<PAGE>
As filed with the Securities and Exchange Commission on April 19, 2000
Registration No. 33-87276
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-6
FOR REGISTRATION UNDER THE SECURITIES ACT OF 1933
OF SECURITIES OF UNIT INVESTMENT TRUSTS
REGISTERED ON FORM N-8B-2
POST-EFFECTIVE AMENDMENT NO. 8
Penn Mutual Variable Life Account I
(Exact name of trust)
THE PENN MUTUAL LIFE INSURANCE COMPANY
(Name of depositor)
600 Dresher Road
Horsham, Pennsylvania 19044
(Complete address of depositor's principal executive offices)
Richard F. Plush
Vice President
The Penn Mutual Life Insurance Company
600 Dresher Road
Horsham, PA 19044
(Name and complete address of agent for service)
Copy to:
Richard W. Grant, Esq.
C. Ronald Rubley
Morgan, Lewis & Bockius LLP
1701 Market Street
Philadelphia, PA 19103-6993
It is proposed that this filing will become effective:
|_| Immediately upon filing pursuant to paragraph (b) of Rule 485.
|X| On May 1, 2000 pursuant to paragraph (b) of Rule 485.
|_| 60 days after filing pursuant to paragraph (a) of Rule 485.
|_| On (date) pursuant to paragraph (a) of Rule 485.
================================================================================
<PAGE>
PENN MUTUAL VARIABLE LIFE ACCOUNT I
THE PENN MUTUAL LIFE INSURANCE COMPANY
Cross Reference to Items Required by Form N-8B-2
<TABLE>
<CAPTION>
N-8B-2 Item Caption in Prospectus
- ----------- ---------------------
<S> <C>
1 Cover Page
2 Cover Page
3 Not applicable
4 Additional Information - Sale of Policies
5 Additional Information - Penn Mutual Variable Life Account I
6 Additional Information - Penn Mutual Variable Life Account I
7 Not applicable
8 Not applicable
9 Additional Information - Litigation
10 Basic Information; Additional Information - The Penn Mutual Life Insurance
Company - Penn Mutual Variable Life Account I - The Funds
11 Additional Information - The Funds
12 Additional Information - The Funds
13 Basic Information - What Are the Fees and Charges Under the Policy?
14 Basic Information - What Payments Must Be Made Under the Policy?
15 Basic Information - What Payments Must Be Made Under the Policy?
16 Additional Information - The Funds
17 Basic Information; Additional Information
18 Basic Information
19 Basic Information - How Does Penn Mutual Communicate With Me?
20 Basic Information
21 Basic Information - What Is a Policy Loan?
22 Not applicable
23 Not applicable
24 Not applicable
25 Additional Information - The Penn Mutual Life Insurance Company
26 Basic Information - What Are the Fees and Charges Under the Policy?
27 Additional Information - The Penn Mutual Life Insurance Company
28 Additional Information - The Penn Mutual Life Insurance Company Additional
Information - Penn Mutual Trustees and Officers
29 Not applicable
30 Not applicable
31 Not applicable
32 Not applicable
33 Not applicable
34 Not applicable
35 Additional Information - The Penn Mutual Life Insurance Company
36 Not applicable
37 Not applicable
38 Additional Information - Sale of Policies
39 Additional Information - Sale of Policies
<PAGE>
40 Additional Information - Sale of Policies
41 Not applicable
42 Not applicable
43 Not applicable
44 Basic Information - How Will the Value of the Policy Change Over Time?;
Additional Information - More Information About Policy Values
45 Not applicable
46 Basic Information - How Will the Value of the Policy Change Over Time?;
Additional Information - More Information About Policy Values
47 Basic Information; Additional Information - Penn Mutual Variable Life
Account I - The Funds
48 Additional Information - The Penn Mutual Life Insurance Company
49 Not applicable
50 Not applicable
51 Basic Information
52 Additional Information - Penn Mutual Variable Life Account I
53 Additional Information - Federal Income Tax Considerations
54 Not applicable
55 Illustrations
56 Not applicable
57 Not applicable
58 Not applicable
59 Additional Information - Financial Statements
</TABLE>
<PAGE>
PART I
Information Required in Prospectus
<PAGE>
PROSPECTUS
FOR
VARIABLE ESTATEMAX I
a last survivor 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 on two insureds and a cash surrender
value that may vary 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
Money Market Fund Independence Capital Management, Inc.
Limited Maturity Bond Fund Independence Capital Management, Inc.
Quality Bond Fund Independence Capital Management, Inc.
High Yield Bond Fund T. Rowe Price Associates, Inc.
Flexibly Managed Fund T. Rowe Price Associates, Inc.
Growth Equity Fund Independence Capital Management, Inc.
Large Cap Value Fund Putnam Investment Management, Inc.
Index 500 Fund Wells Capital Management Incorporated
Mid Cap Growth Fund Turner Investment Partners, Inc.
Mid Cap Value Fund Neuberger Berman Management, Inc.
Emerging Growth Fund RS Investment Management, Inc.
Small Cap Value Fund Royce & Associates, Inc.
International Equity Fund Vontobel USA, Inc.
- --------------------------------------------------------------- ---------------------------------------------------
Neuberger Berman Advisors Management Trust Manager
Balanced Portfolio Neuberger Berman Management, Inc.
- --------------------------------------------------------------- ---------------------------------------------------
Fidelity Investments' Variable Insurance Products Fund Manager
Equity-Income Portfolio Fidelity Management and Research Company
Growth Portfolio Fidelity Management and Research Company
- --------------------------------------------------------------- ---------------------------------------------------
Fidelity Investments' Variable Insurance Products Fund II Manager
Asset Manager Portfolio Fidelity Management and Research Company
- --------------------------------------------------------------- ---------------------------------------------------
Morgan Stanley's The Universal Institutional Funds, Manager
Inc.
Emerging Markets Equity (International) Portfolio Morgan Stanley Asset Management
- --------------------------------------------------------------- ---------------------------------------------------
</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.
May 1, 2000
<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" sections start on page 20.
o After the Illustrations sections 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 29.
o The financial statements for Penn Mutual and Penn Mutual
Variable Life Account I follow the Additional Information
section. They start on page 43.
o Appendices A through D are after the financial statements. The
Appendices are referred to in the Basic Information section.
They provide specific information and examples to help
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.
2
<PAGE>
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?............................................................4
Who Owns the Policy?...........................................................4
What Payments Must Be Made Under the Policy?...................................5
How Will the Value of the Policy Change Over Time?.............................6
What Are the Fees and Charges Under the Policy?................................7
What Are the Fees and Expenses Paid by the Investment Funds?...................9
Are There Other Charges That Penn Mutual Could Deduct in the Future?..........11
How Can I Change My Policy's Investment Allocations?..........................11
What Is a Policy Loan?........................................................12
How Can I Withdraw Money from My Policy?......................................13
What Is the Timing of Transactions Under the Policy?..........................13
How Much Life Insurance Coverage Does the Policy Provide?.....................14
Can I Change Insurance Coverage Under My Policy?..............................15
What Are the Supplemental Benefit Riders That I Can Buy?......................16
Do I Have the Right to Cancel My Policy?......................................16
Can I Choose Different Payout Options Under My Policy? .......................16
How Is the Policy Treated for Federal Income Tax Purposes?....................17
How Do I Communicate With Penn Mutual?........................................17
How Does Penn Mutual Communicate With Me?.....................................18
3
<PAGE>
What Is the Policy?
The Policy provides life insurance on two persons. It is called a "last
survivor" Policy because no insurance proceeds ("death benefit") are payable
until the death of the second of two insureds (the "last surviving insured").
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.
While at least one of the two insured persons is alive, 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
investment options
o Borrow from your Policy
o Change the beneficiary who will receive the death benefit
o Decrease 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 each or one of the
proposed insureds. 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 your Policy is the policy anniversary nearest the
younger Insured's 100th birthday. If the Policy is still in force on the
maturity date, a maturity benefit will be paid to you. The maturity benefit is
equal to the policy value less any policy loan on the maturity date. Upon the
written request of the owner, this policy will continue in force beyond the
maturity date. Thereafter, the death benefit will be the net policy value.
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. 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.
4
<PAGE>
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. Also, if you make a premium
payment that exceeds certain other limits imposed under federal tax law, you
could incur a penalty on amounts you take out of your policy. We will monitor
the Policy and will attempt to notify you on a timely basis if you are about to
exceed this limit. See How is this 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 choose 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 Five Year No-Lapse Feature and Lapse and Reinstatement below.
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.
5
<PAGE>
Five Year No-Lapse Feature
Your Policy will remain in force during the first five 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, equals or exceeds
(b) The monthly "no-lapse premium" specified in your Policy,
multiplied by the number of months the Policy has been in
force.
The monthly "no-lapse premium" will generally be less than the monthly
equivalent of the planned premium you specified.
The five 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 five-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" from the date we notify you 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.
If the last survivor dies 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 both insureds are alive or if one of the
insureds died prior to the lapse. You will have to provide evidence that the
insured person (or persons, if both insureds are living) 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.
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 for the
first premium payment which will be invested in the Penn Series Money Market
Fund during the free look period of time).
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 4%. 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
6
<PAGE>
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 of the policy value
allocated or transferred to the variable investment options,
o plus interest credited to the amount of your policy value
allocated or transferred 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? described later in this section.
For more information on policy values and the variable and fixed
investment options, see also the Additional Information section of this
prospectus.
What Are the Fees and Charges Under the Policy?
Premium Charge
o Premium Charge - 7.5% is deducted from premium payments before
allocation to the investment options. It consists of 2.5% to
cover state premium taxes and 5% to partially compensate us
for the expense of selling and distributing the Policies. For
premiums received after the first 15 policy years, we intend
to reduce the rate for the sales charge portion to 3%, which
will result in a total premium charge of 5.5% in those years.
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 issue age and
length of time the Policy has been in effect 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. We currently place
people we insure in the following rate classes: a smoker or
nonsmoker standard rate class, a preferred underwriting class,
or a rate class involving a higher mortality risk (a
"substandard class"). Regardless of the table used, cost of
insurance
7
<PAGE>
rates generally increase each year that you own your Policy,
as the insureds' attained ages increase. The charge is
deducted pro-rata from your variable investment and fixed
interest accounts.
o Administrative Charge - A maximum monthly charge to help
cover our administrative costs. This charge has two parts:
(1) a flat dollar charge (Currently, the flat dollar charge
is $15 in the first policy year and $5 thereafter-- 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 ($0.20
per $1,000 per month of initial specified amount of
insurance). Administrative expenses relate to premium
billing and collection, recordkeeping, processing of death
benefit claims, policy loans and Policy changes, reporting
and overhead costs, processing applications and establishing
Policy records. 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.
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 the fixed interest
option. It is guaranteed not to exceed 0.90% for the duration of the policy.
Currently, the charge is an annual rate of 0.90% of assets of the policy value
allocated in the variable accounts. After the fifteenth policy year, we intend
to charge 0.60%. 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 transfer charge on any transfer of
policy value among the variable investment options and/or fixed interest option
in excess of the 12 transfers each policy year. We will notify you before
imposing the charge. No transfer charge will be made if the specified amount of
insurance exceeds $4,999,999.
Surrender Charge
If you surrender your Policy during the first 16 policy years, we will
deduct a surrender charge in calculating the surrender proceeds payable. We
determine the surrender charge by the following formula:
the sum of (a) plus (b), multiplied by (c), where:
(a) = 25% of the lesser of (i) the sum of all premiums paid in the
Policy and (ii) the maximum surrender charge premium (which is
an amount calculated separately for each policy);
8
<PAGE>
(b) = an administrative charge based on the initial specified amount
of insurance and the younger insured's attained age on the
policy date (ranging from $6 at insured's age 20 to $14 at
insured's age 60 and over, per $1,000 of initial specified
amount -- for more information on this charge, see Appendix B
at the end of this prospectus); and
(c) = the applicable surrender factor for the policy year during
which the surrender is made (see table below).
Surrender Factor
Surrender During Policy Year Applied to (c) in Formula
1st through 7th 1.00
8th .90
9th .80
10th .70
11th .60
12th .50
13th .40
14th .30
15th .20
16th .10
17th and later 0
Under the formula, the surrender charge declines by 10% each policy
year after the seventh, to $0 by the 17th policy year so that, after the 16th
policy year, there is no surrender charge. For policies issued to New York
residents, see the table in Appendix C at the end of this prospectus.
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 of the surrender charge covers
administrative expenses associated with underwriting and issuing the Policy,
including the costs of processing applications, conducting medical exams,
determining insurability and the Insureds' rate class, and creating and
maintaining Policy records, as well as the administrative costs of processing
surrender requests. We do not anticipate making any profit on the administrative
charge component of the surrender charge.
Partial Surrender Charge
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.
What Are the Fees and Expenses Paid by the Investment Funds?
The following tables show the fees and expenses paid by the investment
funds.
9
<PAGE>
Penn Series Funds, Inc.
Underlying Fund Annual Expenses (as a % of portfolio average net assets)
<TABLE>
<CAPTION>
Management Administrative Total
Fees and Corporate Accounting Other Fund
(after waiver) Service Fees Fees Expenses Expenses
------------- -------------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Money Market (1) ............... 0.20% 0.15% 0.08% 0.08% 0.51%
Limited Maturity Bond(1) ....... 0.30% 0.15% 0.08% 0.03% 0.56%
Quality Bond(1) ................ 0.35% 0.15% 0.08% 0.10% 0.68%
High Yield Bond(2) ............. 0.50% 0.15% 0.08% 0.09% 0.82%
Flexibly Managed(1) ............ 0.60% 0.15% 0.05% 0.06% 0.86%
Growth Equity(1) ............... 0.65% 0.15% 0.06% 0.05% 0.91%
Large Cap Value(1)* ............ 0.60% 0.15% 0.06% 0.05% 0.86%
.
Index 500 Fund(1) .............. 0.07% 0.09% 0.06% 0.03% 0.25%(3)
Mid Cap Growth Fund(1) ......... 0.70% 0.15% 0.08% 0.07% 1.00%
Mid Cap Value Fund(1) .......... 0.55% 0.15% 0.08% 0.08% 0.86%
Emerging Growth(2) ............. 0.73% 0.15% 0.07% 0.09% 1.04%
Small Cap Value (1)* .......... 0.85% 0.15% 0.08% 0.09% 1.17%
.
International Equity(1) ....... 0.85% 0.15% 0.08% 0.10% 1.18%
</TABLE>
- ----------------------
(1) The expenses are estimates provided by the Funds' investment adviser.
(2) The expenses are for the last fiscal year.
(3) The total expenses for the Index 500 Fund are estimated to be 0.31% if the
Fund's administrator does not waive its Administrative and Corporate
Services fees.
* Prior to May 1, 2000, the Penn Series Large Cap Value Fund was the Penn
Series Value Equity Fund and the Penn Series Small Cap Value Fund was the Penn
Series Small Capitalization Fund.
- --------------------------------------------------------------------------------
Neuberger Berman Advisers Management Trust (a)
Underlying Fund Annual Expenses (as a % of portfolio average net assets)
Management,
Advisory and
Administration Other Total Fund
Fees Expenses Expenses
-------------- -------- ----------
Balanced........................... 0.85% 0.18% 1.03%
- ----------------------
(a) Neuberger Berman Advisers Management Trust (the "Trust") is divided into
portfolios (each a "Portfolio"). Each Portfolio invests in a corresponding
series ("Series") of the Trust. This table shows the current expenses paid by
the Balanced Portfolio and the Portfolio's share of the current expenses of its
Series. See "Expenses" in the Trust's Prospectus.
10
<PAGE>
- --------------------------------------------------------------------------------
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................ 0.49% 0.07% 0.56%
Growth....................... 0.59% 0.06% 0.65%
- ----------------------
(a) These expenses are for the last fiscal year. Some of the brokerage
commissions paid by the fund reduced the expenses shown in this table. Without
this reduction, total expenses would have been 0.57% for the Equity Income
Portfolio and 0.66% for the Growth Portfolio.
- --------------------------------------------------------------------------------
Fidelity Investments' Variable Insurance Products Fund II
Underlying Fund Annual Expenses (as a % of portfolio average net assets)
Management Fee Other Total Fund
(After Waiver) Expenses Expenses
--------------- -------- ----------
Asset Manager (a)............. 0.54% 0.08% 0.62%
- ----------------------
(a) The expenses presented are for the last fiscal year. Some of the brokerage
commissions paid by the fund reduced the expenses shown in this table. Without
this reduction, total expenses would have been 0.63% for the Asset Manager
Portfolio.
- --------------------------------------------------------------------------------
Morgan Stanley's The Universal Institutional Funds, Inc.
Underlying Fund Annual Expenses (as a % of portfolio average net assets)
<TABLE>
<CAPTION>
Management Other Total Fund
Fee Expenses Expenses
----------- -------- -----------
<S> <C> <C> <C>
Emerging Markets Equity (International)...................... 1.25% 0.50% 1.75%
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
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. 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.
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:
11
<PAGE>
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 condition;
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.
The Policy is not designed for individuals and professional market
timing organizations that use programmed and frequent transfers among investment
options. We therefore may restrict market timing when we believe it is in the
interest of all of our Policy holders to do so.
Dollar Cost Averaging
This is a program of automatic monthly transfers out of the money
market variable investment option into one or more of the other investment
options and to the fixed interest 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 is a program that 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
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.
Interest charged on a policy loan is 5.0% 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 investment options and the fixed interest option
12
<PAGE>
on a prorated basis (unless you designate a different withdrawal allocation when
you request the loan) and is transferred to a special loan account. The special
loan account will earn interest at 4.0% (or more in our discretion). With the
interest we credit to the special loan account, the net cost of the policy loan
is 1%. After the tenth policy year, we intend to credit interest at the rate of
4.75% (which will result in a net policy loan cost of 0.25% in those years).
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.
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.
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 $200,000.
If you elected the Option 1 insurance coverage (see How Much Insurance
Coverage Does My Policy Provide? below), a partial surrender will reduce your
specific amount of insurance.
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
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<PAGE>
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
of risk and administrative work 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 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 Coverage Does the Policy Provide?
In your application for the Policy, you will tell us how much life
insurance coverage you want on the lives of the two persons to be insured. This
is called the "specified amount" of insurance. The minimum specified amount of
insurance is $200,000.
When the survivor of the insured persons dies, we will pay the death
benefit less the amount of any outstanding policy loan. We offer two different
types of death benefits. 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 policy value multiplied by the
applicable net single premium factor.
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 policy value multiplied by the net single premium
factor.
Net single premium factors are based on the insureds' sexes, rate
classes and attained ages on the date of calculation. The factor decreases each
policy anniversary as the insureds' ages increase. A table of net single premium
factors as of each policy anniversary is included in your Policy. A table
illustrating net single premium factors is included in Appendix D at the end of
this prospectus.
In order for the Policy to qualify as "life insurance" for federal
income taxes, it must satisfy the "cash value accumulation test" under Section
7702(b) of the Internal Revenue Code of 1986, as amended. The test requires that
under the terms of the Policy, the death benefit must be sufficient so that the
14
<PAGE>
policy value does not at any time exceed the net single premium required to pay
for the future benefits provided under the policy. The net single premiums
factors included in your Policy are intended to satisfy the cash value
accumulation test.
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. Because of that, the
policy value will tend to be higher under Option 1 than under Option 2 for the
same premium payments.
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 $200,000;
o no change may be made in the first policy year and no more than
one change may be made in any policy year;
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.
Decrease in the Specified Amount of Insurance
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 any decrease in the specified amount of insurance must be at
least $10,000 and the specified amount after the decrease must
be at least $200,000.
You may not increase the specified amount of insurance under your
Policy.
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.
15
<PAGE>
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.
Flexible Period Single Life Term Rider -- provides term insurance
covering the named insured for the designated period.
Policy Split Option -- permits the Policy to be split into two fixed
benefit (nonvariable) policies upon the issuance of a final divorce
decree relating to the two insureds or a change in federal estate tax
law that results in the inability to defer estate taxes until the death
of the last surviving Insured.
Estate Growth Benefit -- provides for automatic annual increase of 3%
or 6% of the initial specified amount of insurance.
Change of Insured -- permits a change in one insured so long as the new
insured has the same insurable relationship to the remaining insured as
did the insured being replaced.
Supplemental Term Insurance -- provides additional death benefit
payable on the death of the last surviving insured if the death occurs
during the term of the Policy.
Guaranteed Continuation of Policy -- guarantees that the Policy will
remain in force and a death benefit will be payable regardless of the
sufficiency of the net cash surrender value of the Policy.
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.
Do I Have the Right to Cancel My Policy?
You have the right to cancel your Policy within 10 days after you
receive it or within 45 days after you signed your application (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 premium as of the
date of cancellation. The date of cancellation will be the date we receive the
Policy.
During the "free look" period, money held under your Policy will be
invested in the Penn Series Money Market Fund.
Can I Choose Different Payout Options Under My Policy?
16
<PAGE>
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 investment 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.
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, Post Office Box 7460, Philadelphia,
Pennsylvania, 19172, or express all checks and money orders to The Penn Mutual
Life Insurance Company, Receipts Processing (3V), 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,
17
<PAGE>
o decrease 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 privilege to a third party,
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
have 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 does not include this required information.
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. In addition, we also reserve the right to suspend or terminate the
privilege altogether. We may require certain identifying information to process
a telephone transfer.
How Does Penn Mutual Communicate With Me?
At least once 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 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.
18
<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 two insured persons of given ages on the issue
date, would vary over time if planned premiums were paid annually and the return
on the assets in the selected funds were a uniform gross annual rate of 0%, 6%
and 12%. The values would be different from those shown if the returns averaged
0%, 6% or 12%, but fluctuated over and under those averages throughout the years
shown. The tables also show planned premiums accumulated at 5% interest. The
hypothetical investment rates of return are illustrative only and should not be
deemed a representation of past or future investment rates of return. Actual
rates of return for a particular Policy may be more or less than the
hypothetical investment rates of return and will depend on a number of factors
including the investment allocations made by an Owner, prevailing rates and
rates of inflation.
The tables reflect the daily charge against the investments for the
mortality and expense risks we assume, which is equivalent to an effective
annual charge of 0.90% of assets and currently is reduced to 0.60% of assets
after the fifteenth policy year. In addition, the tables assume an average
annual expense ratio of 0.85% of the underlying investment funds available under
the Policies. The average annual expense ratio is based on the expense ratios of
each of the funds for their last fiscal year or, in the case of certain funds,
estimates of their expense ratios. 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 0.91%. We expect the fee waivers and expense
limitations to continue past the current year. For information on fund expenses,
see the prospectuses on the funds that accompany 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 -1.75%, 4.25% and
10.25%, respectively, and -1.45%, 4.55% and 10.55%, respectively, at current
rates after the fifteenth policy year.
The tables also reflect the deduction of the monthly 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. All the tables reflect the fact that
no charges for federal or state income taxes are currently made against the
investments made under a hypothetical policy and assume no policy loans or
charges for supplemental benefits.
The illustrations are based on our sex distinct rates for standard
nonsmokers. Upon request, we will furnish a comparable illustration based upon
the proposed Insureds' individual circumstances. Such illustrations may assume
different hypothetical rates of return than those illustrated in the following
tables.
19
<PAGE>
Illustration of Policy Values
Penn Mutual Life Insurance Company
Male Issue Age: 56 Non-Smoker
Female Issue Age: 53 Non-Smoker
$13,000 ANNUAL PREMIUM
$1,000,000 SPECIFIED AMOUNT
DEATH BENEFIT OPTION 1
<TABLE>
<CAPTION>
USING CURRENT COST OF INSURANCE RATES
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> <C>
1 13,650 9,220 0 1,000,000 9,857 0 1,000,000 10,495 0 1,000,000
2 27,983 20,689 5,375 1,000,000 22,622 7,307 1,000,000 24,632 9,318 1,000,000
3 43,032 31,856 16,542 1,000,000 35,825 20,511 1,000,000 40,112 24,798 1,000,000
4 58,833 42,706 27,391 1,000,000 49,465 34,150 1,000,000 57,052 41,737 1,000,000
5 75,425 53,218 37,904 1,000,000 63,534 48,220 1,000,000 75,576 60,261 1,000,000
6 92,846 63,379 48,064 1,000,000 78,033 62,719 1,000,000 95,830 80,516 1,000,000
7 111,138 73,167 57,853 1,000,000 92,955 77,641 1,000,000 117,971 102,656 1,000,000
8 130,345 82,565 68,782 1,000,000 108,295 94,512 1,000,000 142,174 128,391 1,000,000
9 150,513 91,543 79,291 1,000,000 124,039 111,787 1,000,000 168,625 156,374 1,000,000
10 171,688 100,069 89,349 1,000,000 140,172 129,452 1,000,000 197,536 186,816 1,000,000
15 294,547 134,354 131,291 1,000,000 225,713 222,650 1,000,000 388,017 384,954 1,000,000
20 451,350 157,240 157,240 1,000,000 326,426 326,426 1,000,000 704,382 704,382 1,144,267
25 651,475 160,542 160,542 1,000,000 440,738 440,738 1,000,000 1,214,358 1,214,358 1,727,235
30 906,890 110,749 110,749 1,000,000 557,228 557,228 1,000,000 2,011,848 2,011,848 2,579,767
</TABLE>
- -------------------
(1) Assumes that no policy loans have been made.
(2) Current values reflect current cost of insurance rates, a monthly
administrative charge of $15.00 in year 1 and $5.00 thereafter, and a
mortality and expense risk charge of 0.90% of assets in years 1-15 and
0.60% thereafter.
(3) Net investment returns are calculated as the hypothetical gross investment
returns less all charges and deductions shown in the prospectus.
(4) Assumes that the premium is paid at the beginning of each policy year.
Values would be different if the premiums are paid with a different
frequency or in different amounts.
THE HYPOTHETICAL INVESTMENT RATES OF RETURN SHOWN ABOVE AND ELSEWHERE IN THIS
PROSPECTUS ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF
PAST OR FUTURE INVESTMENT RATES OF RETURN. ACTUAL RATES OF RETURN MAY BE MORE OR
LESS THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS INCLUDING THE
INVESTMENT ALLOCATIONS MADE BY AN OWNER, PREVAILING RATES AND RATES OF
INFLATION. THE DEATH BENEFIT AND CASH VALUE FOR A POLICY WOULD BE DIFFERENT FROM
THOSE SHOWN IF THE ACTUAL RATES OF RETURN AVERAGED 0%, 6% OR 12% OVER A PERIOD
OF YEARS BUT ALSO FLUCTUATED ABOVE OR BELOW THOSE AVERAGES FOR INDIVIDUAL POLICY
YEARS. NO REPRESENTATION CAN BE MADE BY THE COMPANY OR THE FUND THAT THESE
HYPOTHETICAL RATES OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER
ANY PERIOD OF TIME.
20
<PAGE>
Illustration of Policy Values
Penn Mutual Life Insurance Company
Male Issue Age: 56 Non-Smoker
Female Issue Age: 53 Non-Smoker
$13,000 ANNUAL PREMIUM
$1,000,000 SPECIFIED AMOUNT
DEATH BENEFIT OPTION 1
USING GUARANTEED COST OF INSURANCE RATES
<TABLE>
<CAPTION>
0% Hypothetical 6% Hypothetical 12% Hypothetical
Premiums Gross Investment Return Gross Investment Return Gross Investment Return
Accumulated
End of at Net Cash Net Cash Net Cash
Policy 5% Interest Policy Surrender Death Policy Surrender Death Policy Surrender Death
Year Per Year Value Value Benefit Value Value Benefit Value Value Benefit
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 13,650 9,214 0 1,000,000 9,851 0 1,000,000 10,489 0 1,000,000
2 27,983 20,543 5,228 1,000,000 22,470 7,156 1,000,000 24,476 9,162 1,000,000
3 43,032 31,548 16,234 1,000,000 35,498 20,183 1,000,000 39,765 24,451 1,000,000
4 58,833 42,211 26,896 1,000,000 48,925 33,611 1,000,000 56,465 41,151 1,000,000
5 75,425 52,508 37,194 1,000,000 62,742 47,428 1,000,000 74,693 59,379 1,000,000
6 92,846 62,417 47,103 1,000,000 76,936 61,622 1,000,000 94,580 79,266 1,000,000
7 111,138 71,906 56,591 1,000,000 91,487 76,173 1,000,000 116,263 100,949 1,000,000
8 130,345 80,932 67,149 1,000,000 106,365 92,582 1,000,000 139,887 126,104 1,000,000
9 150,513 89,444 77,192 1,000,000 121,529 109,277 1,000,000 165,607 153,355 1,000,000
10 171,688 97,373 86,653 1,000,000 136,920 126,200 1,000,000 193,582 182,862 1,000,000
15 294,547 124,889 121,826 1,000,000 214,323 211,260 1,000,000 374,181 371,118 1,000,000
20 451,350 118,589 118,589 1,000,000 280,634 280,634 1,000,000 651,808 651,808 1,058,860
25 651,475 34,400 34,400 1,000,000 299,353 299,353 1,000,000 1,064,717 1,064,717 1,514,393
30 906,890 0 0 0 179,841 179,841 1,000,000 1,641,022 1,641,022 2,104,262
</TABLE>
(1) Assumes that no policy loans have been made.
(2) Guaranteed values reflect guaranteed cost of insurance rates, a monthly
administrative charge of $15.00 per month, and a mortality and expense risk
charge of 0.90% of assets.
(3) Net investment returns are calculated as the hypothetical gross investment
returns less all charges and deductions shown in the prospectus.
(4) Assumes that the premium is paid at the beginning of each policy year.
Values would be different if the premiums are paid with a different
frequency or in different amounts.
THE HYPOTHETICAL INVESTMENT RATES OF RETURN SHOWN ABOVE AND ELSEWHERE IN THIS
PROSPECTUS ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF
PAST OR FUTURE INVESTMENT RATES OF RETURN. ACTUAL RATES OF RETURN MAY BE MORE OR
LESS THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS INCLUDING THE
INVESTMENT ALLOCATIONS MADE BY AN OWNER, PREVAILING RATES AND RATES OF
INFLATION. THE DEATH BENEFIT AND CASH VALUE FOR A POLICY WOULD BE DIFFERENT FROM
THOSE SHOWN IF THE ACTUAL RATES OF RETURN AVERAGED 0%, 6% OR 12% OVER A PERIOD
OF YEARS BUT ALSO FLUCTUATED ABOVE OR BELOW THOSE AVERAGES FOR INDIVIDUAL POLICY
YEARS. NO REPRESENTATION CAN BE MADE BY THE COMPANY OR THE FUND THAT THESE
HYPOTHETICAL RATES OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER
ANY PERIOD OF TIME.
21
<PAGE>
Illustration of Policy Values
Penn Mutual Life Insurance Company
Male Issue Age: 56 Non-Smoker
Female Issue Age: 53 Non-Smoker
$4,000 ANNUAL PREMIUM
$300,000 SPECIFIED AMOUNT
DEATH BENEFIT OPTION 1
USING CURRENT COST OF INSURANCE RATES
<TABLE>
<CAPTION>
0% Hypothetical 6% Hypothetical 12% Hypothetical
Premiums Gross Investment Return Gross Investment Return Gross Investment Return
Accumulated
End of at Net Cash Net Cash Net Cash
Policy 5% Interest Policy Surrender Death Policy Surrender Death Policy Surrender Death
Year Per Year Value Value Benefit Value Value Benefit Value Value Benefit
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 4,200 2,732 0 300,000 2,925 0 300,000 3,118 0 300,000
2 8,610 6,223 1,628 300,000 6,806 2,212 300,000 7,413 2,819 300,000
3 13,241 9,622 5,027 300,000 10,822 6,227 300,000 12,117 7,523 300,000
4 18,103 12,925 8,330 300,000 14,970 10,376 300,000 17,266 12,671 300,000
5 23,208 16,126 11,531 300,000 19,250 14,656 300,000 22,896 18,301 300,000
6 28,568 19,221 14,626 300,000 23,661 19,067 300,000 29,053 24,459 300,000
7 34,196 22,203 17,609 300,000 28,202 23,608 300,000 35,784 31,190 300,000
8 40,106 25,068 20,933 300,000 32,872 28,737 300,000 43,144 39,009 300,000
9 46,312 27,806 24,130 300,000 37,665 33,990 300,000 51,189 47,513 300,000
10 52,827 30,408 27,191 300,000 42,579 39,363 300,000 59,982 56,766 300,000
15 90,630 40,907 39,988 300,000 68,669 67,750 300,000 117,958 117,040 300,000
20 138,877 48,005 48,005 300,000 99,473 99,473 300,000 214,286 214,286 348,107
25 200,454 49,241 49,241 300,000 134,578 134,578 300,000 369,448 369,448 525,482
30 279,043 34,624 34,624 300,000 170,813 170,813 300,000 612,087 612,087 784,871
</TABLE>
(1) Assumes that no policy loans have been made.
(2) Current values reflect current cost of insurance rates, a monthly
administrative charge of $15.00 in year 1 and $5.00 thereafter, and a
mortality and expense risk charge of 0.90% of assets in years 1-15 and
0.60% thereafter.
(3) Net investment returns are calculated as the hypothetical gross investment
returns less all charges and deductions shown in the prospectus.
(4) Assumes that the premium is paid at the beginning of each policy year.
Values would be different if the premiums are paid with a different
frequency or in different amounts.
THE HYPOTHETICAL INVESTMENT RATES OF RETURN SHOWN ABOVE AND ELSEWHERE IN THIS
PROSPECTUS ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF
PAST OR FUTURE INVESTMENT RATES OF RETURN. ACTUAL RATES OF RETURN MAY BE MORE OR
LESS THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS INCLUDING THE
INVESTMENT ALLOCATIONS MADE BY AN OWNER, PREVAILING RATES AND RATES OF
INFLATION. THE DEATH BENEFIT AND CASH VALUE FOR A POLICY WOULD BE DIFFERENT FROM
THOSE SHOWN IF THE ACTUAL RATES OF RETURN AVERAGED 0%, 6% OR 12% OVER A PERIOD
OF YEARS BUT ALSO FLUCTUATED ABOVE OR BELOW THOSE AVERAGES FOR INDIVIDUAL POLICY
YEARS. NO REPRESENTATION CAN BE MADE BY THE COMPANY OR THE FUND THAT THESE
HYPOTHETICAL RATES OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER
ANY PERIOD OF TIME.
22
<PAGE>
Illustration of Policy Values
Penn Mutual Life Insurance Company
Male Issue Age: 56 Non-Smoker
Female Issue Age: 53 Non-Smoker
$4,000 ANNUAL PREMIUM
$300,000 SPECIFIED AMOUNT
DEATH BENEFIT OPTION 1
USING GUARANTEED COST OF INSURANCE RATES
<TABLE>
<CAPTION>
0% Hypothetical 6% Hypothetical 12% Hypothetical
Premiums Gross Investment Return Gross Investment Return Gross Investment Return
Accumulated
End of at Net Cash Net Cash Net Cash
Policy 5% Interest Policy Surrender Death Policy Surrender Death Policy Surrender Death
Year Per Year Value Value Benefit Value Value Benefit Value Value Benefit
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 4,200 2,730 0 300,000 2,923 0 300,000 3,116 0 300,000
2 8,610 6,096 1,501 300,000 6,675 2,080 300,000 7,278 2,683 300,000
3 13,241 9,364 4,770 300,000 10,548 5,953 300,000 11,827 7,232 300,000
4 18,103 12,531 7,937 300,000 14,539 9,945 300,000 16,795 12,201 300,000
5 23,208 15,589 10,994 300,000 18,646 14,051 300,000 22,218 17,624 300,000
6 28,568 18,530 13,936 300,000 22,864 18,270 300,000 28,134 23,539 300,000
7 34,196 21,346 16,751 300,000 27,188 22,593 300,000 34,583 29,988 300,000
8 40,106 24,024 19,889 300,000 31,607 27,472 300,000 41,608 37,473 300,000
9 46,312 26,547 22,872 300,000 36,110 32,435 300,000 49,256 45,580 300,000
10 52,827 28,897 25,680 300,000 40,680 37,464 300,000 57,573 54,357 300,000
15 90,630 37,006 36,087 300,000 63,619 62,700 300,000 111,227 110,308 300,000
20 138,877 34,962 34,962 300,000 83,123 83,123 300,000 193,598 193,598 314,499
25 200,454 9,496 9,496 300,000 88,097 88,097 300,000 316,280 316,280 449,859
30 279,043 0 0 0 50,878 50,878 300,000 487,510 487,510 625,128
</TABLE>
(1) Assumes that no policy loans have been made.
(2) Guaranteed values reflect guaranteed cost of insurance rates, a monthly
administrative charge of $15.00 per month, and a mortality and expense risk
charge of 0.90% of assets.
(3) Net investment returns are calculated as the hypothetical gross investment
returns less all charges and deductions shown in the prospectus.
(4) Assumes that the premium is paid at the beginning of each policy year.
Values would be different if the premiums are paid with a different
frequency or in different amounts.
THE HYPOTHETICAL INVESTMENT RATES OF RETURN SHOWN ABOVE AND ELSEWHERE IN THIS
PROSPECTUS ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF
PAST OR FUTURE INVESTMENT RATES OF RETURN. ACTUAL RATES OF RETURN MAY BE MORE OR
LESS THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS INCLUDING THE
INVESTMENT ALLOCATIONS MADE BY AN OWNER, PREVAILING RATES AND RATES OF
INFLATION. THE DEATH BENEFIT AND CASH VALUE FOR A POLICY WOULD BE DIFFERENT FROM
THOSE SHOWN IF THE ACTUAL RATES OF RETURN AVERAGED 0%, 6% OR 12% OVER A PERIOD
OF YEARS BUT ALSO FLUCTUATED ABOVE OR BELOW THOSE AVERAGES FOR INDIVIDUAL POLICY
YEARS. NO REPRESENTATION CAN BE MADE BY THE COMPANY OR THE FUND THAT THESE
HYPOTHETICAL RATES OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER
ANY PERIOD OF TIME.
23
<PAGE>
Illustration of Policy Values
Penn Mutual Life Insurance Company
Male Issue Age: 61 Non-Smoker
Female Issue Age: 57 Non-Smoker
$23,000 ANNUAL PREMIUM
$1,000,000 SPECIFIED AMOUNT
DEATH BENEFIT OPTION 1
USING CURRENT COST OF INSURANCE RATES
<TABLE>
<CAPTION>
0% Hypothetical 6% Hypothetical 12% Hypothetical
Premiums Gross Investment Return Gross Investment Return Gross Investment Return
Accumulated
End of at Net Cash Net Cash Net Cash
Policy 5% Interest Policy Surrender Death Policy Surrender Death Policy Surrender Death
Year Per Year Value Value Benefit Value Value Benefit Value Value Benefit
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 24,150 18,266 2,112 1,000,000 19,457 3,303 1,000,000 20,649 4,494 1,000,000
2 49,508 38,532 22,378 1,000,000 42,135 25,981 1,000,000 45,884 29,730 1,000,000
3 76,133 58,241 42,087 1,000,000 65,572 49,417 1,000,000 73,495 57,341 1,000,000
4 104,090 77,376 61,221 1,000,000 89,772 73,618 1,000,000 103,703 87,548 1,000,000
5 133,444 95,914 79,759 1,000,000 114,739 98,585 1,000,000 136,748 120,594 1,000,000
6 164,266 113,818 97,663 1,000,000 140,464 124,310 1,000,000 172,888 156,734 1,000,000
7 196,630 131,054 114,900 1,000,000 166,942 150,788 1,000,000 212,417 196,263 1,000,000
8 230,611 147,596 133,057 1,000,000 194,181 179,642 1,000,000 255,678 241,139 1,000,000
9 266,292 163,416 150,493 1,000,000 222,188 209,264 1,000,000 303,057 290,134 1,000,000
10 303,756 178,475 167,167 1,000,000 250,967 239,659 1,000,000 354,990 343,682 1,000,000
15 521,122 243,744 240,513 1,000,000 409,644 406,413 1,000,000 704,461 701,230 1,174,220
20 798,543 296,007 296,007 1,000,000 609,487 609,487 1,000,000 1,278,870 1,278,870 1,856,522
25 1,152,609 308,686 308,686 1,000,000 852,144 852,144 1,110,485 2,179,243 2,179,243 2,839,916
30 1,604,498 225,593 225,593 1,000,000 1,126,695 1,126,695 1,357,042 3,546,451 3,546,451 4,271,505
</TABLE>
(1) Assumes that no policy loans have been made.
(2) Current values reflect current cost of insurance rates, a monthly
administrative charge of $15.00 in year 1 and $5.00 thereafter, and a
mortality and expense risk charge of 0.90% of assets in years 1-15 and
0.60% thereafter.
(3) Net investment returns are calculated as the hypothetical gross investment
returns less all charges and deductions shown in the prospectus.
(4) Assumes that the premium is paid at the beginning of each policy year.
Values would be different if the premiums are paid with a different
frequency or in different amounts.
THE HYPOTHETICAL INVESTMENT RATES OF RETURN SHOWN ABOVE AND ELSEWHERE IN THIS
PROSPECTUS ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF
PAST OR FUTURE INVESTMENT RATES OF RETURN. ACTUAL RATES OF RETURN MAY BE MORE OR
LESS THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS INCLUDING THE
INVESTMENT ALLOCATIONS MADE BY AN OWNER, PREVAILING RATES AND RATES OF
INFLATION. THE DEATH BENEFIT AND CASH VALUE FOR A POLICY WOULD BE DIFFERENT FROM
THOSE SHOWN IF THE ACTUAL RATES OF RETURN AVERAGED 0%, 6% OR 12% OVER A PERIOD
OF YEARS BUT ALSO FLUCTUATED ABOVE OR BELOW THOSE AVERAGES FOR INDIVIDUAL POLICY
YEARS. NO REPRESENTATION CAN BE MADE BY THE COMPANY OR THE FUND THAT THESE
HYPOTHETICAL RATES OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER
ANY PERIOD OF TIME.
24
<PAGE>
Illustration of Policy Values
Penn Mutual Life Insurance Company
Male Issue Age: 61 Non-Smoker
Female Issue Age: 57 Non-Smoker
$23,000 ANNUAL PREMIUM
$1,000,000 SPECIFIED AMOUNT
DEATH BENEFIT OPTION 1
USING GUARANTEED COST OF INSURANCE RATES
<TABLE>
<CAPTION>
0% Hypothetical 6% Hypothetical 12% Hypothetical
Premiums Gross Investment Return Gross Investment Return Gross Investment Return
Accumulated
End of at Net Cash Net Cash Net Cash
Policy 5% Interest Policy Surrender Death Policy Surrender Death Policy Surrender Death
Year Per Year Value Value Benefit Value Value Benefit Value Value Benefit
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 24,150 18,252 2,097 1,000,000 19,442 3,287 1,000,000 20,633 4,479 1,000,000
2 49,508 38,348 22,194 1,000,000 41,945 25,791 1,000,000 45,687 29,533 1,000,000
3 76,133 57,843 41,688 1,000,000 65,149 48,995 1,000,000 73,047 56,893 1,000,000
4 104,090 76,699 60,545 1,000,000 89,038 72,884 1,000,000 102,909 86,754 1,000,000
5 133,444 94,873 78,718 1,000,000 113,590 97,436 1,000,000 135,482 119,327 1,000,000
6 164,266 112,306 96,152 1,000,000 138,771 122,617 1,000,000 170,993 154,839 1,000,000
7 196,630 128,925 112,771 1,000,000 164,531 148,376 1,000,000 209,685 193,531 1,000,000
8 230,611 144,641 130,102 1,000,000 190,810 176,271 1,000,000 251,830 237,291 1,000,000
9 266,292 159,362 146,439 1,000,000 217,550 204,626 1,000,000 297,744 284,821 1,000,000
10 303,756 172,978 161,670 1,000,000 244,679 233,371 1,000,000 347,793 336,485 1,000,000
15 521,122 219,689 216,458 1,000,000 383,573 380,342 1,000,000 677,545 674,314 1,129,356
20 798,543 206,140 206,140 1,000,000 517,313 517,313 1,000,000 1,169,453 1,169,453 1,697,682
25 1,152,609 59,608 59,608 1,000,000 630,683 630,683 1,000,000 1,861,360 1,861,360 2,425,661
30 1,604,498 0 0 0 709,586 709,586 1,000,000 2,801,569 2,801,569 3,374,336
</TABLE>
(1) Assumes that no policy loans have been made.
(2) Guaranteed values reflect guaranteed cost of insurance rates, a monthly
administrative charge of $15.00 per month, and a mortality and expense risk
charge of 0.90% of assets.
(3) Net investment returns are calculated as the hypothetical gross investment
returns less all charges and deductions shown in the prospectus.
(4) Assumes that the premium is paid at the beginning of each policy year.
Values would be different if the premiums are paid with a different
frequency or in different amounts.
THE HYPOTHETICAL INVESTMENT RATES OF RETURN SHOWN ABOVE AND ELSEWHERE IN THIS
PROSPECTUS ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF
PAST OR FUTURE INVESTMENT RATES OF RETURN. ACTUAL RATES OF RETURN MAY BE MORE OR
LESS THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS INCLUDING THE
INVESTMENT ALLOCATIONS MADE BY AN OWNER, PREVAILING RATES AND RATES OF
INFLATION. THE DEATH BENEFIT AND CASH VALUE FOR A POLICY WOULD BE DIFFERENT FROM
THOSE SHOWN IF THE ACTUAL RATES OF RETURN AVERAGED 0%, 6% OR 12% OVER A PERIOD
OF YEARS BUT ALSO FLUCTUATED ABOVE OR BELOW THOSE AVERAGES FOR INDIVIDUAL POLICY
YEARS. NO REPRESENTATION CAN BE MADE BY THE COMPANY OR THE FUND THAT THESE
HYPOTHETICAL RATES OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER
ANY PERIOD OF TIME.
25
<PAGE>
Illustration of Policy Values
Penn Mutual Life Insurance Company
Male Issue Age: 61 Non-Smoker
Female Issue Age: 57 Non-Smoker
$7,000 ANNUAL PREMIUM
$300,000 SPECIFIED AMOUNT
DEATH BENEFIT OPTION 1
USING CURRENT COST OF INSURANCE RATES
<TABLE>
<CAPTION>
0% Hypothetical 6% Hypothetical 12% Hypothetical
Premiums Gross Investment Return Gross Investment Return Gross Investment Return
Accumulated
End of at Net Cash Net Cash Net Cash
Policy 5% Interest Policy Surrender Death Policy Surrender Death Policy Surrender Death
Year Per Year Value Value Benefit Value Value Benefit Value Value Benefit
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 7,350 5,446 599 300,000 5,805 958 300,000 6,164 1,317 300,000
2 15,068 11,575 6,729 300,000 12,660 7,814 300,000 13,789 8,942 300,000
3 23,171 17,537 12,691 300,000 19,746 14,899 300,000 22,132 17,286 300,000
4 31,679 23,326 18,479 300,000 27,062 22,216 300,000 31,261 26,414 300,000
5 40,613 28,935 24,088 300,000 34,612 29,765 300,000 41,248 36,401 300,000
6 49,994 34,353 29,506 300,000 42,391 37,545 300,000 52,171 47,324 300,000
7 59,844 39,570 34,723 300,000 50,399 45,553 300,000 64,119 59,273 300,000
8 70,186 44,578 40,216 300,000 58,639 54,277 300,000 77,197 72,835 300,000
9 81,045 49,369 45,492 300,000 67,112 63,235 300,000 91,521 87,644 300,000
10 92,448 53,932 50,539 300,000 75,821 72,428 300,000 107,223 103,830 300,000
15 158,602 73,732 72,763 300,000 123,862 122,892 300,000 212,886 211,916 354,845
20 243,035 89,656 89,656 300,000 184,435 184,435 300,000 386,515 386,515 561,099
25 350,794 93,760 93,760 300,000 257,976 257,976 336,186 658,674 658,674 858,362
30 488,326 69,339 69,339 300,000 341,059 341,059 410,786 1,071,947 1,071,947 1,291,101
</TABLE>
(1) Assumes that no policy loans have been made.
(2) Current values reflect current cost of insurance rates, a monthly
administrative charge of $15.00 in year 1 and $5.00 thereafter, and a
mortality and expense risk charge of 0.90% of assets in years 1-15 and
0.60% thereafter.
(3) Net investment returns are calculated as the hypothetical gross
investment returns less all charges and deductions shown in the
prospectus.
(4) Assumes that the premium is paid at the beginning of each policy year.
Values would be different if the premiums are paid with a different
frequency or in different amounts.
THE HYPOTHETICAL INVESTMENT RATES OF RETURN SHOWN ABOVE AND ELSEWHERE IN THIS
PROSPECTUS ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF
PAST OR FUTURE INVESTMENT RATES OF RETURN. ACTUAL RATES OF RETURN MAY BE MORE OR
LESS THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS INCLUDING THE
INVESTMENT ALLOCATIONS MADE BY AN OWNER, PREVAILING RATES AND RATES OF
INFLATION. THE DEATH BENEFIT AND CASH VALUE FOR A POLICY WOULD BE DIFFERENT FROM
THOSE SHOWN IF THE ACTUAL RATES OF RETURN AVERAGED 0%, 6% OR 12% OVER A PERIOD
OF YEARS BUT ALSO FLUCTUATED ABOVE OR BELOW THOSE AVERAGES FOR INDIVIDUAL POLICY
YEARS. NO REPRESENTATION CAN BE MADE BY THE COMPANY OR THE FUND THAT THESE
HYPOTHETICAL RATES OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER
ANY PERIOD OF TIME.
26
<PAGE>
Illustration of Policy Values
Penn Mutual Life Insurance Company
Male Issue Age: 61 Non-Smoker
Female Issue Age: 57 Non-Smoker
$7,000 ANNUAL PREMIUM
$300,000 SPECIFIED AMOUNT
DEATH BENEFIT OPTION 1
USING GUARANTEED COST OF INSURANCE RATES
<TABLE>
<CAPTION>
0% Hypothetical 6% Hypothetical 12% Hypothetical
Premiums Gross Investment Return Gross Investment Return Gross Investment Return
Accumulated
End of at Net Cash Net Cash Net Cash
Policy 5% Interest Policy Surrender Death Policy Surrender Death Policy Surrender Death
Year Per Year Value Value Benefit Value Value Benefit Value Value Benefit
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 7,350 5,442 595 300,000 5,800 954 300,000 6,159 1,312 300,000
2 15,068 11,437 6,591 300,000 12,517 7,671 300,000 13,641 8,795 300,000
3 23,171 17,253 12,406 300,000 19,443 14,597 300,000 21,812 16,965 300,000
4 31,679 22,877 18,031 300,000 26,573 21,726 300,000 30,729 25,882 300,000
5 40,613 28,298 23,451 300,000 33,900 29,054 300,000 40,455 35,608 300,000
6 49,994 33,497 28,650 300,000 41,414 36,568 300,000 51,057 46,211 300,000
7 59,844 38,451 33,605 300,000 49,100 44,253 300,000 62,609 57,762 300,000
8 70,186 43,136 38,774 300,000 56,940 52,578 300,000 75,190 70,828 300,000
9 81,045 47,522 43,644 300,000 64,915 61,038 300,000 88,895 85,018 300,000
10 92,448 51,576 48,184 300,000 73,005 69,612 300,000 103,833 100,440 300,000
15 158,602 65,435 64,466 300,000 114,376 113,406 300,000 202,234 201,265 337,091
20 243,035 61,181 61,181 300,000 154,036 154,036 300,000 349,079 349,079 506,755
25 350,794 16,905 16,905 300,000 187,127 187,127 300,000 555,627 555,627 724,075
30 488,326 0 0 0 208,267 208,267 300,000 836,297 836,297 1,007,274
</TABLE>
(1) Assumes that no policy loans have been made.
(2) Guaranteed values reflect guaranteed cost of insurance rates, a monthly
administrative charge of $15.00 per month, and a mortality and expense risk
charge of 0.90% of assets.
(3) Net investment returns are calculated as the hypothetical gross investment
returns less all charges and deductions shown in the prospectus.
(4) Assumes that the premium is paid at the beginning of each policy year.
Values would be different if the premiums are paid with a different
frequency or in different amounts.
THE HYPOTHETICAL INVESTMENT RATES OF RETURN SHOWN ABOVE AND ELSEWHERE IN THIS
PROSPECTUS ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF
PAST OR FUTURE INVESTMENT RATES OF RETURN. ACTUAL RATES OF RETURN MAY BE MORE OR
LESS THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS INCLUDING THE
INVESTMENT ALLOCATIONS MADE BY AN OWNER, PREVAILING RATES AND RATES OF
INFLATION. THE DEATH BENEFIT AND CASH VALUE FOR A POLICY WOULD BE DIFFERENT FROM
THOSE SHOWN IF THE ACTUAL RATES OF RETURN AVERAGED 0%, 6% OR 12% OVER A PERIOD
OF YEARS BUT ALSO FLUCTUATED ABOVE OR BELOW THOSE AVERAGES FOR INDIVIDUAL POLICY
YEARS. NO REPRESENTATION CAN BE MADE BY THE COMPANY OR THE FUND THAT THESE
HYPOTHETICAL RATES OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER
ANY PERIOD OF TIME.
27
<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......................................29
Penn Mutual Variable Life Account I.........................................29
The Funds...................................................................30
More Information About Policy Values........................................33
Federal Income Tax Considerations...........................................34
Sale of Policies............................................................37
Penn Mutual Trustees and Officers...........................................38
State Regulation............................................................40
Additional Information......................................................40
Experts.....................................................................40
Litigation..................................................................40
Independent Auditors........................................................40
Legal Matters...............................................................40
Financial Statements........................................................41
Appendix A - Minimum Initial Annual Premiums...............................A-1
Appendix B.................................................................B-1
- Administrative Surrender Charges per $1,000 of Initial Specified Amount
- Sample Surrender Charge Premiums for $1,000,000 Specified Amount
Appendix C - Policies Issued to New York residents ........................C-1
Appendix D - Illustrative Net Single Premium Factors.......................D-1
28
<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.
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.
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 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.
29
<PAGE>
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.
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's The Universal
Institutional 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 -- Money Market Fund -- preserve capital, maintain
liquidity and achieve the highest possible level of current income
consistent therewith.
Penn Series -- Limited Maturity Bond Fund -- the highest current income
consistent with low risk to principal and liquidity; total return is
secondary.
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 -- Flexibly Managed Fund -- maximize total return (capital
appreciation and income).
Penn Series -- Growth Equity Fund -- long-term growth of capital and
increase of future income.
Penn Series -- Large Cap Value Fund (formerly, "Value Equity Fund") --
maximize total return (capital appreciation and income).
Penn Series -- Index 500 Fund -- total return of (income and capital
appreciation) which corresponds to that of the Standard & Poor's
Composite Index of 500 stocks.
Penn Series -- Mid Cap Growth Fund -- maximize capital appreciation.
Penn Series -- Mid Cap Value Fund -- growth of capital.
30
<PAGE>
Penn Series-- Emerging Growth Fund-- capital appreciation.
Penn Series-- Small Cap Value Fund (formerly, "Small Capitalization
Fund")-- capital appreciation.
Penn Series-- International Equity Fund-- capital appreciation.
Neuberger Berman -- Balanced Portfolio -- long-term capital growth and
reasonable current income without undue risk to principal.
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.
Morgan Stanley's The Universal Institutional Funds, Inc. -- Emerging
Markets Equity (International) Portfolio -- long term capital
appreciation.
The Managers
Independence Capital Management, Inc. ("Independence Capital
Management"), a subsidiary of Penn Mutual, 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.
Putnam Investment Management, Inc. of Boston, Massachusetts, is the
investment sub-adviser to the Penn Series Large Cap Value Fund.
Wells Capital Management Incorporated of San Francisco, California, is
the sub-adviser to the Penn Series Index 500 Fund.
Turner Investment Partners, Inc. of Berwyn, Pennsylvania, is the
investment sub-adviser to the Penn Series Mid Cap Growth Fund.
Neuberger Berman Management, Inc. of New York, New York, is the
investment sub-adviser to Penn Series Mid Cap Value Fund as well as the
investment adviser to the series of Advisers Managers Trust underlying the
Neuberger Berman Balanced Portfolio.
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.
31
<PAGE>
Royce & Associates, Inc., of New York, New York, is investment
sub-adviser to the Penn Series Small Cap Value Fund.
Vontobel USA Inc., of New York, New York, is the investment sub-adviser
to the Penn Series International Equity Fund.
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. FMR utilizes the
services of two subsidiaries on a sub-advisory basis for foreign securities
investments for the Asset Manager Portfolio. These subsidiaries are Fidelity
Management & Research (U.K.) Inc. and Fidelity Management & Research (Far East)
Inc.
Morgan Stanley Asset Management ("MSAM"), of New York, New York, is the
investment adviser to the 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's The Universal Institutional Funds governing the Separate Account's
investment in those Funds. The advisers to Fidelity Investments' VIP Fund,
Fidelity Investments' VIP Fund II and Morgan Stanley's The Universal
Institutional Funds 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's The Universal
Institutional Funds 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's The Universal
Institutional Funds 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's The
Universal Institutional Funds currently perceives or anticipates any such
disadvantage, the Boards of Directors of Penn Series and Morgan Stanley's The
Universal Institutional Funds, 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 Policy owners and variable life Policy owners
(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's
The Universal Institutional Funds, respectively; or (4) differences between
voting instructions given by variable annuity Policy owners and those given by
variable life Policy owners. In the event of a material irreconcilable conflict,
we will take the steps necessary to protect our variable annuity and variable
life Policy owners. This could include discontinuance of investment in a Fund.
32
<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.
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
33
<PAGE>
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.
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 for partial surrenders. It is the amount received upon a
full surrender of the Policy.
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.
34
<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 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.
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.
35
<PAGE>
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 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.
36
<PAGE>
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.
Taxation of Policy Split
The Policy Split Option Rider which we offer permits a Policy to be
split into two other life policies upon the occurrence of a divorce of the joint
insureds or certain changes in federal estate tax law. A Policy split could have
adverse tax consequence. For example, it is not clear whether a Policy split
will be treated as a nontaxable exchange under Section 1031 through 1043 of the
Code. If a Policy split is not treated as a nontaxable exchange, a split could
result in the recognition of taxable income in an amount up to any gain in the
Policy at the time of the split. In addition, it is not clear whether, in all
circumstances, the individual policies that result from a Policy split would be
treated as life insurance contracts for federal income tax purposes and, if so
treated, whether the individual contracts would be classified as modified
endowment contracts. Before you exercise rights provided by the Policy split
option, it is important that you consult with a competent tax advisor regarding
the possible consequences of a Policy split.
Other Tax Considerations
The transfer of the Policy or the designation of a beneficiary may have
federal, state, and/or local transfer and inheritance tax consequences,
including the imposition of gift, estate and generation-skipping transfer
taxes. For example, the transfer of the Policy to, or the designation as
beneficiary of, or the payment of proceeds to, a person who is assigned to a
generation which is two or more generations below the generation of the owner,
may have generation skipping transfer tax considerations under Section 2601 of
the Code.
The individual situation of each owner or beneficiary will determine
the extent, if any, to which federal, state and local transfer taxes may be
imposed. Consult with your tax adviser for specific information in connection
with these taxes.
Sale of the Policies
Hornor, Townsend & Kent, Inc. ("HTK"), a wholly-owned subsidiary of
Penn Mutual, acts as a principal underwriter of the Policies. HTK also acts as
principal underwriter for Penn Mutual Variable Annuity Account III, a separate
account also established by Penn Mutual and for PIA Variable Annuity Account I,
a separate account established by The Penn Insurance and Annuity Company, a
wholly-owned subsidiary of Penn Mutual. HTK is a registered broker-dealer under
the Securities Exchange Act of 1934 and a member of the National Association of
Securities Dealers, Inc. 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 50% of first year premiums, 2% on premiums paid during the
second through fifteenth policy years, and 1.2% on premiums paid after the first
fifteen policy years. Registered representatives may also be paid commissions of
up to 0.25% of policy value. Other allowances and overrides also may be paid.
Registered representatives who meet certain productivity and profitability
standards may be eligible for additional compensation.
37
<PAGE>
For 1999, 1998 and 1997, Penn Mutual received premium payments on the
Policy in the approximate amount of $14,568,123, $14,914,087 and $11,042,761,
respectively, and compensated HTK in the approximate amounts of $95,156, $77,750
and $73,474, respectively, for its services as principal underwriter.
Penn Mutual Trustees and Officers
Penn Mutual is managed by a board of trustees. The following table sets
forth the name, address and principal occupations during the past five years of
each of Penn Mutual's trustees.
Board of Trustees
<TABLE>
<CAPTION>
Position with
Name and Address Penn Mutual Principal Occupation During Past Five years
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Robert E. Chappell Chairman of the Board Chairman of the Board and Chief Executive Officer (since
The Penn Mutual Life and Chief Executive December 1996), President and Chief Executive Officer
Insurance Company Officer (April 1995-December 1996), President and Chief
Philadelphia, PA 19172 Operating Officer, (January 1994 to April 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 Relations in
1743 22nd Street, NW Beijing, China, and distinguished adviser, American
Washington, DC 20008 Studies Center (April 1998 to present); President, US-
Japan Foundation (July 1996 to March 1998); Group Executive
Vice President, Bank America NT & SA (June 1993 to June
1996).
- ----------------------------------------------------------------------------------------------------------
James A. Hagen Trustee Retired (since May 1996), Chairman of the Board, Conrail,
2040 Montrose Lane Inc. (prior thereto).
Wilmington, NC 28405
- ----------------------------------------------------------------------------------------------------------
Philip E. Lippincott Trustee Retired (since April 1994), Chairman and Chief Executive
4301 Bayberry Drive Officer, Scott Paper Company (prior thereto).
Avalon, NJ 08202
- ----------------------------------------------------------------------------------------------------------
John F. McCaughan Trustee 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, Inc.
367 S. Gulph Road
King of Prussia, PA 19406
- ----------------------------------------------------------------------------------------------------------
Edmond F. Notebaert Trustee President and Chief Executive Officer, The Children's
34th and Civic Center Hospital of Philadelphia (since 1987).
Blvd.
Philadelphia, PA 19104
- ----------------------------------------------------------------------------------------------------------
Robert H. Rock Trustee President, MLR Holdings, LLC (since 1987).
1845 Walnut Street - 9th
Floor
Philadelphia, PA 19103
- ----------------------------------------------------------------------------------------------------------
Norman T. Wilde, Jr. Trustee Co-Chairman of the Board, (since 2000), President and
1801 Market Street Chief Executive Officer (prior thereto), Janney
Philadelphia, PA 19103 Montgomery Scott LLC (a securities broker/dealer and
subsidiary of The Penn Mutual Life Insurance Company).
- ----------------------------------------------------------------------------------------------------------
Wesley S. Williams, Jr., Trustee Partner, Covington & Burling (law firm).
Esq.
1201 Pennsylvania Ave.,
NW
P.O. Box 7566
Washington, D.C. 20004
- ----------------------------------------------------------------------------------------------------------
</TABLE>
38
<PAGE>
The following table sets forth the names, addresses and principal
occupations during the past five years of the senior officers of Penn Mutual
(other than officers who are members of Penn Mutual's Board of Trustees).
Senior Officers
<TABLE>
<CAPTION>
Name Principal Occupation During Past Five years
- ----------------------------------------------------------------------------------------------------------
<S> <C>
John M. Albanese Senior Vice President, Customer Service and Information Systems (since June
The Penn Mutual Life 1997), Vice President, Information Systems Application (prior thereto), The
Insurance Company Penn Mutual Life Insurance Company.
Philadelphia, PA 19172
- ----------------------------------------------------------------------------------------------------------
Michael A. Biondolillo Senior Vice President, Human Resources (since June 1997); Corporate Vice
The Penn Mutual Life President and General Manager, Human Resources and Quality, MG Industries,
Insurance Company America (prior thereto).
Philadelphia, PA 19172
- ----------------------------------------------------------------------------------------------------------
Nancy S. Brodie Executive Vice President and Chief Financial Officer (since December 1995),
The Penn Mutual Life Senior Vice President and Chief Financial Officer prior thereto, The Penn
Insurance Company Mutual Life Insurance Company .
Philadelphia, PA 19172
- ----------------------------------------------------------------------------------------------------------
Bill D. Fife Senior Vice President, Independence Financial Network (since January 2000),
The Penn Mutual Life Regional Vice President, Independence Financial Network (1997-2000), The
Insurance Company Penn Mutual Life Insurance Company; Vice President of Agencies (since 1994),
Philadelphia, PA 19172 General Manager, Western and Northwest Regions (prior thereto), Aetna Life
and Casualty.
- ----------------------------------------------------------------------------------------------------------
Larry L. Mast Executive Vice President, The Penn Mutual Life Insurance Company (May
The Penn Mutual Life 1997 to present). Formerly Senior Vice President, Lafayette Life Insurance
Insurance Company Company (September 1994 to May 1997); Vice President, Security Benefit
Philadelphia, PA 19172 Insurance Company (May 1993 to September 1994); Vice President, Home Life
Insurance Company (July 1990 to May 1993); Agency
Manager, The Equitable Life Insurance Company
(August 1978 to July 1990).
- ----------------------------------------------------------------------------------------------------------
Nina M. Mulrooney General Auditor (since November 1991), Vice President, Market Conduct (since
The Penn Mutual Life December 1997), Assistant Vice President, Corporate Accounting and Control
Insurance Company (prior thereto), The Penn Mutual Life Insurance Company.
Philadelphia, PA 19172
- ----------------------------------------------------------------------------------------------------------
Peter M. Sherman Executive Vice President (since December 1998), Chief Investment Officer
The Penn Mutual Life (since May 1996), Senior Vice President (May 1996 to December 1996), Vice
Insurance Company President, Investments (January 1996 to April 1996), Vice President, Fixed
Philadelphia, PA, 19172 Income Portfolio Management (prior thereto), The Penn Mutual Life Insurance
Company; President, Independence Capital Management, Inc. (an investment
advisory organization and subsidiary of Penn Mutual).
- ----------------------------------------------------------------------------------------------------------
</TABLE>
39
<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.
Additional Information
A registration statement under the Securities Act of 1933 has been
filed with the SEC relating to the offering described in this Prospectus. This
Prospectus does not include all the information set forth in the registration
statement. The omitted information may be obtained at the SEC's principal office
in Washington, D.C. by paying the SEC's prescribed fees.
Experts
Actuarial matters included in this Prospectus have been examined by
Ralph I. Pence, FSA, MAAA, Vice President and Chief Actuary of Penn Mutual,
whose opinion is filed as an exhibit to the Registration Statement.
Litigation
No litigation is pending that would have a material effect upon the
subaccounts or Penn Mutual.
Independent Auditors
Ernst & Young, LLP serves as independent auditors to The Penn Mutual
Life Insurance Company and Penn Mutual Variable Life Account I. Their offices
are located at 2001 Market Street, Suite 4000, Philadelphia, PA.
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.
40
<PAGE>
Financial Statements
The financial statements of the subaccounts of the Separate Account and
the financial statements of Penn Mutual appear on the following pages. The
financial statements of Penn Mutual should be distinguished from any financial
statements of the Separate Account and should be considered only as bearing upon
Penn Mutual's ability to meet its obligations under the Policies.
41
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
PENN MUTUAL VARIABLE LIFE ACCOUNT I
STATEMENT OF ASSETS AND LIABILITIES - DECEMBER 31, 1999
Money Quality
Total Market Fund+ Bond Fund+
------------ ------------ ----------
<S> <C> <C> <C>
Investment in Common Stock
Number of Shares ................................................. 26,314,175 808,876
Cost ............................................................. 331,143,943 $26,314,175 $8,419,173
Assets:
Investments at market value ...................................... 415,163,095 $26,314,175 $8,412,326
Dividends receivable ............................................. 99,160 99,160 -
Liabilities:
Due to(from) the Penn Mutual Life Insurance Company .............. (409,814) (568,781) 2,945
------------ ----------- ----------
Net Assets ....................................................... $415,672,069 $26,982,116 $8,409,381
============ =========== ==========
</TABLE>
[RESTUBED FOR ABOVE]
<TABLE>
<CAPTION>
High Yield Growth Equity Value Equity
Bond Fund+ Fund+ Fund+
---------- ------------- ------------
<S> <C> <C> <C>
Investment in Common Stock
Number of Shares ................................................. 976,640 711,571 1,756,163
Cost ............................................................. $9,279,758 $19,153,246 $35,263,907
Assets:
Investments at market value ...................................... $9,356,213 $29,466,217 $39,004,376
Dividends receivable ............................................. - - -
Liabilities:
Due to(from) the Penn Mutual Life Insurance Company .............. 3,245 15,247 13,831
---------- ----------- -----------
Net Assets ....................................................... $9,352,968 $29,450,970 $38,990,545
========== =========== ===========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
PENN MUTUAL VARIABLE LIFE ACCOUNT I
STATEMENT OF OPERATIONS - FOR THE YEAR ENDED DECEMBER 31, 1999
Money Quality
Total Market Fund+ Bond Fund+
------------ ------------ ----------
<S> <C> <C> <C>
Investment Income:
Dividends ........................................................ $1,697,544 $ 776,851 $ -
Expense:
Mortality and expense risk charges ............................... 2,766,443 134,820 62,224
------------ ----------- ----------
Net investment income (loss) ..................................... (1,068,899) 642,031 (62,224)
------------ ----------- ----------
Realized and Unrealized Gains (Losses) on
Investments:
Realized gains (losses) from redemption of fund
shares ...................................................... 1,853,264 - 300
Capital gains distributions ...................................... 4,604,784 - -
------------ ----------- ----------
Net realized gains (losses) from investment
transactions ................................................ 6,458,048 - 300
Net change in unrealized appreciation/depreciation
of investments .............................................. 61,995,442 - 3,611
------------ ----------- ----------
Net realized and unrealized gains (losses) on
investments ................................................. 68,453,490 - 3,911
------------ ----------- ----------
Net increase (decrease) in net assets resulting
from operations ............................................. $67,384,591 $642,031 $ (58,313)
============ =========== ==========
</TABLE>
[RESTUBED FOR ABOVE]
<TABLE>
<CAPTION>
High Yield Growth Equity Value Equity
Bond Fund+ Fund+ Fund+
---------- ----------- ------------
<S> <C> <C> <C>
Investment Income:
Dividends ........................................................ $ - $ - $ -
Expense:
Mortality and expense risk charges ............................... 72,682 176,930 317,240
---------- ----------- -----------
Net investment income (loss) ..................................... (72,682) (176,930) (317,240)
---------- ----------- -----------
Realized and Unrealized Gains (Losses) on
Investments:
Realized gains (losses) from redemption of fund
shares ...................................................... 416 51,190 (37,587)
Capital gains distributions ...................................... - - -
---------- ----------- -----------
Net realized gains (losses) from investment
transactions ................................................ 416 51,190 (37,587)
Net change in unrealized appreciation/depreciation
of investments .............................................. 349,711 6,911,635 (296,100)
---------- ----------- -----------
Net realized and unrealized gains (losses) on
investments ................................................. 350,127 6,962,825 (333,687)
---------- ----------- -----------
Net increase (decrease) in net assets resulting
from operations ............................................. $ 277,445 $ 6,785,895 $ (650,927)
========== =========== ===========
</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.
42
<PAGE>
[RESTUBED FOR ABOVE]
<TABLE>
<CAPTION>
Flexibly Small
Managed International Capitalization
Fund+ Equity Fund+ Fund+
----------- ------------- --------------
<S> <C> <C> <C>
Investment in Common Stock
Number of Shares ................................................. 3,012,632 1,273,775 820,791
Cost ............................................................. $56,394,230 $20,526,548 $10,790,412
Assets:
Investments at market value ...................................... $59,107,839 $34,111,715 $10,374,806
Dividends receivable ............................................. - - -
Liabilities:
Due to(from) the Penn Mutual Life Insurance Company .............. 20,896 16,356 4,031
----------- ----------- -----------
Net Assets ....................................................... $59,086,943 $34,095,359 $10,370,775
=========== =========== ===========
</TABLE>
[RESTUBED FOR ABOVE]
<TABLE>
<CAPTION>
Emerging
Growth
Fund+
-----------
<S> <C>
Investment in Common Stock
Number of Shares ................................................. 594,401
Cost ............................................................. $11,618,219
Assets:
Investments at market value ...................................... $29,529,819
Dividends receivable ............................................. -
Liabilities:
Due to(from) the Penn Mutual Life Insurance Company .............. 14,547
-----------
Net Assets ....................................................... $29,515,272
===========
</TABLE>
<PAGE>
[RESTUBED FOR ABOVE]
<TABLE>
<CAPTION>
Flexibly Small
Managed International Capitalization
Fund+ Equity Fund+ Fund+
----------- ------------- --------------
<S> <C> <C> <C>
Investment Income:
Dividends ........................................................ $ - $ - $ -
Expense:
Mortality and expense risk charges ............................... 470,251 226,031 80,192
----------- ----------- -----------
Net investment income (loss) ..................................... (470,251) (226,031) (80,192)
----------- ----------- -----------
Realized and Unrealized Gains (Losses) on
Investments:
Realized gains (losses) from redemption of fund
shares ...................................................... 16,311 1,131,146 8,164
Capital gains distributions ...................................... - - -
----------- ----------- -----------
Net realized gains (losses) from investment
transactions ................................................ 16,311 1,131,146 8,164
Net change in unrealized appreciation/depreciation
of investments .............................................. 3,692,338 10,566,719 (63,045)
----------- ----------- -----------
Net realized and unrealized gains (losses) on
investments ................................................. 3,708,649 11,697,865 (54,881)
----------- ----------- -----------
Net increase (decrease) in net assets resulting
from operations ............................................. $3,238,398 $11,471,834 $ (135,073)
=========== =========== ===========
</TABLE>
[RESTUBED FOR ABOVE]
<TABLE>
<CAPTION>
Emerging
Growth
Fund+
-----------
<S> <C>
Investment Income:
Dividends ........................................................ $ -
Expense:
Mortality and expense risk charges ............................... 134,466
-----------
Net investment income (loss) ..................................... (134,466)
-----------
Realized and Unrealized Gains (Losses) on
Investments:
Realized gains (losses) from redemption of fund
shares ...................................................... 195,921
Capital gains distributions ...................................... -
-----------
Net realized gains (losses) from investment
transactions ................................................ 195,921
Net change in unrealized appreciation/depreciation
of investments .............................................. 16,746,334
-----------
Net realized and unrealized gains (losses) on
investments ................................................. 16,942,255
-----------
Net increase (decrease) in net assets resulting
from operations ............................................. $16,807,789
===========
</TABLE>
The accompanying notes are an integral part of these financial statements
43
<PAGE>
PENN MUTUAL VARIABLE LIFE ACCOUNT I
STATEMENT OF ASSETS AND LIABILITIES - DECEMBER 31, 1999 (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 ................... 379,976 119,189 649,655 607,528
Cost ............................... $5,930,634 $1,656,162 $12,528,737 $5,958,383
Assets:
Investments at Market Value ........ $7,937,696 $1,578,060 $12,759,239 $9,015,707
Dividends receivable ............... - - - -
Liabilities:
Due to (from) the Penn Mutual Life
Insurance Company ................. 3,639 495 4,364 4,247
------------ -------------- --------------- ------------
Net Assets ......................... $7,934,057 $1,577,565 $12,754,875 $9,011,460
============ ============== =============== ============
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
PENN MUTUAL VARIABLE LIFE ACCOUNT I
STATEMENT OF OPERATIONS - FOR THE YEAR ENDED DECEMBER 31, 1999 (CONT'D )
<TABLE>
<CAPTION>
Limited Capital
Balanced Maturity Bond Partners Appreciation
Portfolio++ Portfolio++ Portfolio++ Portfolio+++
------------- -------------- ----------- -------------
<S> <C> <C> <C> <C>
Investment Income:
Dividends ........................... $ 84,700 $ 73,751 $ 112,968 $ -
Expense:
Mortality and expense risk charges .. 49,029 11,431 92,071 56,208
----------- ---------- ----------- ----------
Net investment income (loss) ........ 35,671 62,320 20,897 (56,208)
----------- ---------- ----------- ----------
Realized and Unrealized Gains (Losses)
on Investments:
Realized gains (losses) from redemption
of fund shares ....................... 20,108 (1,650) 17,928 35,362
Capital gains distributions ........... 125,480 - 196,466 -
----------- ---------- ----------- ----------
Net realized gains (losses) from
investment transactions .............. 145,588 (1,650) 214,394 35,362
Net change in unrealized appreciation/
depreciation of investments .......... 1,736,544 (73,233) 412,343 3,540,972
----------- ---------- ----------- ----------
Net realized and unrealized gains
(losses) on investments ............. 1,882,132 (74,883) 626,737 3,576,334
----------- ---------- ----------- ----------
Net increase (decrease) in net assets
resulting from operations ............ $1,917,803 $ (12,563) $ 647,634 $3,520,126
=========== =========== =========== ==========
</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.
44
<PAGE>
PENN MUTUAL VARIABLE LIFE ACCOUNT I
STATEMENT OF ASSETS AND LIABILITIES - DECEMBER 31, 1999 (CONT'D)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
Emerging
Equity Income Growth Asset Manager Index 500 Markets Equity
Portfolio++++ Portfolio++++ Portfolio++++ Portfolio++++ Portfolio+++++
------------- ------------- ------------- ------------- --------------
<S> <C> <C> <C> <C> <C>
Investment in Common Stock
Number of Shares .................. 1,035,626 1,043,259 330,433 258,519 346,155
Cost .............................. $23,380,155 $ 39,256,514 $5,528,223 $36,006,089 $3,139,378
Assets:
Investments at Market Value ....... $26,625,948 $ 57,306,211 $6,169,173 $43,278,566 $4,815,009
Dividends receivable .............. - - - - -
Liabilities:
Due to (from) the Penn Mutual Life
Insurance Company ................ 9,558 24,194 2,370 16,807 2,195
----------- ------------ ---------- ----------- ----------
Net Assets ........................ $26,616,390 $ 57,282,017 $6,166,803 $43,261,759 $4,812,814
=========== ============ ========== =========== ==========
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
PENN MUTUAL VARIABLE LIFE ACCOUNT I
STATEMENT OF OPERATIONS - FOR THE YEAR ENDED DECEMBER 31, 1999 (CONT'D)
<TABLE>
<CAPTION>
Emerging
Equity Income Growth Asset Manager Index 500 Markets Equity
Portfolio++++ Portfolio++++ Portfolio++++ Portfolio++++ Portfolio+++++
------------- ------------- -------------- ------------- ---------------
<S> <C> <C> <C> <C> <C>
Investment Income:
Dividends .............................. $ 301,716 $ 53,154 $ 126,920 $ 166,609 $ 875
Expense:
Mortality and expense risk charges ..... 205,909 363,835 42,734 241,977 28,413
----------- ------------ ---------- ----------- ----------
Net investment income (loss) ........... 95,807 (310,681) 84,186 (75,368) (27,538)
----------- ------------ ---------- ----------- ----------
Realized and Unrealized Gains (Losses)
on Investments:
Realized gains (losses) from redemption
of fund shares ........................ 8,531 33,562 (110) 3,504 370,168
Capital gains distributions ............ 666,953 3,342,064 160,764 113,057 -
----------- ------------ ---------- ----------- ----------
Net realized gains (losses) from
investment transactions ............... 675,484 3,375,626 160,654 116,561 370,168
Net change in unrealized appreciation/
depreciation of investments ........... 330,734 10,574,337 272,683 5,205,293 2,084,566
----------- ------------ ---------- ----------- ----------
Net realized and unrealized gains
(losses) on investments ................ 1,006,218 13,949,963 433,337 5,321,854 2,454,734
----------- ------------ ---------- ----------- ----------
Net increase (decrease) in net assets
resulting from operations ............. $ 1,102,025 $ 13,639,282 $ 517,523 $ 5,246,486 $2,427,196
=========== ============ ========== =========== ==========
</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.
45
<PAGE>
PENN MUTUAL VARIABLE LIFE ACCOUNT I
STATEMENTS OF CHANGES IN NET ASSETS - FOR THE YEARS ENDED DECEMBER 31, 1999
AND 1998
<TABLE>
<CAPTION>
Total Money Market Fund+
------------------------------ ------------------------------
1999 1998 1999 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Operations:
Net investment income (loss) .............................. ($1,068,899) $ 2,477,914 $ 642,031 $ 433,508
Net realized gains (losses) from
investment transactions .............................. 6,458,048 16,167,956 -- --
Net change in unrealized appreciation/
depreciation of investments .......................... 61,995,442 6,282,694 -- --
------------- ------------- ----------- -----------
Net increase (decrease) in net assets
resulting from operations ............................ 67,384,591 24,928,564 642,031 433,508
------------- ------------- ----------- -----------
Variable Life Activities:
Purchase payments ......................................... 131,276,317 96,529,479 54,823,381 42,019,252
Death benefits ............................................ (289,327) (121,041) (23,803) (2,035)
Cost of insurance ......................................... (19,824,330) (14,082,492) (1,662,531) (1,191,497)
Net transfers ............................................. (6,189,133) (3,175,599) (36,567,835) (36,872,301)
Transfers of policy loans ................................. 2,006,171 577,625 1,221,644 (251)
Contract administration charges ........................... (5,669,735) (3,850,403) (1,161,009) (488,180)
Surrender benefits ........................................ (10,371,329) (5,921,782) (1,709,339) (418,927)
------------- ------------- ----------- -----------
Net increase in net assets resulting
from variable annuity activities .......................... 90,938,634 69,955,787 14,920,508 3,046,061
------------- ------------- ----------- -----------
Total increase (decrease) in net assets .................. 158,323,225 94,884,351 15,562,539 3,479,569
Net Assets:
Beginning of year ............................................ 257,348,845 162,464,494 11,419,577 7,940,008
------------- ------------- ----------- -----------
End of year .................................................. $415,672,070 $ 257,348,845 $26,982,116 $11,419,577
============= ============= =========== ===========
High Yield Bond Fund+ Growth Equity Fund+
------------------------------ ------------------------------
1999 1998 1999 1998
------------- ------------- ------------- -------------
Operations:
Net investment income (loss) .............................. ($72,682) $ 563,430 ($176,930) ($76,215)
Net realized gains (losses) from
investment transactions .............................. 416 291 51,190 1,590,059
Net change in unrealized appreciation/
depreciation of investments .......................... 349,711 (318,691) 6,911,635 2,350,499
------------- ------------- ------------- -------------
Net increase (decrease) in net assets
resulting from operations ............................ 277,445 245,030 6,785,895 3,864,343
------------- ------------- ------------- -------------
Variable Life Activities:
Purchase payments ......................................... 2,380,766 1,768,367 4,496,063 2,036,864
Death benefits ............................................ (19,671) (232) (13,556) (413)
Cost of insurance ......................................... (545,364) (377,793) (1,235,541) (570,484)
Net transfers ............................................. (330,639) 1,334,768 5,205,840 2,177,912
Transfers of policy loans ................................. 8,662 8,460 69,797 15,214
Contract administration charges ........................... (126,960) (95,903) (330,511) (129,899)
Surrender benefits ........................................ (208,829) (220,758) (654,069) (316,681)
------------- ------------- ------------- -------------
Net increase in net assets resulting
from variable annuity activities .......................... 1,157,965 2,416,909 7,538,023 3,212,513
------------- ------------- ------------- -------------
Total increase (decrease) in net assets .................. 1,435,410 2,661,939 14,323,918 7,076,856
Net Assets:
Beginning of year ............................................ 7,917,558 5,255,619 15,127,052 8,050,196
------------- ------------- ------------- -------------
End of year .................................................. $ 9,352,968 $ 7,917,558 $ 29,450,970 $ 15,127,052
============= ============= ============= =============
</TABLE>
<PAGE>
[RESTUBBED]
<TABLE>
<CAPTION>
Quality Bond Fund+
----------------------------
1999 1998
------------ -------------
<S> <C> <C>
Operations:
Net investment income (loss) .............................. ($62,224) $ 252,041
Net realized gains (losses) from
investment transactions .............................. 300 203,736
Net change in unrealized appreciation/
depreciation of investments .......................... 3,611 (14,899)
----------- -------------
Net increase (decrease) in net assets
resulting from operations ............................ (58,313) 440,878
----------- -------------
Variable Life Activities:
Purchase payments ......................................... 1,355,013 1,155,232
Death benefits ............................................ (2,243) (249)
Cost of insurance ......................................... (360,405) (259,658)
Net transfers ............................................. 1,123,017 1,041,850
Transfers of policy loans ................................. 11,409 10,440
Contract administration charges ........................... (73,285) (42,018)
Surrender benefits ........................................ (226,335) (105,331)
----------- -------------
Net increase in net assets resulting
from variable annuity activities .......................... 1,827,171 1,800,266
----------- -------------
Total increase (decrease) in net assets .................. 1,768,858 2,241,144
Net Assets:
Beginning of year ............................................ 6,640,523 4,399,379
----------- -------------
End of year .................................................. $ 8,409,381 $ 6,640,523
=========== =============
Value Equity Fund+
----------------------------
1999 1998
----------- -------------
Operations:
Net investment income (loss) .............................. ($317,240) $ 181,632
Net realized gains (losses) from
investment transactions .............................. (37,587) 3,177,280
Net change in unrealized appreciation/
depreciation of investments .......................... (296,100) (904,321)
----------- -------------
Net increase (decrease) in net assets
resulting from operations ............................ (650,927) 2,454,591
----------- -------------
Variable Life Activities:
Purchase payments ......................................... 9,300,537 7,712,812
Death benefits ............................................ (34,277) (3,109)
Cost of insurance ......................................... (2,317,035) (2,002,921)
Net transfers ............................................. (1,332,367) 2,352,575
Transfers of policy loans ................................. 83,517 129,894
Contract administration charges ........................... (490,439) (471,036)
Surrender benefits ........................................ (1,050,128) (800,734)
----------- -------------
Net increase in net assets resulting
from variable annuity activities .......................... 4,159,808 6,917,481
----------- -------------
Total increase (decrease) in net assets .................. 3,508,881 9,372,072
Net Assets:
Beginning of year ............................................ 35,481,664 26,109,592
----------- -------------
End of year .................................................. $38,990,545 $ 35,481,664
=========== =============
</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.
46
<PAGE>
<TABLE>
<CAPTION>
Flexibly Managed Fund+ International Equity Fund+
- --------------------------- --------------------------
1999 1998 1999 1998
- ------------ ------------ ------------ ------------
<S> <C> <C> <C>
($470,251) $ 1,144,764 ($226,031) $56,661
16,311 5,784,840 1,131,146 970,588
3,692,338 (4,524,890) 10,566,719 2,087,405
- ----------- ------------ ----------- -----------
3,238,398 2,404,714 11,471,834 3,114,654
- ----------- ------------ ----------- -----------
12,696,631 12,234,331 6,485,087 4,244,414
(82,516) (17,851) (7,506) (15,627)
(3,522,739) (3,137,840) (1,671,752) (1,050,548)
(6,182,355) 1,345,485 (3,336,017) 3,160,776
211,590 139,613 72,417 65,814
(690,067) (646,642) (408,378) (252,405)
(1,818,495) (1,299,724) (906,723) (633,058)
- ----------- ------------ ----------- -----------
612,049 8,617,372 227,128 5,519,366
- ----------- ------------ ----------- -----------
3,850,447 11,022,086 11,698,962 8,634,020
55,236,496 44,214,410 22,396,397 13,762,377
- ----------- ------------ ----------- -----------
$59,086,943 $55,236,496 $34,095,359 $22,396,397
=========== =========== =========== ===========
Emerging Growth Fund+ Balanced Portfolio++
- --------------------------- -------------------------
1999 1998 1999 1998
- ------------ ----------- ----------- -----------
($134,466) ($29,768) $35,671 $52,777
195,921 10,412 145,588 610,655
16,746,334 1,277,385 1,736,544 (184,479)
- ----------- ---------- ---------- ----------
16,807,789 1,258,029 1,917,803 478,953
- ----------- ---------- ---------- ----------
2,612,183 1,376,626 1,484,570 1,068,630
(7,463) -- (6,801) (2,001)
(575,948) (270,389) (353,927) (278,391)
5,165,425 2,271,306 (12,467) 526,196
27,154 949 18,188 83,335
(190,593) (117,695) (73,565) (50,297)
(260,812) (61,482) (174,227) (163,220)
- ----------- ---------- ---------- ----------
6,769,946 3,199,315 881,771 1,184,252
- ----------- ---------- ---------- ----------
23,577,735 4,457,344 2,799,574 1,663,205
5,937,537 1,480,193 5,134,483 3,471,278
- ----------- ---------- ---------- ----------
$29,515,272 $5,937,537 $7,934,057 $5,134,483
=========== ========== ========== ==========
</TABLE>
<PAGE>
[RESTUBBED]
<TABLE>
<CAPTION>
Small Partners
Capitalization Fund+ Portfolio++
-------------------------- -------------------------
1999 1998 1999 1998
------------ ------------ ------------ -----------
<S> <C> <C> <C>
($80,192) ($5,543) $20,897 ($33,955)
8,164 135,416 214,394 486,053
(63,045) (791,507) 412,343 (271,429)
----------- ----------- ----------- ----------
(135,073) (661,634) 647,634 180,669
----------- ----------- ----------- ----------
3,124,582 2,372,356 2,466,761 2,301,846
(7,256) (10,571) (13,903) --
(604,903) (505,718) (469,143) (484,655)
(12,470) 2,227,491 2,236,859 3,388,292
45,711 11,010 14,898 11,914
(147,833) (165,296) (126,557) (201,761)
(228,773) (129,707) (211,368) (138,687)
----------- ----------- ----------- ----------
2,169,058 3,799,565 3,897,547 4,876,949
----------- ----------- ----------- ----------
2,033,985 3,137,931 4,545,181 5,057,618
8,336,790 5,198,859 8,209,694 3,152,076
----------- ----------- ----------- ----------
$10,370,775 $ 8,336,790 $12,754,875 $8,209,694
=========== =========== =========== ==========
Limited Maturity Growth
Bond Portfolio++ Portfolio++++
-------------------------- ------------------------
1999 1998 1999 1998
------------ ----------- ----------- -----------
$62,320 $41,895 ($56,208) ($47,491)
($1,650) 242 35,362 140,032
(73,233) (13,221) 3,540,972 (261,202)
---------- ---------- ---------- ----------
(12,563) 28,916 3,520,126 (168,661)
---------- ---------- ---------- ----------
539,187 300,887 1,370,035 1,577,063
(2,119) -- (2,858) (3,745)
(97,258) (58,968) (342,503) (342,552)
(23,735) 318,853 (932,409) (1,352,477)
2,417 5,849 15,155 35,632
(27,049) (14,141) (57,224) (53,636)
(29,913) (9,313) (323,009) (244,500)
---------- ---------- ---------- ----------
361,530 543,167 (272,813) (384,215)
---------- ---------- ---------- ----------
348,967 572,083 3,247,313 (552,876)
1,228,598 656,515 5,764,147 6,317,023
---------- ---------- ---------- ----------
$1,577,565 $1,228,598 $9,011,460 $5,764,147
========== ========== ========== ==========
</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.
47
<PAGE>
PENN MUTUAL VARIABLE LIFE ACCOUNT I
STATEMENTS OF CHANGES IN NET ASSETS - FOR THE
YEARS ENDED DECEMBER 31, 1999 AND 1998 (CONT'D.)
<TABLE>
<CAPTION>
Equity Income Growth Asset Manager
Portfolio++++ Portfolio++++ Portfolio++++
------------------------- ------------------------- -------------------------
1999 1998 1999 1998 1999 1998
---------- ----------- ----------- ----------- ---------- ----------
Operations:
<S> <C> <C> <C> <C> <C> <C>
Net investment income (loss) ............. $95,807 $40,458 ($310,681) ($106,277) $84,186 $43,537
Net realized gains (losses) from
investment transactions ............. 675,484 649,737 3,375,626 2,143,029 160,654 202,236
Net change in unrealized appreciation/
depreciation of investments ......... 330,734 963,306 10,574,337 5,047,623 272,683 136,988
----------- ----------- ----------- ----------- ---------- ----------
Net increase (decrease) in net assets
resulting from operations ........... 1,102,025 1,653,501 13,639,282 7,084,375 517,523 382,761
----------- ----------- ----------- ----------- ---------- ----------
Variable Life Activities:
Purchase payments ........................ 6,666,334 4,640,276 10,979,093 5,974,648 1,375,866 834,804
Death benefits ........................... (14,032) (20,055) (38,816) (45,153) (1,237) -
Cost of insurance ........................ (1,603,588) (1,115,035) (2,562,252) (1,459,882) (347,344) (216,443)
Net transfers ............................ 1,627,390 2,979,305 8,714,008 2,873,583 1,102,953 807,683
Transfers of policy loans ................ 71,994 25,171 68,165 22,413 3,213 1,050
Contract administration charges .......... (373,064) (297,186) (720,794) (385,848) (73,304) (49,185)
Surrender benefits ....................... (726,919) (430,380) (1,358,474) (689,227) (129,352) (115,461)
------------ ----------- ----------- ----------- ---------- ----------
Net increase in net assets resulting
from variable annuity activities ......... 5,648,115 5,782,096 15,080,930 6,290,534 1,930,795 1,262,448
----------- ----------- ----------- ----------- ---------- ----------
Total increase (decrease) in net assets . 6,750,140 7,435,597 28,720,212 13,374,909 2,448,318 1,645,209
Net Assets:
Beginning of year ........................... 19,866,250 12,430,653 28,561,805 15,186,896 3,718,485 2,073,276
----------- ----------- ----------- ----------- ---------- ----------
End of year ................................. $26,616,390 $19,866,250 $57,282,017 $28,561,805 $6,166,803 $3,718,485
=========== =========== =========== =========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
Index 500 Emerging Markets
Portfolio++++ Portfolio+++++
------------------------------- ------------------------------
1999 1998 1999 1998
----------- ----------- ---------- ----------
Operations:
<S> <C> <C> <C> <C>
Net investment income (loss) ............. ($75,368) ($32,366) ($27,538) ($1,174)
Net realized gains (losses) from
investment transactions ............. 116,561 60,958 370,168 2,392
Net change in unrealized appreciation/
depreciation of investments ......... 5,205,293 1,980,793 2,084,566 (276,666)
----------- ----------- ---------- ----------
Net increase (decrease) in net assets
resulting from operations ........... 5,246,486 2,009,385 2,427,196 (275,448)
----------- ----------- ---------- ----------
Variable Life Activities:
Purchase payments ........................ 8,565,619 4,295,628 554,609 615,443
Death benefits ........................... (9,073) - (2,197) -
Cost of insurance ........................ (1,447,507) (664,534) (104,590) (95,184)
Net transfers ............................ 16,965,879 7,630,497 399,790 612,607
Transfers of policy loans ................ 56,519 9,823 3,721 1,295
Contract administration charges .......... (568,474) (335,545) (30,629) (53,730)
Surrender benefits ....................... (317,861) (115,742) (36,703) (28,850)
----------- ----------- ---------- ----------
Net increase in net assets resulting
from variable annuity activities ......... 23,245,102 10,820,127 784,001 1,051,581
----------- ----------- ---------- ----------
Total increase (decrease) in net assets . 28,491,588 12,829,512 3,211,197 776,133
Net Assets:
Beginning of year ........................... 14,770,171 1,940,659 1,601,618 825,485
----------- ----------- ---------- ----------
End of year ................................. $43,261,759 $14,770,171 $4,812,815 $1,601,618
=========== =========== ========== ==========
</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 intergral part of these financial statements.
48
<PAGE>
PENN MUTUAL VARIABLE LIFE ACCOUNT I
- --------------------------------------------------------------------------------
Notes to Financial Statements
December 31, 1999
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
VULII, Cornerstone VULIII, 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, 1999 and the reported amounts from operations and
variable life activities during 1999 and 1998. Actual results could differ from
those estimates.
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 life contract other than a contract
issued in connection with certain types of employee benefit plans will not be
treated as a life 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.
49
<PAGE>
Note 2. Purchases and Sales of Investments
The following table shows aggregate cost of shares purchased and
proceeds from sales of each fund or portfolio for the year ended December 31,
1999:
Purchases Sales
--------- -----
Money Market Fund ............................. $84,361,990 $69,381,912
Quality Bond Fund ............................. 3,276,420 1,511,209
High Yield Bond Fund .......................... 4,879,404 3,792,156
Growth Equity Fund ............................ 9,938,419 2,514,823
Value Equity Fund ............................. 9,258,922 5,446,023
Flexibly Managed Fund ......................... 9,434,808 9,268,233
Small Capitalization Fund ..................... 3,500,074 1,398,790
International Equity Fund ..................... 42,117,549 40,973,961
Emerging Growth Fund .......................... 10,436,516 3,591,156
Limited Maturity Bond Portfolio ............... 868,999 446,591
Balanced Portfolio ............................ 2,053,296 987,858
Partners Portfolio ............................ 6,297,152 2,162,024
Capital Appreciation Portfolio ................ 1,318,604 1,609,498
Equity Income Portfolio ....................... 9,028,532 2,604,920
Growth Portfolio .............................. 20,977,467 2,815,137
Asset Manager Portfolio ....................... 2,891,976 714,920
Index 500 Portfolio ........................... 25,076,298 1,777,197
Emerging Markets Equity Portfolio ............. 11,124,088 10,192,650
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; Cornerstone VUL III
is determined daily at a current annual rate guaranteed not to exceed 0.90% of
the average value of Cornerstone VUL III; Variable Estatemax is determined
daily at a current annual rate guaranteed not to exceed 0.90% of the average
value of Variable Estatemax; 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, Cornerstone VUL III and
Variable Estatemax 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 Cornerstone VUL III policy is surrendered within the
first 16 years, or a Variable Estatemax 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.
50
<PAGE>
Note 4. Unit Values
Accumulation Unit Values For Variable Life Account I as of 12/31/99 are as
follows:
Accumulation Accumulation
Units Unit Value
----- ----------
Money Market Fund
Cornerstone VUL 209,517 $12.84
Cornerstone VUL II 1,036,419 $12.04
Cornerstone VUL III 552,696 $10.19
Variable Estatemax 302,526 $12.05
Momentum Builder 143,910 $17.63
Quality Bond Fund
Cornerstone VUL 161,919 $14.16
Cornerstone VUL II/Variable Estatemax 416,913 $13.29
Cornerstone VUL III 32,112 $ 9.98
Momentum Builder 10,474 $24.25
High Yield Bond Fund
Cornerstone VUL 188,612 $16.29
Cornerstone VUL II/Variable Estatemax 372,690 $14.84
Cornerstone VUL III 11,772 $ 9.97
Momentum Builder 22,436 $28.16
Growth Equity Fund
Cornerstone VUL 315,704 $37.32
Cornerstone VUL II/Variable Estatemax 484,230 $32.30
Cornerstone VUL III 48,303 $11.73
Momentum Builder 28,612 $51.07
Value Equity Fund
Cornerstone VUL 503,094 $24.10
Cornerstone VUL II/Variable Estatemax 1,309,074 $19.75
Cornerstone VUL III 63,921 $ 9.16
Momentum Builder 10,655 $39.71
Flexibly Managed Fund
Cornerstone VUL 1,102,009 $20.45
Cornerstone VUL II/Variable Estatemax 2,115,595 $16.64
Cornerstone VUL III 121,555 $ 9.86
Momentum Builder 3,919 $38.12
Small Capitalization Fund
Cornerstone VUL 78,360 $14.36
Cornerstone VUL II/Variable Estatemax 634,413 $14.26
Cornerstone VUL III 21,360 $ 9.19
International Equity Fund
Cornerstone VUL 455,807 $28.13
Cornerstone VUL II/Variable Estatemax 853,934 $24.42
Cornerstone VUL III 31,574 $13.32
<PAGE>
Accumulation Accumulation
Units Unit Value
----- ----------
Emerging Growth Fund
Cornerstone VUL 100,262 $52.78
Cornerstone VUL II/Variable Estatemax 436,087 $52.57
Cornerstone VUL III 76,337 $16.99
Limited Maturity Bond Portfolio
Cornerstone VUL 9,262 $12.76
Cornerstone VUL II/Variable Estatemax 107,727 $12.05
Cornerstone VUL III 16,003 $10.05
Balanced Portfolio
Cornerstone VUL 130,873 $23.49
Cornerstone VUL II/Variable Estatemax 222,649 $20.95
Cornerstone VUL III 15,487 $12.59
Partners Portfolio
Cornerstone VUL 170,254 $13.73
Cornerstone VUL II/Variable Estatemax 729,954 $13.67
Cornerstone VUL III 47,250 $ 9.29
Capital Appreciation Portfolio
Cornerstone VUL 194,305 $20.60
Cornerstone VUL II/Variable Estatemax 289,841 $17.28
Equity Income Portfolio
Cornerstone VUL 198,335 $20.17
Cornerstone VUL II/Variable Estatemax 1,094,397 $20.03
Cornerstone VUL III 75,665 $ 9.21
Growth Portfolio
Cornerstone VUL 333,903 $32.68
Cornerstone VUL II/Variable Estatemax 1,380,600 $32.45
Cornerstone VUL III 137,813 $11.42
Asset Manager Portfolio
Cornerstone VUL 60,527 $19.19
Cornerstone VUL II/Variable Estatemax 252,747 $19.06
Cornerstone VUL III 18,374 $10.26
Index 500 Portfolio
Cornerstone VUL 245,482 $18.59
Cornerstone VUL II/Variable Estatemax 1,928,357 $18.52
Cornerstone VUL III 288,250 $10.38
Emerging Markets Equity Portfolio
Cornerstone VUL 68,051 $13.17
Cornerstone VUL II/Variable Estatemax 282,276 $13.12
Cornerstone VUL III 15,534 $13.77
51
<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 and Emerging
Markets Equity Portfolio) as of December 31, 1999, and the related statement of
operations for the year then ended and statements of changes in net assets for
each of the two years in the period then ended. The financial statements are the
responsibility of the management of Penn Mutual Variable Life Account I. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatements. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. Our
procedures included confirmation of securities owned as of December 31, 1999, by
correspondence with the transfer agents. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of each of the portfolios
constituting the Penn Mutual Variable Life Account I at December 31, 1999, the
results of their operations for the year then ended and the changes in their net
assets for each of the two years in the period then ended, in conformity with
accounting principles generally accepted in the United States.
/s/ Ernst & Young LLP
-----------------------------------
Ernst & Young LLP
Philadelphia, Pennsylvania
April 4, 2000
52
<PAGE>
The Penn Mutual Life Insurance Company and Subsidiaries
Consolidated Balance Sheets
<TABLE>
<CAPTION>
As of December 31, 1999 1998
- ---------------------------------------------------------------------------------------------
(in thousands)
ASSETS
<S> <C> <C>
Debt securities, at fair value $ 4,733,261 $ 5,500,924
Equity securities, at fair value 3,949 4,161
Mortgage loans on real estate 27,115 38,828
Real estate, net of accumulated depreciation 15,461 15,791
Policy loans 642,420 638,376
Short-term investments 6,934 1,024
Other invested assets 137,766 98,571
----------- -----------
Total investments 5,566,906 6,297,675
Cash and cash equivalents 37,481 24,468
Investment income due and accrued 89,254 104,208
Deferred acquisition costs 549,573 399,742
Amounts recoverable from reinsurers 220,847 69,583
Broker/dealer receivables 1,143,702 793,522
Other assets 109,818 94,179
Separate account assets 2,865,366 2,302,937
----------- -----------
Total Assets $10,582,947 $10,086,314
=========== ===========
LIABILITIES
Reserves for payment of future policy benefits $ 2,735,609 $ 2,761,319
Other policyholder funds 2,710,589 2,835,081
Policyholders' dividends payable 28,770 30,532
Broker/dealer payables 646,479 488,783
Accrued income tax payable 31,919 142,634
Other liabilities 573,909 383,744
Separate account liabilities 2,865,366 2,302,937
----------- -----------
Total Liabilities 9,592,641 8,945,030
----------- -----------
EQUITY
Retained earnings 1,023,704 944,145
Accumulated other comprehensive income/(loss) -
unrealized gains/(losses) (33,398) 197,139
----------- -----------
Total Equity 990,306 1,141,284
----------- -----------
Total Liabilities and Equity $10,582,947 $10,086,314
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
53
<PAGE>
The Penn Mutual Life Insurance Company and Subsidiaries
Consolidated Income Statements
<TABLE>
<CAPTION>
For the Years Ended December 31, 1999 1998 1997
- -------------------------------------------------------------------------------------------------------------
(in thousands)
REVENUES
<S> <C> <C> <C>
Premium and annuity considerations $ 130,516 $ 154,615 $ 178,338
Policy fee income 131,709 114,681 102,398
Net investment income 431,222 433,530 448,135
Net realized capital gains/(losses) 803 3,912 9,655
Broker/dealer fees and commissions 395,483 331,285 290,005
Other income 24,895 15,543 10,920
---------- ---------- ----------
Total Revenue 1,114,628 1,053,566 1,039,451
---------- ---------- ----------
BENEFITS AND EXPENSES
Benefits paid to policyholders and beneficiaries 429,791 445,148 463,444
Policyholder dividends 56,603 61,369 67,412
Decrease in liability for future policy benefits (54,080) (23,337) (10,275)
General expenses 238,603 205,698 195,336
Broker/dealer sales expense 216,712 180,255 160,730
Amortization of deferred acquisition costs 52,668 42,223 43,223
---------- ---------- ----------
Total Benefits and Expenses 940,297 911,356 919,870
---------- ---------- ----------
Income from Continuing Operations Before Income Taxes 174,331 142,210 119,581
---------- ---------- ----------
Income taxes 66,324 57,019 51,323
---------- ---------- ----------
Income from Continuing Operations 108,007 85,191 68,258
---------- ---------- ----------
DISCONTINUED OPERATIONS
Income (loss) from operations of discontinued segment
(net of income taxes of $(2,137), $670 and $2,589) (3,968) 1,243 4,807
Loss on sale of discontinued operations (less
applicable income tax benefit of $13,181) (24,480) - -
---------- ---------- ----------
NET INCOME $ 79,559 $ 86,434 $ 73,065
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
54
<PAGE>
The Penn Mutual Life Insurance Company and Subsidiaries
Consolidated Statements of Changes in Equity
<TABLE>
<CAPTION>
Other
Comprehensive Retained Total
Income/(Loss) Earnings Equity
--------------------------------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C>
Balance at January 1, 1997 $ 85,730 $ 784,646 $ 870,376
Comprehensive Income
Net income for 1997 - 73,065 73,065
Other comprehensive loss, net of tax
Unrealized appreciation of securities,
net of reclassification adjustment 66,279 - 66,279
----------
Comprehensive Income 139,344
--------- ---------- ----------
Balance at December 31, 1997 152,009 857,711 1,009,720
Comprehensive Income
Net income for 1998 - 86,434 86,434
Other comprehensive income, net of tax
Unrealized appreciation of securities,
net of reclassification adjustment 45,130 - 45,130
----------
Comprehensive Income 131,564
--------- ---------- ----------
Balance at December 31, 1998 197,139 944,145 1,141,284
Comprehensive Loss
Net income for 1999 - 79,559 79,559
Other comprehensive loss, net of tax
Unrealized depreciation of securities,
net of reclassification adjustment (230,537) - (230,537)
----------
Comprehensive Loss (150,978)
--------- ---------- ----------
Balance at December 31, 1999 $ (33,398) $1,023,704 $ 990,306
========= ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
55
<PAGE>
The Penn Mutual Life Insurance Company and Subsidiaries
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
For the Years Ended December 31, 1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------
(in thousands)
Cash Flows from Operating Activities
<S> <C> <C> <C>
Net income $ 79,559 $ 86,434 $ 73,065
Adjustments to reconcile net income to net cash provided by operations:
Capitalization of policy acquisition costs (78,644) (72,356) (64,427)
Amortization of deferred acquisition costs 52,668 42,223 43,223
Policy fees on universal life and investment contracts (80,456) (120,315) (104,342)
Interest credited on universal life and investment contracts 132,213 146,081 160,417
Depreciation and amortization 6,294 4,750 18,682
Premiums due and other receivables (16,794) (1,293) (7,291)
Net realized capital (gains)/losses (803) (3,912) (9,655)
Net realized loss on sale of discontinued operations 37,661 - -
(Increase)/decrease in investment income due and accrued 14,954 (1,136) 60
(Increase) in amounts recoverable from reinsurers (18,419) (6,372) (4,329)
(Decrease) in reserves for payment of future policy benefits (25,710) (8,696) (13,358)
Increase/(decrease) in accrued income tax payable 13,222 25,622 (4,526)
Other, net 12,652 3,805 (6,693)
---------- ----------- -----------
Net cash provided by operating activities 128,397 94,835 80,826
---------- ----------- -----------
Cash Flows from Investing Activities
Sale of investments:
Debt securities available for sale 1,624,576 1,837,209 1,235,274
Equity securities 12,003 35,496 20,374
Real estate 853 9,937 87,875
Other 3,884 18,074 14,355
Maturity and other principal repayments:
Debt securities available for sale 415,888 496,283 472,474
Mortgage loans 17,596 2,357 61,813
Other 3,963 - -
Cost of investments acquired:
Debt securities available for sale (1,752,394) (2,315,067) (1,772,007)
Equity securities (12,097) (26,390) (15,268)
Real estate (1,366) (293) (15,600)
Other (39,139) (17,917) (15,503)
Change in policy loans, net (4,044) 4,613 13,084
(Increase)/decrease in short-term investments, net (5,910) 42,446 (5,955)
Purchases of furniture and equipment, net (10,900) (9,446) (4,116)
Sale of discontinued operations (160,332) - -
---------- ----------- -----------
Net cash provided by investing activities 92,581 77,302 76,800
---------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
56
<PAGE>
The Penn Mutual Life Insurance Company and Subsidiaries
Consolidated Statements of Cash Flows - Continued
<TABLE>
<CAPTION>
For the Years Ended December 31, 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------
(in thousands)
Cash Flows from Financing Activities
<S> <C> <C> <C>
Deposits for universal life and investment contracts $ 605,568 $ 589,070 $ 653,233
Withdrawals from universal life and investment contracts (641,296) (605,821) (552,311)
Transfers to separate accounts (146,981) (147,708) (236,008)
Issuance/(repayment) of debt 167,228 90,772 24,842
(Increase)/decrease in net broker dealer receivables (192,484) (111,046) (47,632)
--------- ---------- ---------
Net cash used by financing activities (207,965) (184,733) (157,876)
--------- ---------- ---------
Net increase/(decrease) in cash and cash equivalents 13,013 (12,596) (250)
Cash and cash equivalents
Beginning of the year 24,468 37,064 37,314
--------- ---------- ---------
End of the year $ 37,481 $ 24,468 $ 37,064
========= ========== =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
57
<PAGE>
- --------------------------------------------------------------------------------
THE PENN MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For The Years Ended December 31, 1999, 1998 and 1997
(in thousands of dollars)
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
- ----------------------------------------------
Organization and Basis of Presentation
The Penn Mutual Life Insurance Company was founded and commenced business in
1847 as a mutual life insurance company. The Company concentrates primarily on
the sale of individual life insurance and annuity products. The primary products
that the Company currently markets are traditional whole life, term life,
universal life, variable life, immediate annuities and deferred annuities, both
fixed and variable. The Company markets its products through a network of career
agents, independent agents, and independent marketing organizations. The Company
is also involved in the broker-dealer business which offers a variety of
investment products and services and is conducted through the Company's
non-insurance subsidiaries. The Company sells its products in all fifty states
and the District of Columbia.
The accompanying consolidated financial statements have been prepared in
conformity with accounting principles generally accepted in the United States
and include the accounts of The Penn Mutual Life Insurance Company, its wholly
owned life insurance subsidiary, The Penn Insurance and Annuity Company ("PIA"),
and non-insurance subsidiaries (principally broker/dealer and investment
advisory subsidiaries) (the "Company"). All significant intercompany accounts
and transactions have been eliminated in consolidation. The preparation of
financial statements requires management to make estimates and assumptions that
affect the amounts reported in the consolidated financial statements and notes
to the consolidated financial statements.
New Accounting Pronouncements
As of January 1, 1999, the Company adopted Statement of Position (SOP) 97-3,
"Accounting by Insurance and Other Enterprises for Insurance-Related
Assessments." SOP 97-3 provides guidance for determining when and how to measure
assets and liabilities associated with guaranty fund and other insurance related
assessments. The Company also adopted SOP 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use" which gives guidance
on accounting for the costs related to developing, obtaining, modifying and/or
implementing internal use software. The adoption of SOP 97-3 and SOP 98-1 did
not have a material effect on the Company's financial condition or results of
operations.
As of January 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. (SFAS) 130, "Reporting Comprehensive Income." SFAS No. 130
established standards for the reporting and display of comprehensive income and
its components in the financial statements. The initial application of SFAS No.
130, required the reclassification of prior-year financial statements to reflect
the components of comprehensive income.
In June 1998, the FASB issued Statement of Financial Accounting Standards No
(SFAS). 133, "Accounting for Derivative Instruments and Hedging Activities."
SFAS No. 133 requires all derivatives to be recognized in the statement of
financial position as either assets or liabilities and measured at fair value.
The corresponding derivative gains and losses should be reported based on hedge
relationships that exist. Changes in the fair value of derivatives that are not
designated as hedges or that do not meet the hedge accounting criteria in SFAS
No. 133, are required to be reported in earnings. In June 1999, the FASB issued
SFAS No. 137 which defers the effective date for implementation of SFAS No. 133
to fiscal years beginning after June 15, 2000. Adoption of SFAS No. 133 is not
expected to have a material effect on the Company's financial condition or
results of operations.
Investments
Debt securities (bonds, notes, redeemable preferred stocks and mortgage-backed
securities) which might be sold prior to maturity are classified as available
for sale. These securities are carried at fair value, with the change in
unrealized gains and losses reported in other comprehensive income. Interest on
debt securities is credited to income as it is earned. Debt securities are
amortized using the scientific method. Prepayment assumptions for loan-backed
and structured securities are obtained from broker dealer survey values or
internal estimates. These assumptions are
58
<PAGE>
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements, continued
(In Thousands of Dollars)
- --------------------------------------------------------------------------------
consistent with the current interest rate and economic environments. The
retrospective adjustment method is used to value all such securities.
Equity securities are classified as available for sale and carried at fair
value. Dividends on equity securities are credited to income on their
ex-dividend dates.
The Company regularly evaluates the carrying value of debt and equity securities
based on current economic conditions, past credit loss experience and other
circumstances of the investee. A decline in a security's fair value that is
deemed to be other than temporary is treated as a realized loss and a reduction
in the cost basis of the security.
Mortgage loans on real estate are stated at unpaid principal balances, net of
unamortized discounts and valuation allowances. Valuation allowances on impaired
loans are based on the present value of expected future cash flows discounted at
the loan's original effective interest rate or the collateral value if the loan
is collateral dependent. However, if foreclosure is or becomes probable, the
measurement method used is collateral value.
Investment real estate, which the Company has the intent to hold, is carried at
cost less accumulated depreciation and valuation reserves. The Company
establishes valuation reserves for investment real estate when declines in value
are deemed to be other then temporary based on an analysis of discounted future
cash flows. Properties held for sale are carried at the lower of depreciated
cost or fair value less selling costs. Valuation reserves are established for
properties held for sale when the fair value less estimated selling costs is
below depreciated cost. Real estate acquired through foreclosure is recorded at
the lower of cost or fair value less estimated selling costs at the time of
foreclosure. Depreciation is calculated using the straight-line method over the
estimated useful lives of the real estate.
Policy loans are carried at the unpaid principal balances.
Short-term investments include securities purchased with a maturity date of 90
days to less than one year. Short-term investments are valued at cost.
Other invested assets primarily include venture capital limited partnerships
which are carried at fair value.
Realized gains and losses are determined by specific identification and are
included in income on the trade date, net of amortization of deferred
acquisition costs. Unrealized gains and losses, net of appropriate taxes and
amortization of deferred acquisition costs, are accounted for as a separate
component of other comprehensive income.
The Company utilizes various financial instruments, such as interest rate swaps,
financial futures and structured notes, to hedge against interest rate
fluctuation. Most of these investments are recorded as accounting hedges using a
valuation method consistent with the valuation method of the assets hedged.
Gains and losses on these instruments are deferred and recognized in the
Consolidated Income Statements over the remaining life of the hedged security.
Changes in the fair value of these instruments are reported as unrealized gains
or losses. Realized gains or losses are recognized when the hedged securities
are sold.
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand, money market instruments and
other debt securities with a maturity of 90 days or less when purchased.
Other Assets
Property and equipment and leasehold improvements are stated at cost, less
accumulated depreciation and amortization. Depreciation is calculated using the
straight-line method over the estimated useful lives of the related assets.
Amortization of leasehold improvements is calculated using the straight-line
method over the lesser of the term of the leases or the estimated useful life of
the improvements. Accumulated depreciation and amortization on property and
equipment and leasehold improvements was $50,971 and $46,292 at December 31,
1999 and 1998,
59
<PAGE>
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements, continued
(In Thousands of Dollars)
- --------------------------------------------------------------------------------
respectively. Related depreciation and amortization expense was $8,441, $8,586
and $8,183 for the years ended December 31, 1999, 1998 and 1997, respectively.
Goodwill represents the excess of the cost of the businesses acquired over the
fair value of their net assets. These costs are amortized on a straight-line
basis over not more than 40 years and are included in other assets in the
Consolidated Balance Sheets. Unamortized goodwill included in other assets
amounted to $17,228 and $16,126 at December 31, 1999 and 1998, respectively.
Goodwill amortization was $1,008, $806 and $808 for 1999, 1998 and 1997,
respectively.
Deferred Acquisition Costs
Costs of acquiring new insurance and annuity contracts, which vary with and are
primarily related to the production of new business, have been deferred to the
extent that such costs are deemed recoverable from future gross profits. Such
costs include commissions, certain costs of policy issuance and underwriting,
and certain variable agency expenses.
Deferred acquisition costs related to participating traditional and universal
life insurance policies and annuity products without mortality risk that include
significant surrender charges are being amortized over the lesser of the
estimated or actual contract life in proportion to estimated gross profits
arising principally from interest, mortality and expense margins and surrender
charges. The effects on amortization of deferred acquisition costs of revisions
to estimated gross profits are reflected in earnings in the period such
estimated gross profits are revised. Deferred acquisition costs are reviewed to
determine that the unamortized portion of such costs is recoverable from future
estimated gross profits. Certain costs and expenses reported in the consolidated
income statements are net of amounts deferred.
Separate Accounts
Separate Account assets and liabilities represent segregated funds administered
and invested by the Company primarily for the benefit of variable life insurance
policyholders and annuity and pension contractholders, including certain of the
Company's benefit plans. The value of the assets in the Separate Accounts
reflects the actual investment performance of the respective accounts and is not
guaranteed by the Company. The carrying value for Separate Account assets and
liabilities approximates the estimated fair value of the underlying assets.
Insurance Liabilities and Revenue Recognition
Participating Traditional Life and Life Contingent Annuity Products
Future policy benefits include reserves for participating traditional life
insurance and life contingent annuity products and are established in amounts
adequate to meet the estimated future obligations of the policies in force.
Liabilities for participating traditional life products are computed using the
net level premium method, using assumptions for investment yields, mortality,
morbidity and withdrawals, which are consistent with the dividend fund interest
rate and mortality rates used in calculating cash surrender values. Interest
rate assumptions used in the calculation of the liabilities for participating
traditional life products ranged from 2.25% to 4.5%. Premiums are recognized as
income when due. Death and surrender benefits are reported in expense as
incurred.
Liabilities for life contingent annuity products are computed by estimating
future benefits and expenses. Assumptions are based on Company experience
projected at the time of policy issue, with provision for adverse deviations.
Interest rate assumptions range from 2.25% to 13.25%. Premiums are recognized as
income as they are received. Death and surrender benefits are reported in
expense as incurred.
Universal Life Products and Other Annuity Products
Other policyholder funds represent liabilities for universal life and
investment-type annuity products. The liabilities for these products are based
on the contract account value which consists of deposits received from customers
and investment earnings on the account value, less administrative and expense
charges. The liability for universal life products is also reduced by mortality
charges. Liabilities for the non-life contingent annuity products are computed
60
<PAGE>
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements, continued
(In Thousands of Dollars)
- --------------------------------------------------------------------------------
by estimating future benefits and expenses. Assumptions are based on Company
experience projected at the time of policy issue. Interest rate assumptions
range from 2.0% to 11.25%.
Contract charges assessed against account value for universal life and
investment-type annuities are reflected as policy fee income in revenue.
Interest credited to account values and universal life benefit claims in excess
of fund values are reflected as benefit expense.
Policyholders' Dividends
The majority of the Company's insurance products have been issued on a
participating basis. As of December 31, 1999, participating insurance expressed
as a percentage of insurance in force is 91%, and as a percentage of premium
income is 83%. The amount of policyholders' dividends to be paid is approved
annually by the Board of Trustees. The aggregate amount of policyholders'
dividends is calculated based on actual interest, mortality, morbidity and
expense experience for the year and on management's judgment as to the
appropriate level of equity to be retained by the Company. The carrying value of
this liability approximates the earned amount and fair value at December 31,
1999.
Broker/Dealer Revenue Recognition
Broker-dealer transactions in securities and listed options, including related
commission revenue and expense, are recorded on a settlement-date basis. There
would be no material effect on the financial statements if such transactions
were recorded on a trade-date basis.
Federal Income Taxes
The Company files a consolidated federal income tax return with its life and
non-life insurance subsidiaries. Federal income taxes are charged or credited to
operations based upon amounts estimated to be payable or recoverable as a result
of taxable operations for the current year. Deferred income tax assets and
liabilities are established to reflect the impact of temporary differences
between the amount of assets and liabilities recognized for financial reporting
purposes and such amounts recognized for tax purposes. These deferred tax assets
or liabilities are measured by using the enacted tax rates expected to apply to
taxable income in the period in which the deferred tax liabilities or assets are
expected to be settled or realized.
Reinsurance
In the normal course of business, the Company seeks to limit its exposure to
loss on any single insured and to recover a portion of benefits paid by ceding
reinsurance to other insurance enterprises or reinsurers under excess coverage
and coinsurance contracts. The Company has set its retention limit for
acceptance of risk on life insurance policies at various levels up to $1,250.
Insurance liabilities are reported before the effects of reinsurance.
Reinsurance receivables (including amounts related to insurance liabilities) are
reported as assets. Estimated reinsurance receivables are recognized in a manner
consistent with the liabilities related to the underlying reinsured contracts.
Reclassification
Certain 1998 and 1997 amounts have been reclassified to conform with 1999
presentation.
2. DISCONTINUED OPERATIONS:
- ---------------------------
During 1999, the Company decided to exit the Disability Income (DI) line of
business and entered into an indemnity reinsurance agreement with Christian
Mutual Life Insurance Company and ACE Bermuda Ltd. to cede all of its remaining
risk associated with this line. Under the agreement, effective July 1, 1999, the
Company agreed to transfer assets with a fair market value of $167,750 to
reinsure net liabilities of $139,889. The Company recognized a pretax loss of
$37,661 on this transaction, including costs of sale. Under the agreement, 95%
of the assets and liabilities were transferred to the reinsurer effective July
1, 1999. The remaining 5% of the related assets are being held in an escrow
account under the Company's control, pending approval of the transaction by the
State of New York. Accordingly,
61
<PAGE>
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements, continued
(In Thousands of Dollars)
- --------------------------------------------------------------------------------
reserves for payment of future policy benefits at December 31, 1999 include
$7,458 related to the remaining 5% of the DI business.
As this is a disposal of a segment of business, the Company has modified the
presentation in the accompanying income statements to separate the results of
operations attributable to this business. Revenue from discontinued operations
for the year ended December 31, 1999, 1998 and 1997 were $16,855, $28,854 and
$29,884, respectively.
The reinsurance agreement is secured for the Company by a collateralized trust
which names the Company as the beneficiary. As of December 31, 1999, the Company
had a reinsurance recoverable from Christian Mutual of $141,707 which was
secured by investment grade securities with a market value of $155,046 held in
trust.
3. INVESTMENTS:
- ---------------
Debt Securities
The following tables summarize the Company's investment in debt securities,
including redeemable preferred stocks. All debt securities are classified as
available for sale and are carried at estimated fair value. Amortized cost is
net of cumulative writedowns for other than temporary declines in value of
$8,703 and $3,056 as of December 31, 1999 and 1998, respectively.
<TABLE>
<CAPTION>
December 31, 1999
------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------------- --------------- -------------- --------------
<S> <C> <C> <C> <C>
U.S. Treasury securities and U.S.
Government and agency securities $ 10,527 $ 119 $ 178 $ 10,468
States and political subdivisions 11,600 - 58 11,542
Foreign governments 19,854 758 - 20,612
Corporate securities 2,678,302 69,875 116,357 2,631,820
Mortgage and other asset-backed securities 2,106,506 9,975 58,011 2,058,470
----------- -------- -------- ----------
Total bonds 4,826,789 80,727 174,604 4,732,912
Redeemable preferred stocks 360 - 11 349
----------- ------- -------- ----------
Total $4,827,149 $80,727 $174,615 $4,733,261
========== ======= ======== ==========
</TABLE>
<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>
62
<PAGE>
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements, continued
(In Thousands of Dollars)
- --------------------------------------------------------------------------------
The following table summarizes the amortized cost and estimated fair value of
debt securities, including redeemable preferred stocks, as of December 31, 1999
by contractual maturity.
<TABLE>
<CAPTION>
Amortized Estimated
Years to maturity: Cost Fair Value
----------- ----------
<S> <C> <C>
One or less $ 226,324 $ 215,589
After one through five 247,287 248,905
After five through ten 523,294 545,057
After ten 1,723,378 1,664,891
Mortgage and other asset-backed securities 2,106,506 2,058,470
----------- ----------
Total bonds 4,826,789 4,732,912
Redeemable preferred stocks 360 349
----------- ----------
Total $ 4,827,149 $4,733,261
=========== ==========
</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 7.5 years.
At December 31, 1999, the Company held $2,058,470 in mortgage and other
asset-backed securities. The structured securities portfolio consists of
commercial and residential mortgage pass-through holdings totaling $1,675,587
and securities backed by credit card receivables, auto loans, home equity and
manufactured housing loans totaling $382,883. These securities follow a
structured principal repayment schedule and are of high credit quality.
Securities totaling $1,412,879 are rated AAA and include $16,617 of
interest-only tranches . As of December 31, 1999 and 1998, the Company's
investments included $370,541 and $475,699, respectively, of the tranches
retained from the 1996 securitization of the Company's commercial mortgage loan
portfolio. These investments represented 37% and 42% of equity at December 31,
1999 and 1998, respectively.
At December 31, 1999, the largest industry concentration of the Company's
portfolio was investments in the finance industry of $506,017 representing 11%
of the total debt portfolio.
Proceeds during 1999, 1998 and 1997 from sales of available-for-sale securities
were $1,623,191, $1,931,269 and $1,353,112, respectively. Gross gains and gross
losses realized on those sales were $18,843 and $17,702, respectively, during
1999, $37,324 and $35,257, respectively, during 1998 and $21,799 and $8,990,
respectively, during 1997.
The Company's investment portfolio of debt securities is predominantly comprised
of investment grade securities. At December 31, 1999 and 1998, debt securities
with amortized cost totaling $218,351 and $192,724, respectively, were less than
investment grade. At December 31, 1999 and 1998, the Company held securities
with a carrying value of $0 and $9,170, respectively, which were to be
restructured pursuant to commenced negotiations. The Company did not hold any
debt securities which were non-income producing for the preceding twelve months
as of December 31, 1999 and 1998.
Equity Securities
During 1999, 1998 and 1997, the proceeds from sales of equity securities
amounted to $12,003, $35,496 and $20,374, respectively. The gross gains and
gross losses realized on those sales were $89 and $352, $3,095 and $239 and $975
and $239 for 1999, 1998 and 1997, respectively
63
<PAGE>
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements, continued
(In Thousands of Dollars)
- --------------------------------------------------------------------------------
Mortgage Loans
The following tables summarize the carrying value of mortgage loans, by property
type and geographic concentration, at December 31.
<TABLE>
<CAPTION>
1999 1998
--------- --------
<S> <C> <C>
Property Type
Office building $ 1,366 $ 9,204
Retail 8,414 5,553
Dwellings 16,062 24,741
Other 2,773 3,130
Valuation Allowance (1,500) (3,800)
-------- --------
Total $ 27,115 $ 38,828
======== ========
</TABLE>
<TABLE>
<CAPTION>
1999 1998
------------ --------
<S> <C> <C>
Geographic Concentration
Northeast $ 5,506 $10,273
Midwest 5,515 5,728
South 11,612 12,075
West 5,982 14,552
Valuation Allowance (1,500) (3,800)
------- -------
Total $27,115 $38,828
======= =======
</TABLE>
The following table presents changes in the mortgage loan valuation allowance
for the years presented:
<TABLE>
<CAPTION>
1999 1998
-------- -------
<S> <C> <C>
Balance at January 1 $ 3,800 $3,800
Reduction in provision (2,300) -
Charge-offs - -
------- ------
Balance at December 31 $ 1,500 $3,800
======= ======
</TABLE>
As of December 31, 1999 and 1998, the Company's mortgage loan portfolio
contained no loans delinquent over 60 days or in foreclosure and there were no
non-income producing mortgage loans for the preceding twelve months.
During 1999 and 1998, the Company did not restructure the terms of any
outstanding mortgages. As of December 31, 1999 and 1998, the mortgage loan
portfolio included $2,275 and $2,555, respectively, of restructured mortgage
loans.
Restructured mortgage loans include commercial loans for which the basic terms,
such as interest rate, maturity date, collateral or guaranty have been changed
as a result of actual or anticipated delinquency. Restructures do not include
mortgages refinanced upon maturity at or above current market rates. Gross
interest income on restructured mortgage loans on real estate that would have
been recorded in accordance with the original terms of such loans amounted to
$305 and $258 in 1999 and 1998, respectively. Gross interest income from these
loans included in net investment income totaled $211 and $236 in 1999 and 1998,
respectively.
64
<PAGE>
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements, continued
(In Thousands of Dollars)
- --------------------------------------------------------------------------------
At December 31, 1999 and 1998, no loans were considered to be impaired. The
Company had no investments in impaired loans during the year ended December 31,
1999. The average recorded investment in impaired loans during the year ended
December 31, 1998 was approximately $6,184. During 1998, $163 was received on
these impaired loans which was applied to the outstanding principal balance or
will be applied to principal at the date of foreclosure.
Real Estate
The following table summarizes the carrying value of the Company's real estate
holdings at December 31.
<TABLE>
<CAPTION>
1999 1998
-------- -------
<S> <C> <C>
Investment $19,461 $19,111
Properties held for sale - 1,914
Less: Valuation allowance (4,000) (5,234)
------- -------
Total $15,461 $15,791
======= =======
</TABLE>
At December 31, 1999 and 1998, accumulated depreciation on real estate amounted
to $7,233 and $6,218, respectively. Depreciation expense on real estate totaled
$1,015, $1,071 and $5,709 for the years ended December 31, 1999, 1998 and 1997,
respectively. During 1997, the Company sold its largest real estate investment
for $65,007 cash to an unrelated buyer. At the date of the sale, this property
had a carrying value of $61,914, net of related reserves, resulting in a gain of
$3,093.
Other
Investments on deposit with regulatory authorities as required by law were
$6,444 and $7,104 at December 31, 1999 and 1998, respectively.
4. INVESTMENT INCOME AND CAPITAL GAINS:
- ----------------------------------------
The following table summarizes the sources of investment income, excluding
investment gains/(losses), for the year ended December 31.
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Debt securities $385,963 $395,628 $390,852
Equity securities 311 206 1,371
Mortgage loans 2,706 4,268 12,098
Real estate 2,209 2,903 17,519
Policy loans 39,371 39,760 40,921
Short-term investments 830 2,032 2,428
Other invested assets 17,446 11,330 21,268
-------- -------- --------
Gross investment income 448,836 456,127 486,457
Less: Investment expense 11,104 11,430 26,251
Less: Discontinued operations 6,510 11,167 12,071
-------- -------- --------
Investment income, net $431,222 $433,530 $448,135
======== ======== ========
</TABLE>
65
<PAGE>
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements, continued
(In Thousands of Dollars)
- --------------------------------------------------------------------------------
The following table summarizes net realized capital gains/(losses) on
investments for the year ended December 31. Net realized capital gains/(losses)
include decreases in valuation allowances of $1,066, $235 and $3,154 in 1999,
1998 and 1997, respectively.
<TABLE>
<CAPTION>
1999 1998 1997
-------- ---------- --------
<S> <C> <C> <C>
Debt securities $ (4,506) $ 110 $ 12,991
Equity securities (263) 2,856 417
Mortgage loans 2,300 210 280
Real estate 173 4,148 (684)
Other 2,430 (2,109) (811)
Amortization of deferred acquisition costs 669 (1,303) (2,538)
-------- ---------- ---------
Net realized capital gains/(losses) $ 803 $ 3,912 $ 9,655
======== ========== =========
</TABLE>
The following table summarizes the change in unrealized gains and losses for
investments carried at fair value which are reflected in other comprehensive
income for the year ended December 31.
<TABLE>
<CAPTION>
1999 1998 1997
---------- ------- ---------
<S> <C> <C> <C>
Unrealized gains/(losses):
Debt securities $ (477,036) $ 86,594 $ 160,850
Equity securities (43) (2,092) 408
Other 5,555 (2,091) (14,581)
---------- ------- ---------
(471,524) 82,411 146,677
---------- ------- ---------
Less:
Deferred policy acquisition costs 117,050 (12,841) (45,043)
Deferred income taxes 123,937 (24,440) (35,355)
---------- -------- ---------
Net change in unrealized gains/(losses) $ (230,537) $ 45,130 $ 66,279
========== ======== =========
</TABLE>
The following table sets forth the reclassification adjustment required to avoid
double-counting in comprehensive income items that are included as part of net
income for a period that also had been part of other comprehensive income in
earlier periods:
<TABLE>
<CAPTION>
Reclassification Adjustments 1999 1998 1997
---------- -------- --------
<S> <C> <C> <C>
Unrealized holding gains/(losses) arising
during period $ (255,859) $ 53,576 $ 71,797
Reclassification adjustment for gains included
in net income 25,322 8,446 5,518
---------- -------- --------
Unrealized gains/(losses) on investments, net
of reclassification adjustment $ (230,537) $ 45,130 $ 66,279
========== ======== ========
</TABLE>
Reclassification adjustments reported in the above table for the years ended
December 31, 1999, 1998 and 1997 are net of income tax expense of $13,635,
$7,679 and $4,519, respectively, and $11,760, $5,815 and $2,875, respectively,
relating to the effects of such amounts on deferred acquisition costs.
66
<PAGE>
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements, continued
(In Thousands of Dollars)
- --------------------------------------------------------------------------------
5. FAIR VALUE INFORMATION:
- --------------------------
The following table summarizes the carrying value and estimated fair value of
the Company's financial instruments as of December 31, 1999 and 1998.
<TABLE>
<CAPTION>
1999 1998
----------------------------- ---------------------------------
Carrying Fair Carrying Fair
Value Value Value Value
------------ ----------- ----------- -----------
<S> <C> <C> <C> <C>
Financial Assets:
Debt securities, available for sale $ 4,733,261 $ 4,733,261 $ 5,500,924 $ 5,500,924
Equity securities
Common stock 276 276 158 158
Non-redeemable preferred stocks 3,673 3,673 4,003 4,003
Mortgage loans 27,115 28,615 38,828 42,675
Policy loans 642,420 612,501 638,376 605,144
Cash and cash equivalents 37,481 37,481 24,468 24,468
Short-term investments 6,934 6,934 1,024 1,024
Separate account assets 2,865,366 2,865,366 2,302,937 2,302,937
Other invested assets 137,766 137,766 98,571 98,571
Financial Liabilities:
Investment-type contracts
Individual annuities $ 997,686 $ 1,011,298 $ 1,108,274 $ 1,143,373
Guaranteed investment contracts 22,786 21,353 39,571 40,556
Other group annuities 85,465 85,213 113,974 115,422
Other policyholder funds 339,937 339,937 340,761 340,761
----------- ----------- ----------- -----------
Total policyholder funds 1,445,874 1,457,801 1,602,580 1,640,112
Policyholder's dividends payable 28,770 28,770 30,532 30,532
Separate account liabilities 2,865,366 2,865,366 2,302,937 2,302,937
</TABLE>
The estimated fair values for the Company's investments in debt and equity
securities are based on quoted market prices, where available. In situations
where market prices are not readily available, primarily private placements,
fair values are estimated using a formula pricing method based on fair values of
securities with similar characteristics. The estimated fair value of currently
performing mortgage loans is estimated by discounting the cash flows associated
with the investment, using an interest rate currently offered for similar loans
to borrowers with similar credit ratings. Loans with similar credit quality,
characteristics and time to maturity are aggregated for purposes of discounted
cash flow analysis. Assumptions regarding credit risk, cash flows and discount
rates are determined using the available market and borrower-specific
information. The estimated fair value for non-performing loans is based on the
estimated fair value of the underlying real estate, which is based on recent
appraisals or other estimation techniques. The estimated fair value of policy
loans is calculated by discounting estimated future cash flows using interest
rates currently being offered for similar loans. Loans with similar
characteristics are aggregated for purposes of the calculations. The carrying
values of cash, cash equivalents, short-term investments and separate account
assets approximate their fair values. The estimated fair values for the venture
capital limited partnerships are based on values determined by the partnerships'
managing general partners. The resulting estimated fair values may not be
indicative of the value which could be negotiated in an actual sale.
67
<PAGE>
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements, continued
(In Thousands of Dollars)
- --------------------------------------------------------------------------------
The fair values of the Company's liabilities for individual annuities,
guaranteed investment contracts and certain group annuities are estimated by
discounting the cash flows associated with the contracts, using an interest rate
currently offered for similar contracts with maturities similar to those
remaining for the contracts being valued. The statement values of policyholders'
dividends payable and separate account liabilities approximate their fair
values.
Currently, disclosure of estimated fair values is not required for all the
Company's assets and liabilities. Therefore, presentation of the estimated fair
value of a significant portion of assets without a corresponding valuation of
liabilities associated with insurance contracts can be misinterpreted. The
estimated fair values of liabilities under all of the Company's contracts are
considered in the overall management of interest rate risk. The continuing
management of the relationship between the maturities of the Company's
investments and the amounts due under insurance contracts reduces the Company's
exposure to changing interest rates.
The Company is exposed to interest rate risk on its interest-sensitive products.
The Company's investment strategy is designed to minimize interest risk by
managing the durations and anticipated cash flows of the Company's assets and
liabilities.
To minimize exposure and reduce risk from exchange and interest rate
fluctuations in the normal course of business, the Company enters into interest
rate swap programs for purposes other than trading. As of December 31, 1999 and
1998, the Company had interest rate swaps with aggregate notional amounts equal
to $20,000 and $95,000, respectively, with average unexpired terms of 7 months
and 8 months, respectively. Interest rate swap agreements involve the exchange
of fixed and floating rate interest payment obligations without an exchange of
the underlying notional principal amounts. During the term of the swap, the net
settlement amount is accrued as an adjustment to interest income. Gross
unrealized gains and losses, which represent fair value based on dealer-quoted
prices, were $335 and $0, respectively, at December 31, 1999 and $2,248 and $0,
respectively, at December 31, 1998. These fair values represent the amount at
risk if the counterparties default and the amount that the Company would receive
to terminate the contracts, taking into account current interest rates and,
where appropriate, the current creditworthiness of the counterparties.
In the normal course of business, the Company loans securities under
arrangements in which collateral is obtained in amounts greater than the current
market value of loaned securities. This collateral is held in the form of cash,
cash equivalents or securities issued or guaranteed by the United States
Government. The Company is at risk to the extent the value of loaned securities
exceeds the value of the collateral obtained. The Company controls this risk by
requiring collateral of the highest quality and requiring that additional
collateral be deposited when the market value of loaned securities increases in
relation to the collateral held or the value of the collateral held decreases in
relation to the value of the loaned securities. The Company had loaned
securities outstanding of $34,457 and $38,144 as of December 31, 1999 and 1998,
respectively.
68
<PAGE>
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements, continued
(In Thousands of Dollars)
- --------------------------------------------------------------------------------
6. INCOME TAXES:
- ----------------
The Company follows the asset and liability method of accounting for income
taxes whereby current and deferred tax assets and liabilities are recognized
utilizing currently enacted tax laws and rates. Deferred taxes are adjusted to
reflect tax rates at which future tax liabilities or assets are expected to be
settled or realized.
Deferred income taxes reflect the impact for financial statement reporting
purposes of temporary differences between the financial statement carrying
amounts and tax basis of assets and liabilities. The significant temporary
differences that give rise to the deferred tax assets and liabilities at
December 31 relate to the following:
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Deferred tax assets
Future policy benefits $ 90,877 $ 92,909
Dividend award 10,010 10,255
Allowances for investment losses 6,153 4,232
Employee benefit liabilities 30,479 29,762
Unrealized investment losses 17,934 -
Other 17,256 18,677
-------- --------
Total deferred tax asset 172,709 155,835
-------- --------
Deferred tax liabilities
Deferred acquisition costs 145,360 135,248
Unrealized investment gains - 105,993
Other 18,484 22,375
--------- ---------
Total deferred tax liability 163,844 263,616
--------- ---------
Net deferred tax liability (8,865) 107,781
Tax currently payable 40,784 34,853
--------- ---------
Accrued income tax payable $ 31,919 $ 142,634
========= =========
</TABLE>
The federal income taxes attributable to consolidated net income are different
from the amounts determined by multiplying consolidated net income before
federal income taxes by the expected federal income tax rate. The difference
between the amount of tax at the U.S. federal income tax rate of 35% and the
consolidated tax provision is summarized as follows:
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- -------
<S> <C> <C> <C>
Tax expense at 35% $ 45,697 $ 50,443 $ 44,442
Increase in income taxes resulting
from:
Differential earnings amount 3,010 2,681 6,942
Other 2,299 4,565 2,528
-------- --------- --------
Federal income tax expense $ 51,006 $ 57,689 $ 53,912
======== ========= ========
</TABLE>
69
<PAGE>
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements, continued
(In Thousands of Dollars)
- --------------------------------------------------------------------------------
The make up of the tax expense/(benefit) is as follows:
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Continuing operations $ 66,324 $ 57,019 $ 51,323
Discontinued operations:
Operations (2,137) 670 2,589
Sale (13,181) - -
--------- -------- --------
Total federal income tax expense $ 51,006 $ 57,689 $ 53,912
========= ======= ========
</TABLE>
As a mutual life insurance company, the Company is subject to Internal Revenue
Code provisions which require mutual, but not stock, life insurance companies to
include the Differential Earnings Amount (DEA) in each year's taxable income.
This amount is computed by multiplying the Company's average taxable equity base
by a prescribed rate, which is intended to reflect the difference between stock
and mutual companies' earnings rates.
The Internal Revenue Service has examined the Company's income tax returns
through the year 1994 and is currently examining years 1995 through 1997.
Management believes that an adequate provision has been made for potential
assessments.
7. BENEFIT PLANS:
- -----------------
The following table summarizes the funded status and accrued benefit cost for
the Company's defined benefit plans and other postretirement benefit plans as of
December 31:
<TABLE>
<CAPTION>
Pension Benefits Other Benefits
---------------- --------------
1999 1998 1999 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Benefit Obligation $(90,293) $(90,428) $(27,808) $ (26,439)
Fair value of plan assets 63,616 53,349 - -
------------- ------------- ------------- -------------
Funded Status $(26,677) $(37,079) $(27,808) $ (26,439)
============= ============= ============= =============
Accrued benefit cost recognized in the
consolidated balance sheet $(25,861) $(22,530) $(44,205) $ (44,558)
</TABLE>
The weighted-average assumptions used to measure the actuarial present value of
the projected benefit obligation were:
<TABLE>
<CAPTION>
Pension Benefits Other Benefits
---------------- --------------
1999 1998 1999 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Discount rate 6.75% 6.75% 6.75% 6.75%
Expected return on plan assets 8.00% 8.00% - -
Rate of compensation increase 5.50% 5.50% 5.00% 5.00%
</TABLE>
At December 31, 1999, the assumed health care cost trend rate used in measuring
the accumulated postretirement benefit obligation was 8% for 2000, grading to 5%
for 2004. At December 31, 1998, the assumed health care cost trend rate used in
measuring the accumulated postretirement benefit obligation was 8% for 1999,
grading to 5% for 2004. The assumed health care cost trend rate used at December
31, 1997 in measuring the accumulated postretirement benefit obligation was 8.5%
for 1998, grading to 5% for 2004. Assumed health care cost trend rates have a
significant effect on the amounts reported for the health care plans.
70
<PAGE>
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements, continued
(In Thousands of Dollars)
- --------------------------------------------------------------------------------
The contributions made and the benefits paid from the plans were:
<TABLE>
<CAPTION>
Pension Benefits Other Benefits
---------------- --------------
1999 1998 1999 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Benefit cost recognized in $ 5,072 $ 5,692 $ 1,140 $ 831
consolidated income statement
Employer contribution 1,741 6,687 1,493 1,415
Plan participants' contribution - - - -
Benefits paid 3,593 3,229 1,493 1,415
</TABLE>
The Company maintains four defined contribution pension plans for substantially
all of its employees and full-time agents. For two plans, designated
contributions of up to 6% or 8% of annual compensation are eligible to be
matched by the Company. Contributions for the third plan are based on tiered
earnings of full-time agents. The last plan, which covers employees of a
subsidiary, are determined on a discretionary basis by the Board of Directors of
that subsidiary. For the years ended December 31, 1999, 1998 and 1997, the
expense recognized for these plans was $11,192, $9,526 and $8,345, respectively.
The estimated fair value of the defined contribution plans' assets at December
31, 1999 and 1998 was $300,170 and $260,706, respectively.
8. REINSURANCE:
- ---------------
The Company has assumed and ceded reinsurance on certain life and annuity
contracts under various agreements. Reinsurance permits recovery of a portion of
losses from reinsurers, although the Company remains primarily liable as the
direct insurer on all risks reinsured. The Company evaluates the financial
strength of potential reinsurers and continually monitors the financial
condition of present reinsurers to ensure that amounts due from reinsurers are
collectible. The table below highlights the amounts shown in the accompanying
financial statements.
<TABLE>
<CAPTION>
Assumed Ceded to
Gross From Other Other Net
Amount Companies Companies Amount
--------------- --------------- -------------- ----------------
<S> <C> <C> <C> <C>
December 31, 1999:
Life Insurance in Force $ 33,554,483 $ 353,382 $ 8,185,527 $ 25,722,338
Premiums 149,187 6,399 16,803 138,783
Benefits 455,518 15,629 32,705 438,442
Reserves 5,446,024 175 220,656 5,225,543
December 31, 1998:
Life Insurance in Force $ 32,066,821 $ 5,115,520 $ 5,954,701 $ 31,227,640
Premiums 166,708 10,586 5,940 171,354
Benefits 457,239 15,710 17,913 455,036
Reserves 5,594,712 1,688 62,198 5,534,202
</TABLE>
For the years ended December 31, 1999 and 1998, the above numbers include
premiums from discontinued operations of $8,267 and $16,739, respectively, and
benefits from discontinued operations of $8,651 and $9,888, respectively.
During 1997, the Company had gross premiums of $190,754, assumed premiums of
$11,189 and ceded premiums of $6,723 and gross benefits of $492,857, assumed
benefits of $14,293 and ceded benefits of $26,916. Reinsurance receivables with
a carrying value of $205,559 and $55,119 were associated with a single reinsurer
at December 31, 1999 and 1998, respectively.
71
<PAGE>
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements, continued
(In Thousands of Dollars)
- --------------------------------------------------------------------------------
9. COMMITMENTS AND CONTINGENCIES:
- --------------------------------
The Company and its subsidiaries are respondents in a number of proceedings,
some of which involve extra-contractual damage in addition to other damages. In
addition, insurance companies are subject to assessments, up to statutory
limits, by state guaranty funds for losses of policyholders of insolvent
insurance companies. In the opinion of management, the outcome of the
proceedings and assessments are not likely to have a material adverse effect on
the financial position of the Company.
The Company, in the ordinary course of business, extends commitments relating to
its investment activities. As of December 31, 1999, the Company had outstanding
commitments totaling $70,757 relating to these investment activities. The fair
value of these commitments approximates the face amount.
10. STATUTORY INFORMATION:
- ---------------------------
State insurance regulatory authorities prescribe or permit statutory accounting
practices for calculating net income and capital and surplus which differ in
certain respects from generally accepted accounting principles (GAAP). The
significant differences relate to deferred acquisition costs, which are charged
to expenses as incurred; federal income taxes, which reflect amounts that are
currently taxable; and benefit reserves, which are determined using prescribed
mortality, morbidity and interest assumptions, and which, when considered in
light of the assets supporting these reserves, adequately provide for
obligations under policies and contracts. In addition, the recording of
impairments in the value of investments generally lags recognition under GAAP.
The combined insurance companies' statutory capital and surplus at December 31,
1999 and 1998 was $558,700 and $495,212, respectively. The combined insurance
companies' net income, determined in accordance with statutory accounting
practices, for the years ended December 31, 1999, 1998 and 1997, was $76,680,
$83,676 and $63,613, respectively.
The National Association of Insurance Commissioners has released a comprehensive
guide to Statutory Accounting Principles, Accounting Practices and Procedures
Manual - version effective January 1, 2001, (Codification) to provide a
consistent basis of statutory accounting effective for years ending December 31,
2001. The Company does not expect the adoption of Codification to have a
material effect on its statutory capital and surplus.
72
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Trustees
The Penn Mutual Life Insurance Company
Philadelphia, Pennsylvania
We have audited the accompanying consolidated balance sheets of The Penn Mutual
Life Insurance Company and subsidiaries as of December 31, 1999 and 1998, and
the related consolidated income statements, statements of changes in equity, and
statements of cash flows for each of the three years in the period ended
December 31, 1999. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of The
Penn Mutual Life Insurance Company and subsidiaries as of December 31, 1999 and
1998, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 1999, in conformity with accounting
principles generally accepted in the United States.
ERNST & YOUNG LLP
Philadelphia, Pennsylvania
January 28, 2000
73
<PAGE>
APPENDIX A
Minimum Initial Annual Premiums
The following table shows for Insureds of varying ages, the minimum
initial annual premium for a Policy with a Basic death benefit of $1,000,000.
The table assumes the Insureds will be placed in a nonsmoker class and that no
supplemental benefits will be added to the base Policy.
Age of Male Age of Female Minimum Initial Annual
Premium
- --------------------------------------------------------------------------------
35 35 $2,802
- --------------------------------------------------------------------------------
40 45 $3,224
- --------------------------------------------------------------------------------
45 45 $3,296
- --------------------------------------------------------------------------------
50 45 $3,376
- --------------------------------------------------------------------------------
55 45 $3,462
- --------------------------------------------------------------------------------
55 55 $4,248
- --------------------------------------------------------------------------------
60 58 $4,687
- --------------------------------------------------------------------------------
65 70 $7,146
- --------------------------------------------------------------------------------
70 62 $6,391
- --------------------------------------------------------------------------------
A-1
<PAGE>
APPENDIX B
Administrative Surrender Charges per $1,000 of Initial Specified Amount
Attained Age of Younger Charge Per Each $1,000 of
Insured on Policy Date Initial Specified Amount
----------------------------------------------------------------------
20-29 $6.00
----------------------------------------------------------------------
30-39 $8.00
----------------------------------------------------------------------
40-49 $10.00
----------------------------------------------------------------------
50-59 $12.00
----------------------------------------------------------------------
60-over $14.00
----------------------------------------------------------------------
Sample Surrender Charge Premiums for $1,000,000 Specified Amount
(NS = Nonsmoker; S = Smoker)
Age of Smoking Age of Smoking Maximum Surrender
Male Status Female Status Charge Premium
----------------------------------------------------------------------
50 NS 45 NS $9,254
----------------------------------------------------------------------
65 NS 65 NS $29,399
----------------------------------------------------------------------
55 S 55 S $16,280
----------------------------------------------------------------------
55 S 45 NS $10,392
----------------------------------------------------------------------
45 NS 45 S $9,040
----------------------------------------------------------------------
35 NS 35 NS $5,364
----------------------------------------------------------------------
70 NS 62 S $25,370
----------------------------------------------------------------------
40 S 45 S $9,044
----------------------------------------------------------------------
65 S 70 NS $31,204
----------------------------------------------------------------------
60 NS 58 NS $16,885
----------------------------------------------------------------------
B-1
<PAGE>
APPENDIX C
Policies Issued to New York Residents
For Policies issued to New York residents, the surrender charge declines
during the 6th through the 14th policy years so that no surrender charge is
deductible during the 15th and later policy years. The surrender factors used to
calculate the surrender charge for such Policies are as follows:
Surrender Factor
Surrender During Applied to (c) in
Policy Year Formula on Page
-------------------------------------------------------------
1st through 5th 1.00
-------------------------------------------------------------
6th .90
-------------------------------------------------------------
7th .80
-------------------------------------------------------------
8th .70
-------------------------------------------------------------
9th .60
-------------------------------------------------------------
10th .50
-------------------------------------------------------------
11th .40
-------------------------------------------------------------
12th .30
-------------------------------------------------------------
13th .20
-------------------------------------------------------------
14th .10
-------------------------------------------------------------
15th 0
-------------------------------------------------------------
C-1
<PAGE>
APPENDIX D
Illustrative Net Single Premium Factors
For a Policy Issued to a Male Nonsmoker, age 65, standard underwriting
class and Female, Nonsmoker, age 65, standard underwriting class.
65 2.2464 83 1.2787
---------------------------------------------------------------------------
66 2.1200 84 1.2557
---------------------------------------------------------------------------
67 2.0406 85 1.2348
---------------------------------------------------------------------------
68 1.9656 86 1.2159
---------------------------------------------------------------------------
69 1.8949 87 1.1987
---------------------------------------------------------------------------
70 1.8283 88 1.1831
---------------------------------------------------------------------------
71 1.7657 89 1.1686
---------------------------------------------------------------------------
72 1.7068 90 1.1550
---------------------------------------------------------------------------
73 1.6517 91 1.1421
---------------------------------------------------------------------------
74 1.6002 92 1.1295
---------------------------------------------------------------------------
75 1.5523 93 1.1171
---------------------------------------------------------------------------
76 1.5080 94 1.1044
---------------------------------------------------------------------------
77 1.4670 95 1.0913
---------------------------------------------------------------------------
78 1.4290 96 1.0778
---------------------------------------------------------------------------
79 1.3940 97 1.0643
---------------------------------------------------------------------------
81 1.3316 98 1.0520
---------------------------------------------------------------------------
80 1.3615 99 1.0321
---------------------------------------------------------------------------
D-1
<PAGE>
PROSPECTUS
FOR
VARIABLE ESTATEMAX II
a last survivor 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 on two insureds and a cash surrender
value that may vary 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
Money Market Fund Independence Capital Management, Inc.
Limited Maturity Bond Fund Independence Capital Management, Inc.
Quality Bond Fund Independence Capital Management, Inc.
High Yield Bond Fund T. Rowe Price Associates, Inc.
Flexibly Managed Fund T. Rowe Price Associates, Inc.
Growth and Income Fund Independence Capital Management, Inc.
Growth Equity Fund Independence Capital Management, Inc.
Large Cap Value Fund Putnam Investment Management, Inc.
Index 500 Fund Wells Capital Management Incorporated
Mid Cap Growth Fund Turner Investment Partners, Inc.
Mid Cap Value Fund Neuberger Berman Management, Inc.
Emerging Growth Fund RS Investment Management, Inc.
Small Cap Value Fund Royce & Associates, Inc.
International Equity Fund Vontobel USA, Inc.
Neuberger Berman Advisors Management Trust Manager
Balanced Portfolio Neuberger Berman Management, Inc.
Fidelity Investments' Variable Insurance Products Fund Manager
Equity-Income Portfolio Fidelity Management and Research Company
Growth Portfolio Fidelity Management and Research Company
Fidelity Investments' Variable Insurance Products Fund II Manager
Asset Manager Portfolio Fidelity Management and Research Company
Morgan Stanley's The Universal Institutional Funds, Inc. Manager
Emerging Markets Equity (International) Portfolio Morgan Stanley Asset Management
- ---------------------------------------------------------------------------------------------------------
</TABLE>
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.
May 1, 2000
1
<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" sections
start on page 20.
o After the Illustrations sections 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 29.
o The financial statements for Penn Mutual and Penn Mutual Variable
Life Account I follow the Additional Information section. They start
on page 43.
o Appendices A through D are after the financial statements. The
Appendices are referred to in the Basic Information section. They
provide specific information and examples to help 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.
2
<PAGE>
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?............................................................4
Who Owns the Policy?...........................................................4
What Payments Must Be Made Under the Policy?...................................5
How Will the Value of the Policy Change Over Time?.............................6
What Are the Fees and Charges Under the Policy?................................7
What Are the Fees and Expenses Paid by the Investment Funds? .................10
Are There Other Charges That Penn Mutual Could Deduct in the Future?..........11
How Can I Change My Policy's Investment Allocations?..........................12
What Is a Policy Loan?........................................................13
How Can I Withdraw Money from My Policy?......................................13
What Is the Timing of Transactions Under the Policy?..........................14
How Much Life Insurance Coverage Does the Policy Provide?.....................14
Can I Change Insurance Coverage Under My Policy?..............................15
What Are the Supplemental Benefit Riders That I Can Buy?......................16
Do I Have the Right to Cancel My Policy?......................................17
Can I Choose Different Payout Options Under My Policy? .......................17
How Is the Policy Treated for Federal Income Tax Purposes?....................18
How Do I Communicate With Penn Mutual?........................................18
How Does Penn Mutual Communicate With Me?.....................................19
3
<PAGE>
What Is the Policy?
The Policy provides life insurance on two persons. It is called a "last
survivor" Policy because no insurance proceeds ("death benefit") are payable
until the death of the second of two insureds (the "last surviving insured").
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.
While at least one of the two insured persons is alive, 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
investment options
o Borrow from your Policy
o Change the beneficiary who will receive the death benefit
o Decrease 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 each or one of the
proposed insureds. 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 your Policy is the policy anniversary nearest the
younger Insured's 100th birthday. If the Policy is still in force on the
maturity date, a maturity benefit will be paid to you. The maturity benefit is
equal to the policy value less any policy loan on the maturity date. Upon the
written request of the owner, this policy will continue in force beyond the
maturity date. Thereafter, the death benefit will be the net policy value.
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. 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.
4
<PAGE>
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. Also, if you make a premium
payment that exceeds certain other limits imposed under federal tax law, you
could incur a penalty on amounts you take out of your policy. We will monitor
the Policy and will attempt to notify you on a timely basis if you are about to
exceed this limit. See How is this 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 Five Year No-Lapse Feature and Lapse and Reinstatement below.
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.
5
<PAGE>
Five Year No-Lapse Feature
Your Policy will remain in force during the first five 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 equals or exceeds
(b) The monthly "no-lapse premium" specified in your Policy, multiplied
by the number of months the Policy has been in force.
The monthly "no-lapse premium" will generally be less than the monthly
equivalent of the planned premium you specified.
The five 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 five-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" from the date we notify you 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.
If the last survivor dies 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 both insureds are alive or if one of the
insureds died prior to the lapse. You will have to provide evidence that the
insured person (or persons, if both insureds are living) 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.
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 for the
first premium payment which will be invested in the Penn Series Money Market
Fund during the free look period of time).
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 4%. 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
6
<PAGE>
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 of the policy value allocated or
transferred to the variable investment options,
o plus interest credited to the amount of your policy value allocated
or transferred to the fixed interest option,
o minus policy 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? described later in this section.
For more information on policy values and the variable and fixed
investment options, see also the Additional Information section of this
prospectus.
What Are the Fees and Charges Under the Policy?
Premium Charge
o Premium Charge - 7.5% is deducted from premium payments before
allocation to the investment options. It consists of 2.5% to cover
state premium taxes and 5% to partially compensate us for the expense
of selling and distributing the Policies. For premiums received after
the first 15 policy years, we intend to deduct only the 2.5% to cover
state premium taxes. We will notify you in advance if we change our
current rates. For policies issued to New York residents, see the
table in Appendix C at the end of this Prospectus.
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 issue age and length of time the Policy
has been in effect 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. We currently
place people we insure in the following rate classes: a smoker or
nonsmoker standard rate class, a preferred underwriting class, or a
rate class involving a higher mortality risk (a "substandard class").
7
<PAGE>
Regardless of the table used, cost of insurance rates generally
increase each year that you own your Policy, as the insureds'
attained ages increase. The charge is deducted pro-rata from your
variable investment and fixed interest accounts.
o Administrative Charge - A maximum monthly charge to help cover our
administrative costs. This charge has two parts: (1) a flat dollar
charge of up to $15 (Currently, the flat dollar charge is $15 in the
first policy year and $5 thereafter -- 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 not to exceed 0.20 per $1,000 per month of initial
specified amount of insurance (Currently, the charge is $0.15 per
$1,000 per month of initial specified amount of insurance up to a
maximum amount of $375.00). Administrative expenses relate to premium
billing and collection, recordkeeping, processing of death benefit
claims, policy loans and Policy changes, reporting and overhead
costs, processing applications and establishing Policy records. 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.
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 the fixed interest
option. It is guaranteed not to exceed 0.90% for the duration of the policy.
Currently, the charge is an annual rate of 0.90% of assets of the policy value
allocated in the variable accounts. After the fifteenth policy year, we intend
to charge 0.60%. 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. For policies issued to New York residents, see the table in Appendix C
at the end of this Prospectus.
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 transfer charge on any transfer of
policy value among the variable investment options and/or fixed interest option
in excess of the 12 transfers each policy year. We will notify you before
imposing the charge. No transfer charge will be made if the specified amount of
insurance exceeds $4,999,999.
Surrender Charge
If you surrender your Policy during the first 16 policy years, we will
deduct a surrender charge in calculating the surrender proceeds payable. We
determine the surrender charge by the following formula:
the sum of (a) plus (b), multiplied by (c), where:
8
<PAGE>
(a) = 25% of the lesser of (i) the sum of all premiums paid in the
Policy and (ii) the maximum surrender charge premium (which is
an amount calculated separately for each policy);
(b) = an administrative charge based on the initial specified
amount of insurance and the younger insured's attained age on
the policy date (ranging from $6 at insured's age 20 to $14 at
insured's age 60 and over, per $1,000 of initial specified
amount -- for more information on this charge, see Appendix B
at the end of this prospectus); and
(c) = the applicable surrender factor for the policy year during
which the surrender is made (see table below).
Surrender Factor
Surrender During Policy Year Applied to (c) in Formula
- --------------------------------------------------------------------------------
1st through 7th 1.00
- --------------------------------------------------------------------------------
8th .90
- --------------------------------------------------------------------------------
9th .80
- --------------------------------------------------------------------------------
10th .70
- --------------------------------------------------------------------------------
11th .60
- --------------------------------------------------------------------------------
12th .50
- --------------------------------------------------------------------------------
13th .40
- --------------------------------------------------------------------------------
14th .30
- --------------------------------------------------------------------------------
15th .20
- --------------------------------------------------------------------------------
16th .10
- --------------------------------------------------------------------------------
17th and later 0
- --------------------------------------------------------------------------------
Under the formula, the surrender charge declines by 10% each policy
year after the seventh, to $0 by the 17th policy year so that, after the 16th
policy year, there is no surrender charge. For policies issued to New York
residents, see the table in Appendix C at the end of this prospectus.
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 of the surrender charge covers
administrative expenses associated with underwriting and issuing the Policy,
including the costs of processing applications, conducting medical exams,
determining insurability and the Insureds' rate class, and creating and
maintaining Policy records, as well as the administrative costs of processing
surrender requests. We do not anticipate making any profit on the administrative
charge component of the surrender charge.
Partial Surrender Charge
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.
9
<PAGE>
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.
Underlying Fund Annual Expenses (as a % of portfolio average net assets)
<TABLE>
<CAPTION>
Administrative
Management Fees and Corporate Accounting Other Total Fund
(after waiver) Service Fees Fees Expenses Expenses
-------------- -------------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C>
Money Market(1) ............ 0.20% 0.15% 0.08% 0.08% 0.51%
Limited Maturity Bond(1) ... 0.30% 0.15% 0.08% 0.03% 0.56%
Quality Bond(1) ............ 0.35% 0.15% 0.08% 0.10% 0.68%
High Yield Bond(2) ......... 0.50% 0.15% 0.08% 0.09% 0.82%
Flexibly Managed(1) ........ 0.60% 0.15% 0.05% 0.06% 0.86%
Growth Equity(1) ........... 0.65% 0.15% 0.06% 0.05% 0.91%
Large Cap Value(1)* ........ 0.60% 0.15% 0.06% 0.05% 0.86%
Index 500 Fund(1) .......... 0.07% 0.09% 0.06% 0.03% 0.25%(3)
Mid Cap Growth Fund(1) ..... 0.70% 0.15% 0.08% 0.07% 1.00%
Mid Cap Value Fund(1) ...... 0.55% 0.15% 0.08% 0.08% 0.86%
Emerging Growth(2) ......... 0.73% 0.15% 0.07% 0.09% 1.04%
Small Cap Value (1)* ....... 0.85% 0.15% 0.08% 0.09% 1.17%
International Equity(1) .... 0.85% 0.15% 0.08% 0.10% 1.18%
</TABLE>
- ----------------------
(1) The expenses are estimates provided by the Funds' investment adviser.
(2) The expenses are for the last fiscal year.
(3) The total expenses for the Index 500 Fund are estimated to be 0.31% if the
Fund's administrator does not waive its Administrative and Corporate Services
Fee.
* Prior to May 1, 2000, the Penn Series Large Cap Value Fund was the Penn Series
Value Equity Fund and the Penn Series Small Cap Value Fund was the Penn Series
Small Capitalization Fund.
- --------------------------------------------------------------------------------
Neuberger Berman Advisers Management Trust (a)
Underlying Fund Annual Expenses (as a % of portfolio average net assets)
<TABLE>
<CAPTION>
Management,
Advisory and
Administration Other Total Fund
Fees Expenses Expenses
-------------- -------- ----------
<S> <C> <C> <C>
Balanced........................................................... 0.85% 0.18% 1.03%
</TABLE>
- ----------------------
(a) Neuberger Berman Advisers Management Trust (the "Trust") is divided into
portfolios (each a "Portfolio"). Each Portfolio invests in a corresponding
series ("Series") of the Trust. This table shows the current expenses paid by
the Balanced Portfolio and the Portfolio's share of the current expenses of its
Series. See "Expenses" in the Trust's Prospectus.
- --------------------------------------------------------------------------------
10
<PAGE>
Fidelity Investments' Variable Insurance Products Fund (a)
Underlying Fund Annual Expenses (as a % of portfolio average net assets)
<TABLE>
<CAPTION>
Management Other Total Fund
Fee Expenses Expenses
---------- -------- ----------
<S> <C> <C> <C>
Equity-Income.............................................. 0.49% 0.07% 0.56%
Growth..................................................... 0.59% 0.06% 0.65%
</TABLE>
- ----------------------
(a) These expenses are for the last fiscal year. Some of the brokerage
commissions paid by the fund reduced the expenses shown in this table. Without
this reduction, total expenses would have been 0.57% for the Equity Income
Portfolio and 0.66% for the Growth Portfolio.
- --------------------------------------------------------------------------------
Fidelity Investments' Variable Insurance Products Fund II
Underlying Fund Annual Expenses (as a % of portfolio average net assets)
<TABLE>
<CAPTION>
Management Fee Other Total Fund
(After Waiver) Expenses Expenses
-------------- -------- ----------
<S> <C> <C> <C>
Asset Manager (a)............................................ 0.54% 0.08% 0.62%
</TABLE>
- ----------------------
(a) The expenses presented are for the last fiscal year. Some of the brokerage
commissions paid by the fund reduced the expenses shown in this table. Without
this reduction, total expenses would have been 0.63% for the Asset Manager
Portfolio.
- --------------------------------------------------------------------------------
Morgan Stanley's The Universal Institutional Funds, Inc.
Underlying Fund Annual Expenses (as a % of portfolio average net assets)
<TABLE>
<CAPTION>
Management Other Total Fund
Fee Expenses Expenses
---------- -------- ----------
<S> <C> <C> <C>
Emerging Markets Equity (International)...................... 1.25% 0.50% 1.75%
</TABLE>
- --------------------------------------------------------------------------------
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. 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.
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.
11
<PAGE>
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 condition;
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.
The Policy is not designed for individuals and professional market
timing organizations that use programmed and frequent transfers among investment
options. We therefore may restrict market timing when we believe it is in the
interest of all of our Policy holders to do so.
Dollar Cost Averaging
This is a program of automatic monthly transfers out of the money
market variable investment option into one or more of the other investment
options and to the fixed interest 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 is a program that 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
12
<PAGE>
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.
Interest charged on a policy loan is 5.0% 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 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. The special loan
account will earn interest at 4.0% (or more in our discretion). With the
interest we credit to the special loan account, the net cost of the policy loan
is 1%. After the tenth policy year, we intend to credit interest at the rate of
4.75% (which will result in a net policy loan cost of 0.25% in those years).
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.
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.
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 $200,000.
13
<PAGE>
If you elected the Option 1 insurance coverage (see How Much Insurance
Coverage Does My Policy Provide? below), a partial surrender will reduce your
specific amount of insurance.
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
of risk and administrative work 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 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 Coverage Does the Policy Provide?
In your application for the Policy, you will tell us how much life
insurance coverage you want on the lives of the two persons to be insured. This
is called the "specified amount" of insurance. The minimum specified amount of
insurance is $200,000.
When the survivor of the insured persons dies, we will pay the death
benefit less the amount of any outstanding policy loan. We offer two different
types of death benefits. 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 policy value multiplied by the
applicable net single premium factor.
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 policy value multiplied by the net single premium factor.
14
<PAGE>
Net single premium factors are based on the insureds' sexes, rate
classes and attained ages on the date of calculation. The factor decreases each
policy anniversary as the insureds' ages increase. A table of net single premium
factors as of each policy anniversary is included in your Policy. A table
illustrating net single premium factors is included in Appendix D at the end of
this prospectus.
In order for the Policy to qualify as "life insurance" for federal
income taxes, it must satisfy the "cash value accumulation test" under Section
7702(b) of the Internal Revenue Code of 1986, as amended. The test requires that
under the terms of the Policy, the death benefit must be sufficient so that the
policy value does not at any time exceed the net single premium required to pay
for the future benefits provided under the policy. The net single premiums
factors included in your Policy are intended to satisfy the cash value
accumulation test.
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. Because of that, the
policy value will tend to be higher under Option 1 than under Option 2 for the
same premium payments.
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
$200,000;
o no change may be made in the first policy year and no more than one
change may be made in any policy year;
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.
Decrease in Specified Amount of Insurance
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.
15
<PAGE>
o any decrease in the specified amount of insurance must be at least
$10,000 and the specified amount after the decrease must be at least
$200,000.
You may not increase the specified amount of insurance under your
Policy.
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.
Flexible Period Single Life Term Rider -- provides term insurance
covering the named insured for the designated period.
Policy Split Option -- permits the Policy to be split into two fixed
benefit (nonvariable) policies upon the issuance of a final divorce
decree relating to the two insureds or a change in federal estate tax
law that results in the inability to defer estate taxes until the death
of the last surviving Insured.
Estate Growth Benefit -- provides for automatic annual increase of 3%
or 6% of the initial specified amount of insurance.
Change of Insured -- permits a change in one insured so long as the new
insured has the same insurable relationship to the remaining insured as
did the insured being replaced.
Supplemental Term Insurance -- provides additional death benefit
payable on the death of the last surviving insured if the death occurs
during the term of the Policy.
Guaranteed Continuation of Policy -- guarantees that the Policy will
remain in force and a death benefit will be payable regardless of the
sufficiency of the net cash surrender value of the Policy.
Extended Maturity -- provides that the maturity date of the Policy is
extended, subject to conditions and limitations.
Return of Premium Supplement 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.
Estate Preservation -- provides additional death benefit payable on the
death of the last surviving insured if the death occurs during the
first four Policy years.
16
<PAGE>
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.
Do I Have the Right to Cancel My Policy?
You have the right to cancel your Policy within 10 days after you
receive it or within 45 days after you signed your application (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.
You will receive a refund of your premium as of the date of
cancellation. The date of cancellation will be the date we receive the Policy.
During the "free look" period, money held under your Policy will be
invested in the Penn Series Money Market Fund.
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 investment 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.
17
<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, Post Office Box 7460, Philadelphia,
Pennsylvania, 19172, or express all checks and money orders to The Penn Mutual
Life Insurance Company, Receipts Processing (3V), 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 decrease 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 privilege to a third party,
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
have 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 does not include this required information.
18
<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.
How Does Penn Mutual Communicate With Me?
At least once 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 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.
19
<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 two insured persons of given ages on the issue
date, would vary over time if planned premiums were paid annually and the return
on the assets in the selected funds were a uniform gross annual rate of 0%, 6%
and 12%. The values would be different from those shown if the returns averaged
0%, 6% or 12%, but fluctuated over and under those averages throughout the years
shown. The tables also show planned premiums accumulated at 5% interest. The
hypothetical investment rates of return are illustrative only and should not be
deemed a representation of past or future investment rates of return. Actual
rates of return for a particular Policy may be more or less than the
hypothetical investment rates of return and will depend on a number of factors
including the investment allocations made by an Owner, prevailing rates and
rates of inflation.
The tables reflect the daily charge against the investments for the
mortality and expense risks we assume, which is equivalent to an effective
annual charge of 0.90% of assets and currently is reduced to 0.60% of assets
after the fifteenth policy year. In addition, the tables assume an average
annual expense ratio of 0.85% of the underlying investment funds available under
the Policies. The average annual expense ratio is based on the expense ratios of
the Funds for the last fiscal year or, in the case of certain Funds, estimates
of their expense ratios. 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 0.91%. For information on fund expenses, see the
prospectuses on the funds that accompany 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 -1.75%, 4.25% and
10.25%, respectively, and -1.45%, 4.55% and 10.55%, respectively, at current
rates after the fifteenth policy year.
The tables also reflect the deduction of the monthly 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. All the tables reflect the fact that
no charges for federal or state income taxes are currently made against the
investments made under a hypothetical policy and assume no policy loans or
charges for supplemental benefits.
The illustrations are based on our sex distinct rates for standard
nonsmokers. Upon request, we will furnish a comparable illustration based upon
the proposed Insureds' individual circumstances. Such illustrations may assume
different hypothetical rates of return than those illustrated in the following
tables.
For New York residents, the illustrations using current cost of
insurance rates may differ after the end of Policy Year 15. Upon request, we
will furnish illustrations reflecting current costs and charges for New York
residents.
20
<PAGE>
Illustration of Policy Values
Penn Mutual Life Insurance Company
Male Issue Age: 56 Non-Smoker
Female Issue Age: 53 Non-Smoker
$13,000 ANNUAL PREMIUM
$1.000,000 SPECIFIED AMOUNT
DEATH BENEFIT OPTION 1
USING CURRENT COST OF INSURANCE RATES
<TABLE>
<CAPTION>
0% Hypothetical 6% Hypothetical 12% Hypothetical
Premiums Gross Investment Return Gross Investment Return Gross Investment Return
Accumulated
End of at Net Cash Net Cash Net Cash
Policy 5% Interest Policy Surrender Death Policy Surrender Death Policy Surrender Death
Year Per Year Value Value Benefit Value Value Benefit Value Value Benefit
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 13,650 9,809 0 1,000,000 10,465 0 1,000,000 11,122 0 1,000,000
2 27,983 21,246 5,934 1,000,000 23,234 7,921 1,000,000 25,301 9,989 1,000,000
3 43,032 32,359 17,047 1,000,000 36,418 21,105 1,000,000 40,803 25,490 1,000,000
4 58,833 43,129 27,816 1,000,000 50,009 34,697 1,000,000 57,738 42,425 1,000,000
5 75,425 53,539 38,226 1,000,000 64,005 48,692 1,000,000 76,234 60,921 1,000,000
6 92,846 63,574 48,262 1,000,000 78,403 63,090 1,000,000 96,433 81,121 1,000,000
7 111,138 73,216 57,903 1,000,000 93,195 77,882 1,000,000 118,490 103,178 1,000,000
8 130,345 82,457 68,676 1,000,000 108,389 94,608 1,000,000 142,592 128,811 1,000,000
9 150,513 91,272 79,022 1,000,000 123,974 111,724 1,000,000 168,927 156,677 1,000,000
10 171,688 99,642 88,923 1,000,000 139,946 129,227 1,000,000 197,718 186,999 1,000,000
15 294,547 133,765 130,702 1,000,000 225,196 222,134 1,000,000 388,052 384,989 1,000,000
20 451,350 158,671 158,671 1,000,000 328,141 328,141 1,000,000 707,241 707,241 1,148,804
25 651,475 170,100 170,100 1,000,000 450,296 450,296 1,000,000 1,225,953 1,225,953 1,743,531
30 906,890 152,363 152,363 1,000,000 591,726 591,726 1,000,000 2,055,407 2,055,407 2,635,197
</TABLE>
(1) Assumes that no policy loans have been made.
(2) Current values reflect current cost of insurance rates, a monthly
administrative charge of $15.00 in year 1 and $5.00 thereafter, and a
mortality and expense risk charge of 0.90% of assets in years 1-15 and
0.60% thereafter.
(3) Net investment returns are calculated as the hypothetical gross investment
returns less all charges and deductions shown in the prospectus.
(4) Assumes that the premium is paid at the beginning of each policy year.
Values would be different if the premiums are paid with a different
frequency or in different amounts.
THE HYPOTHETICAL INVESTMENT RATES OF RETURN SHOWN ABOVE AND ELSEWHERE IN THIS
PROSPECTUS ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF
PAST OR FUTURE INVESTMENT RATES OF RETURN. ACTUAL RATES OF RETURN MAY BE MORE OR
LESS THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS INCLUDING THE
INVESTMENT ALLOCATIONS MADE BY AN OWNER, PREVAILING RATES AND RATES OF
INFLATION. THE DEATH BENEFIT AND CASH VALUE FOR A POLICY WOULD BE DIFFERENT FROM
THOSE SHOWN IF THE ACTUAL RATES OF RETURN AVERAGED 0%, 6% OR 12% OVER A PERIOD
OF YEARS BUT ALSO FLUCTUATED ABOVE OR BELOW THOSE AVERAGES FOR INDIVIDUAL POLICY
YEARS. NO REPRESENTATION CAN BE MADE BY THE COMPANY OR THE FUND THAT THESE
HYPOTHETICAL RATES OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER
ANY PERIOD OF TIME.
21
<PAGE>
Illustration of Policy Values
Penn Mutual Life Insurance Company
Male Issue Age: 56 Non-Smoker
Female Issue Age: 53 Non-Smoker
$13,000 ANNUAL PREMIUM
$1.000,000 SPECIFIED AMOUNT
DEATH BENEFIT OPTION 1
USING GUARANTEED COST OF INSURANCE RATES
<TABLE>
<CAPTION>
0% Hypothetical 6% Hypothetical 12% Hypothetical
Premiums Gross Investment Return Gross Investment Return Gross Investment Return
Accumulated
End of at Net Cash Net Cash Net Cash
Policy 5% Interest Policy Surrender Death Policy Surrender Death Policy Surrender Death
Year Per Year Value Value Benefit Value Value Benefit Value Value Benefit
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 13,650 9,215 0 1,000,000 9,851 0 1,000,000 10,489 0 1,000,000
2 27,983 20,544 5,231 1,000,000 22,471 7,159 1,000,000 24,477 9,164 1,000,000
3 43,032 31,550 16,237 1,000,000 35,500 20,187 1,000,000 39,767 24,455 1,000,000
4 58,833 42,214 26,901 1,000,000 48,929 33,616 1,000,000 56,469 41,156 1,000,000
5 75,425 52,513 37,201 1,000,000 62,748 47,435 1,000,000 74,700 59,387 1,000,000
6 92,846 62,424 47,111 1,000,000 76,944 61,632 1,000,000 94,589 79,277 1,000,000
7 111,138 71,914 56,602 1,000,000 91,498 76,186 1,000,000 116,277 100,964 1,000,000
8 130,345 80,943 67,162 1,000,000 106,380 92,599 1,000,000 139,906 126,125 1,000,000
9 150,513 89,457 77,207 1,000,000 121,547 109,297 1,000,000 165,632 153,382 1,000,000
10 171,688 97,389 86,671 1,000,000 136,944 126,255 1,000,000 193,616 182,897 1,000,000
15 294,547 124,922 121,859 1,000,000 214,381 211,319 1,000,000 374,287 371,224 1,000,000
20 451,350 118,641 118,641 1,000,000 280,753 280,753 1,000,000 652,078 652,078 1,059,200
25 651,475 34,469 34,469 1,000,000 299,576 299,576 1,000,000 1,065,291 1,065,291 1,515,040
30 906,890 0 0 0 180,269 180,269 1,000,000 1,642,181 1,642,181 2,105,408
</TABLE>
(1) Assumes that no policy loans have been made.
(2) Guaranteed values reflect guaranteed cost of insurance rates, a monthly
administrative charge of $15.00 per month, and a mortality and expense
risk charge of 0.90% of assets.
(3) Net investment returns are calculated as the hypothetical gross investment
returns less all charges and deductions shown in the prospectus.
(4) Assumes that the premium is paid at the beginning of each policy year.
Values would be different if the premiums are paid with a different
frequency or in different amounts.
THE HYPOTHETICAL INVESTMENT RATES OF RETURN SHOWN ABOVE AND ELSEWHERE IN THIS
PROSPECTUS ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF
PAST OR FUTURE INVESTMENT RATES OF RETURN. ACTUAL RATES OF RETURN MAY BE MORE OR
LESS THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS INCLUDING THE
INVESTMENT ALLOCATIONS MADE BY AN OWNER, PREVAILING RATES AND RATES OF
INFLATION. THE DEATH BENEFIT AND CASH VALUE FOR A POLICY WOULD BE DIFFERENT FROM
THOSE SHOWN IF THE ACTUAL RATES OF RETURN AVERAGED 0%, 6% OR 12% OVER A PERIOD
OF YEARS BUT ALSO FLUCTUATED ABOVE OR BELOW THOSE AVERAGES FOR INDIVIDUAL POLICY
YEARS. NO REPRESENTATION CAN BE MADE BY THE COMPANY OR THE FUND THAT THESE
HYPOTHETICAL RATES OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER
ANY PERIOD OF TIME.
22
<PAGE>
Illustration of Policy Values
Penn Mutual Life Insurance Company
Male Issue Age: 56 Non-Smoker
Female Issue Age: 53 Non-Smoker
$4,000 ANNUAL PREMIUM
$300,000 SPECIFIED AMOUNT
DEATH BENEFIT OPTION 1
USING CURRENT COST OF INSURANCE RATES
<TABLE>
<CAPTION>
0% Hypothetical 6% Hypothetical 12% Hypothetical
Premiums Gross Investment Return Gross Investment Return Gross Investment Return
Accumulated
End of at Net Cash Net Cash Net Cash
Policy 5% Interest Policy Surrender Death Policy Surrender Death Policy Surrender Death
Year Per Year Value Value Benefit Value Value Benefit Value Value Benefit
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 4,200 2,909 0 300,000 3,107 0 300,000 3,306 0 300,000
2 8,610 6,390 1,796 300,000 6,990 2,396 300,000 7,614 3,020 300,000
3 13,241 9,773 5,179 300,000 10,999 6,406 300,000 12,325 7,731 300,000
4 18,103 13,052 8,458 300,000 15,133 10,540 300,000 17,471 12,878 300,000
5 23,208 16,222 11,628 300,000 19,391 14,798 300,000 23,093 18,500 300,000
6 28,568 19,280 14,686 300,000 23,772 19,179 300,000 29,234 24,640 300,000
7 34,196 22,218 17,624 300,000 28,275 23,681 300,000 35,941 31,347 300,000
8 40,106 25,036 20,901 300,000 32,900 28,766 300,000 43,270 39,135 300,000
9 46,312 27,725 24,050 300,000 37,646 33,971 300,000 51,280 47,605 300,000
10 52,827 30,280 27,064 300,000 42,512 39,296 300,000 60,038 56,822 300,000
15 90,630 40,731 39,812 300,000 68,515 67,596 300,000 117,971 117,052 300,000
20 138,877 48,449 48,449 300,000 100,006 100,006 300,000 215,166 215,166 349,505
25 200,454 52,130 52,130 300,000 137,471 137,471 300,000 373,002 373,002 530,477
30 279,043 47,100 47,100 300,000 181,093 181,093 300,000 625,391 625,391 801,801
</TABLE>
(1) Assumes that no policy loans have been made.
(2) Current values reflect current cost of insurance rates, a monthly
administrative charge of $15.00 in year 1 and $5.00 thereafter, and a
mortality and expense risk charge of 0.90% of assets in years 1-15 and
0.60% thereafter.
(3) Net investment returns are calculated as the hypothetical gross investment
returns less all charges and deductions shown in the prospectus.
(4) Assumes that the premium is paid at the beginning of each policy year.
Values would be different if the premiums are paid with a different
frequency or in different amounts.
THE HYPOTHETICAL INVESTMENT RATES OF RETURN SHOWN ABOVE AND ELSEWHERE IN THIS
PROSPECTUS ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF
PAST OR FUTURE INVESTMENT RATES OF RETURN. ACTUAL RATES OF RETURN MAY BE MORE OR
LESS THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS INCLUDING THE
INVESTMENT ALLOCATIONS MADE BY AN OWNER, PREVAILING RATES AND RATES OF
INFLATION. THE DEATH BENEFIT AND CASH VALUE FOR A POLICY WOULD BE DIFFERENT FROM
THOSE SHOWN IF THE ACTUAL RATES OF RETURN AVERAGED 0%, 6% OR 12% OVER A PERIOD
OF YEARS BUT ALSO FLUCTUATED ABOVE OR BELOW THOSE AVERAGES FOR INDIVIDUAL POLICY
YEARS. NO REPRESENTATION CAN BE MADE BY THE COMPANY OR THE FUND THAT THESE
HYPOTHETICAL RATES OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER
ANY PERIOD OF TIME.
23
<PAGE>
Illustration of Policy Values
Penn Mutual Life Insurance Company
Male Issue Age: 56 Non-Smoker
Female Issue Age: 53 Non-Smoker
$4,000 ANNUAL PREMIUM
$300,000 SPECIFIED AMOUNT
DEATH BENEFIT OPTION 1
USING GUARANTEED COST OF INSURANCE RATES
<TABLE>
<CAPTION>
0% Hypothetical 6% Hypothetical 12% Hypothetical
Premiums Gross Investment Return Gross Investment Return Gross Investment Return
Accumulated
End of at Net Cash Net Cash Net Cash
Policy 5% Interest Policy Surrender Death Policy Surrender Death Policy Surrender Death
Year Per Year Value Value Benefit Value Value Benefit Value Value Benefit
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 4,200 2,731 0 300,000 2,923 0 300,000 3,116 0 300,000
2 8,610 6,096 1,502 300,000 6,675 2,081 300,000 7,278 2,684 300,000
3 13,241 9,365 4,771 300,000 10,548 5,955 300,000 11,828 7,234 300,000
4 18,103 12,532 7,938 300,000 14,540 9,947 300,000 16,797 12,203 300,000
5 23,208 15,590 10,996 300,000 18,648 14,054 300,000 22,220 17,626 300,000
6 28,568 18,532 13,938 300,000 22,866 18,273 300,000 28,137 23,543 300,000
7 34,196 21,349 16,755 300,000 27,191 22,597 300,000 34,587 29,993 300,000
8 40,106 24,027 19,893 300,000 31,611 27,477 300,000 41,614 37,480 300,000
9 46,312 26,551 22,876 300,000 36,116 32,441 300,000 49,264 45,589 300,000
10 52,827 28,902 25,686 300,000 40,687 37,471 300,000 57,583 54,368 300,000
15 90,630 37,016 36,097 300,000 63,637 62,718 300,000 111,258 110,339 300,000
20 138,877 34,977 34,977 300,000 83,158 83,158 300,000 193,679 193,679 314,601
25 200,454 9,517 9,517 300,000 88,163 88,163 300,000 316,451 316,451 450,052
30 279,043 0 0 0 51,005 51,005 300,000 487,855 487,855 625,469
</TABLE>
(1) Assumes that no policy loans have been made.
(2) Guaranteed values reflect guaranteed cost of insurance rates, a monthly
administrative charge of $15.00 per month, and a mortality and expense
risk charge of 0.90% of assets.
(3) Net investment returns are calculated as the hypothetical gross investment
returns less all charges and deductions shown in the prospectus.
(4) Assumes that the premium is paid at the beginning of each policy year.
Values would be different if the premiums are paid with a different
frequency or in different amounts.
THE HYPOTHETICAL INVESTMENT RATES OF RETURN SHOWN ABOVE AND ELSEWHERE IN THIS
PROSPECTUS ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF
PAST OR FUTURE INVESTMENT RATES OF RETURN. ACTUAL RATES OF RETURN MAY BE MORE OR
LESS THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS INCLUDING THE
INVESTMENT ALLOCATIONS MADE BY AN OWNER, PREVAILING RATES AND RATES OF
INFLATION. THE DEATH BENEFIT AND CASH VALUE FOR A POLICY WOULD BE DIFFERENT FROM
THOSE SHOWN IF THE ACTUAL RATES OF RETURN AVERAGED 0%, 6% OR 12% OVER A PERIOD
OF YEARS BUT ALSO FLUCTUATED ABOVE OR BELOW THOSE AVERAGES FOR INDIVIDUAL POLICY
YEARS. NO REPRESENTATION CAN BE MADE BY THE COMPANY OR THE FUND THAT THESE
HYPOTHETICAL RATES OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER
ANY PERIOD OF TIME.
24
<PAGE>
Illustration of Policy Values
Penn Mutual Life Insurance Company
Male Issue Age: 61 Non-Smoker
Female Issue Age: 57 Non-Smoker
$23,000 ANNUAL PREMIUM
$1,000,000 SPECIFIED AMOUNT
DEATH BENEFIT OPTION 1
USING CURRENT COST OF INSURANCE RATES
<TABLE>
<CAPTION>
0% Hypothetical 6% Hypothetical 12% Hypothetical
Premiums Gross Investment Return Gross Investment Return Gross Investment Return
Accumulated
End of at Net Cash Net Cash Net Cash
Policy 5% Interest Policy Surrender Death Policy Surrender Death Policy Surrender Death
Year Per Year Value Value Benefit Value Value Benefit Value Value Benefit
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 24,150 18,847 2,694 1,000,000 20,056 3,903 1,000,000 21,266 5,114 1,000,000
2 49,508 39,053 22,900 1,000,000 42,710 26,557 1,000,000 46,513 30,361 1,000,000
3 76,133 58,656 42,504 1,000,000 66,071 49,919 1,000,000 74,087 57,935 1,000,000
4 104,090 77,620 61,468 1,000,000 90,126 73,973 1,000,000 104,186 88,034 1,000,000
5 133,444 95,903 79,750 1,000,000 114,854 98,701 1,000,000 137,024 120,872 1,000,000
6 164,266 113,513 97,361 1,000,000 140,289 124,136 1,000,000 172,899 156,747 1,000,000
7 196,630 130,450 114,298 1,000,000 166,457 150,305 1,000,000 212,134 195,981 1,000,000
8 230,611 146,666 132,129 1,000,000 193,345 178,808 1,000,000 255,049 240,512 1,000,000
9 266,292 162,137 149,215 1,000,000 220,964 208,042 1,000,000 302,036 289,114 1,000,000
10 303,756 176,842 165,535 1,000,000 249,336 238,029 1,000,000 353,545 342,238 1,000,000
15 521,122 239,069 235,838 1,000,000 404,531 401,301 1,000,000 699,516 696,285 1,165,872
20 798,543 295,346 295,346 1,000,000 606,960 606,960 1,000,000 1,275,990 1,275,990 1,852,143
25 1,152,609 336,923 336,923 1,000,000 864,069 864,069 1,125,859 2,206,712 2,206,712 2,875,286
30 1,604,498 324,401 324,401 1,000,000 1,167,279 1,167,279 1,405,544 3,667,032 3,667,032 4,415,546
</TABLE>
(1) Assumes that no policy loans have been made.
(2) Current values reflect current cost of insurance rates, a monthly
administrative charge of $15.00 in year 1 and $5.00 thereafter, and a
mortality and expense risk charge of 0.90% of assets in years 1-15 and
0.60% thereafter.
(3) Net investment returns are calculated as the hypothetical gross investment
returns less all charges and deductions shown in the prospectus.
(4) Assumes that the premium is paid at the beginning of each policy year.
Values would be different if the premiums are paid with a different
frequency or in different amounts.
THE HYPOTHETICAL INVESTMENT RATES OF RETURN SHOWN ABOVE AND ELSEWHERE IN THIS
PROSPECTUS ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF
PAST OR FUTURE INVESTMENT RATES OF RETURN. ACTUAL RATES OF RETURN MAY BE MORE OR
LESS THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS INCLUDING THE
INVESTMENT ALLOCATIONS MADE BY AN OWNER, PREVAILING RATES AND RATES OF
INFLATION. THE DEATH BENEFIT AND CASH VALUE FOR A POLICY WOULD BE DIFFERENT FROM
THOSE SHOWN IF THE ACTUAL RATES OF RETURN AVERAGED 0%, 6% OR 12% OVER A PERIOD
OF YEARS BUT ALSO FLUCTUATED ABOVE OR BELOW THOSE AVERAGES FOR INDIVIDUAL POLICY
YEARS. NO REPRESENTATION CAN BE MADE BY THE COMPANY OR THE FUND THAT THESE
HYPOTHETICAL RATES OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER
ANY PERIOD OF TIME.
25
<PAGE>
Illustration of Policy Values
Penn Mutual Life Insurance Company
Male Issue Age: 61 Non-Smoker
Female Issue Age: 57 Non-Smoker
$23,000 ANNUAL PREMIUM
$1,000,000 SPECIFIED AMOUNT
DEATH BENEFIT OPTION 1
USING GUARANTEED COST OF INSURANCE RATES
<TABLE>
<CAPTION>
0% Hypothetical 6% Hypothetical 12% Hypothetical
Premiums Gross Investment Return Gross Investment Return Gross Investment Return
Accumulated
End of at Net Cash Net Cash Net Cash
Policy 5% Interest Policy Surrender Death Policy Surrender Death Policy Surrender Death
Year Per Year Value Value Benefit Value Value Benefit Value Value Benefit
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 24,150 18,252 2,100 1,000,000 19,442 3,290 1,000,000 20,634 4,481 1,000,000
2 49,508 38,350 22,197 1,000,000 41,947 25,794 1,000,000 45,689 29,536 1,000,000
3 76,133 57,846 41,694 1,000,000 65,153 49,000 1,000,000 73,051 56,899 1,000,000
4 104,090 76,705 60,552 1,000,000 89,044 72,892 1,000,000 102,916 86,763 1,000,000
5 133,444 94,881 78,729 1,000,000 113,600 97,448 1,000,000 135,494 119,341 1,000,000
6 164,266 112,318 96,166 1,000,000 138,785 122,633 1,000,000 171,011 154,858 1,000,000
7 196,630 128,941 112,788 1,000,000 164,551 148,398 1,000,000 209,710 193,558 1,000,000
8 230,611 144,661 130,124 1,000,000 190,837 176,299 1,000,000 251,865 237,327 1,000,000
9 266,292 159,387 146,465 1,000,000 217,584 204,662 1,000,000 297,791 284,869 1,000,000
10 303,756 173,008 161,701 1,000,000 244,721 233,415 1,000,000 347,854 336,547 1,000,000
15 521,122 219,749 216,519 1,000,000 383,681 380,451 1,000,000 677,736 674,506 1,129,573
20 798,543 206,239 206,239 1,000,000 517,544 517,544 1,000,000 1,169,919 1,169,919 1,698,178
25 1,152,609 59,755 59,755 1,000,000 631,170 631,170 1,000,000 1,862,386 1,862,386 2,426,638
30 1,604,498 0 0 0 710,766 710,766 1,000,000 2,803,819 2,803,819 3,376,134
</TABLE>
(1) Assumes that no policy loans have been made.
(2) Guaranteed values reflect guaranteed cost of insurance rates, a monthly
administrative charge of $15.00 per month, and a mortality and expense
risk charge of 0.90% of assets.
(3) Net investment returns are calculated as the hypothetical gross investment
returns less all charges and deductions shown in the prospectus.
(4) Assumes that the premium is paid at the beginning of each policy year.
Values would be different if the premiums are paid with a different
frequency or in different amounts.
THE HYPOTHETICAL INVESTMENT RATES OF RETURN SHOWN ABOVE AND ELSEWHERE IN THIS
PROSPECTUS ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF
PAST OR FUTURE INVESTMENT RATES OF RETURN. ACTUAL RATES OF RETURN MAY BE MORE OR
LESS THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS INCLUDING THE
INVESTMENT ALLOCATIONS MADE BY AN OWNER, PREVAILING RATES AND RATES OF
INFLATION. THE DEATH BENEFIT AND CASH VALUE FOR A POLICY WOULD BE DIFFERENT FROM
THOSE SHOWN IF THE ACTUAL RATES OF RETURN AVERAGED 0%, 6% OR 12% OVER A PERIOD
OF YEARS BUT ALSO FLUCTUATED ABOVE OR BELOW THOSE AVERAGES FOR INDIVIDUAL POLICY
YEARS. NO REPRESENTATION CAN BE MADE BY THE COMPANY OR THE FUND THAT THESE
HYPOTHETICAL RATES OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER
ANY PERIOD OF TIME.
26
<PAGE>
Illustration of Policy Values
Penn Mutual Life Insurance Company
Male Issue Age: 61 Non-Smoker
Female Issue Age: 57 Non-Smoker
$7,000 ANNUAL PREMIUM
$300,000 SPECIFIED AMOUNT
DEATH BENEFIT OPTION 1
USING CURRENT COST OF INSURANCE RATES
<TABLE>
<CAPTION>
0% Hypothetical 6% Hypothetical 12% Hypothetical
Premiums Gross Investment Return Gross Investment Return Gross Investment Return
Accumulated
End of at Net Cash Net Cash Net Cash
Policy 5% Interest Policy Surrender Death Policy Surrender Death Policy Surrender Death
Year Per Year Value Value Benefit Value Value Benefit Value Value Benefit
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 7,350 5,620 774 300,000 5,984 1,139 300,000 6,349 1,503 300,000
2 15,068 11,732 6,886 300,000 12,833 7,987 300,000 13,978 9,132 300,000
3 23,171 17,662 12,816 300,000 19,895 15,050 300,000 22,310 17,464 300,000
4 31,679 23,399 18,554 300,000 27,168 22,323 300,000 31,406 26,560 300,000
5 40,613 28,932 24,086 300,000 34,646 29,800 300,000 41,331 36,485 300,000
6 49,994 34,262 29,416 300,000 42,339 37,493 300,000 52,175 47,329 300,000
7 59,844 39,389 34,543 300,000 50,254 45,409 300,000 64,035 59,189 300,000
8 70,186 44,300 39,938 300,000 58,389 54,028 300,000 77,009 72,648 300,000
9 81,045 48,986 45,109 300,000 66,746 62,869 300,000 91,216 87,339 300,000
10 92,448 53,442 50,050 300,000 75,333 71,941 300,000 106,791 103,399 300,000
15 158,602 72,333 71,363 300,000 122,333 121,364 300,000 211,408 210,439 352,351
20 243,035 89,475 89,475 300,000 183,700 183,700 300,000 385,681 385,681 559,830
25 350,794 102,223 102,223 300,000 261,593 261,593 340,848 667,047 667,047 869,144
30 488,326 98,857 98,857 300,000 353,359 353,359 425,487 1,108,515 1,108,515 1,334,785
</TABLE>
(1) Assumes that no policy loans have been made.
(2) Current values reflect current cost of insurance rates, a monthly
administrative charge of $15.00 in year 1 and $5.00 thereafter, and a
mortality and expense risk charge of 0.90% of assets in years 1-15 and
0.60% thereafter.
(3) Net investment returns are calculated as the hypothetical gross investment
returns less all charges and deductions shown in the prospectus.
(4) Assumes that the premium is paid at the beginning of each policy year.
Values would be different if the premiums are paid with a different
frequency or in different amounts.
THE HYPOTHETICAL INVESTMENT RATES OF RETURN SHOWN ABOVE AND ELSEWHERE IN THIS
PROSPECTUS ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF
PAST OR FUTURE INVESTMENT RATES OF RETURN. ACTUAL RATES OF RETURN MAY BE MORE OR
LESS THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS INCLUDING THE
INVESTMENT ALLOCATIONS MADE BY AN OWNER, PREVAILING RATES AND RATES OF
INFLATION. THE DEATH BENEFIT AND CASH VALUE FOR A POLICY WOULD BE DIFFERENT FROM
THOSE SHOWN IF THE ACTUAL RATES OF RETURN AVERAGED 0%, 6% OR 12% OVER A PERIOD
OF YEARS BUT ALSO FLUCTUATED ABOVE OR BELOW THOSE AVERAGES FOR INDIVIDUAL POLICY
YEARS. NO REPRESENTATION CAN BE MADE BY THE COMPANY OR THE FUND THAT THESE
HYPOTHETICAL RATES OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER
ANY PERIOD OF TIME.
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<PAGE>
Illustration of Policy Values
Penn Mutual Life Insurance Company
Male Issue Age: 61 Non-Smoker
Female Issue Age: 57 Non-Smoker
$7,000 ANNUAL PREMIUM
$300,000 SPECIFIED AMOUNT
DEATH BENEFIT OPTION 1
USING GUARANTEED COST OF INSURANCE RATES
<TABLE>
<CAPTION>
0% Hypothetical 6% Hypothetical 12% Hypothetical
Premiums Gross Investment Return Gross Investment Return Gross Investment Return
Accumulated
End of at Net Cash Net Cash Net Cash
Policy 5% Interest Policy Surrender Death Policy Surrender Death Policy Surrender Death
Year Per Year Value Value Benefit Value Value Benefit Value Value Benefit
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 7,350 5,442 596 300,000 5,800 954 300,000 6,159 1,313 300,000
2 15,068 11,438 6,592 300,000 12,518 7,672 300,000 13,642 8,796 300,000
3 23,171 17,254 12,408 300,000 19,444 14,598 300,000 21,813 16,967 300,000
4 31,679 22,879 18,033 300,000 26,575 21,729 300,000 30,731 25,885 300,000
5 40,613 28,300 23,455 300,000 33,903 29,057 300,000 40,458 35,612 300,000
6 49,994 33,500 28,654 300,000 41,418 36,573 300,000 51,063 46,214 300,000
7 59,844 38,456 33,610 300,000 49,106 44,260 300,000 62,616 57,771 300,000
8 70,186 43,141 38,780 300,000 56,948 52,586 300,000 75,200 70,839 300,000
9 81,045 47,529 43,652 300,000 64,925 61,049 300,000 88,909 85,033 300,000
10 92,448 51,585 48,193 300,000 73,017 69,625 300,000 103,851 100,459 300,000
15 158,602 65,453 64,484 300,000 114,408 113,439 300,000 202,291 201,322 337,156
20 243,035 61,211 61,211 300,000 154,105 154,105 300,000 349,219 349,219 506,903
25 350,794 16,949 16,949 300,000 187,272 187,272 300,000 555,934 555,934 724,367
30 488,326 0 0 0 208,618 208,618 300,000 836,969 836,969 1,007,811
</TABLE>
(1) Assumes that no policy loans have been made.
(2) Guaranteed values reflect guaranteed cost of insurance rates, a monthly
administrative charge of $15.00 per month, and a mortality and expense
risk charge of 0.90% of assets.
(3) Net investment returns are calculated as the hypothetical gross investment
returns less all charges and deductions shown in the prospectus.
(4) Assumes that the premium is paid at the beginning of each policy year.
Values would be different if the premiums are paid with a different
frequency or in different amounts.
THE HYPOTHETICAL INVESTMENT RATES OF RETURN SHOWN ABOVE AND ELSEWHERE IN THIS
PROSPECTUS ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF
PAST OR FUTURE INVESTMENT RATES OF RETURN. ACTUAL RATES OF RETURN MAY BE MORE OR
LESS THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS INCLUDING THE
INVESTMENT ALLOCATIONS MADE BY AN OWNER, PREVAILING RATES AND RATES OF
INFLATION. THE DEATH BENEFIT AND CASH VALUE FOR A POLICY WOULD BE DIFFERENT FROM
THOSE SHOWN IF THE ACTUAL RATES OF RETURN AVERAGED 0%, 6% OR 12% OVER A PERIOD
OF YEARS BUT ALSO FLUCTUATED ABOVE OR BELOW THOSE AVERAGES FOR INDIVIDUAL POLICY
YEARS. NO REPRESENTATION CAN BE MADE BY THE COMPANY OR THE FUND THAT THESE
HYPOTHETICAL RATES OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER
ANY PERIOD OF TIME.
28
<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.
<TABLE>
<CAPTION>
Contents of this Section Page
------------------------ ----
<S> <C>
The Penn Mutual Life Insurance Company.........................................................30
Penn Mutual Variable Life Account I............................................................30
The Funds......................................................................................31
More Information About Policy Values...........................................................34
Federal Income Tax Considerations..............................................................35
Sale of Policies...............................................................................39
Penn Mutual Trustee and Officers...............................................................39
State Regulation...............................................................................41
Additional Information.........................................................................41
Independent Auditors...........................................................................41
Experts........................................................................................41
Litigation.....................................................................................42
Legal Matters..................................................................................42
Financial Statements...........................................................................42
Appendix A - Minimum Initial Annual Premiums..................................................A-1
Appendix B....................................................................................B-1
- Administrative Surrender Charges per $1,000 of Initial Specified Amount
- Sample Surrender Charge Premiums for $1,000,000 Specified Amount
Appendix C - Policies Issued to New York residents ...........................................C-1
Appendix D - Illustrative Net Single Premium Factors..........................................D-1
</TABLE>
29
<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.
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.
Net premiums received under the Policy and under other variable life
insurance policies are allocated to subaccounts of the Separate Account for
investment in 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 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
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<PAGE>
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.
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's The Universal
Institutional 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 -- Money Market Fund -- preserve capital, maintain
liquidity and achieve the highest possible level of current income
consistent therewith.
Penn Series -- Limited Maturity Bond Fund -- the highest current income
consistent with low risk to principal and liquidity; total return is
secondary.
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 -- Flexibly Managed Fund -- maximize total return (capital
appreciation and income).
Penn Series -- Growth Equity Fund -- long-term growth of capital and
increase of future income.
Penn Series -- Large Cap Value Fund (formerly, "Value Equity Fund") --
maximize total return (capital appreciation and income).
Penn Series -- Index 500 Fund -- total return of (income and capital
appreciation) which corresponds to that of the Standard & Poor's
Composite Index of 500 stocks.
Penn Series -- Mid Cap Growth Fund -- maximize capital appreciation.
Penn Series -- Mid Cap Value Fund -- growth of capital.
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<PAGE>
Penn Series-- Emerging Growth Fund-- capital appreciation.
Penn Series -- Small Cap Value Fund (formerly, "Small Capitalization
Fund ") -- capital appreciation.
Penn Series-- International Equity Fund-- capital appreciation.
Neuberger Berman -- Balanced Portfolio -- long-term capital growth and
reasonable current income without undue risk to principal.
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.
Morgan Stanley's The Universal Institutional Funds, Inc. -- Emerging
Markets Equity (International) Portfolio -- long term capital
appreciation..
The Managers
Independence Capital Management, Inc. ("Independence Capital
Management"), a subsidiary of Penn Mutual, 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.
Putnam Investment Management, Inc. of Boston, Massachusetts, is the
investment sub-adviser to the Penn Series Large Cap Value Fund.
Wells Capital Management Incorporated of San Francisco, California, is
the sub-adviser to the Penn Series Index 500 Fund.
Turner Investment Partners, Inc. of Berwyn, Pennsylvania, is the
investment sub-adviser to the Penn Series Mid Cap Growth Fund.
Neuberger Berman Management, Inc. of New York, New York, is the
investment sub-adviser to Penn Series Mid Cap Value Fund as well as the
investment adviser to the series of Advisers Managers Trust underlying the
Neuberger Berman Balanced Portfolio.
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.
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<PAGE>
Royce & Associates, Inc., of New York, New York, is investment
sub-adviser to the Penn Series Small Cap Value Fund.
Vontobel USA Inc., of New York, New York, is the investment sub-adviser
to the Penn Series International Equity Fund.
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. FMR utilizes the
services of two subsidiaries on a sub-advisory basis for foreign securities
investments for the Asset Manager Portfolio. These subsidiaries are Fidelity
Management & Research (U.K.) Inc. and Fidelity Management & Research (Far East)
Inc.
Morgan Stanley Asset Management ("MSAM"), of New York, New York, is the
investment adviser to the 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's The Universal Institutional Funds governing the Separate Account's
investment in those Funds. The advisers to Fidelity Investments' VIP Fund,
Fidelity Investments' VIP Fund II and Morgan Stanley's The Universal
Institutional Funds 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's The Universal
Institutional Funds 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's The Universal
Institutional Funds 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's The
Universal Institutional Funds currently perceives or anticipates any such
disadvantage, the Boards of Directors of Penn Series and Morgan Stanley's The
Universal Institutional Funds, 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 Policy owners and variable life Policy owners
(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's
The Universal Institutional Funds, respectively; or (4) differences between
voting instructions given by variable annuity Policy owners and those given by
variable life Policy owners. In the event of a material irreconcilable conflict,
we will take the steps necessary to protect our variable annuity and variable
life Policy owners. This could include discontinuance of investment in a Fund.
33
<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.
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
34
<PAGE>
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
special loan account.
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 for partial surrenders. It is the amount received upon a
full surrender of the Policy.
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.
35
<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.
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.
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<PAGE>
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 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
37
<PAGE>
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.
Taxation of Policy Split
The Policy Split Option Rider which we offer permits a Policy to be
split into two other life policies upon the occurrence of a divorce of the joint
insureds or certain changes in federal estate tax law. A Policy split could have
adverse tax consequence. For example, it is not clear whether a Policy split
will be treated as a nontaxable exchange under Section 1031 through 1043 of the
Code. If a Policy split is not treated as a nontaxable exchange, a split could
result in the recognition of taxable income in an amount up to any gain in the
Policy at the time of the split. In addition, it is not clear whether, in all
circumstances, the individual policies that result from a Policy split would be
treated as life insurance contracts for federal income tax purposes and, if so
treated, whether the individual contracts would be classified as modified
endowment contracts. Before you exercise rights provided by the Policy split
option, it is important that you consult with a competent tax advisor regarding
the possible consequences of a Policy split.
Tax Consequences of the Guaranteed Option to Extend Maturity Date
The Guaranteed Option to Extend Maturity Date that we offer allows the Policy
Owner to extend the original maturity date by 20 years. An extension of maturity
could have adverse tax consequences. Before you exercise your rights under this
option, you should consult with a competent tax advisor regarding the possible
tax consequences of an extension of maturity.
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.
38
<PAGE>
Sale of the Policies
Hornor, Townsend & Kent, Inc. ("HTK"), a wholly-owned subsidiary of
Penn Mutual, acts as a principal underwriter of the Policies. HTK also acts as
principal underwriter for Penn Mutual Variable Annuity Account III, a separate
account also established by Penn Mutual and for PIA Variable Annuity Account I,
a separate account established by The Penn Insurance and Annuity Company, a
wholly-owned subsidiary of Penn Mutual. HTK is a registered broker-dealer under
the Securities Exchange Act of 1934 and a member of the National Association of
Securities Dealers, Inc. 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 50% of first year premiums, 2% on premiums paid during the
second through fifteenth policy years, and 1.2% on premiums paid after the first
fifteen policy years. Registered representatives may also be paid commissions of
up to 0.25% of policy value. Other allowances and overrides also may be paid.
Registered representatives who meet certain productivity and profitability
standards may be eligible for additional compensation.
Penn Mutual Trustees and Officers
Penn Mutual is managed by a board of trustees. The following table sets
forth the name, address and principal occupations during the past five years of
each of Penn Mutual's trustees.
Board of Trustees
<TABLE>
<CAPTION>
Position with
NAME AND ADDRESS Penn Mutual Principal Occupation During Past Five years
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Robert E. Chappell Chairman of the Board Chairman of the Board and Chief Executive Officer (since
The Penn Mutual Life and Chief Executive December 1996), President and Chief Executive Officer
Insurance Company Officer (April 1995-December 1996), President and Chief Operating
Philadelphia, PA 19172 Officer, (January 1994 to April 1995), The Penn Mutual Life
Insurance Company.
- ----------------------------------------------------------------------------------------------------------
Daniel J. Toran President, Chief President and Chief Operating Officer (since January 1997),
The Penn Mutual Life Operating Officer Executive Vice President, (May 1996-January 1997), The
Insurance Company and Trustee Penn Mutual Life Insurance Company; Executive Vice
Philadelphia, PA 19172 President, The New England Mutual Life Insurance
Company (prior thereto).
- ----------------------------------------------------------------------------------------------------------
Julia Chang Bloch Trustee Visiting Professor, Institute of International Relations in
1743 22nd Street, NW Beijing, China, and distinguished adviser, American
Washington, DC 20008 Studies Center (April 1998 to present); President, US-Japan
Foundation (July 1996 to March
1998); Group Executive Vice
President, Bank America NT &
SA (June 1993 to June 1996).
- ----------------------------------------------------------------------------------------------------------
James A. Hagen Trustee Retired (since May 1996), Chairman of the Board, Conrail,
2040 Montrose Lane Inc. (prior thereto).
Wilmington, NC 28405
- ----------------------------------------------------------------------------------------------------------
Philip E. Lippincott Trustee Retired (since April 1994), Chairman and Chief Executive
4301 Bayberry Drive Officer, Scott Paper Company (prior thereto).
Avalon, NJ 08202
- ----------------------------------------------------------------------------------------------------------
John F. McCaughan Trustee Retired Chairman, (since 1996), Chairman of the Board
921 Pebble Hill Road (prior thereto), Betz Laboratories, Inc.
Doylestown, PA 18901
- ----------------------------------------------------------------------------------------------------------
</TABLE>
39
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
- ----------------------------------------------------------------------------------------------------------
Alan B. Miller Trustee Chairman and President, Universal Health Services, Inc.
367 S. Gulph Road
King of Prussia, PA 19406
- ----------------------------------------------------------------------------------------------------------
Edmond F. Notebaert Trustee President and Chief Executive Officer, The Children's
34th and Civic Center Blvd. Hospital of Philadelphia (since 1987).
Philadelphia, PA 19104
- ----------------------------------------------------------------------------------------------------------
Robert H. Rock Trustee President, MLR Holdings, LLC (since 1987).
1845 Walnut Street - 9th
Floor
Philadelphia, PA 19103
- ----------------------------------------------------------------------------------------------------------
Norman T. Wilde, Jr. Trustee Co-Chairman of the Board, (since 2000), President and
1801 Market Street Chief Executive Officer (prior thereto), Janney Montgomery
Philadelphia, PA 19103 Scott Inc. (a securities broker/dealer and subsidiary of The
Penn Mutual Life Insurance Company).
- ----------------------------------------------------------------------------------------------------------
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>
John M. Albanese Senior Vice President, Customer Service and Information Systems (since June
The Penn Mutual Life 1997), Vice President, Information Systems Application (prior thereto),
Insurance Company The Penn Mutual Life Insurance Company.
Philadelphia, PA 19172
- ----------------------------------------------------------------------------------------------------------
Michael A. Biondolillo Senior Vice President, Human Resources (since June 1997); Corporate Vice
The Penn Mutual Life President and General Manager, Human Resources and Quality, MG Industries,
Insurance Company America (prior thereto).
Philadelphia, PA 19172
- ----------------------------------------------------------------------------------------------------------
Nancy S. Brodie Executive Vice President and Chief Financial Officer (since December 1995),
The Penn Mutual Life Senior Vice President and Chief Financial Officer prior thereto. The
Insurance Company Penn Mutual Life Insurance Company.
Philadelphia, PA 19172
- ----------------------------------------------------------------------------------------------------------
Bill D. Fife Senior Vice President, Independence Financial Network (since January 2000),
The Penn Mutual Life Regional Vice President, Independence Financial Network (1997-2000), The
Insurance Company Penn Mutual Life Insurance Company; Vice President of Agencies (since
Philadelphia, PA 19172 1994), General Manager, Western and Northwest Regions (prior thereto),
Aetna Life and Casualty.
- ----------------------------------------------------------------------------------------------------------
Larry L. Mast Executive Vice President, The Penn Mutual Life Insurance Company (May 1997
The Penn Mutual Life to present). Formerly Senior Vice President, Lafayette Life Insurance
Insurance Company Company (September 1994 to May 1997); Vice President, Security Benefit
Philadelphia, PA 19172 Insurance Company (May 1993 to September 1994); Vice President, Home Life
Insurance Company (July 1990 to May 1993); Agency Manager, The Equitable
Life Insurance Company (August 1978 to July 1990).
- ----------------------------------------------------------------------------------------------------------
</TABLE>
40
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
- ----------------------------------------------------------------------------------------------------------
Nina M. Mulrooney General Auditor (since November 1991), Vice President, Market Conduct
The Penn Mutual Life (since December 1997), Assistant Vice President, Corporate Accounting and
Insurance Company Control (prior thereto), The Penn Mutual Life Insurance Company.
Philadelphia, PA 19172
- ----------------------------------------------------------------------------------------------------------
Peter M. Sherman Executive Vice President (since December 1998), Chief Investment Officer
The Penn Mutual Life (since May 1996), Senior Vice President May 1996 to December 1996), Vice
Insurance Company President, Investments (January 1996 to April 1996), Vice President, Fixed
Philadelphia, PA, 19172 Income Portfolio Management (prior thereto), The Penn Mutual Life Insurance
Company; President, Independence Capital Management, Inc. (an investment
advisory organization and subsidiary of Penn Mutual).
- ----------------------------------------------------------------------------------------------------------
</TABLE>
State Regulation
Penn Mutual is subject to regulation by the Department of Insurance of
the Commonwealth of Pennsylvania, which periodically examines our financial
condition and operations. We are also subject to the insurance laws and
regulations of all jurisdictions where we do business. The Policy described in
this prospectus has been filed with and, where required, approved by, insurance
officials in those jurisdictions where it is sold.
We are required to submit annual statements of our operations,
including financial statements, to the insurance departments of the various
jurisdictions where we do business to determine solvency and compliance with
applicable insurance laws and regulations.
Additional Information
A registration statement under the Securities Act of 1933 has been
filed with the SEC relating to the offering described in this prospectus. This
prospectus does not include all the information set forth in the registration
statement. The omitted information may be obtained at the SEC's principal office
in Washington, D.C. by paying the SEC's prescribed fees.
Independent Auditors
Ernst & Young LLP serves as independent auditors of The Penn Mutual
Life Insurance Company and Penn Mutual Variable Life Account I. Their offices
are located at 2001 Market Street, Suite 4000, Philadelphia, PA .
Experts
Actuarial matters included in this prospectus have been examined by
Ralph I. Pence, FSA, MAAA, Vice President and Chief Actuary of Penn Mutual,
whose opinion is filed as an exhibit to the Registration Statement.
Litigation
No litigation is pending that would have a material effect upon the
subaccounts or Penn Mutual.
41
<PAGE>
Legal Matters
Morgan, Lewis & Bockius, LLP of Philadelphia, Pennsylvania, has
provided advice on certain matters relating to the federal securities laws and
the offering of the Policies.
Financial Statements
The financial statements of the Separate Account and Penn Mutual appear
on the following pages. The financial statements of Penn Mutual should be
distinguished from any financial statements of the Separate Account and should
be considered only as bearing upon Penn Mutual's ability to meet its obligations
under the Policies.
42
<PAGE>
<TABLE>
<CAPTION>
PENN MUTUAL VARIABLE LIFE ACCOUNT I
STATEMENT OF ASSETS AND LIABILITIES - DECEMBER 31, 1999
- -------------------------------------------------------------------------------------------------------------------------------
Money Quality
Total Market Fund+ Bond Fund+
------------ ------------ ----------
<S> <C> <C> <C>
Investment in Common Stock
Number of Shares ................................................. 26,314,175 808,876
Cost ............................................................. 331,143,943 $26,314,175 $8,419,173
Assets:
Investments at market value ...................................... 415,163,095 $26,314,175 $8,412,326
Dividends receivable ............................................. 99,160 99,160 -
Liabilities:
Due to(from) the Penn Mutual Life Insurance Company .............. (409,814) (568,781) 2,945
------------ ----------- ----------
Net Assets ....................................................... $415,672,069 $26,982,116 $8,409,381
============ =========== ==========
</TABLE>
[RESTUBED FOR ABOVE]
<TABLE>
<CAPTION>
High Yield Growth Equity Value Equity
Bond Fund+ Fund+ Fund+
---------- ------------- ------------
<S> <C> <C> <C>
Investment in Common Stock
Number of Shares ................................................. 976,640 711,571 1,756,163
Cost ............................................................. $9,279,758 $19,153,246 $35,263,907
Assets:
Investments at market value ...................................... $9,356,213 $29,466,217 $39,004,376
Dividends receivable ............................................. - - -
Liabilities:
Due to(from) the Penn Mutual Life Insurance Company .............. 3,245 15,247 13,831
---------- ----------- -----------
Net Assets ....................................................... $9,352,968 $29,450,970 $38,990,545
========== =========== ===========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
PENN MUTUAL VARIABLE LIFE ACCOUNT I
STATEMENT OF OPERATIONS - FOR THE YEAR ENDED DECEMBER 31, 1999
Money Quality
Total Market Fund+ Bond Fund+
------------ ------------ ----------
<S> <C> <C> <C>
Investment Income:
Dividends ........................................................ $1,697,544 $ 776,851 $ -
Expense:
Mortality and expense risk charges ............................... 2,766,443 134,820 62,224
------------ ----------- ----------
Net investment income (loss) ..................................... (1,068,899) 642,031 (62,224)
------------ ----------- ----------
Realized and Unrealized Gains (Losses) on
Investments:
Realized gains (losses) from redemption of fund
shares ...................................................... 1,853,264 - 300
Capital gains distributions ...................................... 4,604,784 - -
------------ ----------- ----------
Net realized gains (losses) from investment
transactions ................................................ 6,458,048 - 300
Net change in unrealized appreciation/depreciation
of investments .............................................. 61,995,442 - 3,611
------------ ----------- ----------
Net realized and unrealized gains (losses) on
investments ................................................. 68,453,490 - 3,911
------------ ----------- ----------
Net increase (decrease) in net assets resulting
from operations ............................................. $67,384,591 $642,031 $ (58,313)
============ =========== ==========
</TABLE>
[RESTUBED FOR ABOVE]
<TABLE>
<CAPTION>
High Yield Growth Equity Value Equity
Bond Fund+ Fund+ Fund+
---------- ----------- ------------
<S> <C> <C> <C>
Investment Income:
Dividends ........................................................ $ - $ - $ -
Expense:
Mortality and expense risk charges ............................... 72,682 176,930 317,240
---------- ----------- -----------
Net investment income (loss) ..................................... (72,682) (176,930) (317,240)
---------- ----------- -----------
Realized and Unrealized Gains (Losses) on
Investments:
Realized gains (losses) from redemption of fund
shares ...................................................... 416 51,190 (37,587)
Capital gains distributions ...................................... - - -
---------- ----------- -----------
Net realized gains (losses) from investment
transactions ................................................ 416 51,190 (37,587)
Net change in unrealized appreciation/depreciation
of investments .............................................. 349,711 6,911,635 (296,100)
---------- ----------- -----------
Net realized and unrealized gains (losses) on
investments ................................................. 350,127 6,962,825 (333,687)
---------- ----------- -----------
Net increase (decrease) in net assets resulting
from operations ............................................. $ 277,445 $ 6,785,895 $ (650,927)
========== =========== ===========
</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.
43
<PAGE>
[RESTUBED FOR ABOVE]
<TABLE>
<CAPTION>
Flexibly Small
Managed International Capitalization
Fund+ Equity Fund+ Fund+
----------- ------------- --------------
<S> <C> <C> <C>
Investment in Common Stock
Number of Shares ................................................. 3,012,632 1,273,775 820,791
Cost ............................................................. $56,394,230 $20,526,548 $10,790,412
Assets:
Investments at market value ...................................... $59,107,839 $34,111,715 $10,374,806
Dividends receivable ............................................. - - -
Liabilities:
Due to(from) the Penn Mutual Life Insurance Company .............. 20,896 16,356 4,031
----------- ----------- -----------
Net Assets ....................................................... $59,086,943 $34,095,359 $10,370,775
=========== =========== ===========
</TABLE>
[RESTUBED FOR ABOVE]
<TABLE>
<CAPTION>
Emerging
Growth
Fund+
-----------
<S> <C>
Investment in Common Stock
Number of Shares ................................................. 594,401
Cost ............................................................. $11,618,219
Assets:
Investments at market value ...................................... $29,529,819
Dividends receivable ............................................. -
Liabilities:
Due to(from) the Penn Mutual Life Insurance Company .............. 14,547
-----------
Net Assets ....................................................... $29,515,272
===========
</TABLE>
<PAGE>
[RESTUBED FOR ABOVE]
<TABLE>
<CAPTION>
Flexibly Small
Managed International Capitalization
Fund+ Equity Fund+ Fund+
----------- ------------- --------------
<S> <C> <C> <C>
Investment Income:
Dividends ........................................................ $ - $ - $ -
Expense:
Mortality and expense risk charges ............................... 470,251 226,031 80,192
----------- ----------- -----------
Net investment income (loss) ..................................... (470,251) (226,031) (80,192)
----------- ----------- -----------
Realized and Unrealized Gains (Losses) on
Investments:
Realized gains (losses) from redemption of fund
shares ...................................................... 16,311 1,131,146 8,164
Capital gains distributions ...................................... - - -
----------- ----------- -----------
Net realized gains (losses) from investment
transactions ................................................ 16,311 1,131,146 8,164
Net change in unrealized appreciation/depreciation
of investments .............................................. 3,692,338 10,566,719 (63,045)
----------- ----------- -----------
Net realized and unrealized gains (losses) on
investments ................................................. 3,708,649 11,697,865 (54,881)
----------- ----------- -----------
Net increase (decrease) in net assets resulting
from operations ............................................. $3,238,398 $11,471,834 $ (135,073)
=========== =========== ===========
</TABLE>
[RESTUBED FOR ABOVE]
<TABLE>
<CAPTION>
Emerging
Growth
Fund+
-----------
<S> <C>
Investment Income:
Dividends ........................................................ $ -
Expense:
Mortality and expense risk charges ............................... 134,466
-----------
Net investment income (loss) ..................................... (134,466)
-----------
Realized and Unrealized Gains (Losses) on
Investments:
Realized gains (losses) from redemption of fund
shares ...................................................... 195,921
Capital gains distributions ...................................... -
-----------
Net realized gains (losses) from investment
transactions ................................................ 195,921
Net change in unrealized appreciation/depreciation
of investments .............................................. 16,746,334
-----------
Net realized and unrealized gains (losses) on
investments ................................................. 16,942,255
-----------
Net increase (decrease) in net assets resulting
from operations ............................................. $16,807,789
===========
</TABLE>
The accompanying notes are an integral part of these financial statements
44
<PAGE>
PENN MUTUAL VARIABLE LIFE ACCOUNT I
STATEMENT OF ASSETS AND LIABILITIES - DECEMBER 31, 1999 (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 ................... 379,976 119,189 649,655 607,528
Cost ............................... $5,930,634 $1,656,162 $12,528,737 $5,958,383
Assets:
Investments at Market Value ........ $7,937,696 $1,578,060 $12,759,239 $9,015,707
Dividends receivable ............... - - - -
Liabilities:
Due to (from) the Penn Mutual Life
Insurance Company ................. 3,639 495 4,364 4,247
------------ -------------- --------------- ------------
Net Assets ......................... $7,934,057 $1,577,565 $12,754,875 $9,011,460
============ ============== =============== ============
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
PENN MUTUAL VARIABLE LIFE ACCOUNT I
STATEMENT OF OPERATIONS - FOR THE YEAR ENDED DECEMBER 31, 1999 (CONT'D )
<TABLE>
<CAPTION>
Limited Capital
Balanced Maturity Bond Partners Appreciation
Portfolio++ Portfolio++ Portfolio++ Portfolio+++
------------- -------------- ----------- -------------
<S> <C> <C> <C> <C>
Investment Income:
Dividends ........................... $ 84,700 $ 73,751 $ 112,968 $ -
Expense:
Mortality and expense risk charges .. 49,029 11,431 92,071 56,208
----------- ---------- ----------- ----------
Net investment income (loss) ........ 35,671 62,320 20,897 (56,208)
----------- ---------- ----------- ----------
Realized and Unrealized Gains (Losses)
on Investments:
Realized gains (losses) from redemption
of fund shares ....................... 20,108 (1,650) 17,928 35,362
Capital gains distributions ........... 125,480 - 196,466 -
----------- ---------- ----------- ----------
Net realized gains (losses) from
investment transactions .............. 145,588 (1,650) 214,394 35,362
Net change in unrealized appreciation/
depreciation of investments .......... 1,736,544 (73,233) 412,343 3,540,972
----------- ---------- ----------- ----------
Net realized and unrealized gains
(losses) on investments ............. 1,882,132 (74,883) 626,737 3,576,334
----------- ---------- ----------- ----------
Net increase (decrease) in net assets
resulting from operations ............ $1,917,803 $ (12,563) $ 647,634 $3,520,126
=========== =========== =========== ==========
</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.
45
<PAGE>
PENN MUTUAL VARIABLE LIFE ACCOUNT I
STATEMENT OF ASSETS AND LIABILITIES - DECEMBER 31, 1999 (CONT'D)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
Emerging
Equity Income Growth Asset Manager Index 500 Markets Equity
Portfolio++++ Portfolio++++ Portfolio++++ Portfolio++++ Portfolio+++++
------------- ------------- ------------- ------------- --------------
<S> <C> <C> <C> <C> <C>
Investment in Common Stock
Number of Shares .................. 1,035,626 1,043,259 330,433 258,519 346,155
Cost .............................. $23,380,155 $ 39,256,514 $5,528,223 $36,006,089 $3,139,378
Assets:
Investments at Market Value ....... $26,625.948 $ 57,306,211 $6,169,173 $43,278,566 $4,815,009
Dividends receivable .............. - - - - -
Liabilities:
Due to (from) the Penn Mutual Life
Insurance Company ................ 9,558 24,194 2,370 16,807 2,195
----------- ------------ ---------- ----------- ----------
Net Assets ........................ $26,616,390 $ 57,282,017 $6,166,803 $43,261,759 $4,812,814
=========== ============ ========== =========== ==========
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
PENN MUTUAL VARIABLE LIFE ACCOUNT I
STATEMENT OF OPERATIONS - FOR THE YEAR E
<TABLE>
<CAPTION>
Emerging
Equity Income Growth Asset Manager Index 500 Markets Equity
Portfolio++++ Portfolio++++ Portfolio++++ Portfolio++++ Portfolio+++++
------------- ------------- -------------- ------------- ---------------
<S> <C> <C> <C> <C> <C>
Investment Income:
Dividends .............................. $ 301,716 $ 53,154 $ 126,920 $ 166,609 $ 875
Expense:
Mortality and expense risk charges ..... 205,909 363,835 42,734 241,977 28,413
----------- ------------ ---------- ----------- ----------
Net investment income (loss) ........... 95,807 (310,681) 84,186 (75,368) (27,538)
----------- ------------ ---------- ----------- ----------
Realized and Unrealized Gains (Losses)
on Investments:
Realized gains (losses) from redemption
of fund shares ........................ 8,531 33,562 (110) 3,504 370,168
Capital gains distributions ............ 666,953 3,342,064 160,764 113,057 -
----------- ------------ ---------- ----------- ----------
Net realized gains (losses) from
investment transactions ............... 675,484 3,375,626 160,654 116,561 370,168
Net change in unrealized appreciation/
depreciation of investments ........... 330,734 10,574,337 272,683 5,205,293 2,084,566
----------- ------------ ---------- ----------- ----------
Net realized and unrealized gains
(losses) on investments ................ 1,006,218 13,949,963 433,337 5,321,854 2,454,734
----------- ------------ ---------- ----------- ----------
Net increase (decrease) in net assets
resulting from operations ............. $ 1,102,025 $ 13,639,282 $ 517,523 $ 5,246,486 $2,427,196
=========== ============ ========== =========== ==========
</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.
46
<PAGE>
PENN MUTUAL VARIABLE LIFE ACCOUNT I
STATEMENTS OF CHANGES IN NET ASSETS - FOR THE YEARS ENDED DECEMBER 31, 1999
AND 1998
<TABLE>
<CAPTION>
Total Money Market Fund+
------------------------------ ------------------------------
1999 1998 1999 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Operations:
Net investment income (loss) .............................. ($1,068,899) $ 2,477,914 $ 642,031 $ 433,508
Net realized gains (losses) from
investment transactions .............................. 6,458,048 16,167,956 -- --
Net change in unrealized appreciation/
depreciation of investments .......................... 61,995,442 6,282,694 -- --
------------- ------------- ----------- -----------
Net increase (decrease) in net assets
resulting from operations ............................ 67,384,591 24,928,564 642,031 433,508
------------- ------------- ----------- -----------
Variable Life Activities:
Purchase payments ......................................... 131,276,317 96,529,479 54,823,381 42,019,252
Death benefits ............................................ (289,327) (121,041) (23,803) (2,035)
Cost of insurance ......................................... (19,824,330) (14,082,492) (1,662,531) (1,191,497)
Net transfers ............................................. (6,189,133) (3,175,599) (36,567,835) (36,872,301)
Transfers of policy loans ................................. 2,006,171 577,625 1,221,644 (251)
Contract administration charges ........................... (5,669,735) (3,850,403) (1,161,009) (488,180)
Surrender benefits ........................................ (10,371,329) (5,921,782) (1,709,339) (418,927)
------------- ------------- ----------- -----------
Net increase in net assets resulting
from variable annuity activities .......................... 90,938,634 69,955,787 14,920,508 3,046,061
------------- ------------- ----------- -----------
Total increase (decrease) in net assets .................. 158,323,225 94,884,351 15,562,539 3,479,569
Net Assets:
Beginning of year ............................................ 257,348,845 162,464,494 11,419,577 7,940,008
------------- ------------- ----------- -----------
End of year .................................................. $415,672,070 $ 257,348,845 $26,982,116 $11,419,577
============= ============= =========== ===========
High Yield Bond Fund+ Growth Equity Fund+
------------------------------ ------------------------------
1999 1998 1999 1998
------------- ------------- ------------- -------------
Operations:
Net investment income (loss) .............................. ($72,682) $ 563,430 ($176,930) ($76,215)
Net realized gains (losses) from
investment transactions .............................. 416 291 51,190 1,590,059
Net change in unrealized appreciation/
depreciation of investments .......................... 349,711 (318,691) 6,911,635 2,350,499
------------- ------------- ------------- -------------
Net increase (decrease) in net assets
resulting from operations ............................ 277,445 245,030 6,785,895 3,864,343
------------- ------------- ------------- -------------
Variable Life Activities:
Purchase payments ......................................... 2,380,766 1,768,367 4,496,063 2,036,864
Death benefits ............................................ (19,671) (232) (13,556) (413)
Cost of insurance ......................................... (545,364) (377,793) (1,235,541) (570,484)
Net transfers ............................................. (330,639) 1,334,768 5,205,840 2,177,912
Transfers of policy loans ................................. 8,662 8,460 69,797 15,214
Contract administration charges ........................... (126,960) (95,903) (330,511) (129,899)
Surrender benefits ........................................ (208,829) (220,758) (654,069) (316,681)
------------- ------------- ------------- -------------
Net increase in net assets resulting
from variable annuity activities .......................... 1,157,965 2,416,909 7,538,023 3,212,513
------------- ------------- ------------- -------------
Total increase (decrease) in net assets .................. 1,435,410 2,661,939 14,323,918 7,076,856
Net Assets:
Beginning of year ............................................ 7,917,558 5,255,619 15,127,052 8,050,196
------------- ------------- ------------- -------------
End of year .................................................. $ 9,352,968 $ 7,917,558 $ 29,450,970 $ 15,127,052
============= ============= ============= =============
</TABLE>
<PAGE>
[RESTUBBED]
<TABLE>
<CAPTION>
Quality Bond Fund+
----------------------------
1999 1998
------------ -------------
<S> <C> <C>
Operations:
Net investment income (loss) .............................. ($62,224) $ 252,041
Net realized gains (losses) from
investment transactions .............................. 300 203,736
Net change in unrealized appreciation/
depreciation of investments .......................... 3,611 (14,899)
----------- -------------
Net increase (decrease) in net assets
resulting from operations ............................ (58,313) 440,878
----------- -------------
Variable Life Activities:
Purchase payments ......................................... 1,355,013 1,155,232
Death benefits ............................................ (2,243) (249)
Cost of insurance ......................................... (360,405) (259,658)
Net transfers ............................................. 1,123,017 1,041,850
Transfers of policy loans ................................. 11,409 10,440
Contract administration charges ........................... (73,285) (42,018)
Surrender benefits ........................................ (226,335) (105,331)
----------- -------------
Net increase in net assets resulting
from variable annuity activities .......................... 1,827,171 1,800,266
----------- -------------
Total increase (decrease) in net assets .................. 1,768,858 2,241,144
Net Assets:
Beginning of year ............................................ 6,640,523 4,399,379
----------- -------------
End of year .................................................. $ 8,409,381 $ 6,640,523
=========== =============
Value Equity Fund+
----------------------------
1999 1998
----------- -------------
Operations:
Net investment income (loss) .............................. ($317,240) $ 181,632
Net realized gains (losses) from
investment transactions .............................. (37,587) 3,177,280
Net change in unrealized appreciation/
depreciation of investments .......................... (296,100) (904,321)
----------- -------------
Net increase (decrease) in net assets
resulting from operations ............................ (650,927) 2,454,591
----------- -------------
Variable Life Activities:
Purchase payments ......................................... 9,300,537 7,712,812
Death benefits ............................................ (34,277) (3,109)
Cost of insurance ......................................... (2,317,035) (2,002,921)
Net transfers ............................................. (1,332,367) 2,352,575
Transfers of policy loans ................................. 83,517 129,894
Contract administration charges ........................... (490,439) (471,036)
Surrender benefits ........................................ (1,050,128) (800,734)
----------- -------------
Net increase in net assets resulting
from variable annuity activities .......................... 4,159,808 6,917,481
----------- -------------
Total increase (decrease) in net assets .................. 3,508,881 9,372,072
Net Assets:
Beginning of year ............................................ 35,481,664 26,109,592
----------- -------------
End of year .................................................. $38,990,545 $ 35,481,664
=========== =============
</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.
47
<PAGE>
<TABLE>
<CAPTION>
Flexibly Managed Fund+ International Equity Fund+
- --------------------------- --------------------------
1999 1998 1999 1998
- ------------ ------------ ------------ ------------
<S> <C> <C> <C>
($470,251) $ 1,144,764 ($226,031) $56,661
16,311 5,784,840 1,131,146 970,588
3,692,338 (4,524,890) 10,566,719 2,087,405
- ----------- ------------ ----------- -----------
3,238,398 2,404,714 11,471,834 3,114,654
- ----------- ------------ ----------- -----------
12,696,631 12,234,331 6,485,087 4,244,414
(82,516) (17,851) (7,506) (15,627)
(3,522,739) (3,137,840) (1,671,752) (1,050,548)
(6,182,355) 1,345,485 (3,336,017) 3,160,776
211,590 139,613 72,417 65,814
(690,067) (646,642) (408,378) (252,405)
(1,818,495) (1,299,724) (906,723) (633,058)
- ----------- ------------ ----------- -----------
612,049 8,617,372 227,128 5,519,366
- ----------- ------------ ----------- -----------
3,850,447 11,022,086 11,698,962 8,634,020
55,236,496 44,214,410 22,396,397 13,762,377
- ----------- ------------ ----------- -----------
$59,086,943 $55,236,496 $34,095,359 $22,396,397
=========== =========== =========== ===========
Emerging Growth Fund+ Balanced Portfolio++
- --------------------------- -------------------------
1999 1998 1999 1998
- ------------ ----------- ----------- -----------
($134,466) ($29,768) $35,671 $52,777
195,921 10,412 145,588 610,655
16,746,334 1,277,385 1,736,544 (184,479)
- ----------- ---------- ---------- ----------
16,807,789 1,258,029 1,917,803 478,953
- ----------- ---------- ---------- ----------
2,612,183 1,376,626 1,484,570 1,068,630
(7,463) -- (6,801) (2,001)
(575,948) (270,389) (353,927) (278,391)
5,165,425 2,271,306 (12,467) 526,196
27,154 949 18,188 83,335
(190,593) (117,695) (73,565) (50,297)
(260,812) (61,482) (174,227) (163,220)
- ----------- ---------- ---------- ----------
6,769,946 3,199,315 881,771 1,184,252
- ----------- ---------- ---------- ----------
23,577,735 4,457,344 2,799,574 1,663,205
5,937,537 1,480,193 5,134,483 3,471,278
- ----------- ---------- ---------- ----------
$29,515,272 $5,937,537 $7,934,057 $5,134,483
=========== ========== ========== ==========
</TABLE>
<PAGE>
[RESTUBBED]
<TABLE>
<CAPTION>
Small Partners
Capitalization Fund+ Portfolio++
-------------------------- -------------------------
1999 1998 1999 1998
------------ ------------ ------------ -----------
<S> <C> <C> <C>
($80,192) ($5,543) $20,897 ($33,955)
8,164 135,416 214,394 486,053
(63,045) (791,507) 412,343 (271,429)
----------- ----------- ----------- ----------
(135,073) (661,634) 647,634 180,669
----------- ----------- ----------- ----------
3,124,582 2,372,356 2,466,761 2,301,846
(7,256) (10,571) (13,903) --
(604,903) (505,718) (469,143) (484,655)
(12,470) 2,227,491 2,236,859 3,388,292
45,711 11,010 14,898 11,914
(147,833) (165,296) (126,557) (201,761)
(228,773) (129,707) (211,368) (138,687)
----------- ----------- ----------- ----------
2,169,058 3,799,565 3,897,547 4,876,949
----------- ----------- ----------- ----------
2,033,985 3,137,931 4,545,181 5,057,618
8,336,790 5,198,859 8,209,694 3,152,076
----------- ----------- ----------- ----------
$10,370,775 $ 8,336,790 $12,754,875 $8,209,694
=========== =========== =========== ==========
Limited Maturity Growth
Bond Portfolio++ Portfolio++++
-------------------------- ------------------------
1999 1998 1999 1998
------------ ----------- ----------- -----------
$62,320 $41,895 ($56,208) ($47,491)
($1,650) 242 35,362 140,032
(73,233) (13,221) 3,540,972 (261,202)
---------- ---------- ---------- ----------
(12,563) 28,916 3,520,126 (168,661)
---------- ---------- ---------- ----------
539,187 300,887 1,370,035 1,577,063
(2,119) -- (2,858) (3,745)
(97,258) (58,968) (342,503) (342,552)
(23,735) 318,853 (932,409) (1,352,477)
2,417 5,849 15,155 35,632
(27,049) (14,141) (57,224) (53,636)
(29,913) (9,313) (323,009) (244,500)
---------- ---------- ---------- ----------
361,530 543,167 (272,813) (384,215)
---------- ---------- ---------- ----------
348,967 572,083 3,247,313 (552,876)
1,228,598 656,515 5,764,147 6,317,023
---------- ---------- ---------- ----------
$1,577,565 $1,228,598 $9,011,460 $5,764,147
========== ========== ========== ==========
</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.
48
<PAGE>
PENN MUTUAL VARIABLE LIFE ACCOUNT I
STATEMENTS OF CHANGES IN NET ASSETS - FOR THE
YEARS ENDED DECEMBER 31, 1999 AND 1998 (CONT'D.)
<TABLE>
<CAPTION>
Equity Income Growth Asset Manager
Portfolio++++ Portfolio++++ Portfolio++++
------------------------- ------------------------- -------------------------
1999 1998 1999 1998 1999 1998
---------- ----------- ----------- ----------- ---------- ----------
Operations:
<S> <C> <C> <C> <C> <C> <C>
Net investment income (loss) ............. $95,807 $40,458 ($310,681) ($106,277) $84,186 $43,537
Net realized gains (losses) from
investment transactions ............. 675,484 649,737 3,375,626 2,143,029 160,654 202,236
Net change in unrealized appreciation/
depreciation of investments ......... 330,734 963,306 10,574,337 5,047,623 272,683 136,988
----------- ----------- ----------- ----------- ---------- ----------
Net increase (decrease) in net assets
resulting from operations ........... 1,102,025 1,653,501 13,639,282 7,084,375 517,523 382,761
----------- ----------- ----------- ----------- ---------- ----------
Variable Life Activities:
Purchase payments ........................ 6,666,334 4,640,276 10,979,093 5,974,648 1,375,866 834,804
Death benefits ........................... (14,032) (20,055) (38,816) (45,153) (1,237) -
Cost of insurance ........................ (1,603,588) (1,115,035) (2,562,252) (1,459,882) (347,344) (216,443)
Net transfers ............................ 1,627,390 2,979,305 8,714,008 2,873,583 1,102,953 807,683
Transfers of policy loans ................ 71,994 25,171 68,165 22,413 3,213 1,050
Contract administration charges .......... (373,064) (297,186) (720,794) (385,848) (73,304) (49,185)
Surrender benefits ....................... (726,919) (430,380) (1,358,474) (689,227) (129,352) (115,461)
------------ ----------- ----------- ----------- ---------- ----------
Net increase in net assets resulting
from variable annuity activities ......... 5,648,115 5,782,096 15,080,930 6,290,534 1,930,795 1,262,448
----------- ----------- ----------- ----------- ---------- ----------
Total increase (decrease) in net assets . 6,750,140 7,435,597 28,720,212 13,374,909 2,448,318 1,645,209
Net Assets:
Beginning of year ........................... 19,866,250 12,430,653 28,561,805 15,186,896 3,718,485 2,073,276
----------- ----------- ----------- ----------- ---------- ----------
End of year ................................. $26,616,390 $19,866,250 $57,282,017 $28,561,805 $6,166,803 $3,718,485
=========== =========== =========== =========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
Index 500 Emerging Markets
Portfolio++++ Portfolio+++++
------------------------------- ------------------------------
1999 1998 1999 1998
----------- ----------- ---------- ----------
Operations:
<S> <C> <C> <C> <C>
Net investment income (loss) ............. ($75,368) ($32,366) ($27,538) ($1,174)
Net realized gains (losses) from
investment transactions ............. 116,561 60,958 370,168 2,392
Net change in unrealized appreciation/
depreciation of investments ......... 5,205,293 1,980,793 2,084,566 (276,666)
----------- ----------- ---------- ----------
Net increase (decrease) in net assets
resulting from operations ........... 5,246,486 2,009,385 2,427,196 (275,448)
----------- ----------- ---------- ----------
Variable Life Activities:
Purchase payments ........................ 8,565,619 4,295,628 554,609 615,443
Death benefits ........................... (9,073) - (2,197) -
Cost of insurance ........................ (1,447,507) (664,534) (104,590) (95,184)
Net transfers ............................ 16,965,879 7,630,497 399,790 612,607
Transfers of policy loans ................ 56,519 9,823 3,721 1,295
Contract administration charges .......... (568,474) (335,545) (30,629) (53,730)
Surrender benefits ....................... (317,861) (115,742) (36,703) (28,850)
----------- ----------- ---------- ----------
Net increase in net assets resulting
from variable annuity activities ......... 23,245,102 10,820,127 784,001 1,051,581
----------- ----------- ---------- ----------
Total increase (decrease) in net assets . 28,491,588 12,829,512 3,211,197 776,133
Net Assets:
Beginning of year ........................... 14,770,171 1,940,659 1,601,618 825,485
----------- ----------- ---------- ----------
End of year ................................. $43,261,759 $14,770,171 $4,812,815 $1,601,618
=========== =========== ========== ==========
</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 intergral part of these financial statements.
49
<PAGE>
PENN MUTUAL VARIABLE LIFE ACCOUNT I
- --------------------------------------------------------------------------------
Notes to Financial Statements
December 31, 1999
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, Cornerstone VUL III, Variable Estatemax 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, 1999 and the reported amounts from operations and
variable life activities during 1999 and 1998. Actual results could differ from
those estimates.
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 life contract other than a contract
issued in connection with certain types of employee benefit plans will not be
treated as a life 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.
50
<PAGE>
Note 2. Purchases and Sales of Investments
The following table shows aggregate cost of shares purchased and
proceeds from sales of each fund or portfolio for the year ended December 31,
1999:
Purchases Sales
--------- -----
Money Market Fund ............................. $84,361,990 $69,381,912
Quality Bond Fund ............................. 3,276,420 1,511,209
High Yield Bond Fund .......................... 4,879,404 3,792,156
Growth Equity Fund ............................ 9,938,419 2,514,823
Value Equity Fund ............................. 9,258,922 5,446,023
Flexibly Managed Fund ......................... 9,434,808 9,268,233
Small Capitalization Fund ..................... 3,500,074 1,398,790
International Equity Fund ..................... 42,117,549 40,973,961
Emerging Growth Fund .......................... 10,436,516 3,591,156
Limited Maturity Bond Portfolio ............... 868,999 446,591
Balanced Portfolio ............................ 2,053,296 987,858
Partners Portfolio ............................ 6,297,152 2,162,024
Capital Appreciation Portfolio ................ 1,318,604 1,609,498
Equity Income Portfolio ....................... 9,028,532 2,604,920
Growth Portfolio .............................. 20,977,467 2,815,137
Asset Manager Portfolio ....................... 2,891,976 714,920
Index 500 Portfolio ........................... 25,076,298 1,777,197
Emerging Markets Equity Portfolio ............. 11,124,088 10,192,650
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; Cornerstone VUL III
is determined daily at a current annual rate guaranteed not to exceed 0.90% of
the average value of Cornerstone VUL III; Variable Estatemax is determined
daily at a current annual rate guaranteed not to exceed 0.90% of the average
value of Variable Estatemax; 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, Cornerstone VUL III and
Variable Estatemax 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 Cornerstone VUL III policy is surrendered within the
first 16 years, or a Variable Estatemax 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.
51
<PAGE>
Note 4. Unit Values
Accumulation Unit Values For Variable Life Account I as of 12/31/99 are as
follows:
Accumulation Accumulation
Units Unit Value
----- ----------
Money Market Fund
Cornerstone VUL 209,517 $12.84
Cornerstone VUL II 1,036,419 $12.04
Cornerstone VUL III 552,696 $10.19
Variable Estatemax 302,526 $12.05
Momentum Builder 143,910 $17.63
Quality Bond Fund
Cornerstone VUL 161,919 $14.16
Cornerstone VUL II/Variable Estatemax 416,913 $13.29
Cornerstone VUL III 32,112 $ 9.98
Momentum Builder 10,474 $24.25
High Yield Bond Fund
Cornerstone VUL 188,612 $16.29
Cornerstone VUL II/Variable Estatemax 372,690 $14.84
Cornerstone VUL III 11,772 $ 9.97
Momentum Builder 22,436 $28.16
Growth Equity Fund
Cornerstone VUL 315,704 $37.32
Cornerstone VUL II/Variable Estatemax 484,230 $32.30
Cornerstone VUL III 48,303 $11.73
Momentum Builder 28,612 $51.07
Value Equity Fund
Cornerstone VUL 503,094 $24.10
Cornerstone VUL II/Variable Estatemax 1,309,074 $19.75
Cornerstone VUL III 63,921 $ 9.16
Momentum Builder 10,655 $39.71
Flexibly Managed Fund
Cornerstone VUL 1,102,009 $20.45
Cornerstone VUL II/Variable Estatemax 2,115,595 $16.64
Cornerstone VUL III 121,555 $ 9.86
Momentum Builder 3,919 $38.12
Small Capitalization Fund
Cornerstone VUL 78,360 $14.36
Cornerstone VUL II/Variable Estatemax 634,413 $14.26
Cornerstone VUL III 21,360 $ 9.19
International Equity Fund
Cornerstone VUL 455,807 $28.13
Cornerstone VUL II/Variable Estatemax 853,934 $24.42
Cornerstone VUL III 31,574 $13.32
<PAGE>
Accumulation Accumulation
Units Unit Value
----- ----------
Emerging Growth Fund
Cornerstone VUL 100,262 $52.78
Cornerstone VUL II/Variable Estatemax 436,087 $52.57
Cornerstone VUL III 76,337 $16.99
Limited Maturity Bond Portfolio
Cornerstone VUL 9,262 $12.76
Cornerstone VUL II/Variable Estatemax 107,727 $12.05
Cornerstone VUL III 16,003 $10.05
Balanced Portfolio
Cornerstone VUL 130,873 $23.49
Cornerstone VUL II/Variable Estatemax 222,649 $20.95
Cornerstone VUL III 15,487 $12.59
Partners Portfolio
Cornerstone VUL 170,254 $13.73
Cornerstone VUL II/Variable Estatemax 729,954 $13.67
Cornerstone VUL III 47,250 $ 9.29
Capital Appreciation Portfolio
Cornerstone VUL 194,305 $20.60
Cornerstone VUL II/Variable Estatemax 289,841 $17.28
Equity Income Portfolio
Cornerstone VUL 198,335 $20.17
Cornerstone VUL II/Variable Estatemax 1,094,397 $20.03
Cornerstone VUL III 75,665 $ 9.21
Growth Portfolio
Cornerstone VUL 333,903 $32.68
Cornerstone VUL II/Variable Estatemax 1,380,600 $32.45
Cornerstone VUL III 137,813 $11.42
Asset Manager Portfolio
Cornerstone VUL 60,527 $19.19
Cornerstone VUL II/Variable Estatemax 252,747 $19.06
Cornerstone VUL III 18,374 $10.26
Index 500 Portfolio
Cornerstone VUL 245,482 $18.59
Cornerstone VUL II/Variable Estatemax 1,928,357 $18.52
Cornerstone VUL III 288,250 $10.38
Emerging Markets Equity Portfolio
Cornerstone VUL 68,051 $13.17
Cornerstone VUL II/Variable Estatemax 282,276 $13.12
Cornerstone VUL III 15,534 $13.77
52
<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 and Emerging
Markets Equity Portfolio) as of December 31, 1999, and the related statement of
operations for the year then ended and statements of changes in net assets for
each of the two years in the period then ended. The financial statements are the
responsibility of the management of Penn Mutual Variable Life Account I. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatements. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. Our
procedures included confirmation of securities owned as of December 31, 1999, by
correspondence with the transfer agents. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of each of the portfolios
constituting the Penn Mutual Variable Life Account I at December 31, 1999, the
results of their operations for the year then ended and the changes in their net
assets for each of the two years in the period then ended, in conformity with
accounting principles generally accepted in the United States.
/s/ Ernst & Young LLP
-----------------------------------
Ernst & Young LLP
Philadelphia, Pennsylvania
April 4, 2000
53
<PAGE>
The Penn Mutual Life Insurance Company and Subsidiaries
Consolidated Balance Sheets
<TABLE>
<CAPTION>
As of December 31, 1999 1998
- ---------------------------------------------------------------------------------------------
(in thousands)
ASSETS
<S> <C> <C>
Debt securities, at fair value $ 4,733,261 $ 5,500,924
Equity securities, at fair value 3,949 4,161
Mortgage loans on real estate 27,115 38,828
Real estate, net of accumulated depreciation 15,461 15,791
Policy loans 642,420 638,376
Short-term investments 6,934 1,024
Other invested assets 137,766 98,571
----------- -----------
Total investments 5,566,906 6,297,675
Cash and cash equivalents 37,481 24,468
Investment income due and accrued 89,254 104,208
Deferred acquisition costs 549,573 399,742
Amounts recoverable from reinsurers 220,847 69,583
Broker/dealer receivables 1,143,702 793,522
Other assets 109,818 94,179
Separate account assets 2,865,366 2,302,937
----------- -----------
Total Assets $10,582,947 $10,086,314
=========== ===========
LIABILITIES
Reserves for payment of future policy benefits $ 2,735,609 $ 2,761,319
Other policyholder funds 2,710,589 2,835,081
Policyholders' dividends payable 28,770 30,532
Broker/dealer payables 646,479 488,783
Accrued income tax payable 31,919 142,634
Other liabilities 573,909 383,744
Separate account liabilities 2,865,366 2,302,937
----------- -----------
Total Liabilities 9,592,641 8,945,030
----------- -----------
EQUITY
Retained earnings 1,023,704 944,145
Accumulated other comprehensive income/(loss) -
unrealized gains/(losses) (33,398) 197,139
----------- -----------
Total Equity 990,306 1,141,284
----------- -----------
Total Liabilities and Equity $10,582,947 $10,086,314
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
54
<PAGE>
The Penn Mutual Life Insurance Company and Subsidiaries
Consolidated Income Statements
<TABLE>
<CAPTION>
For the Years Ended December 31, 1999 1998 1997
- -------------------------------------------------------------------------------------------------------------
(in thousands)
REVENUES
<S> <C> <C> <C>
Premium and annuity considerations $ 130,516 $ 154,615 $ 178,338
Policy fee income 131,709 114,681 102,398
Net investment income 431,222 433,530 448,135
Net realized capital gains/(losses) 803 3,912 9,655
Broker/dealer fees and commissions 395,483 331,285 290,005
Other income 24,895 15,543 10,920
---------- ---------- ----------
Total Revenue 1,114,628 1,053,566 1,039,451
---------- ---------- ----------
BENEFITS AND EXPENSES
Benefits paid to policyholders and beneficiaries 429,791 445,148 463,444
Policyholder dividends 56,603 61,369 67,412
Decrease in liability for future policy benefits (54,080) (23,337) (10,275)
General expenses 238,603 205,698 195,336
Broker/dealer sales expense 216,712 180,255 160,730
Amortization of deferred acquisition costs 52,668 42,223 43,223
---------- ---------- ----------
Total Benefits and Expenses 940,297 911,356 919,870
---------- ---------- ----------
Income from Continuing Operations Before Income Taxes 174,331 142,210 119,581
---------- ---------- ----------
Income taxes 66,324 57,019 51,323
---------- ---------- ----------
Income from Continuing Operations 108,007 85,191 68,258
---------- ---------- ----------
DISCONTINUED OPERATIONS
Income (loss) from operations of discontinued segment
(net of income taxes of $(2,137), $670 and $2,589) (3,968) 1,243 4,807
Loss on sale of discontinued operations (less
applicable income tax benefit of $13,181) (24,480) - -
---------- ---------- ----------
NET INCOME $ 79,559 $ 86,434 $ 73,065
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
55
<PAGE>
The Penn Mutual Life Insurance Company and Subsidiaries
Consolidated Statements of Changes in Equity
<TABLE>
<CAPTION>
Other
Comprehensive Retained Total
Income/(Loss) Earnings Equity
--------------------------------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C>
Balance at January 1, 1997 $ 85,730 $ 784,646 $ 870,376
Comprehensive Income
Net income for 1997 - 73,065 73,065
Other comprehensive loss, net of tax
Unrealized appreciation of securities,
net of reclassification adjustment 66,279 - 66,279
----------
Comprehensive Income 139,344
--------- ---------- ----------
Balance at December 31, 1997 152,009 857,711 1,009,720
Comprehensive Income
Net income for 1998 - 86,434 86,434
Other comprehensive income, net of tax
Unrealized appreciation of securities,
net of reclassification adjustment 45,130 - 45,130
----------
Comprehensive Income 131,564
--------- ---------- ----------
Balance at December 31, 1998 197,139 944,145 1,141,284
Comprehensive Loss
Net income for 1999 - 79,559 79,559
Other comprehensive loss, net of tax
Unrealized depreciation of securities,
net of reclassification adjustment (230,537) - (230,537)
----------
Comprehensive Loss (150,978)
--------- ---------- ----------
Balance at December 31, 1999 $ (33,398) $1,023,704 $ 990,306
========= ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
56
<PAGE>
The Penn Mutual Life Insurance Company and Subsidiaries
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
For the Years Ended December 31, 1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------
(in thousands)
Cash Flows from Operating Activities
<S> <C> <C> <C>
Net income $ 79,559 $ 86,434 $ 73,065
Adjustments to reconcile net income to net cash provided by operations:
Capitalization of policy acquisition costs (78,644) (72,356) (64,427)
Amortization of deferred acquisition costs 52,668 42,223 43,223
Policy fees on universal life and investment contracts (80,456) (120,315) (104,342)
Interest credited on universal life and investment contracts 132,213 146,081 160,417
Depreciation and amortization 6,294 4,750 18,682
Premiums due and other receivables (16,794) (1,293) (7,291)
Net realized capital (gains)/losses (803) (3,912) (9,655)
Net realized loss on sale of discontinued operations 37,661 - -
(Increase)/decrease in investment income due and accrued 14,954 (1,136) 60
(Increase) in amounts recoverable from reinsurers (18,419) (6,372) (4,329)
(Decrease) in reserves for payment of future policy benefits (25,710) (8,696) (13,358)
Increase/(decrease) in accrued income tax payable 13,222 25,622 (4,526)
Other, net 12,652 3,805 (6,693)
---------- ----------- -----------
Net cash provided by operating activities 128,397 94,835 80,826
---------- ----------- -----------
Cash Flows from Investing Activities
Sale of investments:
Debt securities available for sale 1,624,576 1,837,209 1,235,274
Equity securities 12,003 35,496 20,374
Real estate 853 9,937 87,875
Other 3,884 18,074 14,355
Maturity and other principal repayments:
Debt securities available for sale 415,888 496,283 472,474
Mortgage loans 17,596 2,357 61,813
Other 3,963 - -
Cost of investments acquired:
Debt securities available for sale (1,752,394) (2,315,067) (1,772,007)
Equity securities (12,097) (26,390) (15,268)
Real estate (1,366) (293) (15,600)
Other (39,139) (17,917) (15,503)
Change in policy loans, net (4,044) 4,613 13,084
(Increase)/decrease in short-term investments, net (5,910) 42,446 (5,955)
Purchases of furniture and equipment, net (10,900) (9,446) (4,116)
Sale of discontinued operations (160,332) - -
---------- ----------- -----------
Net cash provided by investing activities 92,581 77,302 76,800
---------- ----------- -----------
</TABLE>
- continued -
The accompanying notes are an integral part of these financial statements.
57
<PAGE>
The Penn Mutual Life Insurance Company and Subsidiaries
Consolidated Statements of Cash Flows - Continued
<TABLE>
<CAPTION>
For the Years Ended December 31, 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------
(in thousands)
Cash Flows from Financing Activities
<S> <C> <C> <C>
Deposits for universal life and investment contracts $ 605,568 $ 589,070 $ 653,233
Withdrawals from universal life and investment contracts (641,296) (605,821) (552,311)
Transfers to separate accounts (146,981) (147,708) (236,008)
Issuance/(repayment) of debt 167,228 90,772 24,842
(Increase)/decrease in net broker dealer receivables (192,484) (111,046) (47,632)
--------- ---------- ---------
Net cash used by financing activities (207,965) (184,733) (157,876)
--------- ---------- ---------
Net increase/(decrease) in cash and cash equivalents 13,013 (12,596) (250)
Cash and cash equivalents
Beginning of the year 24,468 37,064 37,314
--------- ---------- ---------
End of the year $ 37,481 $ 24,468 $ 37,064
========= ========== =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
58
<PAGE>
- --------------------------------------------------------------------------------
THE PENN MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For The Years Ended December 31, 1999, 1998 and 1997
(in thousands of dollars)
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
- ----------------------------------------------
Organization and Basis of Presentation
The Penn Mutual Life Insurance Company was founded and commenced business in
1847 as a mutual life insurance company. The Company concentrates primarily on
the sale of individual life insurance and annuity products. The primary products
that the Company currently markets are traditional whole life, term life,
universal life, variable life, immediate annuities and deferred annuities, both
fixed and variable. The Company markets its products through a network of career
agents, independent agents, and independent marketing organizations. The Company
is also involved in the broker-dealer business which offers a variety of
investment products and services and is conducted through the Company's
non-insurance subsidiaries. The Company sells its products in all fifty states
and the District of Columbia.
The accompanying consolidated financial statements have been prepared in
conformity with accounting principles generally accepted in the United States
and include the accounts of The Penn Mutual Life Insurance Company, its wholly
owned life insurance subsidiary, The Penn Insurance and Annuity Company ("PIA"),
and non-insurance subsidiaries (principally broker/dealer and investment
advisory subsidiaries) (the "Company"). All significant intercompany accounts
and transactions have been eliminated in consolidation. The preparation of
financial statements requires management to make estimates and assumptions that
affect the amounts reported in the consolidated financial statements and notes
to the consolidated financial statements.
New Accounting Pronouncements
As of January 1, 1999, the Company adopted Statement of Position (SOP) 97-3,
"Accounting by Insurance and Other Enterprises for Insurance-Related
Assessments." SOP 97-3 provides guidance for determining when and how to measure
assets and liabilities associated with guaranty fund and other insurance related
assessments. The Company also adopted SOP 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use" which gives guidance
on accounting for the costs related to developing, obtaining, modifying and/or
implementing internal use software. The adoption of SOP 97-3 and SOP 98-1 did
not have a material effect on the Company's financial condition or results of
operations.
As of January 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. (SFAS) 130, "Reporting Comprehensive Income." SFAS No. 130
established standards for the reporting and display of comprehensive income and
its components in the financial statements. The initial application of SFAS No.
130, required the reclassification of prior-year financial statements to reflect
the components of comprehensive income.
In June 1998, the FASB issued Statement of Financial Accounting Standards No
(SFAS). 133, "Accounting for Derivative Instruments and Hedging Activities."
SFAS No. 133 requires all derivatives to be recognized in the statement of
financial position as either assets or liabilities and measured at fair value.
The corresponding derivative gains and losses should be reported based on hedge
relationships that exist. Changes in the fair value of derivatives that are not
designated as hedges or that do not meet the hedge accounting criteria in SFAS
No. 133, are required to be reported in earnings. In June 1999, the FASB issued
SFAS No. 137 which defers the effective date for implementation of SFAS No. 133
to fiscal years beginning after June 15, 2000. Adoption of SFAS No. 133 is not
expected to have a material effect on the Company's financial condition or
results of operations.
Investments
Debt securities (bonds, notes, redeemable preferred stocks and mortgage-backed
securities) which might be sold prior to maturity are classified as available
for sale. These securities are carried at fair value, with the change in
unrealized gains and losses reported in other comprehensive income. Interest on
debt securities is credited to income as it is earned. Debt securities are
amortized using the scientific method. Prepayment assumptions for loan-backed
and structured securities are obtained from broker dealer survey values or
internal estimates. These assumptions are
59
<PAGE>
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements, continued
(In Thousands of Dollars)
- --------------------------------------------------------------------------------
consistent with the current interest rate and economic environments. The
retrospective adjustment method is used to value all such securities.
Equity securities are classified as available for sale and carried at fair
value. Dividends on equity securities are credited to income on their
ex-dividend dates.
The Company regularly evaluates the carrying value of debt and equity securities
based on current economic conditions, past credit loss experience and other
circumstances of the investee. A decline in a security's fair value that is
deemed to be other than temporary is treated as a realized loss and a reduction
in the cost basis of the security.
Mortgage loans on real estate are stated at unpaid principal balances, net of
unamortized discounts and valuation allowances. Valuation allowances on impaired
loans are based on the present value of expected future cash flows discounted at
the loan's original effective interest rate or the collateral value if the loan
is collateral dependent. However, if foreclosure is or becomes probable, the
measurement method used is collateral value.
Investment real estate, which the Company has the intent to hold, is carried at
cost less accumulated depreciation and valuation reserves. The Company
establishes valuation reserves for investment real estate when declines in value
are deemed to be other then temporary based on an analysis of discounted future
cash flows. Properties held for sale are carried at the lower of depreciated
cost or fair value less selling costs. Valuation reserves are established for
properties held for sale when the fair value less estimated selling costs is
below depreciated cost. Real estate acquired through foreclosure is recorded at
the lower of cost or fair value less estimated selling costs at the time of
foreclosure. Depreciation is calculated using the straight-line method over the
estimated useful lives of the real estate.
Policy loans are carried at the unpaid principal balances.
Short-term investments include securities purchased with a maturity date of 90
days to less than one year. Short-term investments are valued at cost.
Other invested assets primarily include venture capital limited partnerships
which are carried at fair value.
Realized gains and losses are determined by specific identification and are
included in income on the trade date, net of amortization of deferred
acquisition costs. Unrealized gains and losses, net of appropriate taxes and
amortization of deferred acquisition costs, are accounted for as a separate
component of other comprehensive income.
The Company utilizes various financial instruments, such as interest rate swaps,
financial futures and structured notes, to hedge against interest rate
fluctuation. Most of these investments are recorded as accounting hedges using a
valuation method consistent with the valuation method of the assets hedged.
Gains and losses on these instruments are deferred and recognized in the
Consolidated Income Statements over the remaining life of the hedged security.
Changes in the fair value of these instruments are reported as unrealized gains
or losses. Realized gains or losses are recognized when the hedged securities
are sold.
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand, money market instruments and
other debt securities with a maturity of 90 days or less when purchased.
Other Assets
Property and equipment and leasehold improvements are stated at cost, less
accumulated depreciation and amortization. Depreciation is calculated using the
straight-line method over the estimated useful lives of the related assets.
Amortization of leasehold improvements is calculated using the straight-line
method over the lesser of the term of the leases or the estimated useful life of
the improvements. Accumulated depreciation and amortization on property and
equipment and leasehold improvements was $50,971 and $46,292 at December 31,
1999 and 1998,
60
<PAGE>
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements, continued
(In Thousands of Dollars)
- --------------------------------------------------------------------------------
respectively. Related depreciation and amortization expense was $8,441, $8,586
and $8,183 for the years ended December 31, 1999, 1998 and 1997, respectively.
Goodwill represents the excess of the cost of the businesses acquired over the
fair value of their net assets. These costs are amortized on a straight-line
basis over not more than 40 years and are included in other assets in the
Consolidated Balance Sheets. Unamortized goodwill included in other assets
amounted to $17,228 and $16,126 at December 31, 1999 and 1998, respectively.
Goodwill amortization was $1,008, $806 and $808 for 1999, 1998 and 1997,
respectively.
Deferred Acquisition Costs
Costs of acquiring new insurance and annuity contracts, which vary with and are
primarily related to the production of new business, have been deferred to the
extent that such costs are deemed recoverable from future gross profits. Such
costs include commissions, certain costs of policy issuance and underwriting,
and certain variable agency expenses.
Deferred acquisition costs related to participating traditional and universal
life insurance policies and annuity products without mortality risk that include
significant surrender charges are being amortized over the lesser of the
estimated or actual contract life in proportion to estimated gross profits
arising principally from interest, mortality and expense margins and surrender
charges. The effects on amortization of deferred acquisition costs of revisions
to estimated gross profits are reflected in earnings in the period such
estimated gross profits are revised. Deferred acquisition costs are reviewed to
determine that the unamortized portion of such costs is recoverable from future
estimated gross profits. Certain costs and expenses reported in the consolidated
income statements are net of amounts deferred.
Separate Accounts
Separate Account assets and liabilities represent segregated funds administered
and invested by the Company primarily for the benefit of variable life insurance
policyholders and annuity and pension contractholders, including certain of the
Company's benefit plans. The value of the assets in the Separate Accounts
reflects the actual investment performance of the respective accounts and is not
guaranteed by the Company. The carrying value for Separate Account assets and
liabilities approximates the estimated fair value of the underlying assets.
Insurance Liabilities and Revenue Recognition
Participating Traditional Life and Life Contingent Annuity Products
Future policy benefits include reserves for participating traditional life
insurance and life contingent annuity products and are established in amounts
adequate to meet the estimated future obligations of the policies in force.
Liabilities for participating traditional life products are computed using the
net level premium method, using assumptions for investment yields, mortality,
morbidity and withdrawals, which are consistent with the dividend fund interest
rate and mortality rates used in calculating cash surrender values. Interest
rate assumptions used in the calculation of the liabilities for participating
traditional life products ranged from 2.25% to 4.5%. Premiums are recognized as
income when due. Death and surrender benefits are reported in expense as
incurred.
Liabilities for life contingent annuity products are computed by estimating
future benefits and expenses. Assumptions are based on Company experience
projected at the time of policy issue, with provision for adverse deviations.
Interest rate assumptions range from 2.25% to 13.25%. Premiums are recognized as
income as they are received. Death and surrender benefits are reported in
expense as incurred.
Universal Life Products and Other Annuity Products
Other policyholder funds represent liabilities for universal life and
investment-type annuity products. The liabilities for these products are based
on the contract account value which consists of deposits received from customers
and investment earnings on the account value, less administrative and expense
charges. The liability for universal life products is also reduced by mortality
charges. Liabilities for the non-life contingent annuity products are computed
61
<PAGE>
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements, continued
(In Thousands of Dollars)
- --------------------------------------------------------------------------------
by estimating future benefits and expenses. Assumptions are based on Company
experience projected at the time of policy issue. Interest rate assumptions
range from 2.0% to 11.25%.
Contract charges assessed against account value for universal life and
investment-type annuities are reflected as policy fee income in revenue.
Interest credited to account values and universal life benefit claims in excess
of fund values are reflected as benefit expense.
Policyholders' Dividends
The majority of the Company's insurance products have been issued on a
participating basis. As of December 31, 1999, participating insurance expressed
as a percentage of insurance in force is 91%, and as a percentage of premium
income is 83%. The amount of policyholders' dividends to be paid is approved
annually by the Board of Trustees. The aggregate amount of policyholders'
dividends is calculated based on actual interest, mortality, morbidity and
expense experience for the year and on management's judgment as to the
appropriate level of equity to be retained by the Company. The carrying value of
this liability approximates the earned amount and fair value at December 31,
1999.
Broker/Dealer Revenue Recognition
Broker-dealer transactions in securities and listed options, including related
commission revenue and expense, are recorded on a settlement-date basis. There
would be no material effect on the financial statements if such transactions
were recorded on a trade-date basis.
Federal Income Taxes
The Company files a consolidated federal income tax return with its life and
non-life insurance subsidiaries. Federal income taxes are charged or credited to
operations based upon amounts estimated to be payable or recoverable as a result
of taxable operations for the current year. Deferred income tax assets and
liabilities are established to reflect the impact of temporary differences
between the amount of assets and liabilities recognized for financial reporting
purposes and such amounts recognized for tax purposes. These deferred tax assets
or liabilities are measured by using the enacted tax rates expected to apply to
taxable income in the period in which the deferred tax liabilities or assets are
expected to be settled or realized.
Reinsurance
In the normal course of business, the Company seeks to limit its exposure to
loss on any single insured and to recover a portion of benefits paid by ceding
reinsurance to other insurance enterprises or reinsurers under excess coverage
and coinsurance contracts. The Company has set its retention limit for
acceptance of risk on life insurance policies at various levels up to $1,250.
Insurance liabilities are reported before the effects of reinsurance.
Reinsurance receivables (including amounts related to insurance liabilities) are
reported as assets. Estimated reinsurance receivables are recognized in a manner
consistent with the liabilities related to the underlying reinsured contracts.
Reclassification
Certain 1998 and 1997 amounts have been reclassified to conform with 1999
presentation.
2. DISCONTINUED OPERATIONS:
- ---------------------------
During 1999, the Company decided to exit the Disability Income (DI) line of
business and entered into an indemnity reinsurance agreement with Christian
Mutual Life Insurance Company and ACE Bermuda Ltd. to cede all of its remaining
risk associated with this line. Under the agreement, effective July 1, 1999, the
Company agreed to transfer assets with a fair market value of $167,750 to
reinsure net liabilities of $139,889. The Company recognized a pretax loss of
$37,661 on this transaction, including costs of sale. Under the agreement, 95%
of the assets and liabilities were transferred to the reinsurer effective July
1, 1999. The remaining 5% of the related assets are being held in an escrow
account under the Company's control, pending approval of the transaction by the
State of New York. Accordingly,
62
<PAGE>
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements, continued
(In Thousands of Dollars)
- --------------------------------------------------------------------------------
reserves for payment of future policy benefits at December 31, 1999 include
$7,458 related to the remaining 5% of the DI business.
As this is a disposal of a segment of business, the Company has modified the
presentation in the accompanying income statements to separate the results of
operations attributable to this business. Revenue from discontinued operations
for the year ended December 31, 1999, 1998 and 1997 were $16,855, $28,854 and
$29,884, respectively.
The reinsurance agreement is secured for the Company by a collateralized trust
which names the Company as the beneficiary. As of December 31, 1999, the Company
had a reinsurance recoverable from Christian Mutual of $141,707 which was
secured by investment grade securities with a market value of $155,046 held in
trust.
3. INVESTMENTS:
- ---------------
Debt Securities
The following tables summarize the Company's investment in debt securities,
including redeemable preferred stocks. All debt securities are classified as
available for sale and are carried at estimated fair value. Amortized cost is
net of cumulative writedowns for other than temporary declines in value of
$8,703 and $3,056 as of December 31, 1999 and 1998, respectively.
<TABLE>
<CAPTION>
December 31, 1999
------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------------- --------------- -------------- --------------
<S> <C> <C> <C> <C>
U.S. Treasury securities and U.S.
Government and agency securities $ 10,527 $ 119 $ 178 $ 10,468
States and political subdivisions 11,600 - 58 11,542
Foreign governments 19,854 758 - 20,612
Corporate securities 2,678,302 69,875 116,357 2,631,820
Mortgage and other asset-backed securities 2,106,506 9,975 58,011 2,058,470
----------- -------- -------- ----------
Total bonds 4,826,789 80,727 174,604 4,732,912
Redeemable preferred stocks 360 - 11 349
----------- ------- -------- ----------
Total $4,827,149 $80,727 $174,615 $4,733,261
========== ======= ======== ==========
</TABLE>
<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>
63
<PAGE>
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements, continued
(In Thousands of Dollars)
- --------------------------------------------------------------------------------
The following table summarizes the amortized cost and estimated fair value of
debt securities, including redeemable preferred stocks, as of December 31, 1999
by contractual maturity.
<TABLE>
<CAPTION>
Amortized Estimated
Years to maturity: Cost Fair Value
----------- ----------
<S> <C> <C>
One or less $ 226,324 $ 215,589
After one through five 247,287 248,905
After five through ten 523,294 545,057
After ten 1,723,378 1,664,891
Mortgage and other asset-backed securities 2,106,506 2,058,470
----------- ----------
Total bonds 4,826,789 4,732,912
Redeemable preferred stocks 360 349
----------- ----------
Total $ 4,827,149 $4,733,261
=========== ==========
</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 7.5 years.
At December 31, 1999, the Company held $2,058,470 in mortgage and other
asset-backed securities. The structured securities portfolio consists of
commercial and residential mortgage pass-through holdings totaling $1,675,587
and securities backed by credit card receivables, auto loans, home equity and
manufactured housing loans totaling $382,883. These securities follow a
structured principal repayment schedule and are of high credit quality.
Securities totaling $1,412,879 are rated AAA and include $16,617 of
interest-only tranches . As of December 31, 1999 and 1998, the Company's
investments included $370,541 and $475,699, respectively, of the tranches
retained from the 1996 securitization of the Company's commercial mortgage loan
portfolio. These investments represented 37% and 42% of equity at December 31,
1999 and 1998, respectively.
At December 31, 1999, the largest industry concentration of the Company's
portfolio was investments in the finance industry of $506,017 representing 11%
of the total debt portfolio.
Proceeds during 1999, 1998 and 1997 from sales of available-for-sale securities
were $1,623,191, $1,931,269 and $1,353,112, respectively. Gross gains and gross
losses realized on those sales were $18,843 and $17,702, respectively, during
1999, $37,324 and $35,257, respectively, during 1998 and $21,799 and $8,990,
respectively, during 1997.
The Company's investment portfolio of debt securities is predominantly comprised
of investment grade securities. At December 31, 1999 and 1998, debt securities
with amortized cost totaling $218,351 and $192,724, respectively, were less than
investment grade. At December 31, 1999 and 1998, the Company held securities
with a carrying value of $0 and $9,170, respectively, which were to be
restructured pursuant to commenced negotiations. The Company did not hold any
debt securities which were non-income producing for the preceding twelve months
as of December 31, 1999 and 1998.
Equity Securities
During 1999, 1998 and 1997, the proceeds from sales of equity securities
amounted to $12,003, $35,496 and $20,374, respectively. The gross gains and
gross losses realized on those sales were $89 and $352, $3,095 and $239 and $975
and $239 for 1999, 1998 and 1997, respectively
64
<PAGE>
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements, continued
(In Thousands of Dollars)
- --------------------------------------------------------------------------------
Mortgage Loans
The following tables summarize the carrying value of mortgage loans, by property
type and geographic concentration, at December 31.
<TABLE>
<CAPTION>
1999 1998
--------- --------
<S> <C> <C>
Property Type
Office building $ 1,366 $ 9,204
Retail 8,414 5,553
Dwellings 16,062 24,741
Other 2,773 3,130
Valuation Allowance (1,500) (3,800)
-------- --------
Total $ 27,115 $ 38,828
======== ========
</TABLE>
<TABLE>
<CAPTION>
1999 1998
------------ --------
<S> <C> <C>
Geographic Concentration
Northeast $ 5,506 $10,273
Midwest 5,515 5,728
South 11,612 12,075
West 5,982 14,552
Valuation Allowance (1,500) (3,800)
------- -------
Total $27,115 $38,828
======= =======
</TABLE>
The following table presents changes in the mortgage loan valuation allowance
for the years presented:
<TABLE>
<CAPTION>
1999 1998
-------- -------
<S> <C> <C>
Balance at January 1 $ 3,800 $3,800
Reduction in provision (2,300) -
Charge-offs - -
------- ------
Balance at December 31 $ 1,500 $3,800
======= ======
</TABLE>
As of December 31, 1999 and 1998, the Company's mortgage loan portfolio
contained no loans delinquent over 60 days or in foreclosure and there were no
non-income producing mortgage loans for the preceding twelve months.
During 1999 and 1998, the Company did not restructure the terms of any
outstanding mortgages. As of December 31, 1999 and 1998, the mortgage loan
portfolio included $2,275 and $2,555, respectively, of restructured mortgage
loans.
Restructured mortgage loans include commercial loans for which the basic terms,
such as interest rate, maturity date, collateral or guaranty have been changed
as a result of actual or anticipated delinquency. Restructures do not include
mortgages refinanced upon maturity at or above current market rates. Gross
interest income on restructured mortgage loans on real estate that would have
been recorded in accordance with the original terms of such loans amounted to
$305 and $258 in 1999 and 1998, respectively. Gross interest income from these
loans included in net investment income totaled $211 and $236 in 1999 and 1998,
respectively.
65
<PAGE>
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements, continued
(In Thousands of Dollars)
- --------------------------------------------------------------------------------
At December 31, 1999 and 1998, no loans were considered to be impaired. The
Company had no investments in impaired loans during the year ended December 31,
1999. The average recorded investment in impaired loans during the year ended
December 31, 1998 was approximately $6,184. During 1998, $163 was received on
these impaired loans which was applied to the outstanding principal balance or
will be applied to principal at the date of foreclosure.
Real Estate
The following table summarizes the carrying value of the Company's real estate
holdings at December 31.
<TABLE>
<CAPTION>
1999 1998
-------- -------
<S> <C> <C>
Investment $19,461 $19,111
Properties held for sale - 1,914
Less: Valuation allowance (4,000) (5,234)
------- -------
Total $15,461 $15,791
======= =======
</TABLE>
At December 31, 1999 and 1998, accumulated depreciation on real estate amounted
to $7,233 and $6,218, respectively. Depreciation expense on real estate totaled
$1,015, $1,071 and $5,709 for the years ended December 31, 1999, 1998 and 1997,
respectively. During 1997, the Company sold its largest real estate investment
for $65,007 cash to an unrelated buyer. At the date of the sale, this property
had a carrying value of $61,914, net of related reserves, resulting in a gain of
$3,093.
Other
Investments on deposit with regulatory authorities as required by law were
$6,444 and $7,104 at December 31, 1999 and 1998, respectively.
4. INVESTMENT INCOME AND CAPITAL GAINS:
- ----------------------------------------
The following table summarizes the sources of investment income, excluding
investment gains/(losses), for the year ended December 31.
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Debt securities $385,963 $395,628 $390,852
Equity securities 311 206 1,371
Mortgage loans 2,706 4,268 12,098
Real estate 2,209 2,903 17,519
Policy loans 39,371 39,760 40,921
Short-term investments 830 2,032 2,428
Other invested assets 17,446 11,330 21,268
-------- -------- --------
Gross investment income 448,836 456,127 486,457
Less: Investment expense 11,104 11,430 26,251
Less: Discontinued operations 6,510 11,167 12,071
-------- -------- --------
Investment income, net $431,222 $433,530 $448,135
======== ======== ========
</TABLE>
66
<PAGE>
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements, continued
(In Thousands of Dollars)
- --------------------------------------------------------------------------------
The following table summarizes net realized capital gains/(losses) on
investments for the year ended December 31. Net realized capital gains/(losses)
include decreases in valuation allowances of $1,066, $235 and $3,154 in 1999,
1998 and 1997, respectively.
<TABLE>
<CAPTION>
1999 1998 1997
-------- ---------- --------
<S> <C> <C> <C>
Debt securities $ (4,506) $ 110 $ 12,991
Equity securities (263) 2,856 417
Mortgage loans 2,300 210 280
Real estate 173 4,148 (684)
Other 2,430 (2,109) (811)
Amortization of deferred acquisition costs 669 (1,303) (2,538)
-------- ---------- ---------
Net realized capital gains/(losses) $ 803 $ 3,912 $ 9,655
======== ========== =========
</TABLE>
The following table summarizes the change in unrealized gains and losses for
investments carried at fair value which are reflected in other comprehensive
income for the year ended December 31.
<TABLE>
<CAPTION>
1999 1998 1997
---------- ------- ---------
<S> <C> <C> <C>
Unrealized gains/(losses):
Debt securities $ (477,036) $ 86,594 $ 160,850
Equity securities (43) (2,092) 408
Other 5,555 (2,091) (14,581)
---------- ------- ---------
(471,524) 82,411 146,677
---------- ------- ---------
Less:
Deferred policy acquisition costs 117,050 (12,841) (45,043)
Deferred income taxes 123,937 (24,440) (35,355)
---------- -------- ---------
Net change in unrealized gains/(losses) $ (230,537) $ 45,130 $ 66,279
========== ======== =========
</TABLE>
The following table sets forth the reclassification adjustment required to avoid
double-counting in comprehensive income items that are included as part of net
income for a period that also had been part of other comprehensive income in
earlier periods:
<TABLE>
<CAPTION>
Reclassification Adjustments 1999 1998 1997
---------- -------- --------
<S> <C> <C> <C>
Unrealized holding gains/(losses) arising
during period $ (255,859) $ 53,576 $ 71,797
Reclassification adjustment for gains included
in net income 25,322 8,446 5,518
---------- -------- --------
Unrealized gains/(losses) on investments, net
of reclassification adjustment $ (230,537) $ 45,130 $ 66,279
========== ======== ========
</TABLE>
Reclassification adjustments reported in the above table for the years ended
December 31, 1999, 1998 and 1997 are net of income tax expense of $13,635,
$7,679 and $4,519, respectively, and $11,760, $5,815 and $2,875, respectively,
relating to the effects of such amounts on deferred acquisition costs.
67
<PAGE>
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements, continued
(In Thousands of Dollars)
- --------------------------------------------------------------------------------
5. FAIR VALUE INFORMATION:
- --------------------------
The following table summarizes the carrying value and estimated fair value of
the Company's financial instruments as of December 31, 1999 and 1998.
<TABLE>
<CAPTION>
1999 1998
----------------------------- ---------------------------------
Carrying Fair Carrying Fair
Value Value Value Value
------------ ----------- ----------- -----------
<S> <C> <C> <C> <C>
Financial Assets:
Debt securities, available for sale $ 4,733,261 $ 4,733,261 $ 5,500,924 $ 5,500,924
Equity securities
Common stock 276 276 158 158
Non-redeemable preferred stocks 3,673 3,673 4,003 4,003
Mortgage loans 27,115 28,615 38,828 42,675
Policy loans 642,420 612,501 638,376 605,144
Cash and cash equivalents 37,481 37,481 24,468 24,468
Short-term investments 6,934 6,934 1,024 1,024
Separate account assets 2,865,366 2,865,366 2,302,937 2,302,937
Other invested assets 137,766 137,766 98,571 98,571
Financial Liabilities:
Investment-type contracts
Individual annuities $ 997,686 $ 1,011,298 $ 1,108,274 $ 1,143,373
Guaranteed investment contracts 22,786 21,353 39,571 40,556
Other group annuities 85,465 85,213 113,974 115,422
Other policyholder funds 339,937 339,937 340,761 340,761
----------- ----------- ----------- -----------
Total policyholder funds 1,445,874 1,457,801 1,602,580 1,640,112
Policyholder's dividends payable 28,770 28,770 30,532 30,532
Separate account liabilities 2,865,366 2,865,366 2,302,937 2,302,937
</TABLE>
The estimated fair values for the Company's investments in debt and equity
securities are based on quoted market prices, where available. In situations
where market prices are not readily available, primarily private placements,
fair values are estimated using a formula pricing method based on fair values of
securities with similar characteristics. The estimated fair value of currently
performing mortgage loans is estimated by discounting the cash flows associated
with the investment, using an interest rate currently offered for similar loans
to borrowers with similar credit ratings. Loans with similar credit quality,
characteristics and time to maturity are aggregated for purposes of discounted
cash flow analysis. Assumptions regarding credit risk, cash flows and discount
rates are determined using the available market and borrower-specific
information. The estimated fair value for non-performing loans is based on the
estimated fair value of the underlying real estate, which is based on recent
appraisals or other estimation techniques. The estimated fair value of policy
loans is calculated by discounting estimated future cash flows using interest
rates currently being offered for similar loans. Loans with similar
characteristics are aggregated for purposes of the calculations. The carrying
values of cash, cash equivalents, short-term investments and separate account
assets approximate their fair values. The estimated fair values for the venture
capital limited partnerships are based on values determined by the partnerships'
managing general partners. The resulting estimated fair values may not be
indicative of the value which could be negotiated in an actual sale.
68
<PAGE>
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements, continued
(In Thousands of Dollars)
- --------------------------------------------------------------------------------
The fair values of the Company's liabilities for individual annuities,
guaranteed investment contracts and certain group annuities are estimated by
discounting the cash flows associated with the contracts, using an interest rate
currently offered for similar contracts with maturities similar to those
remaining for the contracts being valued. The statement values of policyholders'
dividends payable and separate account liabilities approximate their fair
values.
Currently, disclosure of estimated fair values is not required for all the
Company's assets and liabilities. Therefore, presentation of the estimated fair
value of a significant portion of assets without a corresponding valuation of
liabilities associated with insurance contracts can be misinterpreted. The
estimated fair values of liabilities under all of the Company's contracts are
considered in the overall management of interest rate risk. The continuing
management of the relationship between the maturities of the Company's
investments and the amounts due under insurance contracts reduces the Company's
exposure to changing interest rates.
The Company is exposed to interest rate risk on its interest-sensitive products.
The Company's investment strategy is designed to minimize interest risk by
managing the durations and anticipated cash flows of the Company's assets and
liabilities.
To minimize exposure and reduce risk from exchange and interest rate
fluctuations in the normal course of business, the Company enters into interest
rate swap programs for purposes other than trading. As of December 31, 1999 and
1998, the Company had interest rate swaps with aggregate notional amounts equal
to $20,000 and $95,000, respectively, with average unexpired terms of 7 months
and 8 months, respectively. Interest rate swap agreements involve the exchange
of fixed and floating rate interest payment obligations without an exchange of
the underlying notional principal amounts. During the term of the swap, the net
settlement amount is accrued as an adjustment to interest income. Gross
unrealized gains and losses, which represent fair value based on dealer-quoted
prices, were $335 and $0, respectively, at December 31, 1999 and $2,248 and $0,
respectively, at December 31, 1998. These fair values represent the amount at
risk if the counterparties default and the amount that the Company would receive
to terminate the contracts, taking into account current interest rates and,
where appropriate, the current creditworthiness of the counterparties.
In the normal course of business, the Company loans securities under
arrangements in which collateral is obtained in amounts greater than the current
market value of loaned securities. This collateral is held in the form of cash,
cash equivalents or securities issued or guaranteed by the United States
Government. The Company is at risk to the extent the value of loaned securities
exceeds the value of the collateral obtained. The Company controls this risk by
requiring collateral of the highest quality and requiring that additional
collateral be deposited when the market value of loaned securities increases in
relation to the collateral held or the value of the collateral held decreases in
relation to the value of the loaned securities. The Company had loaned
securities outstanding of $34,457 and $38,144 as of December 31, 1999 and 1998,
respectively.
69
<PAGE>
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements, continued
(In Thousands of Dollars)
- --------------------------------------------------------------------------------
6. INCOME TAXES:
- ----------------
The Company follows the asset and liability method of accounting for income
taxes whereby current and deferred tax assets and liabilities are recognized
utilizing currently enacted tax laws and rates. Deferred taxes are adjusted to
reflect tax rates at which future tax liabilities or assets are expected to be
settled or realized.
Deferred income taxes reflect the impact for financial statement reporting
purposes of temporary differences between the financial statement carrying
amounts and tax basis of assets and liabilities. The significant temporary
differences that give rise to the deferred tax assets and liabilities at
December 31 relate to the following:
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Deferred tax assets
Future policy benefits $ 90,877 $ 92,909
Dividend award 10,010 10,255
Allowances for investment losses 6,153 4,232
Employee benefit liabilities 30,479 29,762
Unrealized investment losses 17,934 -
Other 17,256 18,677
-------- --------
Total deferred tax asset 172,709 155,835
-------- --------
Deferred tax liabilities
Deferred acquisition costs 145,360 135,248
Unrealized investment gains - 105,993
Other 18,484 22,375
--------- ---------
Total deferred tax liability 163,844 263,616
--------- ---------
Net deferred tax liability (8,865) 107,781
Tax currently payable 40,784 34,853
--------- ---------
Accrued income tax payable $ 31,919 $ 142,634
========= =========
</TABLE>
The federal income taxes attributable to consolidated net income are different
from the amounts determined by multiplying consolidated net income before
federal income taxes by the expected federal income tax rate. The difference
between the amount of tax at the U.S. federal income tax rate of 35% and the
consolidated tax provision is summarized as follows:
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- -------
<S> <C> <C> <C>
Tax expense at 35% $ 45,697 $ 50,443 $ 44,442
Increase in income taxes resulting
from:
Differential earnings amount 3,010 2,681 6,942
Other 2,299 4,565 2,528
-------- --------- --------
Federal income tax expense $ 51,006 $ 57,689 $ 53,912
======== ========= ========
</TABLE>
70
<PAGE>
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements, continued
(In Thousands of Dollars)
- --------------------------------------------------------------------------------
The make up of the tax expense/(benefit) is as follows:
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Continuing operations $ 66,324 $ 57,019 $ 51,323
Discontinued operations:
Operations (2,137) 670 2,589
Sale (13,181) - -
--------- -------- --------
Total federal income tax expense $ 51,006 $ 57,689 $ 53,912
========= ======= ========
</TABLE>
As a mutual life insurance company, the Company is subject to Internal Revenue
Code provisions which require mutual, but not stock, life insurance companies to
include the Differential Earnings Amount (DEA) in each year's taxable income.
This amount is computed by multiplying the Company's average taxable equity base
by a prescribed rate, which is intended to reflect the difference between stock
and mutual companies' earnings rates.
The Internal Revenue Service has examined the Company's income tax returns
through the year 1994 and is currently examining years 1995 through 1997.
Management believes that an adequate provision has been made for potential
assessments.
7. BENEFIT PLANS:
- -----------------
The following table summarizes the funded status and accrued benefit cost for
the Company's defined benefit plans and other postretirement benefit plans as of
December 31:
<TABLE>
<CAPTION>
Pension Benefits Other Benefits
---------------- --------------
1999 1998 1999 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Benefit Obligation $(90,293) $(90,428) $(27,808) $ (26,439)
Fair value of plan assets 63,616 53,349 - -
------------- ------------- ------------- -------------
Funded Status $(26,677) $(37,079) $(27,808) $ (26,439)
============= ============= ============= =============
Accrued benefit cost recognized in the
consolidated balance sheet $(25,861) $(22,530) $(44,205) $ (44,558)
</TABLE>
The weighted-average assumptions used to measure the actuarial present value of
the projected benefit obligation were:
<TABLE>
<CAPTION>
Pension Benefits Other Benefits
---------------- --------------
1999 1998 1999 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Discount rate 6.75% 6.75% 6.75% 6.75%
Expected return on plan assets 8.00% 8.00% - -
Rate of compensation increase 5.50% 5.50% 5.00% 5.00%
</TABLE>
At December 31, 1999, the assumed health care cost trend rate used in measuring
the accumulated postretirement benefit obligation was 8% for 2000, grading to 5%
for 2004. At December 31, 1998, the assumed health care cost trend rate used in
measuring the accumulated postretirement benefit obligation was 8% for 1999,
grading to 5% for 2004. The assumed health care cost trend rate used at December
31, 1997 in measuring the accumulated postretirement benefit obligation was 8.5%
for 1998, grading to 5% for 2004. Assumed health care cost trend rates have a
significant effect on the amounts reported for the health care plans.
71
<PAGE>
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements, continued
(In Thousands of Dollars)
- --------------------------------------------------------------------------------
The contributions made and the benefits paid from the plans were:
<TABLE>
<CAPTION>
Pension Benefits Other Benefits
---------------- --------------
1999 1998 1999 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Benefit cost recognized in $ 5,072 $ 5,692 $ 1,140 $ 831
consolidated income statement
Employer contribution 1,741 6,687 1,493 1,415
Plan participants' contribution - - - -
Benefits paid 3,593 3,229 1,493 1,415
</TABLE>
The Company maintains four defined contribution pension plans for substantially
all of its employees and full-time agents. For two plans, designated
contributions of up to 6% or 8% of annual compensation are eligible to be
matched by the Company. Contributions for the third plan are based on tiered
earnings of full-time agents. The last plan, which covers employees of a
subsidiary, are determined on a discretionary basis by the Board of Directors of
that subsidiary. For the years ended December 31, 1999, 1998 and 1997, the
expense recognized for these plans was $11,192, $9,526 and $8,345, respectively.
The estimated fair value of the defined contribution plans' assets at December
31, 1999 and 1998 was $300,170 and $260,706, respectively.
8. REINSURANCE:
- ---------------
The Company has assumed and ceded reinsurance on certain life and annuity
contracts under various agreements. Reinsurance permits recovery of a portion of
losses from reinsurers, although the Company remains primarily liable as the
direct insurer on all risks reinsured. The Company evaluates the financial
strength of potential reinsurers and continually monitors the financial
condition of present reinsurers to ensure that amounts due from reinsurers are
collectible. The table below highlights the amounts shown in the accompanying
financial statements.
<TABLE>
<CAPTION>
Assumed Ceded to
Gross From Other Other Net
Amount Companies Companies Amount
--------------- --------------- -------------- ----------------
<S> <C> <C> <C> <C>
December 31, 1999:
Life Insurance in Force $ 33,554,483 $ 353,382 $ 8,185,527 $ 25,722,338
Premiums 149,187 6,399 16,803 138,783
Benefits 455,518 15,629 32,705 438,442
Reserves 5,446,024 175 220,656 5,225,543
December 31, 1998:
Life Insurance in Force $ 32,066,821 $ 5,115,520 $ 5,954,701 $ 31,227,640
Premiums 166,708 10,586 5,940 171,354
Benefits 457,239 15,710 17,913 455,036
Reserves 5,594,712 1,688 62,198 5,534,202
</TABLE>
For the years ended December 31, 1999 and 1998, the above numbers include
premiums from discontinued operations of $8,267 and $16,739, respectively, and
benefits from discontinued operations of $8,651 and $9,888, respectively.
During 1997, the Company had gross premiums of $190,754, assumed premiums of
$11,189 and ceded premiums of $6,723 and gross benefits of $492,857, assumed
benefits of $14,293 and ceded benefits of $26,916. Reinsurance receivables with
a carrying value of $205,559 and $55,119 were associated with a single reinsurer
at December 31, 1999 and 1998, respectively.
72
<PAGE>
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements, continued
(In Thousands of Dollars)
- --------------------------------------------------------------------------------
9. COMMITMENTS AND CONTINGENCIES:
- --------------------------------
The Company and its subsidiaries are respondents in a number of proceedings,
some of which involve extra-contractual damage in addition to other damages. In
addition, insurance companies are subject to assessments, up to statutory
limits, by state guaranty funds for losses of policyholders of insolvent
insurance companies. In the opinion of management, the outcome of the
proceedings and assessments are not likely to have a material adverse effect on
the financial position of the Company.
The Company, in the ordinary course of business, extends commitments relating to
its investment activities. As of December 31, 1999, the Company had outstanding
commitments totaling $70,757 relating to these investment activities. The fair
value of these commitments approximates the face amount.
10. STATUTORY INFORMATION:
- ---------------------------
State insurance regulatory authorities prescribe or permit statutory accounting
practices for calculating net income and capital and surplus which differ in
certain respects from generally accepted accounting principles (GAAP). The
significant differences relate to deferred acquisition costs, which are charged
to expenses as incurred; federal income taxes, which reflect amounts that are
currently taxable; and benefit reserves, which are determined using prescribed
mortality, morbidity and interest assumptions, and which, when considered in
light of the assets supporting these reserves, adequately provide for
obligations under policies and contracts. In addition, the recording of
impairments in the value of investments generally lags recognition under GAAP.
The combined insurance companies' statutory capital and surplus at December 31,
1999 and 1998 was $558,700 and $495,212, respectively. The combined insurance
companies' net income, determined in accordance with statutory accounting
practices, for the years ended December 31, 1999, 1998 and 1997, was $76,680,
$83,676 and $63,613, respectively.
The National Association of Insurance Commissioners has released a comprehensive
guide to Statutory Accounting Principles, Accounting Practices and Procedures
Manual - version effective January 1, 2001, (Codification) to provide a
consistent basis of statutory accounting effective for years ending December 31,
2001. The Company does not expect the adoption of Codification to have a
material effect on its statutory capital and surplus.
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, 1999 and 1998, and
the related consolidated income statements, statements of changes in equity, and
statements of cash flows for each of the three years in the period ended
December 31, 1999. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of The
Penn Mutual Life Insurance Company and subsidiaries as of December 31, 1999 and
1998, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 1999, in conformity with accounting
principles generally accepted in the United States.
ERNST & YOUNG LLP
Philadelphia, Pennsylvania
January 28, 2000
74
<PAGE>
APPENDIX A
Minimum Initial Annual Premiums
The following table shows for Insureds of varying ages, the minimum
initial annual premium for a Policy with a Basic death benefit of $1,000,000.
The table assumes the Insureds will be placed in a nonsmoker class and that no
supplemental benefits will be added to the base Policy.
Age of Male Age of Female Minimum Initial Annual
Premium
- -------------------------------------------------------------------------------
35 35 $2,802
- -------------------------------------------------------------------------------
40 45 $3,224
- -------------------------------------------------------------------------------
45 45 $3,296
- -------------------------------------------------------------------------------
50 45 $3,376
- -------------------------------------------------------------------------------
55 45 $3,462
- -------------------------------------------------------------------------------
55 55 $4,248
- -------------------------------------------------------------------------------
60 58 $4,687
- -------------------------------------------------------------------------------
65 70 $7,146
- -------------------------------------------------------------------------------
70 62 $6,391
- -------------------------------------------------------------------------------
A-1
<PAGE>
APPENDIX B
Administrative Surrender Charges per $1,000 of Initial Specified Amount
Attained Age of Younger Charge Per Each $1,000 of
Insured on Policy Date Initial Specified Amount
------------------------------------------------------------
20-29 $6.00
------------------------------------------------------------
30-39 $8.00
------------------------------------------------------------
40-49 $10.00
------------------------------------------------------------
50-59 $12.00
------------------------------------------------------------
60-over $14.00
------------------------------------------------------------
Sample Surrender Charge Premiums for $1,000,000 Specified Amount
(NS = Nonsmoker; S = Smoker)
Age of Smoking Age of Smoking Maximum Surrender
Male Status Female Status Charge Premium
- -----------------------------------------------------------------------
50 NS 45 NS $9,254
- -----------------------------------------------------------------------
65 NS 65 NS $29,399
- -----------------------------------------------------------------------
55 S 55 S $16,280
- -----------------------------------------------------------------------
55 S 45 NS $10,392
- -----------------------------------------------------------------------
45 NS 45 S $9,040
- -----------------------------------------------------------------------
35 NS 35 NS $5,364
- -----------------------------------------------------------------------
70 NS 62 S $25,370
- -----------------------------------------------------------------------
40 S 45 S $9,044
- -----------------------------------------------------------------------
65 S 70 NS $31,204
- -----------------------------------------------------------------------
60 NS 58 NS $16,885
- -----------------------------------------------------------------------
B-1
<PAGE>
APPENDIX C
Policies Issued to New York Residents
Premium Charge
Policy Year % of Premium Charge
1 - 15 7.5%
16+ 5.5%
Mortality and Expense Risk Charge
Policy Years 1 - 15 -- 0.90%
Policy Years 16+ -- 0.60%
Surrender Charge
For Policies issued to New York residents, the surrender charge declines
during the 6th through the 14th policy years so that no surrender charge is
deductible during the 15th and later policy years. The surrender factors used to
calculate the surrender charge for such Policies are as follows:
Surrender Factor
Surrender During Applied to (c) in
Policy Year Formula on Page
-------------------------------------------------
1st through 5th 1.00
-------------------------------------------------
6th .90
-------------------------------------------------
7th .80
-------------------------------------------------
8th .70
-------------------------------------------------
9th .60
-------------------------------------------------
10th .50
-------------------------------------------------
11th .40
-------------------------------------------------
12th .30
-------------------------------------------------
13th .20
-------------------------------------------------
14th .10
-------------------------------------------------
15th 0
-------------------------------------------------
C-1
<PAGE>
APPENDIX D
Illustrative Net Single Premium Factors
For a Policy Issued to a Male Nonsmoker, age 65, standard underwriting
class and Female, Nonsmoker, age 65, standard underwriting class.
65 2.2464 83 1.2787
- ---------------------------------------------------------------------------
66 2.1200 84 1.2557
- ---------------------------------------------------------------------------
67 2.0406 85 1.2348
- ---------------------------------------------------------------------------
68 1.9656 86 1.2159
- ---------------------------------------------------------------------------
69 1.8949 87 1.1987
- ---------------------------------------------------------------------------
70 1.8283 88 1.1831
- ---------------------------------------------------------------------------
71 1.7657 89 1.1686
- ---------------------------------------------------------------------------
72 1.7068 90 1.1550
- ---------------------------------------------------------------------------
73 1.6517 91 1.1421
- ---------------------------------------------------------------------------
74 1.6002 92 1.1295
- ---------------------------------------------------------------------------
75 1.5523 93 1.1171
- ---------------------------------------------------------------------------
76 1.5080 94 1.1044
- ---------------------------------------------------------------------------
77 1.4670 95 1.0913
- ---------------------------------------------------------------------------
78 1.4290 96 1.0778
- ---------------------------------------------------------------------------
79 1.3940 97 1.0643
- ---------------------------------------------------------------------------
80 1.3615 98 1.0520
- ---------------------------------------------------------------------------
81 1.3316 99 1.0321
- ---------------------------------------------------------------------------
82 1.3040
- ---------------------------------------------------------------------------
D-1
<PAGE>
PART II
<PAGE>
UNDERTAKING TO FILE REPORTS
Subject to the terms and conditions of Section 15(d) of the Securities
Exchange Act of 1934, the undersigned Registrant hereby undertakes to file with
the Securities and Exchange Commission such supplementary and periodic
information, documents and reports as may be prescribed by any rule or
regulation of the Commission heretofore or hereafter duly adopted pursuant to
authority conferred in that section.
UNDERTAKING PURSUANT TO RULE 484 UNDER THE SECURITIES ACT OF 1933
Section 6.2 of the By-laws of The Penn Mutual Life Insurance Company
("Penn Mutual" or the "Company") provides that, in accordance with the
provisions of the Section, the Company shall indemnify trustees and officers
against expenses (including attorneys' fees), judgments, fines, excise taxes and
amounts paid in settlement actually and reasonably incurred in connection with
actions, suits and proceedings, to the extent such indemnification is not
prohibited by law, and may provide other indemnification to the extent not
prohibited by law. The By-laws are filed as Exhibit 6(b) on the Form N-4
Registration Statement of Penn Mutual Variable Annuity Account III filed on
September 30, 1998 (File No. 33-62811).
Pennsylvania law (15 Pa. C.S.A. ss.ss. 1741-1750) authorizes Pennsylvania
corporations to provide indemnification to directors, officers and other
persons.
Penn Mutual owns a directors and officers liability insurance policy
covering liabilities that trustees and officers of Penn Mutual and its
subsidiaries may incur in acting as trustees and officers.
Insofar as indemnification for liability arising under the Securities
Act of 1933 (the "Act") may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the foregoing provisions, or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
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<PAGE>
REPRESENTATION PURSUANT TO SECTION 26(e)(2)(A)
OF THE INVESTMENT COMPANY ACT OF 1940
Registrant represents that the fees and charges debuted under the Last
Survivor Flexible Premium Adjustable Variable Life Insurance Policies contained
in this Post Effective Amendment, in the aggregate, are reasonable in relation
to the services rendered, the expenses expected to be incurred, and the risks
assumed by the Registrant.
CONTENTS OF REGISTRATION STATEMENT
This Registration Statement comprises the following papers and documents:
The facing sheet.
The prospectus and it's appendices consisting of 125 pages.
Undertaking to file reports.
Rule 484 Undertaking.
Section 26(e)(2)(A) Representation.
The signatures.
The following exhibits:
1. Copies of all exhibits which would be required by paragraph A of the
instructions as to exhibits in Form N-8B-2 if a Registration Statement
on that Form were currently being filed.
A(1) (a) Resolution of the Board of Trustees of The Penn Mutual
Life Insurance Company establishing the Penn Mutual
Variable Life Account I. Incorporated herein by reference
to Exhibit A(1)(a) to Post Effective Amendment No. 6 to
Registrant's Registration Statement on Form S-6 (File No.
33-87276), as filed with the Securities and Exchange
Commission via EDGAR (Accession No. 0000950116-99-000867)
on April 30, 1999.
(b) Resolution of the Executive Committee of the Board of
Trustees of The Penn Mutual Life Insurance Company
relating to investments held in Penn Mutual Variable Life
Account I. Incorporated herein by reference to Exhibit
A(1)(b) to Post Effective Amendment No. 6 to Registrant's
Registration Statement on Form S-6 (File No. 33-87276), as
filed with the Securities and Exchange Commission via
EDGAR (Accession No. 0000950116-99-000867) on April 30,
1999.
A(2) Not Applicable.
A(3) (a)(1) Distribution Agreement between The Penn Mutual Life
Insurance Company and Hornor, Townsend & Kent, Inc.
Incorporated herein by reference to Exhibit A(3)(a)(1) to
Post Effective Amendment No. 6 to Registrant's
Registration Statement on Form S-6 (File No. 33-87276), as
filed with the Securities and Exchange Commission via
EDGAR (Accession No. 0000950116-99-000867) on April 30,
1999.
(a)(2) Form of Sales Support Agreement between The Penn Mutual
Life Insurance Company and Hornor, Townsend & Kent, Inc.
Incorporated
II-2
<PAGE>
herein by reference to Exhibit A(3)(a)(2) to Post
Effective Amendment No. 6 to Registrant's Registration
Statement on Form S-6 (File No. 33-87276), as filed with
the Securities and Exchange Commission via EDGAR
(Accession No. 0000950116-99-000867) on April 30, 1999.
(b)(1) Form of Agent's Agreement relating to broker-dealer
supervision. Incorporated herein by reference to Exhibit
3(c) to the Registration Statement on Form N-4 of Penn
Mutual Variable Annuity Account III (File No. 333-62811),
as filed with the Securities and Exchange Commission via
EDGAR (Accession No. 0001036050-98-001504) on September 3,
1998.
(b)(2) Form of Broker-Dealer Selling Agreement (for
broker-dealers licensed to sell variable annuity contracts
and/or variable life insurance contracts under state
insurance laws). Incorporated herein by reference to
Exhibit 3(d) to Pre-Effective Amendment No. 1 to the
Registration Statement on Form N-4 of Penn Mutual Variable
Annuity Account III (File No. 333-62811), as filed with
the Securities and Exchange Commission via EDGAR
(Accession No. 0001036050-98-002055) on November 30, 1998.
(b)(3) Form of Broker-Dealer Selling Agreement (for
broker-dealers with affiliated corporations licensed to
sell variable annuity contracts and/or variable life
insurance policies under state insurance laws) and
companion Form of Corporate Insurance Agent Selling
Agreement. Incorporated herein by reference to Exhibit
3(e) to Pos-Effective Amendment to the Registration
Statement on Form N-4 of Penn Mutual Variable Annuity
Account III (File No. 333-62825), as filed with the
Securities and Exchange Commission via EDGAR (Accession
No. 0000950116-99-000834) on April 27, 1999.
(c) Schedule of Sales Commissions. Incorporated herein by
reference to Exhibit A(3)(c) to Post-Effective Amendment
No. 6 to Registrant's Registration Statement on Form S-6
(File No. 33-87276), as filed with the Securities and
Exchange Commission via EDGAR (Accession No.
0000950116-99-000867) on April 30, 1999.
A(4) Not Applicable.
A(5) (a)(1) Specimen Last Survivor Flexible Premium Adjustable
Variable Life Insurance Policy (Sex Distinct).
Incorporated herein by reference to Exhibit A(5)(a)(1) to
Post Effective Amendment No. 6 to Registrant's
Registration Statement on Form S-6 (File No. 33-87276), as
filed with the Securities and Exchange Commission via
EDGAR (Accession No. 0000950116-99-000867) on April 30,
1999.
(a)(2) Specimen Last Survivor Flexible Premium Adjustable
Variable Life Insurance Policy (Unisex). Incorporated
herein by reference to Exhibit A(5)(a)(2) to Post
Effective Amendment No. 6 to Registrant's Registration
Statement on Form S-6 (File No. 33-87276) as filed with
the
II-3
<PAGE>
Securities and Exchange Commission via EDGAR (Accession
No. 0000950116-99-000867) on April 30, 1999.
(a)(3) Specimen Last Survivor Flexible Premium Adjustable
Variable Life Insurance Policy (New York). Incorporated
herein by reference to Exhibit A(5)(a)(3) to Post
Effective Amendment No. 6 to Registrant's Registration
Statement on Form S-6 (File No. 33-87276), as filed with
the Securities and Exchange Commission via EDGAR
(Accession No. 0000950116-99-000867) on April 30, 1999.
(b)(1) Flexible Period Single Life Supplemental Term Insurance
Agreement (Sex Distinct). Incorporated herein by reference
to Exhibit A(5)(b)(1) to Post Effective Amendment No. 6 to
Registrant's Registration Statement on Form S-6 (File No.
33-87276), as filed with the Securities and Exchange
Commission via EDGAR (Accession No. 0000950116-99-000867)
on April 30, 1999.
(b)(2) Flexible Period Single Life Supplemental Term Insurance
Agreement (Unisex). Incorporated herein by reference to
Exhibit A(5)(b)(2) to Post Effective Amendment No. 6 to
Registrant's Registration Statement on Form S-6 (File No.
33-87276), as filed with the Securities and Exchange
Commission via EDGAR (Accession No. 0000950116-99-000867)
on April 30, 1999.
(c)(1) Policy Split Option Agreement. Incorporated herein by
reference to Exhibit A(5)(c)(1) to Post Effective
Amendment No. 6 to Registrant's Registration Statement on
Form S-6 (File No. 33-87276), as filed with the Securities
and Exchange Commission via EDGAR (Accession No.
0000950116-99-000867) on April 30, 1999.
(c)(2) Policy Split Option Agreement (New York). Incorporated
herein by reference to Exhibit A(5)(c)(2) to Post
Effective Amendment No. 6 to Registrant's Registration
Statement on Form S-6 (File No. 33-87276), as filed with
the Securities and Exchange Commission via EDGAR
(Accession No. 0000950116-99-000867) on April 30, 1999.
(d) Estate Growth Benefit Agreement. Incorporated herein by
reference to Exhibit A(5)(d) to Post Effective Amendment
No. 6 to Registrant's Registration Statement on Form S-6
(File No. 33-87276), as filed with the Securities and
Exchange Commission via EDGAR (Accession No.
0000950116-99-000867) on April 30, 1999.
(e)(1) Supplemental Exchange Agreement. Incorporated herein by
reference to Exhibit A(5)(e)(1) to Post Effective
Amendment No. 6 to Registrant's Registration Statement on
Form S-6 (File No. 33-87276), as filed with the Securities
and Exchange Commission via EDGAR (Accession No.
0000950116-99-000867) on April 30, 1999.
II-4
<PAGE>
(e)(2) Supplemental Exchange Agreement (New York). Incorporated
herein by reference to Exhibit A(5)(e)(2) to Post
Effective Amendment No. 6 to Registrant's Registration
Statement on Form S-6 (File No. 33-87276), as filed with
the Securities and Exchange Commission via EDGAR
(Accession No. 0000950116-99-000867) on April 30, 1999.
(f)(1) Supplemental Term Insurance Agreement (Sex Distinct).
Incorporated herein by reference to Exhibit A(5)(f)(1) to
Post Effective Amendment No. 6 to Registrant's
Registration Statement on Form S-6 (File No. 33-87276),
as filed with the Securities and Exchange Commission via
EDGAR (Accession No. 0000950116-99-000867) on April 30,
1999.
(f)(2) Supplemental Term Insurance Agreement (Unisex).
Incorporated herein by reference to Exhibit A(5)(f)(2) to
Post Effective Amendment No. 6 to Registrant's
Registration Statement on Form S-6 (File No. 33-87276),
as filed with the Securities and Exchange Commission via
EDGAR (Accession No. 0000950116-99-000867) on April 30,
1999.
(g)(1) Guaranteed Continuation of Policy Agreement (Sex
Distinct). Incorporated herein by reference to Exhibit
A(5)(g)(1) to Post Effective Amendment No. 6 to
Registrant's Registration Statement on Form S-6 (File No.
33-87276), as filed with the Securities and Exchange
Commission via EDGAR (Accession No. 0000950116-99-000867)
on April 30, 1999.
(g)(2) Guaranteed Continuation of Policy Agreement (Unisex).
Incorporated herein by reference to Exhibit A(5)(g)(2) to
Post Effective Amendment No. 6 to Registrant's
Registration Statement on Form S-6 (File No. 33- 87276),
as filed with the Securities and Exchange Commission via
EDGAR (Accession No. 0000950116-99-000867) on April 30,
1999.
(h)(1) Option to Extend the Maturity Date (Sex Distinct). Filed
herewith.
(h)(2) Option to Extend the Maturity Date (Unisex). Filed
herewith.
(i)(1) Return of Premium Term Insurance Agreement (Sex distinct).
Filed herewith.
(i)(2) Return of Premium Term Insurance Agreement (Unisex). Filed
herewith.
(j)(1) Estate Preservation Supplemental Term Insurance Agreement
(Sex Distinct). Filed herewith
(j)(2) Estate Preservation Supplemental Term Insurance Agreement
(Unisex). Filed herewith.
A(6) (a) Charter of The Penn Mutual Life Insurance Company.
Incorporated herein by reference to Exhibit 6(a) to the
Registration Statement on
II-5
<PAGE>
Form N-4 of Penn Mutual Variable Annuity Account III (File
No. 333-62811), as filed with the Securities and Exchange
Commission via EDGAR (Accession No. 0001036050-98-001504)
on September 3, 1998.
(b) By-Laws of The Penn Mutual Life Insurance Company.
Incorporated herein by reference to Exhibit 6(b) to the
Registration Statement on Form N-4 of Penn Mutual Variable
Annuity Account III (File No. 333-62811), as filed with
the Securities and Exchange Commission via EDGAR
(Accession No. 0001036050-98-001504) on September 3, 1998.
A(7) Not Applicable.
A(8) (a) Form of Sales Agreement between The Penn Mutual Life
Insurance Company and Penn Series Funds, Inc. Incorporated
herein by reference to Exhibit A(8)(a) to Post Effective
Amendment No. 6 to Registrant's Registration Statement on
Form S-6 (File No. 33-87276), as filed with the Securities
and Exchange Commission via EDGAR (Accession No.
0000950116-99-000867) on April 30, 1999.
(b)(1) Form of Sales Agreement between The Penn Mutual Life
Insurance Company and Neuberger & Berman Advisers
Management Trust. Incorporated herein by reference to
Exhibit 8(b)(1) to Post Effective Amendment No. 1 to
Registrant's Registration Statement on Form S-6 (File No.
33-87276), as filed with the Securities and Exchange
Commission via EDGAR (Accession No. 0000950109-96-002471)
on April 29, 1996.
(b)(2) Assignment and Modification Agreement between Neuberger &
Berman Management Incorporated, Neuberger & Berman
Advisers Management Trust and The Penn Mutual Life
Insurance Company. Incorporated herein by reference to
Exhibit 8(b)(2) to Post Effective Amendment No. 1 to
Registrant's Registration Statement on Form S-6 (File No.
33-87276), as filed with the Securities and Exchange
Commission via EDGAR (Accession No. 0000950109-96-002471)
on April 29, 1996.
(b)(3) Amendment to Agreement between The Penn Mutual Life
Insurance Company and Neuberger & Berman Advisers
Management Trust. Incorporated herein by reference to
Exhibit A(8)(b)(3) to Post Effective Amendment No. 5 to
the Registration Statement on Form S-6 for Penn Mutual
Variable Life Account I (File No. 33-54662) as filed with
the Securities and Exchange Commission via EDGAR
(Accession No. 0000950109-97-003328) on April 30, 1997.
(c) Form of Fund Participation Agreement between The Penn
Mutual Life Insurance Company, TCI Portfolios, Inc.
(renamed American Century Variable Portfolios, Inc.
effective May 1, 1997) and Investors Research Company
(renamed American Century Investment Management, Inc).
Incorporated herein by reference to Exhibit 8(a) to the
Registration
II-6
<PAGE>
Statement on Form N-4 of Penn Mutual Variable Annuity
Account III (File No. 333-62811), as filed with the
Securities and Exchange Commission via EDGAR (Accession
No. 0001036050-98-001504) on September 3, 1998.
(d) Form of Participation Agreement between The Penn Mutual
Life Insurance Company, Variable Insurance Products Fund
and Fidelity Distributors Corporation. Incorporated herein
by reference to Exhibit 8(d) to the Registration Statement
on Form N-4 of Penn Mutual Variable Annuity Account III
(File No. 333-62811), as filed with the Securities and
Exchange Commission via EDGAR (Accession No.
0001036050-98-001504) on September 3, 1998.
(e) Form of Participation Agreement between The Penn Mutual
Life Insurance Company and Variable Insurance Products
Fund II. Incorporated herein by reference to Exhibit 8(e)
to the Registration Statement on Form N-4 of Penn Mutual
Variable Annuity Account III (File No. 333-62811), as
filed with the Securities and Exchange Commission via
EDGAR (Accession No. 0001036050-98-001504) on September 3,
1998.
(f) Participation Agreement between The Penn Mutual Life
Insurance Company and Morgan Stanley Universal Funds, Inc.
Incorporated herein by reference to Exhibit 8(f) to
Post-Effective Amendment No. 22 to the Registration
Statement on Form N-4 of Penn Mutual Variable Annuity
Account III (File No. 2-77283), as filed with the
Securities and Exchange Commission via EDGAR (Accession
No. 0001021408-97- 000161) on April 29, 1997.
A(9) Not applicable.
A(10) (a) Application form for Last Survivor Flexible Premium
Adjustable Variable Life Insurance. Incorporated herein by
reference to Exhibit A(10)(a) to Post-Effective Amendment
No. 6 to Registrant's Registration Statement on Form S-6
(File No. 33-87276), as filed with the Securities and
Exchange Commission via EDGAR (Accession No.
0000950116-99-000867) on April 30, 1999.
(b) Supplemental application form for Last Survivor Flexible
Premium Adjustable Variable Life Insurance. Incorporated
herein by reference to Exhibit A(10)(b) to Post-Effective
Amendment No. 6 of Registrant's Registration Statement on
Form S-6 (File No. 33-87276), as filed with the
Securities and Exchange Commission via EDGAR (Accession
No. 0000950116-99-000867) on April 30, 1999.
II-7
<PAGE>
A(11) Memorandum describing issuance, transfer and redemption
procedures. Incorporated herein by reference to Exhibit
A(11) to Post-Effective Amendment No. 6 of Registrant's
Registration Statement on Form S-6 (File No. 33-87276), as
filed with the Securities and Exchange Commission via
EDGAR (Accession No. 0000950116-99-000867) on April 30,
1999.
2. Opinion and consent of C. Ronald Rubley, Esq., Associate General Counsel,
The Penn Mutual Life Insurance, dated April 11, 1995, as to the legality of
the securities being registered. Incorporated herein by reference to
Exhibit 2 to Post Effective Amendment No. 6 to Registrant's Registration
Statement on Form S-6 (File No. 33-87276) as filed with the Securities and
Exchange Commission via EDGAR (Accession No. 0000950116-99-000867) on April
30, 1999.
3. Opinion and Consent of Ralph I. Pence, FSA, MAAA, Actuary, The Penn Mutual
Life Insurance Company, dated April 12, 2000, as to actuarial matters
pertaining to the securities being registered. Filed herewith.
4. (a) Consent of Ernst & Young, LLP. Filed herewith.
(b) Consent of Morgan, Lewis & Bockius LLP. Filed herewith.
5. (a) Powers of Attorney of Robert E. Chapell, James A. Hagen, Phillip E.
Lippincott, John F. McCaughan, Alan B. Miller, Daniel J. Toran,
Norman T. Wilde, Jr., Wesley S. Williams, Jr. and Nancy S. Brodie.
Incorporated herein by reference to Post Effective Amendment No. 2 to
Registrant's Registration Statement on Form S-6 (File No. 33-87276
)of Penn Mutual Variable Life Account I as filed with the Securities
and Exchange Commission via EDGAR (Accession No.
0000950109-97-003355) on April 30, 1997.
(b) Powers of Attorney of Edmond F. Notebaert and Robert H. Rock.
Incorporated herein by reference to PostEffective Amendment No. 4 to
Registrant's Registration Statement on Form S-6(File No. 33-87276),
as filed with the Securities and Exchange Commission via EDGAR
(Accession No. 0001036050-98-000671) on April 23, 1998.
(c) Power of Attorney of Julia Chang Bloch. Incorporated herein by
reference to Post Effective Amendment No. 5 to Registrant's
Registration Statement on Form S-6 (File No. 33-87276), as filed with
the Securities and Exchange Commission via EDGAR (Accession No.
0000950116-99-000329) on March 1, 1999.
II-8
<PAGE>
SIGNATURES
On its behalf and on behalf of Penn Mutual Variable Life Account I,
Pursuant to the requirements of the Securities Act of 1933, as amended, and the
Investment Company Act of 1940, as amended, the The Penn Mutual Life Insurance
Company certifies that it meets the requirements of Securities Act Rule 485(b)
for effectiveness of this Registration Statement and has duly caused this Post-
Effective Amendment No. 8 to the Registration Statement to be signed on its
behalf by the undersigned thereunto duly authorized, and its seal to be hereunto
affixed and attested, all in the Township of Horsham and the Commonwealth of
Pennsylvania, on the 19th day of April, 2000.
[SEAL] The Penn Mutual Life Insurance Company
on its behalf and on behalf of Penn
Mutual Variable Life Account I
Attest: /s/ Laura M. Ritzko By: /s/ Robert E. Chappell
------------------------- ----------------------------
Laura M. Ritzko Robert E. Chappell
Chairman of the Board of Trustees
And Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment No. 8 to the Registration Statement has been signed
below by the following persons in the capacities indicated on the 19th day of
April, 2000.
Signature Title
- --------- -----
/s/ Robert E. Chappell Chairman of the Board of Trustees
- ------------------------------- and Chief Executive Officer
Robert E. Chappell
/s/ Nancy S. Brodie Executive Vice President
- ------------------------------- and Chief Financial Officer
Nancy S. Brodie
*JULIA CHANG BLOCH Trustee
*JAMES A. HAGEN Trustee
*PHILIP E. LIPPINCOTT Trustee
*JOHN F. McCAUGHAN Trustee
*ALAN B. MILLER Trustee
*EDMOND F. NOTEBAERT Trustee
*ROBERT H. ROCK Trustee
II-9
<PAGE>
*DANIEL J. TORAN Trustee
*NORMAN T. WILDE, JR. Trustee
*WESLEY S. WILLIAMS, JR. Trustee
*By /s/ Robert E. Chappell
-------------------------------------
Robert E. Chappell, attorney-in-fact
II-10
<PAGE>
Exhibit Index
--------------
A(5)(h)(1) Option to Extend the Maturity Date (Sex Distinct). Filed herewith.
A(5)(h)(2) Option to Extend the Maturity Date (Unisex). Filed herewith.
A(5)(i)(1) Return of Premium Term Insurance Agreement (Sex distinct).
Filed herewith.
A(5)(i)(2) Return of Premium Term Insurance Agreement (Unisex). Filed
herewith.
A(5)(j)(1) Estate Preservation Supplemental Term Insurance Agreement (Sex
Distinct).
A(5)(j)(2) Estate Preservation Supplemental Term Insurance Agreement (Unisex).
Filed herewith.
3 Opinion and Consent of Ralph I. Pence, FSA, MAAA, Actuary, The Penn
Mutual Life Insurance Company, dated April 12, 2000, as to
actuarial matters pertaining to the securities being registered.
Filed herewith
4(a) Consent of Ernst & Young, LLP. Filed herewith.
4(b) Consent of Morgan, Lewis & Bockius LLP. Filed herewith.
II-11
<PAGE>
Exhibit A(5)(h)(1)
Rider - Option to Extend the Maturity Date
The Company agrees, subject to the provisions of this supplemental agreement, to
provide the Option to Extend the Maturity Date as described below. The Company
also agrees to provide all of the other benefits stated in this agreement.
This supplemental agreement is a part of the policy to which it is attached and
supersedes the Deferral of Maturity provision. It is subject to all of the
provisions of the policy unless stated otherwise in this agreement.
Option to Extend the Maturity Date--The Owner will have the option to continue
the Basic Death Benefit under the base policy past the original Maturity Date
listed on Page 3 without evidence of insurability. The option will be exercised,
while this agreement is in force, as of the original Maturity Date. By
exercising this option, the original Maturity Date will be extended a period of
20 years.
The Basic Death Benefit and the Policy Value will continue to be calculated as
defined in the base policy. The attained age Net Single Premium Factor will
equal 1.00 for the maturity extension period. The Basic Cost of Insurance Rate
for attained ages during the maturity extension period will be equal to zero.
New Policy Loans may not be made during the maturity extension period. Policy
Loans taken prior to the original Maturity Date will continue to accrue interest
and the Policy Loan Account will continue to operate as stated in the base
policy.
During the maturity extension period, premium payments will not be accepted
unless necessary to prevent lapse.
All riders and benefits attached to the base policy will terminate as of the
original Maturity Date.
Cost of Insurance--The Cost of Insurance for the Option to Extend the Maturity
Date is determined on a monthly basis. The Cost of Insurance for a policy month
is calculated as (a) multiplied by (b) minus (c), where:
(a) is the Cost of Insurance for this benefit divided by 1,000;
(b) is the Basic Death Benefit at the beginning of the policy month divided by
the monthly equivalent of the guaranteed interest rate;
(c) is the Policy Value at the beginning of the policy month before the
Monthly Deduction.
The Cost of Insurance Rate for this benefit is based on policy year and attained
age, sex and rate class of each Insured. The Cost of Insurance Rates will be
determined by Penn Mutual based on expectations as to future experience.
However, these rates combined with the Cost of Insurance rates on the base
policy will not exceed the Base Rates shown in the Additional Policy
Specifications for the base policy.
Termination--This agreement will terminate upon:
(a) lapse of this policy;
(b) the date of death of the last Insured to die;
(c) surrender of this policy;
(d) the Monthly Anniversary that coincides with or next follows the (I)
receipt at the Home Office of a written request by the Owner to terminate
this agreement and (ii) return of this policy for appropriate endorsement.
Date of Issue--The Date of Issue of this agreement is the same as the Date of
Issue of this policy unless another Date of Issue is shown below.
The Penn Mutual Life Insurance Company
[GRAPHIC OMITTED]
Chairman and
Chief Executive Officer
The policy may be subject to tax consequences when continued beyond the original
Maturity Date. You should consult a qualified tax advisor prior to the exercise
of this option.
<PAGE>
Exhibit A(5)(h)(2)
Rider - Option to Extend the Maturity Date
The Company agrees, subject to the provisions of this supplemental agreement, to
provide the Option to Extend the Maturity Date as described below. The Company
also agrees to provide all of the other benefits stated in this agreement.
This supplemental agreement is a part of the policy to which it is attached and
supersedes the Deferral of Maturity provision. It is subject to all of the
provisions of the policy unless stated otherwise in this agreement.
Option to Extend the Maturity Date--The Owner will have the option to continue
the Basic Death Benefit under the base policy past the original Maturity Date
listed on Page 3 without evidence of insurability. The option will be exercised,
while this agreement is in force, as of the original Maturity Date. By
exercising this option, the original Maturity Date will be extended a period of
20 years.
The Basic Death Benefit and the Policy Value will continue to be calculated as
defined in the base policy. The attained age Net Single Premium Factor will
equal 1.00 for the maturity extension period. The Basic Cost of Insurance Rate
for attained ages during the maturity extension period will be equal to zero.
New Policy Loans may not be made during the maturity extension period. Policy
Loans taken prior to the original Maturity Date will continue to accrue interest
and the Policy Loan Account will continue to operate as stated in the base
policy.
During the maturity extension period, premium payments will not be accepted
unless necessary to prevent lapse.
All riders and benefits attached to the base policy will terminate as of the
original Maturity Date.
Cost of Insurance--The Cost of Insurance for the Option to Extend the Maturity
Date is determined on a monthly basis. The Cost of Insurance for a policy month
is calculated as (a) multiplied by (b) minus (c), where:
(a) is the Cost of Insurance for this benefit divided by 1,000;
(b) is the Basic Death Benefit at the beginning of the policy month divided by
the monthly equivalent of the guaranteed interest rate;
(c) is the Policy Value at the beginning of the policy month before the Monthly
Deduction.
The Cost of Insurance Rate for this benefit is based on the policy year and
attained age, and rate class of each Insured. The Cost of Insurance Rates will
be determined by Penn Mutual based on expectations as to future experience.
However, these rates combined with the Cost of Insurance rates on the base
policy will not exceed the Base Rates shown in the Additional Policy
Specifications for the base policy.
Termination--This agreement will terminate upon:
(a) lapse of this policy;
(b) the date of death of the last Insured to die;
(c) surrender of this policy;
(d) the Monthly Anniversary that coincides with or next follows the (I) receipt
at the Home Office of a written request by the Owner to terminate this
agreement and (ii) return of this policy for appropriate endorsement.
Date of Issue--The Date of Issue of this agreement is the same as the Date of
Issue of this policy unless another Date of Issue is shown below.
The Penn Mutual Life Insurance Company
[GRAPHIC OMITTED]
Chairman and
Chief Executive Officer
The policy may be subject to tax consequences when continued beyond the original
Maturity Date. You should consult a qualified tax advisor prior to the exercise
of this option.
<PAGE>
Exhibit A(5)(i)(1)
Rider - Return of Premium Term Insurance Agreement
The Company agrees, subject to the provisions of this supplemental agreement, to
provide the Term Insurance Benefit. The Company also agrees to provide all of
the other benefits which are stated in this agreement.
This agreement is a part of the policy to which it is attached. It is subject to
all of the provisions of the policy unless stated otherwise in this agreement.
Return of Premium Term Insurance Benefit--The Company will pay the Term
Insurance Benefit upon receipt of due proof of the death of the last Insured to
die while this agreement is in force. The amount of the Term Insurance Benefit
is the sum of all premiums paid into the policy up to the most recent
monthiversary.
The Term Insurance Benefit will be paid on the death of the last Insured to die
to the beneficiary in one sum or, if elected, under an income payment option. If
part or all of the benefit is paid in one sum, the Company will pay interest on
this sum from the date of death to the date of payment. The interest rate will
be determined each year by the Company, but will not be less than a rate of 3%
per year compounded annually, or such higher rate as may be required by state
law.
Monthly Deduction--While this agreement is in force, the Monthly Deduction under
this policy will include the Monthly Deduction for this agreement. The Monthly
Deduction for this agreement is the Cost of Insurance for the policy month for
the Term Insurance under this agreement.
Cost of Insurance--The Cost of Insurance for the Term Insurance under this
agreement is determined on a monthly basis. It is calculated as (a) multiplied
by (b) where:
(a) is the Cost of Insurance Rate divided by $1,000 for the Term Insurance
applicable to this policy, and
(b) is the amount of Term Insurance under this agreement.
The Cost of Insurance Rate for the Term Insurance is based on the policy year
and attained age, sex and rate class of each Insured. Cost of Insurance Rates
will be determined by the Company based on expectations as to future mortality,
investment, expense and persistency experience. However, these rates will not
exceed those ROPJ-00(S) shown for Term Rates in the Additional Policy
Specifications. Cost of Insurance Rates will not be adjusted by the Company as a
means of recovering prior losses nor as a means of distributing prior profits.
Computation of Values--All values and benefits in this agreement are equal to or
greater than those required by the law of the jurisdiction in which this policy
is delivered.
Availability. This agreement will not be considered a part of the policy unless
the Specified Amount for the base policy includes the Policy Value. A request at
a later date to change the Specified Amount Option so that the Specified Amount
does not include the Policy Value will not be allowed unless we also receive a
written request to terminate this rider.
Termination of Agreement--This agreement will terminate upon :
(a) the original maturity date of the base policy;
(b) lapse of this policy;
(c) surrender of this policy;
(d) the Monthly Anniversary which coincides with or next follows (i) receipt by
the Company of a written request by the Owner to terminate this agreement,
and (ii) return of this policy for appropriate endorsement.
Effective Date--The effective date of this agreement is the same as the Date of
Issue of this policy unless another effective date is shown below.
The Penn Mutual Life Insurance Company
[GRAPHIC OMITTED]
Chairman and
Chief Executive Officer
<PAGE>
Exhibit A(5)(i)(2)
Rider - Return of Premium Term Insurance Agreement
The Company agrees, subject to the provisions of this supplemental agreement, to
provide the Term Insurance Benefit. The Company also agrees to provide all of
the other benefits which are stated in this agreement.
This agreement is a part of the policy to which it is attached. It is subject to
all of the provisions of the policy unless stated otherwise in this agreement.
Return of Premium Term Insurance Benefit-- The Company will pay the Term
Insurance Benefit upon receipt of due proof of the death of the last Insured to
die while this agreement is in force. The amount of the Term Insurance Benefit
is the sum of all premiums paid into the policy up to the most recent
monthiversary.
The Term Insurance Benefit will be paid on the death of the last Insured to die
to the beneficiary in one sum or, if elected, under an income payment option. If
part or all of the benefit is paid in one sum, the Company will pay interest on
this sum from the date of death to the date of payment. The interest rate will
be determined each year by the Company, but will not be less than a rate of 3%
per year compounded annually, or such higher rate as may be required by state
law.
Monthly Deduction--While this agreement is in force, the Monthly Deduction under
this policy will include the Monthly Deduction for this agreement. The Monthly
Deduction for this agreement is the the Cost of Insurance for the policy month
for the Term Insurance under this agreement.
Cost of Insurance--The Cost of Insurance for the Term Insurance under this
agreement is determined on a monthly basis. It is calculated as (a) multiplied
by (b) where:
(a) is the Cost of Insurance Rate divided by $1,000 for the Term Insurance
applicable to this policy, and
(b) is the amount of Term Insurance under this agreement.
The Cost of Insurance Rate for the Term Insurance is based on the policy year
and attained age, and rate class of each Insured. Cost of Insurance Rates will
be determined by the Company based on expectations as to future mortality,
investment, expense and persistency experience. However, these rates will not
exceed those shown for Term Rates in the Additional Policy Specifications. Cost
of Insurance Rates will not be adjusted by the Company as a means of recovering
prior losses nor as a means of distributing prior profits.
Computation of Values--All values and benefits in this agreement are equal to or
greater than those required by the law of the jurisdiction in which this policy
is delivered.
Availability. This agreement will not be considered a part of the policy unless
the Specified Amount for the base policy includes the Policy Value. A request at
a later date to change the Specified Amount Option so that the Specified Amount
does not include the Policy Value will not be allowed unless we also receive a
written request to terminate this rider.
Termination of Agreement--This agreement will terminate upon:
(a) the original maturity date of the base policy;
(b) lapse of this policy;
(c) surrender of this policy;
(d) the Monthly Anniversary which coincides with or next follows (i) receipt by
the Company of a written request by the Owner to terminate this agreement,
and (ii) return of this policy for appropriate endorsement.
Effective Date--The effective date of this agreement is the same as the Date of
Issue of this policy unless another effective date is shown below.
The Penn Mutual Life Insurance Company
[GRAPHIC OMITTED]
Chairman and
Chief Executive Officer
<PAGE>
Exhibit A(5)(j)(1)
Rider - Estate Preservation - Supplemental Term Insurance Agreement
The Penn Mutual Life Insurance Company agrees, subject to the provisions of this
agreement, to provide the Supplemental Term Insurance Benefit. The Company also
agrees to provide all of the other benefits which are stated in this agreement.
This agreement is a part of the policy to which it is attached. It is subject to
all of the provisions of the policy unless stated otherwise in this agreement.
Supplemental Term Insurance Benefit--The Company will pay, upon receipt of due
proof of the last insured to die while this agreement is in force, the
Supplemental Term Insurance Benefit. The amount of the Term Insurance Benefit is
the Specified Amount for this supplemental term insurance as shown in the Policy
Specifications.
The Term Insurance Benefit payable upon the death of the last insured to die
will be paid to the beneficiary in one sum or, if elected, under an income
payment option. If part or all of the benefit is paid in one sum, the Company
will pay interest on this sum from the date of death to the date of payment. The
interest rate will be determined each year by the Company, but will not be less
than a rate of 3% per year compounded annually or such higher rate as is
required by law.
Monthly Deduction--While this agreement is in force, the Monthly Deduction under
this policy will include the Monthly Deduction for this agreement. The Monthly
Deduction for this agreement is the Cost of Insurance for the policy month for
the supplemental term insurance benefit under this agreement; and
Cost of Insurance--The Cost of Insurance for the term insurance under this
agreement is determined on a monthly basis. It is calculated as (a) multiplied
by (b) where:
(a) is the Cost of Insurance Rate divided by $1,000 for Supplemental Term
Insurance applicable to this policy, and
(b) is the Specified Amount for this agreement.
The Cost of Insurance Rate for this supplemental term insurance is based on the
policy year and attained age, sex and rate class of each Insured. Cost of
Insurance Rates will be determined by the Company based on expectations as to
future mortality, investment, expense and persistency experience. However, these
rates will not exceed those shown for Term Rates in the Additional Policy
Specifications.
Cost of Insurance Rates will not be adjusted by the Company as a means of
recovering prior losses nor as a means of distributing prior profits.
Computation of Values--All values and benefits in this agreement are equal to or
greater than those required by the law of the jurisdiction in which this policy
is delivered.
Termination of Agreement--This agreement will terminate upon:
(a) the Termination Date for this agreement shown on the Additional Policy
Specifications Page;
(b) lapse of this policy;
(c) surrender of this policy;
(d) the Maturity Date of this policy; or
(e) the Monthly Anniversary that coincides with or next follows (i) the receipt
at the Home Office of a written request by the Owner to terminate this
agreement, and (ii) the return of this policy for appropriate endorsement.
Effective Date -- The effective date of this agreement is the same as the Date
of Issue of this policy unless another effective date is shown below.
The Penn Mutual Life Insurance Company
[GRAPHIC OMITTED]
Chairman and
Chief Executive Officer
<PAGE>
Exhibit A(5)(j)(2)
Rider - Estate Preservation - Supplemental Term Insurance Agreement
The Penn Mutual Life Insurance Company agrees, subject to the provisions of this
agreement, to provide the Supplemental Term Insurance Benefit. The Company also
agrees to provide all of the other benefits which are stated in this agreement.
This agreement is a part of the policy to which it is attached. It is subject to
all of the provisions of the policy unless stated otherwise in this agreement.
Supplemental Term Insurance Benefit--The Company will pay, upon receipt of due
proof of the last insured to die while this agreement is in force, this
supplemental term insurance benefit. The amount of the Term Insurance Benefit is
the Specified Amount for Supplemental Term Insurance as shown in the Policy
Specifications.
The Term Insurance Benefit payable upon the death of the last insured to die
will be paid to the beneficiary in one sum or, if elected, under an income
payment option. If part or all of the benefit is paid in one sum, the Company
will pay interest on this sum from the date of death to the date of payment. The
interest rate will be determined each year by the Company, but will not be less
than a rate of 3% per year compounded annually or such higher rate as is
required by law.
Monthly Deduction--While this agreement is in force, the Monthly Deduction under
this policy will include the Monthly Deduction for this agreement. The Monthly
Deduction for this agreement is the the Cost of Insurance for the policy month
for the Supplemental Term Insurance Benefit under this agreement.
Cost of Insurance--The Cost of Insurance for the term insurance under this
agreement is determined on a monthly basis. It is calculated as (a) multiplied
by (b) where:
(a) is the Cost of Insurance Rate divided by $1,000 for Supplemental Term
Insurance applicable to this policy, and
(b) is the Specified Amount for this agreement.
The Cost of Insurance Rate for Supplemental Term Insurance is based on the
policy year and attained age and rate class of each Insured. Cost of Insurance
Rates will be determined by the Company based on expectations as to future
mortality, investment, expense and persistency experience. However, these rates
will not exceed those shown for Term Rates in the Additional Policy
Specifications.
Cost of Insurance Rates will not be adjusted by the Company as a means of
recovering prior losses nor as a means of distributing prior profits.
Computation of Values--All values and benefits in this agreement are equal to or
greater than those required by the law of the jurisdiction in which this policy
is delivered.
Termination of Agreement--This agreement will terminate upon:
(a) the Termination Date for this agreement shown on the Additional Policy
Specifications Page;
(b) lapse of this policy;
(c) surrender of this policy; or
(d) the Maturity Date of this policy; (e) the Monthly Anniversary that
coincides with or next follows (i) the receipt at the Home Office of a
written request by the Owner to terminate this agreement, and (ii) the
return of this policy for appropriate endorsement.
Effective Date -- The effective date of this agreement is the same as the Date
of Issue of this policy unless another effective date is shown below.
The Penn Mutual Life Insurance Company
[GRAPHIC OMITTED]
Chairman and
Chief Executive Officer
<PAGE>
April 12, 2000
Board of Trustees
The Penn Mutual Life Insurance Company
Independence Square
Philadelphia, PA 19172
Re: Last Survivor Flexible Premium Adjustable Variable Life Insurance Policy
To the Board of Trustees:
This opinion is furnished in connection with the filing of Post-Effective
Amendment No. 8 to Penn Mutual's Registration Statement on Form S-6 (the
"Registration Statement") covering last survivor flexible premium adjustable
variable life insurance policies ("Policies" or "Policy") to be issued by The
Penn Mutual Life Insurance Company (the "Company") (S.E.C. file No. 33-87276).
The Prospectus included in the Registration Statement describes the Policy. The
Policy forms were reviewed under my direction, and I am familiar with the
Registration Statement and Exhibits thereto. In my opinion:
1. The illustrations of Policy Values, Net Cash Surrender Values, Death Benefits
and Accumulated Premiums included in the Prospectus and based on the assumptions
stated in the illustrations, are consistent with the provisions of the Policy.
The rate structure of the Policy has not been designed so as to make the
relationship between premiums and benefits, as shown in the illustrations,
appear more favorable to a prospective purchaser of a Policy for the ages and
sexes shown, than to prospective purchasers of a Policy for other ages and sex.
2. The tables of minimum initial premiums, administrative surrender charges,
surrender factors and net single premium factors included in the appendices to
the Prospectus, are consistent with the provisions of the Policy.
I hereby consent to the use of this opinion as an exhibit to the Registration
Statement and to the use of my name relating to actuarial matters under the
heading "Experts" in the Prospectus.
Very truly yours,
/s/ Ralph I. Pence
--------------------------------
Ralph I. Pence, F.S.A., M.A.A.A.
Vice President and Chief Actuary
<PAGE>
Consent of Ernst & Young LLP, Independent Auditors
We consent to the reference to our firm under the caption "Independent Auditors"
in the Prospectuses, and to the use of our report dated January 28, 2000
accompanying the consolidated financial statements of the Penn Mutual Life
Insurance Company for the year ended December 31, 1999, and to the use of our
report dated April 4, 2000 accompanying the financial statements of Penn Mutual
Variable Life Account I for the year ended December 31, 1999 in the
Post-Effective Amendment Number 8 to Registration Statement Number 33-87276 on
Form S-6 and the related Prospectuses of Penn Mutual Variable Life Account I.
/s/Ernst & Young LLP
Philadelphia, Pennsylvania
April 12, 2000
<PAGE>
Morgan, Lewis & Bockius LLP
1701 Market Street
Philadelphia, Pennsylvania 19103
April 13, 2000
Board of Trustees
The Penn Mutual Life Insurance Company
Philadelphia, Pennsylvania 19172
Re: Penn Mutual Variable Life Account I
SEC Registration No. 33-87276
Dear Ladies and Gentlemen:
We hereby consent to the reference of our name under the caption "Legal Matters"
in the Statement of Additional Information filed as part of this Post-Effective
Amendment No. 8. In giving this consent, we do not admit that we are in the
category of persons whose consent is required under Section 7 of the Securities
Act of 1933.
Very truly yours,
/s/ Morgan, Lewis & Bockius LLP
Morgan, Lewis & Bockius LLP
