costs are amortized on a
straight-line basis over not more than 40 years and are included in other
assets in the Consolidated Balance Sheets. Unamortized goodwill amounted to
$16,126 and $16,932 at December 31, 1998 and 1997, respectively. Goodwill
amortization was $806, $808 and $909 for 1998, 1997 and 1996, respectively.
DEFERRED ACQUISITION COSTS
Costs of acquiring new insurance and annuity contracts, which vary with
and are primarily related to the production of new business, have been deferred
to the extent that such costs are deemed recoverable from future gross profits.
Such costs include commissions, certain costs of policy issuance and
underwriting, and certain variable agency expenses.
81
<PAGE>
- --------------------------------------------------------------------------------
THE PENN MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(IN THOUSANDS OF DOLLARS)
Deferred acquisition costs related to participating traditional and
universal life insurance policies and annuity products without mortality risk
that include significant surrender charges are being amortized over the lesser
of the estimated or actual contract life in proportion to estimated gross
profits arising principally from interest, mortality and expense margins and
surrender charges. The effects on amortization of deferred acquisition costs of
revisions to estimated gross profits are reflected in earnings in the period
such estimated gross profits are revised. Deferred acquisition costs are
reviewed to determine that the unamortized portion of such costs is recoverable
from future estimated gross profits. Certain costs and expenses reported in the
consolidated income statements are net of amounts deferred.
SEPARATE ACCOUNTS
Separate Account assets and liabilities represent segregated funds
administered and invested by the Company primarily for the benefit of variable
life insurance policyholders and annuity and pension contractholders, including
certain of the Company's benefit plans. The value of the assets in the Separate
Accounts reflects the actual investment performance of the respective accounts
and is not guaranteed by the Company. The carrying value for Separate Account
assets and liabilities approximates the estimated fair value of the underlying
assets.
INSURANCE LIABILITIES AND REVENUE RECOGNITION
Participating Traditional Life and Life Contingent Annuity Products
Future policy benefits include reserves for participating traditional life
insurance and life contingent annuity products and are established in amounts
adequate to meet the estimated future obligations of the policies in force.
Liabilities for participating traditional life products are computed using the
net level premium method, using assumptions for investment yields, mortality,
morbidity and withdrawals, which are consistent with the dividend fund interest
rate and mortality rates used in calculating cash surrender values. Interest
rate assumptions used in the calculation of the liabilities for participating
traditional life products ranged from 2.25% to 4.5%. Premiums are recognized as
income when due. Death and surrender benefits are reported in expense as
incurred.
Liabilities for life contingent annuity products are computed by
estimating future benefits and expenses. Assumptions are based on Company
experience projected at the time of policy issue, with provision for adverse
deviations. Interest rate assumptions range from 2.25% to 13.25%. Premiums are
recognized as income as they are received. Death and surrender benefits are
reported in expense as incurred.
Universal Life Products and Other Annuity Products
Other policyholder funds represent liabilities for universal life and
investment-type annuity products. The liabilities for these products are based
on the contract account value which consists of deposits received from
customers and investment earnings on the account value, less administrative and
expense charges. The liability for universal life products is also reduced by
mortality charges. Liabilities for the non-life contingent annuity products are
computed by estimating future benefits and expenses. Assumptions are based on
Company experience projected at the time of policy issue. Interest rate
assumptions range from 2.0% to 11.25%.
Contract charges assessed against account value for universal life and
investment-type annuities are reflected as policy fee income in revenue.
Interest credited to account values and universal life benefit claims in excess
of fund values are reflected as benefit expense.
Policyholders' Dividends
The majority of the Company's insurance products have been issued on a
participating basis. As of December 31, 1998, participating insurance expressed
as a percentage of insurance in force is 92%, and as a percentage of premium
income is 89%. The amount of policyholders' dividends to be paid is approved
annually by the Board of Trustees. The aggregate amount of policyholders'
dividends is calculated based on actual interest, mortality, morbidity and
expense experience for the year and on management's judgment as to the
appropriate level of equity to be retained by the Company. The carrying value
of this liability approximates the earned amount and fair value at December 31,
1998.
82
<PAGE>
- --------------------------------------------------------------------------------
THE PENN MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(IN THOUSANDS OF DOLLARS)
BROKER/DEALER REVENUE RECOGNITION
Broker-dealer transactions in securities and listed options, including
related commission revenue and expense, are recorded on a settlement-date
basis. There would be no material effect on the financial statements if such
transactions were recorded on a trade-date basis.
FEDERAL INCOME TAXES
The Company files a consolidated federal income tax return with its life
and non-life insurance subsidiaries. Federal income taxes are charged or
credited to operations based upon amounts estimated to be payable or
recoverable as a result of taxable operations for the current year. Deferred
income tax assets and liabilities are established to reflect the impact of
temporary differences between the amount of assets and liabilities recognized
for financial reporting purposes and such amounts recognized for tax purposes.
These deferred tax assets or liabilities are measured by using the enacted tax
rates expected to apply to taxable income in the period in which the deferred
tax liabilities or assets are expected to be settled or realized.
REINSURANCE
In the normal course of business, the Company seeks to limit its exposure
to loss on any single insured and to recover a portion of benefits paid by
ceding reinsurance to other insurance enterprises or reinsurers under excess
coverage and coinsurance contracts. The Company has set its retention limit for
acceptance of risk on life insurance policies at various levels up to $1,250.
Insurance liabilities are reported before the effects of reinsurance.
Reinsurance receivables (including amounts related to insurance liabilities)
are reported as assets. Estimated reinsurance receivables are recognized in a
manner consistent with the liabilities related to the underlying reinsured
contracts.
2. INVESTMENTS:
DEBT SECURITIES
The following tables summarize the Company's investment in debt
securities, including redeemable preferred stocks. All debt securities are
classified as available for sale and are carried at estimated fair value.
Amortized cost is net of cumulative writedowns for other than temporary
declines in value of $3,056 and $1,208 as of December 31, 1998 and 1997,
respectively.
<TABLE>
<CAPTION>
DECEMBER 31, 1998
-------------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
-------------- ------------ ------------ --------------
<S> <C> <C> <C> <C>
U.S. Treasury securities and U.S. Government and agency
securities ........................................... $ 13,109 $ 1,271 $ -- $ 14,380
States and political subdivisions ..................... 12,094 2,216 -- 14,310
Foreign governments ................................... 24,920 3,323 -- 28,243
Corporate securities .................................. 3,058,066 299,489 4,956 3,352,599
Mortgage and other asset-backed securities ............ 2,006,891 86,271 4,399 2,088,763
----------- --------- ------- -----------
Total bonds ........................................... 5,115,080 392,570 9,355 5,498,295
Redeemable preferred stocks ........................... 2,696 -- 67 2,629
----------- --------- ------- -----------
TOTAL .............................................. $ 5,117,776 $ 392,570 $ 9,422 $ 5,500,924
=========== ========= ======= ===========
</TABLE>
83
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THE PENN MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
DECEMBER 31, 1997
-------------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
-------------- ------------ ------------ --------------
<S> <C> <C> <C> <C>
U.S. Treasury securities and U.S. Government and agency
securities ........................................... $ 107,539 $ 6,302 $ -- $ 113,841
States and political subdivisions ..................... 12,085 569 -- 12,654
Foreign governments ................................... 20,397 3,049 -- 23,446
Corporate securities .................................. 2,854,234 218,145 6,748 3,065,631
Mortgage and other asset-backed securities ............ 2,133,758 76,160 757 2,209,161
----------- --------- ------- -----------
Total bonds ........................................... 5,128,013 304,225 7,505 5,424,733
Redeemable preferred stocks ........................... 3,085 -- 166 2,919
----------- --------- ------- -----------
TOTAL .............................................. $ 5,131,098 $ 304,225 $ 7,671 $ 5,427,652
=========== ========= ======= ===========
</TABLE>
The following tables summarize the amortized cost and estimated fair value
of debt securities, including redeemable preferred stocks, as of December 31,
1998 by contractual maturity.
<TABLE>
<CAPTION>
AMORTIZED ESTIMATED
COST FAIR VALUE
-------------- --------------
<S> <C> <C>
Years to Maturity:
One or less ........................................ $ 279,580 $ 294,068
After one through five ............................. 357,684 369,099
After five through ten ............................. 566,864 631,968
After ten .......................................... 1,904,061 2,114,397
Mortgage and other asset-backed securities ......... 2,006,891 2,088,763
----------- -----------
Total bonds ...................................... 5,115,080 5,498,295
Redeemable preferred stocks ........................ 2,696 2,629
----------- -----------
TOTAL ............................................ $ 5,117,776 $ 5,500,924
=========== ===========
</TABLE>
Expected maturities may differ from contractual maturities because certain
borrowers have the right to call or prepay obligations with or without call or
prepayment penalties. Mortgage and other asset-backed securities are presented
separately in the maturity schedule due to the potential for prepayment. The
weighted average life of these securities is 7.1 years.
At December 31, 1998, the Company held $2,088,763 in mortgage and other
asset-backed securities. The structured securities portfolio consists of
commercial and residential mortgage pass-through holdings totaling $1,865,556
and securities backed by credit card receivables, auto loans, home equity and
manufactured housing loans totaling $223,207. These securities follow a
structured principal repayment schedule and are of high credit quality.
Securities totaling $1,512,963 are rated AAA and include $20,394 of
interest-only tranches that were retained from the securitization of the
Company's mortgage loan portfolio.
At December 31, 1998, the largest industry concentration of the Company's
portfolio was investments in the finance industry of $624,768 representing 11%
of the total debt portfolio.
Proceeds during 1998, 1997 and 1996 from sales of available-for-sale
securities were $1,931,269, $1,353,112 and $927,905, respectively. Gross gains
and gross losses realized on those sales were $37,324 and $35,257,
respectively, during 1998, $21,799 and $8,990, respectively, during 1997 and
$15,932 and $6,899, respectively, during 1996.
The Company's investment portfolio of debt securities is predominantly
comprised of investment grade securities. At December 31, 1998 and 1997, debt
securities with amortized cost totaling $192,724 and $198,943, respectively,
were less than investment grade. At December 31, 1998 the Company held
securities with a carrying value of $9,170 which are to be restructured
pursuant to commenced negotiations. At December 31 1997, the Company did not
hold any securities which were either in default as to principal and/or
interest payments, were to be restructured pursuant to commenced negotiations
or were in situations where the borrowers went into bankruptcy subsequent to
acquisition. The Company did not hold any debt securities which were non-income
producing for the preceding twelve months as of December 31, 1998 and 1997.
84
<PAGE>
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THE PENN MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(IN THOUSANDS OF DOLLARS)
EQUITY SECURITIES
During 1998, 1997 and 1996, the proceeds from sales of equity securities
amounted to $18,487, $20,374 and $25,413, respectively. The gross gains and
gross losses realized on those sales were $3,095 and $239, $975 and $239 and
$1,369 and $247 for 1998, 1997 and 1996, respectively.
MORTGAGE LOANS
On August 29, 1996, the Company securitized the majority of its mortgage
loan portfolio by transferring the loans to a trust which qualifies as a REMIC
(Real Estate Mortgage Investment Conduit) under the Internal Revenue Code.
Prior to transferring the loans with a principal value of $781,564 and a book
value of $780,942, the loans were written down to a fair market value of
$755,559, and the related reserve of $25,285 was released. The trust issued
sixteen classes of Commercial Mortgage Pass-Through Certificates with a total
par value of $781,564. The certificates evidence the entire beneficial
ownership interest in the trust. The cash flow from the mortgages will be used
to repay the certificates over an average life of 4.28 years. The actual date
on which the principal amount of the notes may be paid in full could be
substantially earlier or later based on performance of the mortgages. The cash
flows of the assets of the trust will be the sole source of payments on the
notes. The Company has not guaranteed these certificates or the mortgage loans
held by the trust. As a result of this transaction, the Company recognized a
loss of $98 upon the transfer of the mortgages to the trust, representing the
difference between the fair market value of the certificates and the book value
of the mortgage loans transferred to the trust.
The Company retained the highest quality classes of certificates with a
par value of $715,126 and a fair market value of $734,326 at the time of the
securitization. As of December 31, 1998, the par value and fair value of these
securities were $460,753 and $475,699, respectively. As of December 31, 1997,
the par value and fair value of these securities were $570,130 and $597,248,
respectively. The Company sold the lowest rated classes of certificates with a
par value of $66,438 and a fair market value of $24,838.
The mortgage loans which were not included in the securitization and were
retained by the Company had a book value of $171,555 with a related reserve of
$21,907 and an estimated fair value of $153,405 on the date of the
securitization. Loans which the Company intended to dispose of within a period
of 6 to 24 months were written down to their estimated net realizable value.
These loans had a book value of $99,817 and an estimated net realizable value
of $81,310 at the time of the securitization. The writedown of $18,507 was
fully offset by a release in mortgage loss reserve. As of December 31, 1998 and
1997, the Company held $0 and $12,368 of these loans, respectively. The Company
intended to hold mortgage loans with a book value of $71,738 on the date of the
securitization through their remaining terms. As of December 31, 1998 and 1997,
the Company continued to hold $42,628 and $44,428 of these mortgages,
respectively. The Company discontinued the origination of commercial mortgage
loans in 1996.
The following tables summarize the carrying value of mortgage loans, by
property type and geographic concentration, at December 31.
1998 1997
------------ -----------
Property Type
Office buildings ............ $ 9,204 $ 20,012
Retail ...................... 5,553 7,862
Dwellings ................... 24,741 25,237
Other ....................... 3,130 3,685
Valuation allowance ......... (3,800) (3,800)
-------- --------
TOTAL ..................... $ 38,828 $ 52,996
======== ========
85
<PAGE>
- --------------------------------------------------------------------------------
THE PENN MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(IN THOUSANDS OF DOLLARS)
1998 1997
---------- ----------
Geographic Concentration
Northeast ................... $ 10,273 $ 23,313
Midwest ..................... 5,728 5,922
South ....................... 12,075 12,502
West ........................ 14,552 15,059
Valuation allowance ......... (3,800) (3,800)
-------- --------
TOTAL ..................... $ 38,828 $ 52,996
======== ========
The following table presents changes in the mortgage loan valuation
allowance for the years presented:
1998 1997
---------- ----------
Balance at January 1 .............. $ 3,800 $ 3,400
Provision ......................... -- 400
Charge-offs ....................... -- --
------- -------
BALANCE AT DECEMBER 31 .......... $ 3,800 $ 3,800
======= =======
As of December 31, 1998 and 1997, the Company's mortgage loan portfolio
contained no loans delinquent over 60 days or in foreclosure and there were no
non-income producing mortgage loans for the preceding twelve months.
During 1998 and 1997, the Company did not restructure the terms of any
outstanding mortgages. As of December 31, 1998 and 1997, the mortgage loan
portfolio included $2,555 and $2,834, respectively, of restructured mortgage
loans. Restructured mortgage loans include commercial loans for which the basic
terms, such as interest rate, maturity date, collateral or guaranty have been
changed as a result of actual or anticipated delinquency. Restructures do not
include mortgages refinanced upon maturity at or above current market rates.
Gross interest income on restructured mortgage loans on real estate that would
have been recorded in accordance with the original terms of such loans amounted
to $258 and $298 in 1998 and 1997, respectively. Gross interest income from
these loans included in net investment income totaled $236 and $262 in 1998 and
1997, respectively.
At December 31, 1998, no loans were considered to be impaired. At December
31, 1997, the recorded investment in loans that were considered to be impaired
was $12,368 that, as a result of writedowns, did not have a valuation
allowance. The average recorded investment in impaired loans during the year
ended December 31, 1998 and 1997 was approximately $6,184 and $38,096,
respectively. During 1998 and 1997, $163 and $1,454 was received, respectively,
on these impaired loans which was applied to the outstanding principal balance
or will be applied to principal at the date of foreclosure.
REAL ESTATE
The following table summarizes the carrying value of the Company's real
estate holdings at December 31.
1998 1997
----------- -----------
Investment ......................... $ 19,111 $ 19,999
Properties held for sale ........... 1,914 7,828
Less: Valuation allowance .......... (5,234) (5,469)
-------- --------
TOTAL ............................ $ 15,791 $ 22,358
======== ========
At December 31, 1998 and 1997, accumulated depreciation on real estate
amounted to $6,218 and $6,498, respectively. Depreciation expense on real
estate totaled $1,071, $5,709 and $6,488 for the years ended December 31, 1998,
1997 and 1996, respectively. During 1997, the Company sold its largest real
estate investment for $65,007 cash to an unrelated buyer. At the date of the
sale, this property had a carrying value of $61,914, net of related reserves,
resulting in a gain of $3,093. During 1996, the Company wrote down the
statement value of this property by $16,000 to its estimated fair value, based
on changes in future valuation assumptions.
86
<PAGE>
- --------------------------------------------------------------------------------
THE PENN MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(IN THOUSANDS OF DOLLARS)
OTHER
Investments on deposit with regulatory authorities as required by law were
$7,104 and $7,106 at December 31, 1998 and 1997, respectively.
As of December 31, 1998 and 1997, the Company's investments included
$475,699 and $597,248, respectively, of the tranches retained from the 1996
securitization of the Company's commercial mortgage loan portfolio. These
investments represented 42% and 59% of equity at December 31, 1998 and 1997,
respectively.
3. INVESTMENT INCOME AND CAPITAL GAINS:
The following table summarizes the sources of investment income, excluding
investment gains/(losses), for the year ended December 31.
1998 1997 1996
------------ ------------ ----------
Debt securities ..................... $ 395,628 $ 390,852 $ 356,669
Equity securities ................... 206 1,371 1,313
Mortgages ........................... 4,268 12,098 62,454
Real estate ......................... 2,903 17,519 24,143
Policy loans ........................ 39,760 40,921 40,580
Short-term investments .............. 2,029 2,426 6,052
Other invested assets ............... 11,330 21,268 14,665
Cash and cash equivalents ........... 3 2 44
--------- --------- ---------
Gross investment income ............. 456,127 486,457 505,920
Less: Investment expenses .......... 11,430 26,251 30,605
--------- --------- ---------
Investment income, net .............. $ 444,697 $ 460,206 $ 475,315
========= ========= =========
The following table summarizes net realized capital gains/(losses) on
investments for the year ended December 31. Net realized capital gains/(losses)
include decreases in valuation allowances of $235, $3,154 and $44,164 in 1998,
1997 and 1996, respectively.
1998 1997 1996
----------- ----------- ------------
Debt securities ..................... $ 110 $ 12,991 $ 10,412
Equity securities ................... 2,856 417 1,122
Mortgage loans ...................... 210 280 (2,821)
Real estate ......................... 4,148 (684) (22,356)
Other ............................... (2,109) (811) 3,565
Amortization of deferred acquisition
costs ............................ (1,303) (2,538) --
-------- -------- ----------
Realized gains/(losses) ............. $ 3,912 $ 9,655 $ (10,078)
======== ======== ==========
87
<PAGE>
- --------------------------------------------------------------------------------
THE PENN MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(IN THOUSANDS OF DOLLARS)
The following table summarizes the change in unrealized gains and losses
for investments carried at fair value which are reflected in other
comprehensive income for the year ended December 31.
1998 1997 1996
----------- ------------ -----------
Unrealized gains/(losses):
Debt securities .................... $ 86,594 $ 160,850 $ (149,259)
Equity securities .................. (2,092) 408 (582)
Other .............................. (2,091) (14,581) (1,545)
--------- --------- -----------
82,411 146,677 (151,386)
--------- --------- -----------
Less:
Deferred policy acquisition costs .. (12,841) (45,043) 38,324
Deferred income taxes .............. (24,440) (35,355) 39,851
--------- --------- -----------
Net change in unrealized gains/
(losses) .......................... $ 45,130 $ 66,279 $ (73,211)
========= ========= ===========
The following table sets forth the reclassification adjustment required to
avoid double-counting in comprehensive income items that are included as part
of net income for a period that also had been part of other comprehensive
income in earlier periods:
1998 1997 1996
----------- ----------- -------------
Reclassification Adjustments
Unrealized holding gains/(losses)
arising during period ............. $ 53,576 $ 71,797 $ (57,160)
Reclassification adjustment for
gains included in net income ...... 8,446 5,518 16,051
-------- -------- ----------
Unrealized gains/(losses) on
investments, net of
reclassification adjustment ....... $ 45,130 $ 66,279 $ (73,211)
======== ======== ==========
Reclassification adjustments reported in the above table for the years
ended December 31, 1998, 1997 and 1996 are net of income tax expense of $7,679,
$4,519 and $13,350, respectively, and $5,815, $2,875 and $8,740, respectively,
relating to the effects of such amounts on deferred acquisition costs.
88
<PAGE>
- --------------------------------------------------------------------------------
THE PENN MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(IN THOUSANDS OF DOLLARS)
4. FAIR VALUE INFORMATION:
The following table summarizes the carrying value and estimated fair value
of the Company's financial instruments as of December 31, 1998 and 1997.
<TABLE>
<CAPTION>
1998 1997
------------------------------- -------------------------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
FINANCIAL ASSETS:
Debt securities
Available for sale ...................... $ 5,500,924 $ 5,500,924 $ 5,427,652 $ 5,427,652
Equity securities
Common stock ............................ 158 158 3,051 3,051
Non-redeemable preferred stocks ........... 4,003 4,003 9,451 9,451
Mortgage loans ............................ 38,828 42,678 52,996 57,224
Policy loans .............................. 638,376 605,144 642,989 606,681
Cash and cash equivalents ................. 24,468 24,468 37,064 37,064
Short-term investments .................... 1,024 1,024 43,470 43,470
Separate account assets ................... 2,302,937 2,302,937 1,869,094 1,869,094
Other invested assets ..................... 98,571 98,571 88,928 88,928
FINANCIAL LIABILITIES:
Investment-type contracts
Individual annuities .................... $ 1,108,274 $ 1,143,373 $ 1,225,192 $ 1,260,639
Guaranteed investment contracts ......... 39,571 40,556 59,809 61,456
Other group annuities ................... 113,974 115,422 147,061 148,257
Other policyholder funds ................ 1,573,262 1,573,262 1,541,372 1,541,372
----------- ----------- ----------- -----------
Total policyholder funds .................. 2,835,081 2,866,627 2,973,434 3,011,724
Policyholders' dividends payable .......... 30,532 30,532 35,273 35,273
Separate account liabilities .............. 2,302,937 2,302,937 1,869,094 1,869,094
</TABLE>
The estimated fair values for the Company's investments in debt and equity
securities are based on quoted market prices, where available. In situations
where market prices are not readily available, primarily private placements,
fair values are estimated using a formula pricing method based on fair values
of securities with similar characteristics. The estimated fair value of
currently performing mortgage loans is estimated by discounting the cash flows
associated with the investment, using an interest rate currently offered for
similar loans to borrowers with similar credit ratings. Loans with similar
credit quality, characteristics and time to maturity are aggregated for
purposes of discounted cash flow analysis. Assumptions regarding credit risk,
cash flows and discount rates are determined using the available market and
borrower-specific information. The estimated fair value for non-performing
loans is based on the estimated fair value of the underlying real estate, which
is based on recent appraisals or other estimation techniques. The estimated
fair value of policy loans is calculated by discounting estimated future cash
flows using interest rates currently being offered for similar loans. Loans
with similar characteristics are aggregated for purposes of the calculations.
The carrying values of cash, cash equivalents, short-term investments and
separate account assets approximate their fair values. The estimated fair
values for the venture capital limited partnerships are based on values
determined by the partnerships' managing general partners. The resulting
estimated fair values may not be indicative of the value which could be
negotiated in an actual sale.
The fair values of the Company's liabilities for individual annuities,
guaranteed investment contracts and certain group annuities are estimated by
discounting the cash flows associated with the contracts, using an interest
rate currently offered for similar contracts with maturities similar to those
remaining for the contracts being valued. The statement value for certain of
the other group annuities approximates their fair value due to the nature of
the contracts. The statement values of other policyholder funds, policyholders'
dividends payable and separate account liabilities approximate their fair
values.
89
<PAGE>
- --------------------------------------------------------------------------------
THE PENN MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(IN THOUSANDS OF DOLLARS)
Currently, disclosure of estimated fair values is not required for all the
Company's assets and liabilities. Therefore, presentation of the estimated fair
value of a significant portion of assets without a corresponding valuation of
liabilities associated with insurance contracts can be misinterpreted. The
estimated fair values of liabilities under all of the Company's contracts are
considered in the overall management of interest rate risk. The continuing
management of the relationship between the maturities of the Company's
investments and the amounts due under insurance contracts reduces the Company's
exposure to changing interest rates.
The Company is exposed to interest rate risk on its interest-sensitive
products. The Company's investment strategy is designed to minimize interest
risk by managing the durations and anticipated cash flows of the Company's
assets and liabilities.
To minimize exposure and reduce risk from exchange and interest rate
fluctuations in the normal course of business, the Company enters into interest
rate swap programs for purposes other than trading. As of December 31, 1998 and
1997, the Company had interest rate swaps with aggregate notional amounts equal
to $95,000 and $105,000, respectively, with average unexpired terms of 8 and 19
months, respectively. Interest rate swap agreements involve the exchange of
fixed and floating rate interest payment obligations without an exchange of the
underlying notional principal amounts. During the term of the swap, the net
settlement amount is accrued as an adjustment to interest income. Gross
unrealized gains and losses, which represent fair value based on dealer-quoted
prices, were $2,248 and $0, respectively, at December 31, 1998 and $5,164 and
$0, respectively, at December 31, 1997. These fair values represent the amount
at risk if the counterparties default and the amount that the Company would
receive to terminate the contracts, taking into account current interest rates
and, where appropriate, the current creditworthiness of the counterparties.
In the normal course of business, the Company loans securities under
arrangements in which collateral is obtained in amounts greater than the
current market value of loaned securities. This collateral is held in the form
of cash, cash equivalents or securities issued or guaranteed by the United
States Government. The Company is at risk to the extent the value of loaned
securities exceeds the value of the collateral obtained. The Company controls
this risk by requiring collateral of the highest quality and requiring that
additional collateral be deposited when the market value of loaned securities
increases in relation to the collateral held or the value of the collateral
held decreases in relation to the value of the loaned securities. The Company
had loaned securities outstanding of $38,144 and $155,356 as of December 31,
1998 and 1997, respectively.
5. INCOME TAXES:
The Company follows the asset and liability method of accounting for
income taxes whereby current and deferred tax assets and liabilities are
recognized utilizing currently enacted tax laws and rates. Deferred taxes are
adjusted to reflect tax rates at which future tax liabilities or assets are
expected to be settled or realized.
90
<PAGE>
- --------------------------------------------------------------------------------
THE PENN MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(IN THOUSANDS OF DOLLARS)
Deferred income taxes reflect the impact for financial statement reporting
purposes of temporary differences between the financial statement carrying
amounts and tax bases of assets and liabilities. The significant temporary
differences that give rise to the deferred tax assets and liabilities at
December 31 relate to the following:
1998 1997
----------- -----------
DEFERRED TAX ASSETS
Future policy benefits ................... $ 92,909 $ 88,172
Dividend award ........................... 10,255 11,970
Allowances for investment losses ......... 4,232 3,667
Employee benefit liabilities ............. 29,762 27,979
Other .................................... 18,677 24,728
--------- --------
Total deferred tax asset ............... 155,835 156,516
--------- --------
DEFERRED TAX LIABILITIES
Deferred acquisition costs ............... 135,248 127,495
Unrealized investment gains .............. 105,993 81,553
Other .................................... 22,375 22,564
--------- --------
Total deferred tax liability ........... 263,616 231,612
--------- --------
NET DEFERRED TAX LIABILITY ................ $ 107,781 $ 75,096
========= ========
The federal income taxes attributable to consolidated net income are
different from the amounts determined by multiplying consolidated net income
before federal income taxes by the expected federal income tax rate. The
difference between the amount of tax at the U.S. federal income tax rate of 35%
and the consolidated tax provision is summarized as follows:
1998 1997 1996
----------- ----------- -----------
Tax expense at 35% ........................ $ 50,443 $ 44,442 $ 26,930
Increase/(decrease) in income taxes
resulting from:
Differential earnings amount ............. 2,681 6,942 500
Other .................................... 4,565 2,528 595
-------- -------- --------
Federal income tax expense/(benefit) ...... $ 57,689 $ 53,912 $ 28,025
======== ======== ========
As a mutual life insurance company, the Company is subject to Internal
Revenue Code provisions which require mutual, but not stock, life insurance
companies to include the Differential Earnings Amount (DEA) in each year's
taxable income. This amount is computed by multiplying the Company's average
taxable equity base by a prescribed rate, which is intended to reflect the
difference between stock and mutual companies' earnings rates.
The Internal Revenue Service has examined the Company's income tax returns
through the year 1994. Management believes that an adequate provision has been
made for potential assessments.
91
<PAGE>
- --------------------------------------------------------------------------------
THE PENN MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(IN THOUSANDS OF DOLLARS)
6. BENEFIT PLANS:
The following table summarizes the funded status and accrued benefit cost
for the Company's defined benefit plans and other postretirement benefit plans:
As of December 31,
<TABLE>
<CAPTION>
PENSION BENEFITS OTHER BENEFITS
------------------------------- -------------------------------
1998 1997 1998 1997
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Benefit obligation ................................ $ (90,428) $ (84,051) $ (26,439) $ (31,413)
Fair value of plan assets ......................... 53,349 42,783 -- --
---------- ---------- ---------- ----------
Funded Status ..................................... $ (37,079) $ (41,268) $ (26,439) $ (31,413)
========== ========== ========== ==========
Accrued benefit cost recognized in the consolidated
balance sheet .................................... $ (22,530) $ (23,527) $ (44,558) $ (45,143)
</TABLE>
The weighted-average assumptions used to measure the actuarial present
value of the projected benefit obligation were:
<TABLE>
<CAPTION>
PENSION BENEFITS OTHER BENEFITS
----------------------- -----------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Discount rate .......................... 6.75% 7.00% 6.75% 7.00%
Expected return on plan assets ......... 8.00% 8.00% -- --
Rate of compensation increase .......... 5.50% 5.50% 5.00% 5.50%
</TABLE>
At December 31, 1998, the assumed health care cost trend rate used in
measuring the accumulated postretirement benefit obligation was 8% in 1999,
grading to 5% in the year 2004. At December 31, 1997, the assumed health care
cost trend rate used in measuring the accumulated postretirement benefit
obligation was 8.5% in 1998, grading to 5.0% in the year 2004. The assumed
health care cost trend rate used at December 31, 1996 in measuring the
accumulated postretirement benefit obligation was 8.5% in 1997, grading to 5.0%
in the year 2004. Assumed health care cost trend rates have a significant
effect on the amounts reported for the health care plans.
The contributions made and the benefits paid from the plan were:
<TABLE>
<CAPTION>
PENSION BENEFITS OTHER BENEFITS
----------------------- ---------------------
1998 1997 1998 1997
---------- ---------- -------- ----------
<S> <C> <C> <C> <C>
Benefit cost recognized in consolidated income
statement ................................... $ 5,692 $ 5,917 $ 831 $ 1,515
Employer contribution ........................ 6,687 3,006 1,415 2,191
Plan participants' contribution .............. -- -- -- --
Benefits paid ................................ 3,229 3,085 1,415 2,191
</TABLE>
The Company maintains four defined contribution pension plans for
substantially all of its employees and full-time agents. For two plans,
designated contributions of up to 6% or 8% of annual compensation are eligible
to be matched by the Company. Contributions for the third plan are based on
tiered earnings of full-time agents. The last plan, which covers employees of a
subsidiary, are determined on a discretionary basis by the Board of Directors
of that subsidiary. For the years ended December 31, 1998, 1997 and 1996, the
expense recognized for these plans was $9,526, $8,345 and $6,092, respectively.
The estimated fair value of the defined contribution plans' assets at December
31, 1998 and 1997 was $260,706 and $229,378, respectively.
92
<PAGE>
- --------------------------------------------------------------------------------
THE PENN MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(IN THOUSANDS OF DOLLARS)
7. REINSURANCE:
The Company has assumed and ceded reinsurance on certain life and annuity
contracts under various agreements. Reinsurance permits recovery of a portion
of losses from reinsurers, although the Company remains primarily liable as the
direct insurer on all risks reinsured. The Company evaluates the financial
strength of potential reinsurers and continually monitors the financial
condition of present reinsurers to ensure that amounts due from reinsurers are
collectible. The table below highlights the amounts shown in the accompanying
financial statements.
<TABLE>
<CAPTION>
ASSUMED CEDED TO
GROSS FROM OTHER OTHER NET
AMOUNT COMPANIES COMPANIES AMOUNT
-------------- ------------ ------------- --------------
<S> <C> <C> <C> <C>
DECEMBER 31, 1998:
Life Insurance in Force ......... $32,066,821 $5,115,520 $5,954,701 $31,227,640
Premiums ........................ 166,708 10,586 5,940 171,354
Benefits ........................ 457,239 15,710 17,913 455,036
Reserves ........................ 5,594,712 1,688 62,198 5,534,202
DECEMBER 31, 1997:
Life Insurance in Force ......... $31,027,764 $5,217,856 $4,620,599 $31,625,021
Premiums ........................ 190,754 11,189 6,723 195,220
Benefits ........................ 492,857 14,293 26,916 480,234
Reserves ........................ 5,741,456 1,993 59,322 5,684,127
</TABLE>
During 1996, the Company had gross premiums of $196,897, assumed premiums
of $12,745 and ceded premiums of $9,821 and gross benefits of $293,270, assumed
benefits of $16,466 and ceded benefits of $16,808. Reinsurance receivables with
a carrying value of $55,119 and $50,617 were associated with a single reinsurer
at December 31, 1998 and 1997, respectively.
8. COMMITMENTS AND CONTINGENCIES:
The Company and its subsidiaries are respondents in a number of
proceedings, some of which involve extra-contractual damage in addition to
other damages. In addition, insurance companies are subject to assessments, up
to statutory limits, by state guaranty funds for losses of policyholders of
insolvent insurance companies. In the opinion of management, the outcome of the
proceedings and assessments are not likely to have a material adverse effect on
the financial position of the Company.
The Company, in the ordinary course of business, extends commitments
relating to its investment activities. As of December 31, 1998, the Company had
outstanding commitments totaling $19,413 relating to these investment
activities. The fair value of these commitments approximates the face amount.
9. STATUTORY INFORMATION:
State insurance regulatory authorities prescribe or permit statutory
accounting practices for calculating net income and capital and surplus which
differ in certain respects from generally accepted accounting principles
(GAAP). The significant differences relate to deferred acquisition costs, which
are charged to expenses as incurred; federal income taxes, which reflect
amounts that are currently taxable; and benefit reserves, which are determined
using prescribed mortality, morbidity and interest assumptions, and which, when
considered in light of the assets supporting these reserves, adequately provide
for obligations under policies and contracts. In addition, the recording of
impairments in the value of investments generally lags recognition under GAAP.
The combined insurance companies' statutory capital and surplus at
December 31, 1998 and 1997 was $495,212 and $435,861, respectively. The
combined insurance companies' net income, determined in accordance with
statutory accounting practices, for the years ended December 31, 1998, 1997 and
1996, was $83,676 $63,613 and $25,905, respectively.
93
<PAGE>
- --------------------------------------------------------------------------------
THE PENN MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(IN THOUSANDS OF DOLLARS)
10. YEAR 2000 (Unaudited):
The services provided by the Company depend on the smooth functioning of
computer systems. Many computer systems in use today cannot recognize the Year
2000, but revert to 1900 or some other date, due to the manner in which dates
were encoded and calculated earlier in this century. If not corrected, many
computer applications could fail or create erroneous results by or at the Year
2000. Failure of computer systems could affect pricing, account services, and
the handling of investment transactions, among other things. The Company began
preparing for the Year 2000 actively in 1996. The effort involves assessing all
computers, computer programs and related equipment, making necessary changes
and ensuring that all systems process dates correctly. The Company believes
that it has designed and implemented an efficient process for identifying what
needs to be changed and is working to correct and test systems that research
shows will be affected by dates in the Year 2000 and beyond. The Company
expects its computer systems to be Year 2000 compliant.
The Company has relationships with vendors and other service providers
that are not affiliated with the Company. As part of its plan, the Company is
contacting vendors and service providers to obtain assurances that such service
providers have taken appropriate measures to address the Year 2000 issue. The
Company will assess and attempt to mitigate risks where outside service
providers are not Year 2000 ready. However, there is no assurance that the
failure of outside service providers to complete adequate preparations in a
timely manner, which results in systems interruptions or other consequences,
will not have an adverse effect, directly or indirectly, on the Company.
The cost of addressing the Year 2000 issue is significant but not material
to the Company's financial condition or results of operations. The Company will
continue to incur costs in addressing the Year 2000, but does not anticipate
that the costs will be material going forward.
The foregoing statements are designated Year 2000 Readiness Disclosure
within the meaning of The Year 2000 Information and Readiness Disclosure Act
(P.L. 105-271,S.2392).
94
<PAGE>
- -------------------------------------------------------------------------------
APPENDIX A
- -------------------------------------------------------------------------------
SAMPLE MINIMUM INITIAL PREMIUMS
The following table shows for Insureds of varying ages, the minimum initial
premium for a Policy with a basic death benefit indicated. The table assumes the
Insureds will be placed in a nonsmoker class and that no supplemental benefits
will be added to the base Policy.
Issue Age Minimum Initial
of Insured Sex of Insured Base Death Benefit Premium
------------------------------------------------------------------------------
25 M $50,000 $286
------------------------------------------------------------------------------
30 F $75,000 $390
------------------------------------------------------------------------------
35 M $75,000 $448
------------------------------------------------------------------------------
40 F $100,000 $640
------------------------------------------------------------------------------
45 M $100,000 $827
------------------------------------------------------------------------------
50 F $100,000 $975
------------------------------------------------------------------------------
55 M $100,000 $1,377
------------------------------------------------------------------------------
60 F $75,000 $1,155
------------------------------------------------------------------------------
65 M $75,000 $2,022
------------------------------------------------------------------------------
70 F $50,000 $1,327
------------------------------------------------------------------------------
A-1
<PAGE>
- --------------------------------------------------------------------------------
APPENDIX B
- --------------------------------------------------------------------------------
APPLICABLE PERCENTAGES UNDER THE GUIDELINE PREMIUM / CASH VALUE CORRIDOR TEST
<TABLE>
<CAPTION>
Attained Attained Attained Attained Attained
Age Percentage Age Percentage Age Percentage Age Percentage Age Percentage
-------- ---------- -------- ---------- -------- ---------- -------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
0-40 250% 51 178% 62 126% 73 109% 84 105%
41 243% 52 171% 63 124% 74 107% 85 105%
42 236% 53 164% 64 122% 75 105% 86 105%
43 229% 54 157% 65 120% 76 105% 87 105%
44 222% 55 150% 66 119% 77 105% 88 105%
45 215% 56 146% 67 118% 78 105% 89 105%
46 209% 57 142% 68 117% 79 105% 90 105%
47 203% 58 138% 69 116% 80 105% 91 104%
48 197% 59 134% 70 115% 81 105% 92 103%
49 191% 60 130% 71 113% 82 105% 93 102%
50 185% 61 128% 72 111% 83 105% 94-99 101%
</TABLE>
SAMPLE APPLICABLE PERCENTAGES UNDER THE CASH VALUE ACCUMULATION TEST
MALE NON-SMOKER
<TABLE>
<CAPTION>
Attained Attained Attained Attained Attained
Age Percentage Age Percentage Age Percentage Age Percentage Age Percentage
-------- ---------- -------- ---------- -------- ---------- -------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
0-19 N/A 36 417.61% 53 240.32% 69 156.24% 85 119.81%
20 699.48% 37 403.76% 54 233.12% 70 152.83% 86 118.55%
21 679.26% 38 390.40% 55 226.22% 71 149.57% 87 117.38%
22 659.36% 39 377.52% 56 219.61% 72 146.49% 88 116.28%
23 639.73% 40 365.11% 57 213.30% 73 143.58% 89 115.23%
24 620.39% 41 353.15% 58 207.25% 74 140.85% 90 114.21%
25 601.33% 42 341.65% 59 201.45% 75 138.30% 91 113.20%
26 582.53% 43 330.57% 60 195.91% 76 135.91% 92 112.17%
27 564.06% 44 319.91% 61 190.60% 77 133.67% 93 111.08%
28 545.97% 45 309.63% 62 185.53% 78 131.57% 94 109.92%
29 528.29% 46 299.75% 63 180.70% 79 129.58% 95 108.65%
30 511.04% 47 290.24% 64 176.09% 80 127.70% 96 107.27%
31 494.24% 48 281.10% 65 171.71% 81 125.91% 97 105.80%
32 477.93% 49 272.29% 66 167.55% 82 124.22% 98 104.25%
33 462.11% 50 263.82% 67 163.60% 83 122.64% 99 102.60%
34 446.78% 51 255.67% 68 159.83% 84 121.17% 100 100.00%
35 431.94% 52 247.84%
</TABLE>
B-1
<PAGE>
FEMALE NON-SMOKER
<TABLE>
<CAPTION>
Attained Attained Attained Attained Attained
Age Percentage Age Percentage Age Percentage Age Percentage Age Percentage
-------- ---------- -------- ---------- -------- ---------- -------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
0-19 N/A 36 468.31% 53 270.97% 69 171.23% 85 122.77%
20 796.54% 37 452.83% 54 262.85% 70 166.87% 86 121.08%
21 771.20% 38 437.93% 55 255.03% 71 162.66% 87 119.50%
22 746.54% 39 423.58% 56 247.50% 72 158.63% 88 118.03%
23 722.57% 40 409.78% 57 240.24% 73 154.80% 89 116.64%
24 699.24% 41 396.51% 58 233.24% 74 151.16% 90 115.32%
25 676.63% 42 383.77% 59 226.46% 75 147.74% 91 114.03%
26 654.62% 43 371.51% 60 219.89% 76 144.52% 92 112.76%
27 633.28% 44 359.71% 61 213.54% 77 141.49% 93 111.49%
28 612.56% 45 348.34% 62 207.41% 78 138.64% 94 110.17%
29 592.47% 46 337.38% 63 201.52% 79 135.95% 95 108.79%
30 572.99% 47 326.82% 64 195.89% 80 133.39% 96 107.34%
31 554.12% 48 316.63% 65 190.51% 81 130.98% 97 105.82%
32 535.83% 49 306.81% 66 185.37% 82 128.71% 98 104.26%
33 518.10% 50 297.34% 67 180.47% 83 126.58% 99 102.60%
34 500.93% 51 288.22% 68 175.76% 84 124.60% 100 100.00%
35 484.36% 52 279.43%
</TABLE>
B-2
<PAGE>
SAMPLE APPLICABLE PERCENTAGES UNDER THE CASH VALUE ACCUMULATION TEST
MALE SMOKER
<TABLE>
<CAPTION>
Attained Attained Attained Attained Attained
Age Percentage Age Percentage Age Percentage Age Percentage Age Percentage
-------- ---------- -------- ---------- -------- ---------- -------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
0-19 N/A 36 342.96% 53 206.34% 69 144.93% 85 118.30%
20 567.36% 37 331.98% 54 201.00% 70 142.45% 86 117.35%
21 551.35% 38 321.41% 55 195.91% 71 140.09% 87 116.44%
22 535.65% 39 311.26% 56 191.05% 72 137.84% 88 115.56%
23 520.14% 40 301.52% 57 186.43% 73 135.71% 89 114.71%
24 504.81% 41 292.18% 58 182.01% 74 133.71% 90 113.85%
25 489.67% 42 283.23% 59 177.78% 75 131.84% 91 112.97%
26 474.70% 43 274.66% 60 173.72% 76 130.10% 92 112.04%
27 459.94% 44 266.46% 61 169.84% 77 128.48% 93 111.02%
28 445.46% 45 258.59% 62 166.14% 78 126.96% 94 109.89%
29 431.30% 46 251.07% 63 162.61% 79 125.52% 95 108.65%
30 417.48% 47 243.85% 64 159.26% 80 124.15% 96 107.27%
31 404.05% 48 236.93% 65 156.08% 81 122.84% 97 105.80%
32 391.02% 49 230.29% 66 153.08% 82 121.59% 98 104.25%
33 378.39% 50 223.92% 67 150.23% 83 120.42% 99 102.60%
34 366.17% 51 217.79% 68 147.52% 84 119.32% 100 100.00%
35 354.36% 52 211.94%
</TABLE>
FEMALE SMOKER
<TABLE>
<CAPTION>
Attained Attained Attained Attained Attained
Age Percentage Age Percentage Age Percentage Age Percentage Age Percentage
-------- ---------- -------- ---------- -------- ---------- -------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
0-19 N/A 36 413.45% 53 247.46% 69 163.93% 85 121.86%
20 700.22% 37 400.10% 54 240.74% 70 160.19% 86 120.34%
21 677.90% 38 387.29% 55 234.28% 71 156.56% 87 118.94%
22 656.20% 39 375.01% 56 228.06% 72 153.07% 88 117.61%
23 635.13% 40 363.24% 57 222.06% 73 149.74% 89 116.35%
24 614.65% 41 351.98% 58 216.25% 74 146.59% 90 115.11%
25 594.81% 42 341.22% 59 210.60% 75 143.63% 91 113.90%
26 575.52% 43 330.93% 60 205.10% 76 140.85% 92 112.70%
27 556.84% 44 321.06% 61 199.75% 77 138.24% 93 111.46%
28 538.74% 45 311.58% 62 194.58% 78 135.78% 94 110.17%
29 521.19% 46 302.46% 63 189.59% 79 133.44% 95 108.79%
30 504.21% 47 293.69% 64 184.82% 80 131.22% 96 107.34%
31 487.80% 48 285.25% 65 180.27% 81 129.11% 97 105.82%
32 471.91% 49 277.11% 66 175.93% 82 127.12% 98 104.26%
33 456.54% 50 269.27% 67 171.78% 83 125.23% 99 102.60%
34 441.67% 51 261.73% 68 167.79% 84 123.48% 100 100.00%
35 427.33% 52 254.46%
</TABLE>
B-3
