<PAGE>
As filed with the Securities and Exchange Commission on April 18, 2000
Registration No. 33-54662
================================================================================
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. 11
-----------------
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, Pennsylvania 19044
(Name and complete address of agent for service)
-----------------
Copy to:
Richard W. Grant, Esq.
C. Ronald Rubley
Morgan, Lewis & Bockius LLP
Philadelphia, PA 19103-6993
-----------------
It is proposed that this filing will become effective:
|_| Immediately upon filing pursuant to paragraph (b) of Rule 485.
|X| On May 1, 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
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
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 the Prospectus
<PAGE>
PROSPECTUS
FOR
CORNERSTONE VUL I
a flexible premium adjustable variable life insurance policy
issued by
THE PENN MUTUAL LIFE INSURANCE COMPANY
and funded through
PENN MUTUAL VARIABLE LIFE ACCOUNT I
The Penn Mutual Life Insurance Company
Philadelphia, PA 19172
800-523-0650
The Policy provides life insurance and a cash surrender value that
varies with the investment performance of one or more of the funds set forth
below. These and other Policy provisions are described in this prospectus.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C>
Penn Series Funds, Inc. Manager
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 Incorporated
- --------------------------------------------------------------------------------------------------------------------
Fidelity Investments' Variable Insurance Products Fund Manager
Equity-Income Portfolio Fidelity Management and Research Company
Growth Portfolio Fidelity Management and Research Company
- --------------------------------------------------------------------------------------------------------------------
Fidelity Investments' Variable Insurance Products Fund II Manager
Asset Manager Portfolio Fidelity Management and Research Company
- --------------------------------------------------------------------------------------------------------------------
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
<PAGE>
Guide to Reading this Prospectus
This prospectus contains information that you should know before you
buy the Policy or exercise any of your rights under the Policy. The purpose of
this prospectus is to provide information on the essential features and
provisions of the Policy and the investment options available under the Policy.
Your rights and obligations under the Policy are determined by the language of
the Policy itself. When you receive your Policy, read it carefully.
The prospectus is arranged as follows:
o The first section is called "Basic Information." It is in a
question and answer format. We suggest you read the Basic
Information section before reading any other section of the
prospectus.
o The next section contains illustrations of a hypothetical Policy
that help clarify how the Policy works. The "Illustrations" section
starts on page 21.
o After the Illustrations section is the "Additional Information"
section. It gives additional information about Penn Mutual, Penn
Mutual Variable Life Account I and the Policy. It generally does
not repeat information that is in the Basic Information section. A
table of contents for the Additional Information section appears on
page 30.
o The financial statements for Penn Mutual and for Penn Mutual
Variable Life Account I follow the Additional Information section.
They start on page 43.
o Appendices A and B are after the financial statements. The
Appendices are referred to in the Basic Information section. They
provide specific information and examples to help you understand
how the Policy works.
**********
The prospectuses of the funds that accompany this prospectus contain
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?.............................7
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?..........12
How Can I Change My Policy's Investment Allocations?..........................12
What Is a Policy Loan?........................................................13
How Can I Withdraw Money from My Policy?......................................14
What Is the Timing of Transactions Under the Policy?..........................14
How Much Life Insurance Does My Policy Provide?...............................15
Can I Change Insurance Coverage Under My Policy?..............................16
What Are the Supplemental Benefit Riders That I Can Buy?......................17
Do I Have the Right to Cancel My Policy?......................................17
Can I Choose Different Payout Options Under My Policy? .......................18
How Is the Policy Treated for Federal Income Tax Purposes?....................18
How Do I Communicate with Penn Mutual?........................................19
How Does Penn Mutual Communicate with Me?.....................................20
3
<PAGE>
WHAT IS THE POLICY?
The Policy provides life insurance on you or another individual you
name. The value of your Policy will increase or decrease based upon the
performance of the investment options you choose. The death benefit may also
increase or decrease based on investment performance. In addition, the Policy
allows you to allocate a part of your policy value to a fixed interest option
where the value will accumulate interest.
You will have several options under the Policy. Here are some major
ones:
o Determine when and how much you pay to us under the Policy
o Determine when and how much of your policy value to allocate the
investment options
o Borrow from your Policy
o Change the beneficiary who will receive the death benefit
o Change the amount of insurance protection
o Change the death benefit option you have selected under your Policy
o Surrender or partially surrender your Policy for all or part of its
net cash surrender value
o Choose the form in which you would like the death benefit or other
proceeds paid out from your Policy
Most of these options are subject to limits that are explained later in
this prospectus.
If you want to purchase a Policy, you must complete an application and
submit it to one of our authorized agents. We require satisfactory evidence of
insurability, which may include a medical examination of the proposed insured.
We evaluate the information provided in accordance with our underwriting rules
and then decide whether to accept or not accept the application.
The maturity date of your Policy is the policy anniversary nearest the
insured's 95th 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. Federal tax law limits the
amount of premium payments you can make relative to the amount of insurance
coverage provided. We will not accept or retain a premium payment that exceeds
the maximum permitted under federal tax law.
If you make a premium payment that exceeds certain other limits imposed
under federal tax law, you could incur a penalty on the amount you take out of
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 and the Policy is in jeopardy
of becoming a "modified endowment contact" under the Code. See How is the Policy
Treated for Federal Income Tax Purposes? below.
Planned Premiums
The Policy Specifications page of your Policy will show the "planned
premium" for the Policy. You choose this amount in the Policy application. We
will send a premium reminder notice to you based upon the planned premium that
you specified in your application. You also 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 Three-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
5
<PAGE>
o if we agree to it, through a salary deduction plan with your
employer.
You can obtain information on these other methods of premium payment by
contacting your Penn Mutual representative or by contacting our office.
Three Year No-Lapse Feature
Your Policy will remain in force during the first three policy years,
regardless of investment performance and your net cash surrender value, if
(a) the total premiums you have paid, less any partial surrenders you
made,
equals or exceeds
(b) the "no-lapse premium" specified in your Policy, multiplied by the
number of months the Policy has been in force.
If you increase the specified amount of insurance under your Policy
during the first three policy years, we will extend the three-year no-lapse
provision to three years after the effective date of the increase.
The "no-lapse premium" will generally be less than the monthly
equivalent of the planned premium you specified.
The three-year no-lapse feature will not apply if the amount borrowed
under your Policy results in excessive indebtedness. See What Is a Policy Loan?
later in this section.
Lapse and Reinstatement
If the net cash surrender value of your Policy is not sufficient to pay
policy charges, and the three-year no-lapse feature is not in effect, we will
notify you of how much premium you will need to pay to keep the Policy in force.
You will have a 61-day "grace period" 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 you die during the grace period, we will pay the death benefit to
your beneficiary less any unpaid policy charges and outstanding policy loan.
If the Policy terminates, you can reinstate it within five years from
the beginning of the grace period if the insured is alive. You will have to
provide evidence that the insured person still meets our requirements for
issuing insurance. You will also have to pay a minimum amount of premium and be
subject to the other terms and conditions applicable to reinstatements, as
specified in the Policy.
Premiums upon an Increase in the Specified Amount
If you increase the specified amount of insurance, you may wish to pay
an additional premium or make a change in planned premiums. See Changes in the
Specified Amount of Insurance on page 16. We will notify you if an additional
premium or a change in planned premiums is necessary.
6
<PAGE>
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
section. Your policy value will be affected by deductions we make from your
Policy for policy charges.
At any time, your policy value is equal to:
o the net premiums you have paid,
o plus or minus the investment results in the part of your policy
value allocated to the variable investment options,
o plus interest credited to the amount in the part of your policy
value (if any) allocated to the fixed interest option,
o minus 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? later in this section.
For more information on policy values and the variable and fixed
investment options, see More Information About Policy Values in the Additional
Information section of this prospectus.
What Are the Fees and Charges Under the Policy?
Premium Charge
o Premium Charge -- 6.5% is deducted from premium payments before
allocation to the investment options. It consists of 2.5% to cover
state premium taxes and 4% 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 2%, which will result in a
total premium charge of 4.5% in those years. We will notify you in
advance if we change our current rates.
7
<PAGE>
Monthly Deductions
o Insurance Charge-- A monthly charge for the cost of insurance
protection. The amount of insurance risk we assume varies from
Policy to Policy and from month to month. The insurance charge
therefore also varies. To determine the charge for a particular
month, we multiply the amount of insurance for which we are at risk
by a cost of insurance rate based upon an actuarial table. The
table in your Policy will show the maximum cost of insurance rates
that we can charge. The cost of insurance rates that we currently
apply are generally less than the maximum rates shown in your
Policy. The table of rates we use will vary by attained age and the
insurance risk characteristics. We place insureds in a rate class
when we issue the Policy, based on our examination of information
bearing on insurance risk. Regardless of the table used, cost of
insurance rates generally increase each year that you own your
Policy, as the insured's attained age increases. We currently place
people we insure in the following rate classes: a smoker, standard
nonsmoker or preferred nonsmoker rate class, or a rate class
involving a higher mortality risk (a "substandard class"). Insureds
age 19 and under are placed in a rate class that does not
distinguish between smoker and nonsmoker. They are assigned to a
smoker class at age 20 unless they have provided satisfactory
evidence that they qualify for a nonsmoker class. When an increase
in the specified amount of insurance is requested, we determine
whether a different rate will apply to the increase. The charge is
deducted pro rata from your variable investment and fixed interest
accounts.
o Administrative Charge-- A maximum monthly charge to help cover our
administrative costs. This charge has three parts: (1) a flat
dollar charge of up to $9 (Currently, the flat dollar charge is $9
in the first policy year and $5 thereafter -- we will notify you in
advance if we change our current rates); (2) for the first 12
months after the policy date, a charge based on the initial
specified amount of insurance ($0.10 per $1,000 per month of
initial specified amount of insurance); and (3) for the first 12
months after an increase in the specified amount of insurance, a
charge based on the increase ($0.10 per $1,000 increase in the
specified amount of insurance). Administrative expenses relate to
premium billing and collection, recordkeeping, 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. Our
current charge is 0.75%. We will notify you before we increase this charge. 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
8
<PAGE>
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.
Surrender Charge
If you surrender your Policy within the first 11 policy years or within
11 years of an increase in the specified amount of insurance under your Policy,
we will deduct a surrender charge from your policy value.
With respect to a surrender within the first 11 policy years, the
surrender charge equals (a) plus (b), multiplied by (c), where:
(a) = 25% of the lesser of (i) the sum of all premiums paid in the
Policy and (ii) the maximum surrender charge premium (which is an
amount calculated separately for each policy and is never more
than 12 no-lapse premiums);
(b) = an administrative charge based on the initial amount of insurance
and the insured's age at the policy date (ranging from $1.00 up
to age 9 to $7.00 at age 60 and over, per $1,000 of initial
specified amount of insurance); and
(c) = the applicable surrender factor from the table below in which the
policy year is determined.
With respect to a surrender within 11 years of an increase in the
specified amount of insurance under your Policy, the surrender charge is based
on the amount of the increase and on the age of the insured at the time of the
increase. The charge equals (a) multiplied by (b), where:
(a) = an administrative charge based on the increase in the initial
amount of insurance and the insured's age on the effective date
of the increase (ranging from $1.00 up to age 9 to $7.00 at age
60 and over, per $1,000 of initial specified amount of
insurance); and
(b) = the applicable surrender factor from the table below, assuming
for this purpose only that the first policy year commences with
the policy year in which the increase in specified amount of
insurance becomes effective.
Surrender During Policy Year Surrender Factor
- --------------------------------------------------------------------------------
1st through 7th 1.00
- --------------------------------------------------------------------------------
8th .80
- --------------------------------------------------------------------------------
9th .60
- --------------------------------------------------------------------------------
10th .40
- --------------------------------------------------------------------------------
11th .20
- --------------------------------------------------------------------------------
12th and later 0
- --------------------------------------------------------------------------------
9
<PAGE>
The surrender charge under both of the above scenarios declines by 20%
each policy year after the seventh, to $0 by the 12th policy year so that, after
the 11th policy year, there is no surrender charge.
If the Policy is surrendered within the first 11 policy years, the
surrender charge consists of a sales charge component and an administrative
charge component. The sales charge component is to reimburse us for some of the
expenses incurred in the distribution of the Policies. The sales charge
component, together with the sales charge component of the premium charge, may
be insufficient to recover distribution expenses related to the sale of the
Policies. Our unrecovered sales expenses are paid for from our surplus. The
administrative charge component for surrenders within the first 11 policy years
covers administrative expenses associated with underwriting and issuing the
Policy, including the costs of processing applications, conducting medical
exams, determining insurability and the insured's rate class, and creating and
maintaining policy records, as well as the administrative costs of processing
surrender requests. If the Policy is surrendered after the first 11 policy
years, but within 11 years of an increase in the specified amount of insurance,
the surrender charge consists solely of an administrative charge for expenses we
incur which are associated with increasing the specified amount of insurance.
We do not anticipate making any profit on the administrative charge
component of the surrender charge.
Partial Surrender Charge
If you partially surrender your Policy, we will deduct the lesser of
$25 or 2% of the amount surrendered. The charge will be deducted from the
available net cash surrender value and will be considered part of the partial
surrender. We also do not anticipate making a profit on this charge.
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>
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>
10
<PAGE>
- ----------------------
(1) The expenses are estimates provided by the Funds' investment adviser.
(2) The expenses are for the last fiscal year.
(3) The total expenses for the Index 500 Fund are estimated to be 0.31% if the
Fund's administrator does not waive part of its Administrative and Corporate
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)
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.
- --------------------------------------------------------------------------------
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.
11
<PAGE>
- --------------------------------------------------------------------------------
Morgan Stanley's The Universal Institutional Funds, Inc.
Underlying Fund Annual Expenses (as a % of portfolio average net assets)
Management Other Total Fund
Fee Expenses Expenses
Emerging Markets Equity (International)....... 1.25% 0.50% 1.75%
- --------------------------------------------------------------------------------
Are There Other Charges That Penn Mutual Could Deduct in the Future?
We currently make no charge against policy values to pay federal income
taxes. 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:
o the minimum amount that may be transferred is $250 (or the amount
held under the investment options from which you are making the
transfer, if less);
o if less than the full amount held under an investment option is
transferred, the amount remaining under the investment option must
be at least $250;
o we may defer transfers under certain conditions;
o transfers may not be made during the free-look period;
o transfers may be made from the fixed interest option only during
the 30-day period following the end of each policy year.
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.
12
<PAGE>
Dollar Cost Averaging
This program automatically makes monthly transfers from the money
market variable investment option to one or more of the other investment options
and to the fixed 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 program automatically reallocates your policy value among the
variable investment options in accordance with the proportions you originally
specified. Over time, variations in investment results will change the
allocation percentage. On a quarterly basis, the rebalancing program will
periodically transfer your policy value among the variable investment options to
reestablish the percentages you had chosen. Rebalancing can result in
transferring amounts from a variable investment option with relatively higher
investment performance to one with relatively lower investment performance. The
minimum policy value to start the program is $1,000. If you also have a dollar
cost averaging program in effect, the portion of your policy value invested in
the Money Market Fund may not be included in the Rebalancing Program. You may
discontinue the program at any time.
What Is a Policy Loan?
You may borrow up to 90% of your cash surrender value. The minimum
amount you may borrow is $250.
Interest charged on a policy loan is 5% 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 deducted from the variable investment options and the fixed interest option
on a prorated basis (unless you designate a different withdrawal allocation when
you request the loan) and is transferred to a special loan account. Amounts
withdrawn from the investment options cease to participate in the investment
experience of the options. The special loan account will earn interest at 4% (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 insured will reduce the amount of the death benefit by the amount of such
loan.
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<PAGE>
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; and
o during the first five policy years, the partial surrender may not
reduce the specified amount of insurance under your Policy to less
than $50,000.
If you elected the Option 1 insurance coverage (see How Much Insurance
Does My Policy Provide? below), a partial surrender will reduce your specific
amount of insurance.
If you have increased the initial specified amount, any reduction will
be applied to the most recent increase.
What Is the Timing of Transactions Under the Policy?
We will ordinarily pay any death benefit, loan proceeds or partial or
full surrender proceeds, and will make transfers among the investment options
and the fixed interest option, within seven days after receipt at our office of
all the documents required for completion of the transaction. Other than the
death benefit, which is determined as of the date of death, transactions will be
based on values at the end of the valuation period in which we receive all
required instructions and necessary documentation. A valuation period is the
period commencing with the close of the New York Stock
14
<PAGE>
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 Fund investment option until our
evaluation has been completed and the premium has been accepted. When accepted,
the net premium will be allocated to the investment options you have designated.
We may defer making a payment or transfer from a variable account
investment option if (1) the disposal or valuation of the Separate Account's
assets is not reasonably practicable because the New York Stock Exchange is
closed for other than a regular holiday or weekend, trading is restricted by the
SEC, or the SEC declares that an emergency exists; or (2) the SEC by order
permits postponement of payment to protect our Policy owners.
We may also defer making a payment or transfer from the fixed interest
option for up to six months from the date we receive the written request.
However, we will not defer payment of a partial surrender or policy loan
requested to pay a premium due on a Penn Mutual Policy. If a payment from the
fixed interest option is deferred for 30 days or more, it will bear interest at
a rate of 3% per year compounded annually while it is deferred.
How Much Life Insurance Does My Policy Provide?
In your application for the Policy, you will tell us how much life
insurance coverage you want on the life of the insured. This is called the
"specified amount" of insurance. The minimum specified amount of insurance under
the Policy is $50,000.
Death Benefits Options
When the insured person dies, we will pay the death benefit less the
amount of any outstanding policy loan. We offer two different types of death
benefits payable under the Policy. You choose which one you want in the
application. They are:
o Option 1 -- The death benefit is the greater of (a) the specified
amount of insurance or (b) the "applicable percentage" of the
policy value on the date of the insured's death.
o Option 2 -- The death benefit is the greater of (a) the specified
amount of insurance plus your policy value on the date of death, or
(b) the "applicable percentage" of the policy value on the date of
the insured's death.
The "applicable percentage" is 250% when the insured has attained age
40 or less and decreases each year to 100% when the insured attains age 95. A
table showing the "applicable percentages" for attained ages 0 to 95 is included
as Appendix B.
If the investment performance of the variable account investment
options you have chosen is favorable, the amount of the death benefit may
increase. However, under Option 1, favorable
15
<PAGE>
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 $50,000;
o no change may be made in the first policy year and no more than one
change may be made in any policy year; and
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 insured, the requested change will not be allowed.
Changes in the Specified Amount of Insurance
You may increase the specified amount of insurance, subject to the
following conditions:
o you must submit an application along with evidence of insurability
acceptable to Penn Mutual;
o you must return your Policy so we can amend it to reflect the
increase;
o any increase in the specified amount must be at least $10,000; and
o no change may be made if it would cause the Policy not to qualify
as insurance under federal income tax law.
If you increase the specified amount within the first three policy
years, the three year no-lapse period will be extended.
You may decrease the specified amount of insurance, subject to the
following conditions:
o no change may be made in the first policy year;
16
<PAGE>
o no change may be made if it would cause the Policy not to qualify
as insurance under federal income tax law;
o no decrease may be made within one year of an increase in the
specified amount; and
o any decrease in the specified amount of insurance must be at least
$5,000 and the specified amount after the decrease must be at least
$50,000.
Tax Consequences
See Federal Income Tax Considerations in the Additional Information
section of this prospectus to learn about possible tax consequences of changing
your insurance coverage under the Policy.
What Are the Supplemental Benefit Riders That I Can Buy?
We offer supplemental benefit riders that may be added to your Policy.
There are monthly charges for the riders, in addition to the charges described
above. If any of these riders are added to your Policy, monthly charges for the
supplemental benefits will be deducted from your policy value as part of the
monthly deduction.
Accidental Death Benefit. Provides a death benefit payable if the
insured's death results from certain accidental causes. There is no
cash value for this benefit.
Additional Insured Term Insurance. Provides a death benefit payable on
the death of an additional insured. More than one rider can be added to
your Policy. There is no cash value for this benefit.
Children's Term Insurance. Provides a death benefit payable on the
death of a covered child. More than one child can be covered. There is
no cash value for this benefit.
Disability Waiver of Monthly Deduction. Provides for the waiver of the
monthly deductions upon total disability of the insured.
Disability Waiver of Monthly Deduction and Disability Monthly Premium
Deposit. Provides for the waiver of the monthly deductions and payment
of stipulated premiums upon total disability of the insured. If Option
1 is in effect at the time this benefit becomes effective, it will be
changed to Option 2.
Guaranteed Continuation of Policy. Guarantees that the Policy will
remain in force and a death benefit will be payable regardless of the
sufficiency of the net cash surrender value.
Guaranteed Option to Increase Specified Amount. Allows the owner to
increase the specified amount without evidence of insurability.
Supplemental Term Insurance. Provides a death benefit payable on the
death of the primary insured. There is no cash value for this benefit.
17
<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. 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
allocated to the Penn Series Money Market Fund investment option.
Can I Choose Different Payout Options Under My Policy?
Choosing a Payout Option
You may choose to receive proceeds from the Policy as a single sum.
This includes proceeds that become payable because of death or full surrender.
Alternatively, you can elect to have proceeds of $5,000 or more applied to any
of a number of other payment options as set forth in your Policy. Periodic
payments may not be less than $50 each.
Changing a Payment Option
You can change the payment option at any time before the proceeds are
payable. If you have not made a choice, the payee may change the payment option
within the period specified in the Policy. The person entitled to the proceeds
may elect a payment option as set forth in the Policy.
Tax Impact
There may be tax consequences to you or your beneficiary depending upon
which payment option is chosen. You should consult a qualified tax adviser
before making that choice.
How Is the Policy Treated for Federal Income Tax Purposes?
Death benefits paid under life insurance policies are not subject to
income tax. Investment gains from your Policy are not subject to income tax as
long as we do not pay them out to you.
Assuming your Policy is not treated as a "modified endowment contract"
under federal income tax law, distributions from the Policy are generally
treated as first recovering the investments in the Policy and then, only after
the return of all investment in the Policy, as receiving taxable income. Amounts
borrowed under the Policy also are not generally subject to federal income tax
at the time of the borrowing.
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
18
<PAGE>
insurance provided under the Policy. Under those circumstances, additional taxes
and penalties may be payable for policy distributions and loans.
For further information about the qualifications of the Policy as life
insurance under federal tax law and the tax consequences of owning a Policy, see
Federal Income Tax Considerations in the Additional Information section of this
prospectus.
How Do I Communicate with Penn Mutual?
General Rules
You may mail all checks and money orders for premium payments to The
Penn Mutual Life Insurance Company, P.O. Box 7460, Philadelphia, Pennsylvania
19101-7460, or express all checks and money orders to The Penn Mutual Life
Insurance Company, Receipts Processing C3V, 600 Dresher Road, Horsham,
Pennsylvania 19044.
Certain requests pertaining to your Policy must be made in writing and
be signed and dated by you. They include the following:
o policy loans in excess of $5,000, and full and partial surrenders,
o change of allocation among investment options for new premium
payments,
o change of death benefit option,
o changes in specified amount of insurance,
o change of beneficiary,
o election of payment option for policy proceeds,
o tax withholding elections, and
o grant of telephone transaction privileges to third parties.
You should mail or express these requests to our office. You should
also send notice of the insured person's death and related documentation to our
office. Communications are not treated as "received" until such time as they
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 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 at 800-523-0650.
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<PAGE>
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 each year we will send to you a report showing your current
policy values, premiums paid and deductions made since the last report, any
outstanding policy loans, and any additional premiums permitted under your
Policy. We will also send to you an annual and a semi-annual report for the
Separate Account and for each Fund underlying a subaccount to which you have
allocated policy value, as required by the 1940 Act. In addition, when you pay
premiums (other than by preauthorized check), or if you borrow money under your
Policy, transfer amounts among the investment options or make partial
surrenders, we will send a written confirmation to you.
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<PAGE>
ILLUSTRATIONS
The tables on the following pages show how values under a hypothetical
Policy change with investment performance over an extended period of time. The
tables illustrate how policy values, net cash surrender values and death
benefits under a Policy covering the insured of a given age on the issue date
would vary over time if planned premiums were paid annually and the return on
the assets in the selected funds were a uniform gross annual rate of 0%, 6% and
12%. The values would be different from those shown if the returns averaged 0%,
6% or 12%, but fluctuated over and under those averages throughout the years
shown. The tables also show planned premiums accumulated at 5% interest. The
hypothetical investment rates of return are illustrative only and should not be
deemed a representation of past or future investment rates of return. Actual
rates of return for a particular Policy may be more or less than the
hypothetical investment rates of return and will depend on a number of factors
including the investment allocations made by an owner, prevailing rates and
rates of inflation.
The tables reflect the daily charge against the investments for the
mortality and expense risks we assume, which is equivalent to an effective
annual charge of 0.75% of assets at the current rate and 0.90% at the maximum
guaranteed rate. In addition, the tables assume an average annual expense ratio
of 0.85% 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%. For information on fund expenses, see the What Are
the Fees and Expenses Paid by the Investment Funds? In the Basic Information
section of this prospectus
After deduction of fund expenses and the mortality and expense risk
charge, the illustrated gross annual investment rates of return of 0%, 6% and
12% would correspond to approximate net annual rates of -1.6%, 4.4% and 10.40%,
respectively, at current rates, and -1.75%, 4.25% and 10.25%, respectively, at
the guaranteed maximum rates.
The tables also reflect the deduction of the monthly administrative
charge and the monthly cost of insurance charge for the hypothetical insured
persons. Our current cost of insurance charges and the higher guaranteed maximum
cost of insurance charges we have the contractual right to charge are reflected
in separate tables on the following pages. 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 account 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 Insured's individual circumstances. Such illustrations may assume
different hypothetical rates of return than those illustrated in the following
tables.
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<PAGE>
Illustration of Policy Values
Penn Mutual Life Insurance Company
Male Issue Age: 35 Non-Smoker
$750 ANNUAL PREMIUM
$75,000 SPECIFIED AMOUNT
DEATH BENEFIT OPTION 1
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>
1 788 381 0 75,000 413 0 75,000 445 0 75,000
2 1,614 887 425 75,000 980 517 75,000 1,077 614 75,000
3 2,483 1,378 916 75,000 1,565 1,102 75,000 1,767 1,304 75,000
4 3,394 1,858 1,395 75,000 2,171 1,709 75,000 2,525 2,062 75,000
5 4,351 2,323 1,861 75,000 2,798 2,336 75,000 3,355 2,893 75,000
6 5,357 2,776 2,313 75,000 3,448 2,985 75,000 4,268 3,805 75,000
7 6,412 3,215 2,752 75,000 4,119 3,657 75,000 5,269 4,806 75,000
8 7,520 3,637 3,267 75,000 4,811 4,441 75,000 6,365 5,995 75,000
9 8,683 4,039 3,762 75,000 5,521 5,244 75,000 7,564 7,287 75,000
10 9,905 4,423 4,238 75,000 6,250 6,065 75,000 8,877 8,692 75,000
15 16,993 6,017 6,017 75,000 10,175 10,175 75,000 17,594 17,594 75,000
20 26,039 7,050 7,050 75,000 14,637 14,637 75,000 31,678 31,678 75,000
25 37,585 7,272 7,272 75,000 19,566 19,566 75,000 54,897 54,897 75,000
30 52,321 6,137 6,137 75,000 24,690 24,690 75,000 93,159 93,159 113,653
</TABLE>
(1) Assumes that no policy loans have been made.
(2) Current values reflect current cost of insurance rates, a monthly
administrative charge of $9.00 in year 1 and $5.00 thereafter, and a
mortality and expense risk charge of 0.75% 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.
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<PAGE>
Illustration of Policy Values
Penn Mutual Life Insurance Company
Male Issue Age: 35 Non-Smoker
$750 ANNUAL PREMIUM
$75,000 SPECIFIED AMOUNT
DEATH BENEFIT OPTION 1
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>
1 788 369 0 75,000 400 0 75,000 432 0 75,000
2 1,614 815 352 75,000 904 442 75,000 998 536 75,000
3 2,483 1,246 783 75,000 1,423 960 75,000 1,615 1,152 75,000
4 3,394 1,662 1,199 75,000 1,955 1,493 75,000 2,287 1,825 75,000
5 4,351 2,061 1,598 75,000 2,501 2,038 75,000 3,019 2,556 75,000
6 5,357 2,443 1,981 75,000 3,060 2,598 75,000 3,816 3,354 75,000
7 6,412 2,807 2,344 75,000 3,631 3,169 75,000 4,684 4,221 75,000
8 7,520 3,152 2,782 75,000 4,215 3,845 75,000 5,630 5,260 75,000
9 8,683 3,478 3,200 75,000 4,811 4,533 75,000 6,660 6,383 75,000
10 9,905 3,784 3,599 75,000 5,418 5,233 75,000 7,785 7,600 75,000
15 16,993 4,965 4,965 75,000 8,595 8,595 75,000 15,150 15,150 75,000
20 26,039 5,389 5,389 75,000 11,861 11,861 75,000 26,688 26,688 75,000
25 37,585 4,560 4,560 75,000 14,760 14,760 75,000 45,122 45,122 75,000
30 52,321 1,640 1,640 75,000 16,494 16,494 75,000 75,634 75,634 92,274
</TABLE>
(1) Assumes that no policy loans have been made.
(2) Guaranteed values reflect guaranteed cost of insurance rates, a monthly
administrative charge of $9.00 per month, and a mortality and expense
risk charge of 0.90% of assets.
(3) Net investment returns are calculated as the hypothetical gross
investment returns less all charges and deductions shown in the
prospectus.
(4) Assumes that the premium is paid at the beginning of each policy year.
Values would be different if the premiums are paid with a different
frequency or in different amounts.
THE HYPOTHETICAL INVESTMENT RATES OF RETURN SHOWN ABOVE AND ELSEWHERE IN THIS
PROSPECTUS ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF
PAST OR FUTURE INVESTMENT RATES OF RETURN. ACTUAL RATES OF RETURN MAY BE MORE OR
LESS THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS INCLUDING THE
INVESTMENT ALLOCATIONS MADE BY AN OWNER, PREVAILING RATES AND RATES OF
INFLATION. THE DEATH BENEFIT AND CASH VALUE FOR A POLICY WOULD BE DIFFERENT FROM
THOSE SHOWN IF THE ACTUAL RATES OF RETURN AVERAGED 0%, 6% OR 12% OVER A PERIOD
OF YEARS BUT ALSO FLUCTUATED ABOVE OR BELOW THOSE AVERAGES FOR INDIVIDUAL POLICY
YEARS. NO REPRESENTATION CAN BE MADE BY THE COMPANY OR THE FUND THAT THESE
HYPOTHETICAL RATES OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER
ANY PERIOD OF TIME.
23
<PAGE>
Illustration of Policy Values
Penn Mutual Life Insurance Company
Male Issue Age: 35 Non-Smoker
$1,200 ANNUAL PREMIUM
$75,000 SPECIFIED AMOUNT
DEATH BENEFIT OPTION 2
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
Per Year Value Value Benefit Value Value Benefit Value Value Benefit
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 1,260 794 332 75,794 852 389 75,852 909 446 75,909
2 2,583 1,707 1,244 76,707 1,876 1,413 76,876 2,052 1,589 77,052
3 3,972 2,597 2,134 77,597 2,937 2,474 77,937 3,305 2,843 78,305
4 5,431 3,468 3,005 78,468 4,040 3,577 79,040 4,684 4,221 79,684
5 6,962 4,318 3,855 79,318 5,184 4,731 80,184 6,198 5,736 81,198
6 8,570 5,148 4,685 80,148 6,372 5,909 81,372 7,863 4,701 82,863
7 10,259 5,957 5,494 80,957 7,604 7,141 82,604 9,694 9,231 84,694
8 12,032 6,742 6,372 81,742 8,879 8,509 83,879 11,703 11,333 86,703
9 13,893 7,501 7,223 82,501 10,196 9,918 85,196 13,905 13,628 88,905
10 15,848 8,232 8,047 83,232 11,555 11,370 86,555 16,322 16,137 91,322
15 27,189 11,454 11,454 86,454 19,010 19,010 94,010 32,412 32,412 107,412
20 41,663 13,959 13,959 88,959 27,719 27,719 102,719 58,184 58,184 133,184
25 60,136 15,441 15,441 90,441 37,572 37,572 112,572 99,371 99,371 174,371
30 83,713 15,343 15,343 90,343 48,106 48,106 123,106 164,988 164,988 239,988
</TABLE>
(1) Assumes that no policy loans have been made.
(2) Current values reflect current cost of insurance rates, a monthly
administrative charge of $9.00 in year 1 and $5.00 thereafter, and a
mortality and expense risk charge of 0.75% 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: 35 Non-Smoker
$1,200 ANNUAL PREMIUM
$75,000 SPECIFIED AMOUNT
DEATH BENEFIT OPTION 2
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 1,260 781 319 75,781 838 375 75,838 895 433 75,895
2 2,583 1,632 1,169 76,632 1,798 1,335 76,798 1,970 1,508 76,970
3 3,972 2,459 1,997 77,459 2,789 2,327 77,790 3,147 2,685 78,147
4 5,431 3,264 2,801 78,264 3,814 3,352 78,814 4,436 3,973 79,436
5 6,962 4,044 3,581 79,044 4,872 4,410 79,872 5,845 5,382 80,845
6 8,570 4,799 4,336 79,799 5,964 5,501 80,964 7,387 6,924 82,387
7 10,259 5,527 5,065 80,527 7,087 6,625 82,087 9,072 8,610 84,072
8 12,032 6,230 5,860 81,230 8,245 7,875 83,245 10,917 10,547 85,917
9 13,893 6,905 6,627 81,905 9,436 9,159 84,437 12,933 12,656 87,933
10 15,848 7,552 7,367 82,552 10,662 10,477 85,662 15,140 14,955 90,140
15 27,189 10,320 10,320 85,320 17,281 17,281 92,281 29,695 29,695 104,695
20 41,663 12,128 12,128 87,128 24,598 24,598 99,598 52,449 52,449 127,449
25 60,136 12,477 12,477 87,477 32,107 32,107 107,107 87,795 87,795 162,795
30 83,713 10,618 10,618 85,618 38,854 38,854 113,854 142,519 142,519 217,519
</TABLE>
(1) Assumes that no policy loans have been made.
(2) Guaranteed values reflect guaranteed cost of insurance rates, a monthly
administrative charge of $9.00 per month, and a mortality and expense
risk charge of 0.90% of assets.
(3) Net investment returns are calculated as the hypothetical gross
investment returns less all charges and deductions shown in the
prospectus.
(4) Assumes that the premium is paid at the beginning of each policy year.
Values would be different if the premiums are paid with a different
frequency or in different amounts.
THE HYPOTHETICAL INVESTMENT RATES OF RETURN SHOWN ABOVE AND ELSEWHERE IN THIS
PROSPECTUS ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF
PAST OR FUTURE INVESTMENT RATES OF RETURN. ACTUAL RATES OF RETURN MAY BE MORE OR
LESS THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS INCLUDING THE
INVESTMENT ALLOCATIONS MADE BY AN OWNER, PREVAILING RATES AND RATES OF
INFLATION. THE DEATH BENEFIT AND CASH VALUE FOR A POLICY WOULD BE DIFFERENT FROM
THOSE SHOWN IF THE ACTUAL RATES OF RETURN AVERAGED 0%, 6% OR 12% OVER A PERIOD
OF YEARS BUT ALSO FLUCTUATED ABOVE OR BELOW THOSE AVERAGES FOR INDIVIDUAL POLICY
YEARS. NO REPRESENTATION CAN BE MADE BY THE COMPANY OR THE FUND THAT THESE
HYPOTHETICAL RATES OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER
ANY PERIOD OF TIME.
25
<PAGE>
Illustration of Policy Values
Penn Mutual Life Insurance Company
Female Issue Age: 45 Non-Smoker
$1,500 ANNUAL PREMIUM
$125,000 SPECIFIED AMOUNT
DEATH BENEFIT OPTION 1
USING CURRENT COST OF INSURANCE RATES
<TABLE>
<CAPTION>
0% Hypothetical 6% Hypothetical 12% Hypothetical
Premiums Gross Investment Return Gross Investment Return Gross Investment Return
Accumulated
End of at Net Cash Net Cash Net Cash
Policy 5% Interest Policy Surrender Death Policy Surrender Death Policy Surrender Death
Year Per Year Value Value Benefit Value Value Benefit Value Value Benefit
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 1,575 835 0 125,000 902 0 125,000 969 0 125,000
2 3,229 1,826 839 125,000 2,018 1,031 125,000 2,218 1,231 125,000
3 4,965 2,773 1,786 125,000 3,155 2,168 125,000 3,569 2,582 125,000
4 6,788 3,683 2,696 125,000 4,319 3,332 125,000 5,038 4,051 125,000
5 8,703 4,554 3,567 125,000 5,511 4,525 125,000 6,637 5,650 125,000
6 10,713 5,385 4,399 125,000 6,731 5,744 125,000 8,378 7,391 125,000
7 12,824 6,188 5,201 125,000 7,989 7,002 125,000 10,288 9,301 125,000
8 15,040 6,958 6,168 125,000 9,285 8,496 125,000 12,380 11,591 125,000
9 17,367 7,689 7,097 125,000 10,614 10,022 125,000 14,670 14,078 125,000
10 19,810 8,384 7,990 125,000 11,978 11,584 125,000 17,180 16,785 125,000
15 33,986 11,161 11,161 125,000 19,253 19,253 125,000 33,853 33,853 125,000
20 52,079 12,656 12,656 125,000 27,356 27,356 125,000 60,934 60,934 125,000
25 75,170 12,254 12,254 125,000 36,033 36,033 125,000 106,121 106,121 125,000
30 104,641 9,237 9,237 125,000 45,157 45,157 125,000 181,883 181,883 194,615
</TABLE>
(1) Assumes that no policy loans have been made.
(2) Current values reflect current cost of insurance rates, a monthly
administrative charge of $9.00 in year 1 and $5.00 thereafter, and a
mortality and expense risk charge of 0.75% 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
Female Issue Age: 45 Non-Smoker
$1,500 ANNUAL PREMIUM
$125,000 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 1,575 757 0 125,000 821 0 125,000 885 0 125,000
2 3,229 1,627 640 125,000 1,807 820 125,000 1,996 1,009 125,000
3 4,965 2,458 1,471 125,000 2,812 1,825 125,000 3,197 2,210 125,000
4 6,788 3,248 2,261 125,000 3,833 2,846 125,000 4,495 3,508 125,000
5 8,703 3,997 3,011 125,000 4,870 3,884 125,000 5,900 4,913 125,000
6 10,713 4,702 3,716 125,000 5,921 4,934 125,000 7,419 6,432 125,000
7 12,824 5,361 4,374 125,000 6,984 5,997 125,000 9,063 8,076 125,000
8 15,040 5,970 5,181 125,000 8,055 7,266 125,000 10,842 10,052 125,000
9 17,367 6,524 5,932 125,000 9,129 8,537 125,000 12,763 12,171 125,000
10 19,810 7,022 6,627 125,000 10,205 9,810 125,000 14,844 14,449 125,000
15 33,986 8,651 8,651 125,000 15,594 15,594 125,000 28,330 28,330 125,000
20 52,079 8,432 8,432 125,000 20,618 20,618 125,000 49,369 49,369 125,000
25 75,170 4,608 4,608 125,000 23,512 23,512 125,000 82,981 82,981 125,000
30 104,641 0 0 0 21,530 21,530 125,000 140,627 140,627 150,471
</TABLE>
(1) Assumes that no policy loans have been made.
(2) Guaranteed values reflect guaranteed cost of insurance rates, a monthly
administrative charge of $9.00 per month, and a mortality and expense
risk charge of 0.90% of assets.
(3) Net investment returns are calculated as the hypothetical gross
investment returns less all charges and deductions shown in the
prospectus.
(4) Assumes that the premium is paid at the beginning of each policy year.
Values would be different if the premiums are paid with a different
frequency or in different amounts.
THE HYPOTHETICAL INVESTMENT RATES OF RETURN SHOWN ABOVE AND ELSEWHERE IN THIS
PROSPECTUS ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF
PAST OR FUTURE INVESTMENT RATES OF RETURN. ACTUAL RATES OF RETURN MAY BE MORE OR
LESS THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS INCLUDING THE
INVESTMENT ALLOCATIONS MADE BY AN OWNER, PREVAILING RATES AND RATES OF
INFLATION. THE DEATH BENEFIT AND CASH VALUE FOR A POLICY WOULD BE DIFFERENT FROM
THOSE SHOWN IF THE ACTUAL RATES OF RETURN AVERAGED 0%, 6% OR 12% OVER A PERIOD
OF YEARS BUT ALSO FLUCTUATED ABOVE OR BELOW THOSE AVERAGES FOR INDIVIDUAL POLICY
YEARS. NO REPRESENTATION CAN BE MADE BY THE COMPANY OR THE FUND THAT THESE
HYPOTHETICAL RATES OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER
ANY PERIOD OF TIME.
27
<PAGE>
Illustration of Policy Values
Penn Mutual Life Insurance Company
Female Issue Age: 45 Non-Smoker
$2,100 ANNUAL PREMIUM
$125,000 SPECIFIED AMOUNT
DEATH BENEFIT OPTION 2
USING CURRENT COST OF INSURANCE RATES
<TABLE>
<CAPTION>
0% Hypothetical 6% Hypothetical 12% Hypothetical
Premiums Gross Investment Return Gross Investment Return Gross Investment Return
Accumulated
End of at Net Cash Net Cash Net Cash
Policy 5% Interest Policy Surrender Death Policy Surrender Death Policy Surrender Death
Year Per Year Value Value Benefit Value Value Benefit Value Value Benefit
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 2,205 1,385 398 126,385 1,485 498 126,485 1,585 598 126,585
2 4,520 2,914 1,927 127,914 3,207 2,220 128,207 3,512 2,526 128,512
3 6,951 4,388 3,401 129,388 4,973 3,986 129,973 5,607 4,621 130,607
4 9,504 5,812 4,825 130,812 6,790 5,803 131,790 7,893 6,906 132,893
5 12,184 7,187 6,200 132,187 8,659 7,672 133,659 10,387 9,400 135,387
6 14,998 8,510 7,523 133,510 10,580 9,593 135,580 13,109 12,122 138,109
7 17,953 9,792 8,805 134,792 12,564 11,578 137,564 16,093 15,106 141,093
8 21,056 11,030 10,240 136,030 14,612 13,823 139,612 19,362 18,573 144,362
9 24,314 12,217 11,625 137,217 16,718 16,126 141,718 22,939 22,347 147,939
10 27,734 13,356 12,961 138,356 18,887 18,492 143,887 26,856 26,461 151,856
15 47,581 18,154 18,154 143,154 30,548 30,548 155,548 52,695 52,695 177,695
20 72,910 21,373 21,373 146,373 43,629 43,629 168,629 93,490 93,490 218,490
25 105,238 22,327 22,327 147,327 57,523 57,523 182,523 157,718 157,718 282,718
30 146,498 20,387 20,387 145,387 71,506 71,506 196,506 259,332 259,332 384,332
</TABLE>
(1) Assumes that no policy loans have been made.
(2) Current values reflect current cost of insurance rates, a monthly
administrative charge of $9.00 in year 1 and $5.00 thereafter, and a
mortality and expense risk charge of 0.75% 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>
Illustration of Policy Values
Penn Mutual Life Insurance Company
Female Issue Age: 45 Non-Smoker
$2,100 ANNUAL PREMIUM
$125,000 SPECIFIED AMOUNT
DEATH BENEFIT OPTION 2
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 2,205 1,305 318 126,305 1,402 415 126,402 1,500 513 126,500
2 4,520 2,710 1,723 127,710 2,992 2,005 127,992 3,285 2,299 128,285
3 6,951 4,064 3,077 129,064 4,621 3,634 129,621 5,225 4,238 130,225
4 9,504 5,365 4,378 130,365 6,288 5,302 131,288 7,332 6,345 132,332
5 12,184 6,611 5,625 131,612 7,995 7,008 132,995 9,622 8,635 134,622
6 14,998 7,801 6,814 132,801 9,738 8,751 134,738 12,109 11,122 137,109
7 17,953 8,931 7,944 133,931 11,515 10,528 136,515 14,810 13,823 139,810
8 21,056 9,998 9,209 134,998 13,322 12,533 138,322 17,742 16,952 142,742
9 24,314 10,996 10,404 135,996 15,155 14,563 140,155 20,920 20,328 145,920
10 27,734 11,925 11,530 136,925 17,012 16,617 142,012 24,369 23,975 149,369
15 47,581 15,508 15,508 140,508 26,629 26,629 151,629 46,675 46,675 171,675
20 72,910 16,909 16,909 141,909 36,325 36,325 161,325 80,560 80,560 205,560
25 105,238 14,442 14,442 139,442 43,948 43,948 168,948 130,803 130,803 255,803
30 146,498 6,104 6,104 131,104 46,389 46,389 171,389 204,749 204,749 329,749
</TABLE>
(1) Assumes that no policy loans have been made.
(2) Guaranteed values reflect guaranteed cost of insurance rates, a monthly
administrative charge of $9.00 per month, and a mortality and expense
risk charge of 0.90% of assets.
(3) Net investment returns are calculated as the hypothetical gross
investment returns less all charges and deductions shown in the
prospectus.
(4) Assumes that the premium is paid at the beginning of each policy year.
Values would be different if the premiums are paid with a different
frequency or in different amounts.
THE HYPOTHETICAL INVESTMENT RATES OF RETURN SHOWN ABOVE AND ELSEWHERE IN THIS
PROSPECTUS ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF
PAST OR FUTURE INVESTMENT RATES OF RETURN. ACTUAL RATES OF RETURN MAY BE MORE OR
LESS THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS INCLUDING THE
INVESTMENT ALLOCATIONS MADE BY AN OWNER, PREVAILING RATES AND RATES OF
INFLATION. THE DEATH BENEFIT AND CASH VALUE FOR A POLICY WOULD BE DIFFERENT FROM
THOSE SHOWN IF THE ACTUAL RATES OF RETURN AVERAGED 0%, 6% OR 12% OVER A PERIOD
OF YEARS BUT ALSO FLUCTUATED ABOVE OR BELOW THOSE AVERAGES FOR INDIVIDUAL POLICY
YEARS. NO REPRESENTATION CAN BE MADE BY THE COMPANY OR THE FUND THAT THESE
HYPOTHETICAL RATES OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER
ANY PERIOD OF TIME.
29
<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................................................................31
Penn Mutual Variable Life Account I...................................................................32
The Funds.............................................................................................33
More Information About Policy Values..................................................................35
Federal Income Tax Considerations.....................................................................36
Sale of the Policies..................................................................................39
Penn Mutual Trustees and Officers.....................................................................40
State Regulation......................................................................................41
Additional Information................................................................................42
Experts...............................................................................................42
Litigation............................................................................................42
Independent Auditors..................................................................................42
Legal Matters.........................................................................................42
Financial Statements..................................................................................42
Appendix A...........................................................................................A-1
- Sample Minimum Initial Premiums
Appendix B-- Applicable Percentages..................................................................B-1
- Sample Applicable Percentages Under the Cash Value Accumulation Life Insurance
Qualification Test
</TABLE>
30
<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 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
31
<PAGE>
the meeting of shareholders. Shares for which no timely instructions are
received will be voted by Penn Mutual in the same proportion as those shares for
which voting instructions are received.
We may, if required by state insurance officials, disregard owner
voting instructions if such instructions would require shares to be voted so as
to cause a change in subclassification 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.
32
<PAGE>
Penn Series -- Mid Cap Value Fund -- growth of capital.
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 Incorporated, 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.
33
<PAGE>
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.
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
34
<PAGE>
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.
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 are 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.
35
<PAGE>
Fixed Account Value
On any valuation date, the fixed account value of a Policy is the
total of all net premiums allocated to the fixed account, plus any amounts
transferred to the fixed account, plus interest credited on such net premiums
and transferred amounts, less the amount of any transfers from the fixed
account, less the amount of any partial surrenders taken from the fixed account
(including the partial surrender charges), and less the pro rata portion of the
monthly deduction deducted from the fixed account. If there have been any policy
loans, the fixed account value is further adjusted to reflect the amount in the
special loan account, including transfers to and from the special loan account
as loans are taken and repayments are made, and interest credited on the 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 to you for full or partial surrenders.
Federal Income Tax Considerations
The following summary provides a general description of the federal
income tax considerations associated with the Policy and does not purport to be
complete or to cover all situations. This discussion is not intended as tax
advice. Counsel or other competent tax advisers 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
36
<PAGE>
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 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 the Policy as a life insurance
contract under Section 7702.
Section 817(h) of the Code requires that the investments of each
subaccount of the Separate Account must be "adequately diversified" in
accordance with Treasury regulations in order for the Policy to qualify as a
life insurance contract under Section 7702 of the Code (discussed above). The
Separate Account, through the funds, intends to comply with the diversification
requirements prescribed in Treas. Reg. 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 Policies' 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 exceed 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
37
<PAGE>
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.
The rules relating to whether a Policy will be treated as a modified
endowment contract are complex and make it impracticable to adequately describe
them in the limited confines of this summary. Therefore, you may wish to consult
with a competent adviser to determine whether a Policy transaction will cause
the Policy to be treated as a modified endowment contract.
Distributions from Policies Classified as Modified Endowment Contracts
Policies classified as modified endowment contracts will be subject to
the following tax rules. First, all distributions, including distributions upon
surrender and partial withdrawals from such a Policy are treated as ordinary
income subject to tax up to the amount equal to the excess (if any) 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% 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% 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
38
<PAGE>
life of any individual will generally not be tax deductible. The deduction of
interest on policy loans may also be subject to the restrictions of Section 264
of the Code. An owner should consult a tax adviser before deducting any interest
paid in respect of a policy loan.
Investment in the Policy
Investment in the Policy means: (i) the aggregate amount of any
premiums or other consideration paid for a Policy, minus (ii) the aggregate
amount received under the Policy which is excluded from gross income of the
owner (except that the amount of any loan from, or secured by, a Policy that is
a modified endowment contract, to the extent such amount is excluded from gross
income, will be disregarded), plus (iii) the amount of any loan from, or secured
by, a Policy that is a modified endowment contract to the extent that such
amount is included in the gross income of the owner.
Other Tax Considerations
The transfer of the Policy or the designation of a beneficiary may have
federal, state, and/or local transfer and inheritance tax consequences,
including the imposition of gift, estate and generation- skipping transfer
taxes. For example, the transfer of the Policy to, or the designation as
beneficiary of, or the payment of proceeds to, a person who is assigned to a
generation which is two or more generations below the generation of the owner,
may have generation-skipping transfer tax considerations under Section 2601 of
the Code.
The individual situation of each owner or beneficiary will determine
the extent, if any, to which federal, state and local transfer taxes may be
imposed. Consult with your tax adviser for specific information in connection
with these taxes.
Sale of 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, 4% on premiums paid during the
second through fifteenth policy years, and 1.2% on premiums paid after the first
fifteen policy years. Registered representatives may also be paid commissions of
up to 0.25% of policy value. Other allowances and overrides also may be paid.
Registered representatives who meet certain productivity and profitability
standards may be eligible for additional compensation.
For 1999, 1998 and 1997, Penn Mutual received premium payments on the
Policy in the approximate amount of $10,380,378, $2,711,652 and $2,174,964,
respectively, and compensated HTK in the approximate amounts of $40,894, $14,136
and $14,741, respectively, for its services as principal underwriter.
39
<PAGE>
Penn Mutual Trustees and Officers
Penn Mutual is managed by a board of trustees. The following table sets
forth the name, address and principal occupations during the past five years of
each of Penn Mutual's trustees.
Board of Trustees
<TABLE>
<CAPTION>
POSITION WITH
NAME AND ADDRESS PENN MUTUAL PRINCIPAL OCCUPATION DURING PAST FIVE YEARS
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Robert E. Chappell Chairman Chairman of the Board and Chief Executive Officer (since
The Penn Mutual Life of the Board December 1996), President and Chief Executive Officer (April
Insurance Company and Chief Executive 1995-December 1996), President and Chief Operating Officer,
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 Penn
Insurance Company and Trustee Mutual Life Insurance Company; Executive Vice President, The
Philadelphia, PA 19172 New England Mutual Life Insurance Company (prior thereto).
- -----------------------------------------------------------------------------------------------------------------------
Julia Chang Bloch Trustee Visiting Professor, Institute of International Relations in Beijing,
1743 22nd Street, NW China, and distinguished adviser, American Studies Center (April
Washington, DC 20008 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, Inc.
2040 Montrose Lane (prior thereto).
Wilmington, NC 28405
- -----------------------------------------------------------------------------------------------------------------------
Philip E. Lippincott Trustee Retired (since April 1994), Chairman and Chief Executive Officer,
4301 Bayberry Drive Scott Paper Company (prior thereto).
Avalon, NJ 08202
- -----------------------------------------------------------------------------------------------------------------------
John F. McCaughan Trustee Retired Chairman, (since 1996) Chairman of the Board, Betz
921 Pebble Hill Road Laboratories, Inc. (prior thereto).
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 Hospital of
34th and Civic Center Blvd. 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 Chief
1801 Market Street Executive Officer, Janney Montgomery Scott Inc. (a securities
Philadelphia, PA 19103 broker/dealer and subsidiary of The Penn Mutual Life Insurance
Company).
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
40
<PAGE>
<TABLE>
<CAPTION>
POSITION WITH
NAME AND ADDRESS PENN MUTUAL PRINCIPAL OCCUPATION DURING PAST FIVE YEARS
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Wesley S. Williams, Jr., Esq. Trustee Partner, Covington & Burling (law firm).
1201 Pennsylvania Ave., NW
P.O. Box 7566
Washington, D.C. 20004
- -----------------------------------------------------------------------------------------------------------
</TABLE>
The following table sets forth the names, addresses and principal
occupations during the past five years of the senior officers of Penn Mutual
(other than officers who are members of Penn Mutual's Board of Trustees).
Senior Officers
<TABLE>
<CAPTION>
NAME PRINCIPAL OCCUPATION DURING PAST FIVE YEARS
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
John M. Albanese Senior Vice President, Customer Service and Information Systems (since June 1997),
The Penn Mutual Life Vice President, Information Systems Application (prior thereto), The Penn Mutual Life
Insurance Company Insurance Company.
Philadelphia, PA 19172
- -----------------------------------------------------------------------------------------------------------------------
Michael A. Biondolillo Senior Vice President, Human Resources (since June 1997); Corporate Vice President
The Penn Mutual Life and General Manager, Human Resources and Quality, MG Industries, America (prior
Insurance Company thereto).
Philadelphia, PA 19172
- -----------------------------------------------------------------------------------------------------------------------
Nancy S. Brodie Executive Vice President and Chief Financial Officer (since December 1995), Senior
The Penn Mutual Life Vice President and Chief Financial Officer prior thereto. The Penn Mutual Life
Insurance Company Insurance Company .
Philadelphia, PA 19172
- -----------------------------------------------------------------------------------------------------------------------
Bill D. Fife Senior Vice President, Independence Financial Network (since January 2000), Regional
The Penn Mutual Life Vice President, Independence Financial Network (1997-2000), The Penn Mutual Life
Insurance Company Insurance Company; Vice President of Agencies (since 1994), General Manager,
Philadelphia, PA 19172 Western and Northwest Regions (prior thereto), Aetna Life and Casualty.
- -----------------------------------------------------------------------------------------------------------------------
Larry L. Mast Executive Vice President, The Penn Mutual Life Insurance Company (May 1997 to
The Penn Mutual Life present). Formerly Senior Vice President, Lafayette Life Insurance Company
Insurance Company (September 1994 to May 1997); Vice President, Security Benefit Insurance Company
Philadelphia, PA 19172 (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 (prior
Insurance Company thereto), The Penn Mutual Life Insurance Company.
Philadelphia, PA 19172
- -----------------------------------------------------------------------------------------------------------------------
Peter M. Sherman Executive Vice President (since December 1998), Chief Investment Officer (since May
The Penn Mutual Life 1996), Senior Vice President (May 1996 to December 1996), Vice President, Investments
Insurance Company (January 1996 to April 1996), Vice President, Fixed Income Portfolio
Philadelphia, PA, 19172 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
41
<PAGE>
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 serve 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.
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 of Penn Mutual
appear on the following pages. The financial statements of Penn Mutual should be
distinguished from any financial statements of the Separate Accounts and should
be considered only as bearing upon Penn Mutual's ability to meet its obligations
under the Policies.
42
<PAGE>
PENN MUTUAL VARIABLE LIFE ACCOUNT I
STATEMENT OF ASSETS AND LIABILITIES - DECEMBER 31, 1999
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Money Quality High Yield
Total Market Fund+ Bond Fund+ Bond Fund+
------------ ------------ ---------- ----------
<S> <C> <C> <C> <C>
Investment in Common Stock
Number of Shares ........................................................ 26,314,175 808,876 976,640
Cost .................................................................... 331,143,943 $26,314,175 $8,419,173 $9,279,758
Assets:
Investments at market value ............................................. 415,163,095 $26,314,175 $8,412,326 $9,356,213
Dividends receivable .................................................... 99,160 99,160 - -
Liabilities:
Due to(from) the Penn Mutual Life Insurance Company ..................... (409,814) (568,781) 2,945 3,245
------------ ----------- ---------- ----------
Net Assets .............................................................. $415,672,069 $26,982,116 $8,409,381 $9,352,968
============ =========== ========== ==========
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
[RESTUBED FOR ABOVE]
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
Flexibly
Growth Equity Value Equity Managed
Fund+ Fund+ Fund+
----------- ------------ -----------
<S> <C> <C> <C>
Investment in Common Stock
Number of Shares ........................................................ 711,571 1,756,163 3,012,632
Cost .................................................................... $19,153,246 $35,263,907 $56,394,230
Assets:
Investments at market value ............................................. $29,466,217 $39,004,376 $59,107,839
Dividends receivable .................................................... - - -
Liabilities:
Due to(from) the Penn Mutual Life Insurance Company ..................... 15,247 13,831 20,896
----------- ----------- ------------
Net Assets .............................................................. $29,450,970 $38,990,545 $59,086,943
=========== =========== ===========
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
[RESTUBED FOR ABOVE]
<TABLE>
<CAPTION>
Small Emerging
International Capitalization Growth
Equity Fund+ Fund+ Fund+
------------- -------------- ------------
<S> <C> <C> <C>
Investment in Common Stock
Number of Shares ........................................................ 1,273,775 820,791 594,401
Cost .................................................................... $20,526,548 $10,790,412 $11,618,219
Assets:
Investments at market value ............................................. $34,111,715 $10,374,806 $29,529,819
Dividends receivable .................................................... - - -
Liabilities:
Due to(from) the Penn Mutual Life Insurance Company ..................... 16,356 4,031 14,547
----------- ----------- -----------
Net Assets .............................................................. $34,095,359 $10,370,775 $29,515,272
=========== =========== ===========
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
43
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
PENN MUTUAL VARIABLE LIFE ACCOUNT I
STATEMENT OF OPERATIONS - FOR THE YEAR ENDED DECEMBER 31, 1999
Money Quality High Yield
Total Market Fund+ Bond Fund+ Bond Fund+
------------ ------------ ---------- ----------
<S> <C> <C> <C> <C>
Investment Income:
Dividends .............................................................. $ 1,697,544 $ 776,851 $ - $ -
Expense:
Mortality and expense risk charges ..................................... 2,766,443 134,820 62,224 72,682
------------ ----------- ---------- ----------
Net investment income (loss) ........................................... (1,068,899) 642,031 (62,224) (72,682)
------------ ----------- ---------- ----------
Realized and Unrealized Gains (Losses) on
Investments:
Realized gains (losses) from redemption of fund
shares ............................................................ 1,853,264 - 300 416
Capital gains distributions ............................................ 4,604,784 - - -
------------ ----------- ---------- ----------
Net realized gains (losses) from investment
transactions ...................................................... 6,458,048 - 300 416
Net change in unrealized appreciation/depreciation
of investments .................................................... 61,995,442 - 3,611 349,711
------------ ----------- ---------- ----------
Net realized and unrealized gains (losses) on
investments ....................................................... 68,453,490 - 3,911 350,127
------------ ----------- ---------- ----------
Net increase (decrease) in net assets resulting
from operations ................................................... $ 67,384,591 $ 642,031 $(58,313) $277,445
============ =========== ========== ==========
</TABLE>
[RESTUBED FOR ABOVE]
<TABLE>
<CAPTION>
Flexibly
Growth Equity Value Equity Managed
Fund+ Fund+ Fund+
------------- ------------ -----------
<S> <C> <C> <C>
Investment Income:
Dividends .............................................................. $ - $ - $ -
Expense:
Mortality and expense risk charges ..................................... 176,930 317,240 470,251
----------- ----------- -----------
Net investment income (loss) ........................................... (176,930) (317,240) (470,251)
----------- ----------- -----------
Realized and Unrealized Gains (Losses) on
Investments:
Realized gains (losses) from redemption of fund
shares ............................................................ 51,190 (37,587) 16,311
Capital gains distributions ............................................ - - -
----------- ----------- -----------
Net realized gains (losses) from investment
transactions ...................................................... 51,190 (37,587) 16,311
Net change in unrealized appreciation/depreciation
of investments .................................................... 6,911,635 (296,100) 3,692,338
----------- ----------- -----------
Net realized and unrealized gains (losses) on
investments ....................................................... 6,962,825 (333,687) 3,708,649
----------- ----------- -----------
Net increase (decrease) in net assets resulting
from operations ................................................... $ 6,785,895 $ (650,927) $ 3,238,398
=========== =========== ===========
</TABLE>
44
<PAGE>
[RESTUBED FOR ABOVE]
<TABLE>
<CAPTION>
Small Emerging
International Capitalization Growth
Equity Fund+ Fund+ Fund+
------------- -------------- --------
<S> <C> <C> <C>
Investment Income:
Dividends .............................................................. $ - $ - $ -
Expense:
Mortality and expense risk charges ..................................... 226,031 80,192 134,466
----------- ----------- -----------
Net investment income (loss) ........................................... (226,031) (80,192) (134,466)
----------- ----------- -----------
Realized and Unrealized Gains (Losses) on
Investments:
Realized gains (losses) from redemption of fund
shares ............................................................ 1,131,146 8,164 195,921
Capital gains distributions ............................................ - - -
----------- ----------- -----------
Net realized gains (losses) from investment
transactions ...................................................... 1,131,146 8,164 195,921
Net change in unrealized appreciation/depreciation
of investments .................................................... 10,566,719 (63,045) 16,746,334
----------- ----------- -----------
Net realized and unrealized gains (losses) on
investments ....................................................... 11,697,865 (54,881) 16,942,255
----------- ----------- -----------
Net increase (decrease) in net assets resulting
from operations ................................................... $11,471,834 $(135,073) $16,807,789
=========== =========== ===========
</TABLE>
[RESTUBED FOR ABOVE]
+ 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.
45
<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 $12,754,874 $9,011,460
========== ========== =========== ==========
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
PENN MUTUAL VARIABLE LIFE ACCOUNT I
STATEMENT OF OPERATIONS - FOR THE YEAR ENDED DECEMBER 31, 1999 (CONT'D )
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.
46
<PAGE>
[RESTUBBED]
<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>
<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.
47
<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>
48
<PAGE>
<TABLE>
<CAPTION>
Quality Bond Fund+ Flexibly Managed Fund+
------------------------------- ---------------------------------
1999 1998 1999 1998
----------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
Operations:
Net investment income (loss) ................ ($62,224) $252,041 ($470,251) $1,144,764
Net realized gains (losses) from
investment transactions ................... 300 203,736 16,311 5,784,840
Net change in unrealized appreciation/
depreciation of investments ............... 3,611 (14,899) 3,692,338 (4,524,890)
----------- ----------- ------------ ------------
Net increase (decrease) in net assets
resulting from operations ................. (58,313) 440,878 3,238,398 2,404,714
----------- ----------- ------------ ------------
Variable Life Activities:
Purchase payments ........................... 1,355,013 1,155,232 12,696,631 12,234,331
Death benefits .............................. (2,243) (249) (82,516) (17,851)
Cost of insurance ........................... (360,405) (259,658) (3,522,739) (3,137,840)
Net transfers ............................... 1,123,017 1,041,850 (6,182,355) 1,345,485
Transfers of policy loans ................... 11,409 10,440 211,590 139,613
Contract administration charges ............. (73,285) (42,018) (690,067) (646,642)
Surrender benefits .......................... (226,335) (105,331) (1,818,495) (1,299,724)
----------- ----------- ------------ ------------
Net increase in net assets resulting
from variable annuity activities ............ 1,827,171 1,800,266 612,049 8,617,372
----------- ----------- ------------ ------------
Total increase (decrease) in net assets .... 1,768,858 2,241,144 3,850,447 11,022,086
Net Assets:
Beginning of year ............................ 6,640,523 4,399,379 55,236,496 44,214,410
----------- ----------- ------------ ------------
End of year .................................. $8,409,381 $6,640,523 $59,086,943 $55,236,496
=========== =========== ============ ============
Value Equity Fund+ Emerging Growth Fund+
------------------------------- ---------------------------------
1999 1998 1999 1998
----------- ----------- ------------ ------------
Operations:
Net investment income (loss) ................ ($317,240) $181,632 ($134,466) ($29,768)
Net realized gains (losses) from
investment transactions ................... (37,587) 3,177,280 195,921 10,412
Net change in unrealized appreciation/
depreciation of investments ............... (296,100) (904,321) 16,746,334 1,277,385
------------ ------------ ------------ ------------
Net increase (decrease) in net assets
resulting from operations ................. (650,927) 2,454,591 16,807,789 1,258,029
------------ ------------ ------------ ------------
Variable Life Activities:
Purchase payments ........................... 9,300,537 7,712,812 2,612,183 1,376,626
Death benefits .............................. (34,277) (3,109) (7,463) -
Cost of insurance ........................... (2,317,035) (2,002,921) (575,948) (270,389)
Net transfers ............................... (1,332,367) 2,352,575 5,165,425 2,271,306
Transfers of policy loans ................... 83,517 129,894 27,154 949
Contract administration charges ............. (490,439) (471,036) (190,593) (117,695)
Surrender benefits .......................... (1,050,128) (800,734) (260,812) (61,482)
------------ ------------ ------------ ------------
Net increase in net assets resulting
from variable annuity activities ............ 4,159,808 6,917,481 6,769,946 3,199,315
------------ ------------ ------------ ------------
Total increase (decrease) in net assets .... 3,508,881 9,372,072 23,577,735 4,457,344
Net Assets:
Beginning of year ............................ 35,481,664 26,109,592 5,937,537 1,480,193
------------ ------------ ------------ ------------
End of year .................................. $38,990,545 $35,481,664 $29,515,272 $5,937,537
============ ============ ============ ============
</TABLE>
49
<PAGE>
<TABLE>
<CAPTION>
Small
International Equity Fund+ Capitalization Fund +
------------------------------ ----------------------------------
1999 1998 1999 1998
------------ ------------ ------------ -----------
<S> <C> <C> <C> <C>
Operations:
Net investment income (loss) ................ ($226,031) $56,661 ($80,192) ($5,543)
Net realized gains (losses) from
investment transactions ................... 1,131,146 970,588 8,164 135,416
Net change in unrealized appreciation/
depreciation of investments ............... 10,566,719 2,087,405 (63,045) (791,507)
------------ ------------ ------------ -----------
Net increase (decrease) in net assets
resulting from operations ................. 11,471,834 3,114,654 (135,073) (661,634)
------------ ------------ ------------ -----------
Variable Life Activities:
Purchase payments ........................... 6,485,087 4,244,414 3,124,582 2,372,356
Death benefits .............................. (7,506) (15,627) (7,256) (10,571)
Cost of insurance ........................... (1,671,752) (1,050,548) (604,903) (505,718)
Net transfers ............................... (3,336,017) 3,160,776 (12,470) 2,227,491
Transfers of policy loans ................... 72,417 65,814 45,711 11,010
Contract administration charges ............. (408,378) (252,405) (147,833) (165,296)
Surrender benefits .......................... (906,723) (633,058) (228,773) (129,707)
------------ ------------ ------------ -----------
Net increase in net assets resulting
from variable annuity activities ............ 227,128 5,519,366 2,169,058 3,799,565
------------ ------------ ------------ -----------
Total increase (decrease) in net assets .... 11,698,962 8,634,020 2,033,985 3,137,931
Net Assets:
Beginning of year ............................ 22,396,397 13,762,377 8,336,790 5,198,859
------------ ------------ ------------ -----------
End of year .................................. $34,095,359 $22,396,397 $10,370,775 $8,336,790
============ ============ ============ ===========
Limited Maturity
Balanced Portfolio++ Bond Portfolio++
------------------------------ ----------------------------------
1999 1998 1999 1998
------------ ------------ ------------ -----------
Operations:
Net investment income (loss) ................ $35,671 $52,777 $62,320 $41,895
Net realized gains (losses) from
investment transactions ................... 145,588 610,655 ($1,650) 242
Net change in unrealized appreciation/
depreciation of investments ............... 1,736,544 (184,479) (73,233) (13,221)
------------ ------------ ------------ -----------
Net increase (decrease) in net assets
resulting from operations ................. 1,917,803 478,953 (12,563) 28,916
------------ ------------ ------------ -----------
Variable Life Activities:
Purchase payments ........................... 1,484,570 1,068,630 539,187 300,887
Death benefits .............................. (6,801) (2,001) (2,119) -
Cost of insurance ........................... (353,927) (278,391) (97,258) (58,968)
Net transfers ............................... (12,467) 526,196 (23,735) 318,853
Transfers of policy loans ................... 18,188 83,335 2,417 5,849
Contract administration charges ............. (73,565) (50,297) (27,049) (14,141)
Surrender benefits .......................... (174,227) (163,220) (29,913) (9,313)
------------ ------------ ------------ -----------
Net increase in net assets resulting
from variable annuity activities ............ 881,771 1,184,252 361,530 543,167
------------ ------------ ------------ -----------
Total increase (decrease) in net assets .... 2,799,574 1,663,205 348,967 572,083
Net Assets:
Beginning of year ............................ 5,134,483 3,471,278 1,228,598 656,515
------------ ------------ ------------ -----------
End of year .................................. $7,934,057 $5,134,483 $1,577,565 $1,228,598
============ ============ ============ ===========
</TABLE>
50
<PAGE>
<TABLE>
<CAPTION>
Partners
Portfolio++
-------------------------------
1999 1998
------------ -----------
<S> <C> <C>
Operations:
Net investment income (loss) ................ $20,897 ($33,955)
Net realized gains (losses) from
investment transactions ................... 214,394 486,053
Net change in unrealized appreciation/
depreciation of investments ............... 412,343 (271,429)
------------ -----------
Net increase (decrease) in net assets
resulting from operations ................. 647,634 180,669
------------ -----------
Variable Life Activities:
Purchase payments ........................... 2,466,761 2,301,846
Death benefits .............................. (13,903) -
Cost of insurance ........................... (469,143) (484,655)
Net transfers ............................... 2,236,859 3,388,292
Transfers of policy loans ................... 14,898 11,914
Contract administration charges ............. (126,557) (201,761)
Surrender benefits .......................... (211,368) (138,687)
------------ -----------
Net increase in net assets resulting
from variable annuity activities ............ 3,897,547 4,876,949
------------ -----------
Total increase (decrease) in net assets .... 4,545,181 5,057,618
Net Assets:
Beginning of year ............................ 8,209,694 3,152,076
------------ -----------
End of year .................................. $12,754,875 $8,209,694
============ ===========
Growth
Portfolio++++
-------------------------------
1999 1998
------------ -----------
Operations:
Net investment income (loss) ................ ($56,208) ($47,491)
Net realized gains (losses) from
investment transactions ................... 35,362 140,032
Net change in unrealized appreciation/
depreciation of investments ............... 3,540,972 (261,202)
------------ -----------
Net increase (decrease) in net assets
resulting from operations ................. 3,520,126 (168,661)
------------ -----------
Variable Life Activities:
Purchase payments ........................... 1,370,035 1,577,063
Death benefits .............................. (2,858) (3,745)
Cost of insurance ........................... (342,503) (342,552)
Net transfers ............................... (932,409) (1,352,477)
Transfers of policy loans ................... 15,155 35,632
Contract administration charges ............. (57,224) (53,636)
Surrender benefits .......................... (323,009) (244,500)
------------ -----------
Net increase in net assets resulting
from variable annuity activities ............ (272,813) (384,215)
------------ -----------
Total increase (decrease) in net assets .... 3,247,313 (552,876)
Net Assets:
Beginning of year ............................ 5,764,147 6,317,023
------------ -----------
End of year .................................. $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
51
<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
Portfolio++++ Portfolio++++
------------------------------------- -------------------------------------
1999 1998 1999 1998
----------------- ----------------- ------------------ ----------------
<S> <C> <C> <C> <C>
Operations:
Net investment income (loss) ........... $95,807 $40,458 ($310,681) ($106,277)
Net realized gains (losses) from
investment transactions ........... 675,484 649,737 3,375,626 2,143,029
Net change in unrealized appreciation/
depreciation of investments ....... 330,734 963,306 10,574,337 5,047,623
----------------- ----------------- ------------------ ----------------
Net increase (decrease) in net assets
resulting from operations ......... 1,102,025 1,653,501 13,639,282 7,084,375
----------------- ----------------- ------------------ ----------------
Variable Life Activities:
Purchase payments ...................... 6,666,334 4,640,276 10,979,093 5,974,648
Death benefits ......................... (14,032) (20,055) (38,816) (45,153)
Cost of insurance ...................... (1,603,588) (1,115,035) (2,562,252) (1,459,882)
Net transfers .......................... 1,627,390 2,979,305 8,714,008 2,873,583
Transfers of policy loans .............. 71,994 25,171 68,165 22,413
Contract administration charges ........ (373,064) (297,186) (720,794) (385,848)
Surrender benefits ..................... (726,919) (430,380) (1,358,474) (689,227)
----------------- ----------------- ------------------ ----------------
Net increase in net assets resulting
from variable annuity activities ....... 5,648,115 5,782,096 15,080,930 6,290,534
----------------- ----------------- ------------------ ----------------
Total increase (decrease) in net assets. 6,750,140 7,435,597 28,720,212 13,374,909
Net Assets:
Beginning of year ......................... 19,866,250 12,430,653 28,561,805 15,186,896
----------------- ----------------- ------------------ ----------------
End of year ............................... $26,616,390 $19,866,250 $57,282,017 $28,561,805
================= ================= ================== ================
</TABLE>
[RESTUB]
<TABLE>
<CAPTION>
Asset Manager
Portfolio++++
---------------------------------------
1999 1998
------------------ -------------------
<S> <C> <C>
Operations:
Net investment income (loss) ........... $84,186 $43,537
Net realized gains (losses) from
investment transactions ........... 160,654 202,236
Net change in unrealized appreciation/
depreciation of investments ....... 272,683 136,988
------------------ -------------------
Net increase (decrease) in net assets
resulting from operations ......... 517,523 382,761
------------------ -------------------
Variable Life Activities:
Purchase payments ...................... 1,375,866 834,804
Death benefits ......................... (1,237) -
Cost of insurance ...................... (347,344) (216,443)
Net transfers .......................... 1,102,953 807,683
Transfers of policy loans .............. 3,213 1,050
Contract administration charges ........ (73,304) (49,185)
Surrender benefits ..................... (129,352) (115,461)
------------------ -------------------
Net increase in net assets resulting
from variable annuity activities ....... 1,930,795 1,262,448
------------------ -------------------
Total increase (decrease) in net assets. 2,448,318 1,645,209
Net Assets:
Beginning of year ......................... 3,718,485 2,073,276
------------------ -------------------
End of year ............................... $6,166,803 $3,718,485
================== ===================
</TABLE>
52
<PAGE>
<TABLE>
<CAPTION>
Index 500 Emerging Markets
Portfolio++++ Portfolio+++++
------------------------------------ -------------------------------------
1999 1998 1999 1998
---------------- ----------------- ------------------ ----------------
<S> <C> <C> <C> <C>
Operations:
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 integral part of these financial statements.
53
<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 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
sinvestments 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.
54
<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.
55
<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
56
<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
57
<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.
[GRAPHIC OMITTED]
Philadelphia, Pennsylvania
April 4, 2000
58
<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.
59
<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.
60
<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.
61
<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.
62
<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.
63
<PAGE>
- --------------------------------------------------------------------------------
THE PENN MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For The Years Ended December 31, 1999, 1998 and 1997
(in thousands of dollars)
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Organization and Basis of Presentation
The Penn Mutual Life Insurance Company was founded and commenced business in
1847 as a mutual life insurance company. The Company concentrates primarily on
the sale of individual life insurance and annuity products. The primary products
that the Company currently markets are traditional whole life, term life,
universal life, variable life, immediate annuities and deferred annuities, both
fixed and variable. The Company markets its products through a network of career
agents, independent agents, and independent marketing organizations. The Company
is also involved in the broker-dealer business which offers a variety of
investment products and services and is conducted through the Company's
non-insurance subsidiaries. The Company sells its products in all fifty states
and the District of Columbia.
The accompanying consolidated financial statements have been prepared in
conformity with accounting principles generally accepted in the United States
and include the accounts of The Penn Mutual Life Insurance Company, its wholly
owned life insurance subsidiary, The Penn Insurance and Annuity Company ("PIA"),
and non-insurance subsidiaries (principally broker/dealer and investment
advisory subsidiaries) (the "Company"). All significant intercompany accounts
and transactions have been eliminated in consolidation. The preparation of
financial statements requires management to make estimates and assumptions that
affect the amounts reported in the consolidated financial statements and notes
to the consolidated financial statements.
New Accounting Pronouncements
As of January 1, 1999, the Company adopted Statement of Position (SOP) 97-3,
"Accounting by Insurance and Other Enterprises for Insurance-Related
Assessments." SOP 97-3 provides guidance for determining when and how to measure
assets and liabilities associated with guaranty fund and other insurance related
assessments. The Company also adopted SOP 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use" which gives guidance
on accounting for the costs related to developing, obtaining, modifying and/or
implementing internal use software. The adoption of SOP 97-3 and SOP 98-1 did
not have a material effect on the Company's financial condition or results of
operations.
As of January 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. (SFAS) 130, "Reporting Comprehensive Income." SFAS No. 130
established standards for the reporting and display of comprehensive income and
its components in the financial statements. The initial application of SFAS No.
130, required the reclassification of prior-year financial statements to reflect
the components of comprehensive income.
In June 1998, the FASB issued Statement of Financial Accounting Standards (SFAS)
No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS
No. 133 requires all derivatives to be recognized in the statement of financial
position as either assets or liabilities and measured at fair value. The
corresponding derivative gains and losses should be reported based on hedge
relationships that exist. Changes in the fair value of derivatives that are not
designated as hedges or that do not meet the hedge accounting criteria in SFAS
No. 133, are required to be reported in earnings. In June 1999, the FASB issued
SFAS No. 137 which defers the effective date for implementation of SFAS No. 133
to fiscal years beginning after June 15, 2000. Adoption of SFAS No. 133 is not
expected to have a material effect on the Company's financial condition or
results of operations.
Investments
Debt securities (bonds, notes, redeemable preferred stocks and mortgage-backed
securities) which might be sold prior to maturity are classified as available
for sale. These securities are carried at fair value, with the change in
unrealized gains and losses reported in other comprehensive income. Interest on
debt securities is credited to income as it is earned. Debt securities are
amortized using the scientific method. Prepayment assumptions for loan-backed
and structured securities are obtained from broker dealer survey values or
internal estimates. These assumptions are
64
<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,
65
<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
66
<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,
67
<PAGE>
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements, continued
(In Thousands of Dollars)
- --------------------------------------------------------------------------------
reserves for payment of future policy benefits at December 31, 1999 include
$7,458 related to the remaining 5% of the DI business.
As this is a disposal of a segment of business, the Company has modified the
presentation in the accompanying income statements to separate the results of
operations attributable to this business. Revenue from discontinued operations
for the year ended December 31, 1999, 1998 and 1997 were $16,855, $28,854 and
$29,884, respectively.
The reinsurance agreement is secured for the Company by a collateralized trust
which names the Company as the beneficiary. As of December 31, 1999, the Company
had a reinsurance recoverable from Christian Mutual of $141,707 which was
secured by investment grade securities with a market value of $155,046 held in
trust.
3. INVESTMENTS:
Debt Securities
The following tables summarize the Company's investment in debt securities,
including redeemable preferred stocks. All debt securities are classified as
available for sale and are carried at estimated fair value. Amortized cost is
net of cumulative writedowns for other than temporary declines in value of
$8,703 and $3,056 as of December 31, 1999 and 1998, respectively.
<TABLE>
<CAPTION>
December 31, 1999
--------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
U.S. Treasury securities and U.S.
Government and agency securities $ 10,527 $ 119 $ 178 $ 10,468
States and political subdivisions 11,600 -- 58 11,542
Foreign governments 19,854 758 -- 20,612
Corporate securities 2,678,302 69,875 116,357 2,631,820
Mortgage and other asset-backed securities 2,106,506 9,975 58,011 2,058,470
---------- ---------- ---------- ----------
Total bonds 4,826,789 80,727 174,604 4,732,912
Redeemable preferred stocks 360 -- 11 349
---------- ---------- ---------- ----------
Total $4,827,149 $ 80,727 $ 174,615 $4,733,261
========== ========== ========== ==========
December 31, 1998
--------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------- ---------- ---------- ----------
U.S. Treasury securities and U.S.
Government and agency securities $ 13,109 $ 1,271 $ -- $ 14,380
States and political subdivisions 12,094 2,216 -- 14,310
Foreign governments 24,920 3,323 -- 28,243
Corporate securities 3,058,066 299,489 4,956 3,352,599
Mortgage and other asset-backed securities 2,006,891 86,271 4,399 2,088,763
---------- ---------- ---------- ----------
Total bonds 5,115,080 392,570 9,355 5,498,295
Redeemable preferred stocks 2,696 -- 67 2,629
---------- ---------- ---------- ----------
Total $5,117,776 $ 392,570 $ 9,422 $5,500,924
========== ========== ========== ==========
</TABLE>
68
<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
69
<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
============ ============
1999 1998
------------ ------------
Geographic Concentration
Northeast $ 5,506 $10,273
Midwest 5,515 5,728
South 11,612 12,075
West 5,982 14,552
Valuation Allowance (1,500) (3,800)
------------ ------------
Total $27,115 $38,828
============ ============
The following table presents changes in the mortgage loan valuation allowance
for the years presented:
1999 1998
------------ ------------
Balance at January 1 $ 3,800 $ 3,800
Reduction in provision (2,300) -
Charge-offs - -
------------ ------------
Balance at December 31 $ 1,500 $ 3,800
============ ============
</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.
70
<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>
71
<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
============= ============= =============
The following table summarizes the change in unrealized gains and losses for
investments carried at fair value which are reflected in other comprehensive
income for the year ended December 31.
1999 1998 1997
---------------- ------------- -------------
Unrealized gains/(losses):
Debt securities $ (477,036) $ 86,594 $ 160,850
Equity securities (43) (2,092) 408
Other 5,555 (2,091) (14,581)
---------------- ------------- -------------
(471,524) 82,411 146,677
---------------- ------------- -------------
Less:
Deferred policy acquisition costs 117,050 (12,841) (45,043)
Deferred income taxes 123,937 (24,440) (35,355)
---------------- ------------- -------------
Net change in unrealized gains/(losses) $ (230,537) $ 45,130 $ 66,279
================ ============= =============
The following table sets forth the reclassification adjustment required to avoid
double-counting in comprehensive income items that are included as part of net
income for a period that also had been part of other comprehensive income in
earlier periods:
Reclassification Adjustments 1999 1998 1997
-------------- -------------- -------------
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.
72
<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
--------------- -------------- --------------- --------------
Financial Assets:
<S> <C> <C> <C> <C>
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.
73
<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.
74
<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>
75
<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.
76
<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.
77
<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.
78
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Trustees
The Penn Mutual Life Insurance Company
Philadelphia, Pennsylvania
We have audited the accompanying consolidated balance sheets of The Penn Mutual
Life Insurance Company and subsidiaries as of December 31, 1999 and 1998, and
the related consolidated income statements, statements of changes in equity, and
statements of cash flows for each of the three years in the period ended
December 31, 1999. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of The
Penn Mutual Life Insurance Company and subsidiaries as of December 31, 1999 and
1998, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 1999, in conformity with accounting
principles generally accepted in the United States.
/s/ ERNST & YOUNG LLP
Philadelphia, Pennsylvania
January 28, 2000
79
<PAGE>
- --------------------------------------------------------------------------------
APPENDIX A
- --------------------------------------------------------------------------------
Minimum Initial Premiums
The following table shows for Insureds of varying ages the minimum
initial premium for a Policy with the basic death benefit indicated. The table
assumes the insured will be placed in a nonsmoker class and that no supplemental
benefits will be added to the base Policy.
Issue Age Sex of Basic Death Minimum Initial
of Insured Insured Benefit Premium
- -------------------------------------------------------------------------
25 M $ 50,000 $289.00
- -------------------------------------------------------------------------
30 F $ 75,000 $459.00
- -------------------------------------------------------------------------
35 M $ 75,000 $651.00
- -------------------------------------------------------------------------
40 F $100,000 $931.00
- -------------------------------------------------------------------------
45 M $100,000 $1,368.00
- -------------------------------------------------------------------------
50 F $100,000 $1,456.00
- -------------------------------------------------------------------------
55 M $100,000 $2,257.00
- -------------------------------------------------------------------------
60 F $ 75,000 $1,787.00
- -------------------------------------------------------------------------
65 M $ 75,000 $2,950.00
- -------------------------------------------------------------------------
70 F $ 50,000 $2,117.00
- -------------------------------------------------------------------------
A-1
<PAGE>
- --------------------------------------------------------------------------------
APPENDIX B
- --------------------------------------------------------------------------------
Applicable Percentages
Attained Age Percentage Attained Age Percentage
- --------------------------------------------------------------------------------
0-40 250 61 128
- --------------------------------------------------------------------------------
41 243 62 126
- --------------------------------------------------------------------------------
42 236 63 124
- --------------------------------------------------------------------------------
43 229 64 122
- --------------------------------------------------------------------------------
44 222 65 120
- --------------------------------------------------------------------------------
45 215 66 119
- --------------------------------------------------------------------------------
46 209 67 118
- --------------------------------------------------------------------------------
47 203 68 117
- --------------------------------------------------------------------------------
48 197 69 116
- --------------------------------------------------------------------------------
49 191 70 115
- --------------------------------------------------------------------------------
50 185 71 113
- --------------------------------------------------------------------------------
51 178 72 111
- --------------------------------------------------------------------------------
52 171 73 109
- --------------------------------------------------------------------------------
53 164 74 107
- --------------------------------------------------------------------------------
54 157 75-90 105
- --------------------------------------------------------------------------------
55 150 91 104
- --------------------------------------------------------------------------------
56 146 92 103
- --------------------------------------------------------------------------------
57 142 93 102
- --------------------------------------------------------------------------------
58 138 94 101
- --------------------------------------------------------------------------------
59 134 95 100
- --------------------------------------------------------------------------------
60 130
- --------------------------------------------------------------------------------
B-1
<PAGE>
PROSPECTUS
FOR
CORNERSTONE VUL II
a flexible premium adjustable variable life insurance policy
issued by
THE PENN MUTUAL LIFE INSURANCE COMPANY
and funded through
PENN MUTUAL VARIABLE LIFE ACCOUNT I
The Penn Mutual Life Insurance Company
Philadelphia, PA 19172
800-523-0650
-----------------------------------------------------
The Policy provides life insurance and a cash surrender value that
varies with the investment performance of one or more of the funds set forth
below. These and other Policy provisions are described in this Prospectus.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
<S> <C>
Penn Series Funds, Inc. Manager
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 Incorporated
- --------------------------------------------------------------------------------------------------------------------
Fidelity Investments' Variable Insurance Products Fund Manager
Equity-Income Portfolio Fidelity Management and Research Company
Growth Portfolio Fidelity Management and Research Company
- --------------------------------------------------------------------------------------------------------------------
Fidelity Investments' Variable Insurance Products Fund II Manager
Asset Manager Portfolio Fidelity Management and Research Company
- --------------------------------------------------------------------------------------------------------------------
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
<PAGE>
GUIDE TO READING THIS PROSPECTUS
This prospectus contains information that you should know before you
buy the Policy or exercise any of your rights under the Policy. The purpose of
this prospectus is to provide information on the essential features and
provisions of the Policy and the investment options available under the Policy.
Your rights and obligations under the Policy are determined by the language of
the Policy itself. When you receive your Policy, read it carefully.
The prospectus is arranged as follows:
o The first section is called "Basic Information." It is in a
question and answer format. We suggest you read the Basic
Information section before reading any other section of the
prospectus.
o The next section contains illustrations of a hypothetical
Policy that help clarify how the Policy works. The
"Illustrations" section starts on page 21.
o After the Illustrations section is the "Additional
Information" section. It gives additional information about
Penn Mutual, Penn Mutual Variable Life Account I and the
Policy. It generally does not repeat information that is in
the Basic Information section. A table of contents for the
Additional Information section appears on page 30.
o The financial statements for Penn Mutual and for the Penn
Mutual Variable Life Account I follow the Additional
Information section. They start on page 43.
o Appendices A and B are after the financial statements. The
Appendices are referred to in the Basic Information section.
They provide specific information and examples to help you
understand how the Policy works.
**********
The prospectuses of the funds that accompany this prospectus contain
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?.............................7
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?..........12
How Can I Change My Policy's Investment Allocations?..........................12
What Is a Policy Loan?........................................................13
How Can I Withdraw Money from My Policy?......................................14
What Is the Timing of Transactions Under the Policy?..........................15
How Much Life Insurance Does My Policy Provide?...............................15
Can I Change Insurance Coverage Under My Policy?..............................16
What Are the Supplemental Benefit Riders That I Can Buy?......................17
Do I Have the Right to Cancel My Policy?......................................18
Can I Choose Different Payout Options Under My Policy? .......................18
How Is the Policy Treated for Federal Income Tax Purposes?....................18
How Do I Communicate with Penn Mutual?........................................19
How Does Penn Mutual Communicate with Me?.....................................20
3
<PAGE>
What is the Policy?
The Policy provides life insurance on you or another individual you
name. The value of your Policy will increase or decrease based upon the
performance of the investment options you choose. The death benefit may also
increase or decrease based on investment performance. In addition, the Policy
allows you to allocate a part of your policy value to a fixed interest option
where the value will accumulate interest.
You will have several options under the Policy. Here are some major
ones:
o Determine when and how much you pay to us under the Policy
o Determine when and how much of your policy value to allocate
the investment options
o Borrow from your Policy
o Change the beneficiary who will receive the death benefit
o Change the amount of insurance protection
o Change the death benefit option you have selected under your
Policy
o Surrender or partially surrender your Policy for all or part
of its net cash surrender value
o Choose the form in which you would like the death benefit or
other proceeds paid out from your Policy
Most of these options are subject to limits that are explained later in
this prospectus.
If you want to purchase a Policy, you must complete an application and
submit it to one of our authorized agents. We require satisfactory evidence of
insurability, which may include a medical examination of the proposed insured.
We evaluate the information provided in accordance with our underwriting rules
and then decide whether to accept or not accept the application.
The maturity date of a Policy is the policy anniversary nearest the
insured's 95th birthday. If the Policy is still in force on the maturity date, a
maturity benefit will be paid. The maturity benefit is equal to the policy value
less any policy loan on the maturity date. Upon written request of the owner,
the Policy will continue in force beyond the maturity date. Thereafter, the
death benefit will be the net policy value.
Who Owns the Policy?
You decide who owns the Policy when you apply for it. The owner of the
Policy is the person who can exercise most of the rights under the Policy, such
as the right to choose the death benefit option, the beneficiary, the investment
options, and the right to surrender the Policy. 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. Federal tax law limits the
amount of premium payments you can make relative to the amount of insurance
coverage provided. We will not accept or retain a premium payment that exceeds
the maximum permitted under federal tax law.
If you make a premium payment that exceeds certain other limits imposed
under federal tax law, you could incur a penalty on the amount you take out of
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 and the Policy is in jeopardy
of becoming a "modified endowment contract" under the Code. See How is the
Policy Treated for Federal Income Tax Purposes? below.
Planned Premiums
The Policy Specifications page of your Policy will show the "planned
premium" for the Policy. You choose this amount in the Policy application. We
will send a premium reminder notice to you based upon the planned premium that
you specified in your application. You also 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 Three-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.
5
<PAGE>
You can obtain information on these other methods of premium payment by
contacting your Penn Mutual representative or by contacting our office.
Three-Year No-Lapse Feature
Your Policy will remain in force during the first three policy years,
regardless of investment performance and your net cash surrender value, if
(a) the total premiums you have paid, less any partial surrenders
you made,
equals or exceeds
(b) the "no-lapse premium" specified in your Policy, multiplied by
the number of months the Policy has been in force.
If you increase the specified amount of insurance under your Policy
during the first three policy years, we will extend the three-year no-lapse
provision to three years after the effective date of the increase.
The "no-lapse premium" will generally be less than the monthly
equivalent of the planned premium you specified.
The three-year no-lapse feature will not apply if the amount borrowed
under your Policy results in excessive indebtedness. See What Is a Policy Loan?
later in this section.
Lapse and Reinstatement
If the net cash surrender value of your Policy is not sufficient to pay
Policy charges, and the three- year no-lapse feature is not in effect, we will
notify you of how much premium you will need to pay to keep the Policy in force.
You will have a 61-day "grace period" to make that payment. If you do not 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 you die during the grace period, we will pay the death benefit to
your beneficiary less any unpaid policy charges and outstanding policy loan.
If the Policy terminates, you can reinstate it within five years from
the beginning of the grace period if the insured is alive. You will have to
provide evidence that the insured person still meets our requirements for
issuing insurance. You will also have to pay a minimum amount of premium and be
subject to the other terms and conditions applicable to reinstatements, as
specified in the Policy.
Premiums upon an Increase in the Specified Amount
If you increase the specified amount of insurance, you may wish to pay
an additional premium or make a change in planned premiums. See Changes in the
Specified Amount of Insurance on page 16. We will notify you if an additional
premium or a change in planned premiums is necessary.
6
<PAGE>
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
section. Your policy value will be affected by deductions we make from your
Policy for policy charges.
At any time, your policy value is equal to:
o the net premiums you have paid,
o plus or minus the investment results in the part of your
policy value allocated to the variable investment options,
o plus interest credited to the amount in the part of your
policy value (if any) allocated to the fixed interest option,
o minus 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? later in this section.
For more information on policy values and the variable and fixed
investment options, see More Information About Policy Values in the Additional
Information section of this prospectus.
What Are the Fees and Charges Under the Policy?
Premium Charge
o Premium Charge -- 6.5% (currently reduced to 4.75% for all
premiums paid in excess of the maximum surrender charge) is
deducted from premium payments before allocation to the
investment options. It consists of 2.5% to cover state premium
taxes and 4% (currently reduced to 2.25% for all premiums paid
in excess of the maximum surrender charge) to partially
compensate us for the expense of selling and distributing the
Policies. We will notify you in advance if we change our
current rates.
7
<PAGE>
Monthly Deductions
o Insurance Charge -- A monthly charge for the cost of insurance
protection. The amount of insurance risk we assume varies from
Policy to Policy and from month to month. The insurance charge
therefore also varies. To determine the charge for a particular
month, we multiply the amount of insurance for which we are at
risk by a cost of insurance rate based upon an actuarial table.
The table in your Policy will show the maximum cost of insurance
rates that we can charge. The cost of insurance rates that we
currently apply are generally less than the maximum rates shown
in your Policy. The table of rates we use will vary by attained
age and the insurance risk characteristics. We place insureds in
a rate class when we issue the Policy, based on our examination
of information bearing on insurance risk. Regardless of the table
used, cost of insurance rates generally increase each year that
you own your Policy, as the insured's attained age increases. We
currently place people we insure in the following rate classes: a
smoker, standard nonsmoker or preferred nonsmoker rate class, or
a rate class involving a higher mortality risk (a "substandard
class"). Insureds age 19 and under are placed in a rate class
that does not distinguish between smoker and nonsmoker. They are
assigned to a smoker class at age 20 unless they have provided
satisfactory evidence that they qualify for a nonsmoker class.
When an increase in the specified amount of insurance is
requested, we determine whether a different rate will apply to
the increase. The charge is deducted pro rata from your variable
investment and fixed interest accounts.
o Administrative Charge--- A maximum monthly charge to help cover
our administrative costs. This charge has three parts: (1) a flat
dollar charge of up to $9.00 (Currently, the flat dollar charge
is $9 in the first policy year and $5 thereafter - we will notify
you in advance if we change our current rates); (2) for the first
12 months after the policy date, a charge based on the initial
specified amount of insurance ($0.10 per $1,000 per month of
initial specified amount of insurance); and (3) for the first 12
months after an increase in the specified amount of insurance, a
charge based on the increase ($0.10 per $1,000 increase in the
specified amount of insurance). Administrative expenses relate to
premium billing and collection, recordkeeping, 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.
8
<PAGE>
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. No transfer charge will be made
if the specified amount exceeds $4,999,999. We will notify you before imposing
the charge.
Surrender Charge
If you surrender your Policy within the first 11 policy years or within
11 years of an increase in the specified amount of insurance under your Policy,
we will deduct a surrender charge from your policy value.
With respect to a surrender within the first 11 policy years, the
surrender charge equals (a) plus (b), multiplied by (c), where:
(a) = 25% of the lesser of (i) the sum of all premiums paid in the
Policy and (ii) the maximum surrender charge premium (which is
an amount calculated separately for each Policy and is never
more than 12 no-lapse premiums);
(b) = an administrative charge based on the initial amount of
insurance and the insured's age at the policy date (ranging
from $1.00 up to age 9 to $7.00 at age 60 and over, per $1,000
of initial specified amount of insurance); and
(c) = the applicable surrender factor from the table below in
which the policy year is determined.
With respect to a surrender within 11 years of an increase in the
specified amount of insurance under your Policy, the surrender charge is based
on the amount of the increase and on the age of the insured at the time of the
increase. The charge equals (a) multiplied by (b), where:
(a) = an administrative charge based on the increase in the
initial amount of insurance and the insured's age on the
effective date of the increase (ranging from $1.00 up to age 9
to $7.00 at age 60 and over, per $1,000 of initial specified
amount of insurance, and
(b) = the applicable surrender factor from the table below, assuming
for this purpose only that the first policy year commences
with the policy year in which the increase in specified amount
of insurance becomes effective.
Surrender During Policy Year Surrender Factor
- --------------------------------------------------------------------------------
1st through 7th 1.00
- --------------------------------------------------------------------------------
8th .80
- --------------------------------------------------------------------------------
9th .60
- --------------------------------------------------------------------------------
10th .40
- --------------------------------------------------------------------------------
11th .20
- --------------------------------------------------------------------------------
12th and later 0
- --------------------------------------------------------------------------------
9
<PAGE>
The surrender charge under both of the above scenarios declines by 20%
each policy year after the seventh, to $0 by the 12th policy year so that, after
the 11th policy year, there is no surrender charge.
If the Policy is surrendered within the first 11 policy years, the
surrender charge consists of a sales charge component and an administrative
charge component. The sales charge component is to reimburse us for some of the
expenses incurred in the distribution of the Policies. The sales charge
component, together with the sales charge component of the premium charge, may
be insufficient to recover distribution expenses related to the sale of the
Policies. Our unrecovered sales expenses are paid for from our surplus. The
administrative charge component for surrenders within the first 11 policy years
covers administrative expenses associated with underwriting and issuing the
Policy, including the costs of processing applications, conducting medical
exams, determining insurability and the insured's rate class, and creating and
maintaining Policy records, as well as the administrative costs of processing
surrender requests. If the Policy is surrendered after the first 11 policy
years, but within 11 years of an increase in the specified amount of insurance,
the surrender charge consists solely of an administrative charge for expenses we
incur which are associated with increasing the specific amount of insurance.
We do not anticipate making any profit on the administrative charge
component of the surrender charge.
Partial Surrender Charge
If you partially surrender your Policy, we will deduct the lesser of
$25 or 2% of the amount surrendered. The charge will be deducted from the
available net cash surrender value and will be considered part of the partial
surrender. We also do not anticipate making a profit on this charge.
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 Total
Management Fees and Corporate Accounting Other Fund
(after waiver) Service Fees Fees Expenses Expenses
-------------- --------------- ---------- -------- --------
<S> <C> <C> <C> <C> <C>
Money Market (1) ............... 0.20% 0.15% 0.08% 0.08% 0.51%
Limited Maturity Bond(1) ....... 0.30% 0.15% 0.08% 0.03% 0.56%
Quality Bond(1) ................ 0.35% 0.15% 0.08% 0.10% 0.68%
High Yield Bond(2) ............. 0.50% 0.15% 0.08% 0.09% 0.82%
Flexibly Managed(1) ............ 0.60% 0.15% 0.05% 0.06% 0.86%
Growth Equity(1) ............... 0.65% 0.15% 0.06% 0.05% 0.91%
Large Cap Value(1)* ............ 0.60% 0.15% 0.06% 0.05% 0.86%
Index 500 Fund(1) .............. 0.07% 0.09% 0.06% 0.03% 0.25%(3)
Mid Cap Growth Fund(1) ......... 0.70% 0.15% 0.08% 0.07% 1.00%
Mid Cap Value Fund(1) .......... 0.55% 0.15% 0.08% 0.08% 0.86%
Emerging Growth(2) ............. 0.73% 0.15% 0.07% 0.09% 1.04%
Small 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.
10
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
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
-------------- -------- ----------
<S> <C> <C> <C>
Balanced........................................................... 0.85% 0.18% 1.03%
</TABLE>
- ----------------------
(a) Neuberger Berman Advisers Management Trust (the "Trust") is divided
into portfolios (each a "Portfolio"). Each Portfolio invests in a
corresponding series ("Series") of the Trust. This table shows the current
expenses paid by the Balanced Portfolio and the Portfolio's share of the
current expenses of its Series. See "Expenses" in the Trust's Prospectus.
- --------------------------------------------------------------------------------
Fidelity Investments' Variable Insurance Products Fund (a)
Underlying Fund Annual Expenses (as a % of portfolio average net assets)
<TABLE>
<CAPTION>
Management Other Total Fund
Fee Expenses Expenses
---------- -------- ----------
<S> <C> <C> <C>
Equity-Income.............................................. 0.49% 0.07% 0.56%
Growth..................................................... 0.59% 0.06% 0.65%
</TABLE>
- ----------------------
(a) These expenses are for the last fiscal year. Some of the brokerage
commissions paid by the fund reduced the expenses shown in this table.
Without this reduction, total expenses would have been 0.57% for the Equity
Income Portfolio and 0.66% for the Growth Portfolio.
- --------------------------------------------------------------------------------
11
<PAGE>
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>
- --------------------------------------------------------------------------------
The funds must pay investment management fees and other operating
expenses. The fees and expenses are different for each fund. They reduce the
investment return of each fund. Current fees and expenses of the funds are as
set forth in the Additional Information section of this prospectus.
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:
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<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 conditions;
o transfers may not be made during the free-look period;
o transfers may be made from the fixed interest option only
during the 30-day period following the end of each policy
year.
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 program automatically makes monthly transfers from the money
market variable investment option to one or more of the other investment options
and to the fixed 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 program automatically reallocates your policy value among the
variable investment options in accordance with the proportions you originally
specified. Over time, variations in investment results will change the
allocation percentage. On a quarterly basis, the rebalancing program will
periodically transfer your policy value among the variable investment options to
reestablish the percentages you had chosen. Rebalancing can result in
transferring amounts from a variable investment option with relatively higher
investment performance to one with relatively lower investment performance. The
minimum policy value to start the program is $1,000. If you also have a dollar
cost averaging program in effect, the portion of your policy value invested in
the Money Market Fund may not be included in the Rebalancing Program. You may
discontinue the program at any time.
What Is a Policy Loan?
You may borrow up to 90% of your cash surrender value. The minimum
amount you may borrow is $250.
Interest charged on a policy loan is 5% 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
13
<PAGE>
equivalent to the loan is withdrawn from the variable investment options and the
fixed interest option on a prorated basis (unless you designate a different
withdrawal allocation when you request the loan) and is transferred to a special
loan account. Amounts withdrawn from the investment options cease to participate
in the investment experience of the options. The special loan account will earn
interest at 4% (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;
and
o during the first five policy years, the partial surrender may
not reduce the specified amount of insurance under your Policy
to less than $50,000.
If you elected the Option 1 insurance coverage (see How Much Insurance
Does My Policy Provide? below), a partial surrender will reduce your specific
amount of insurance.
14
<PAGE>
If you have increased the initial specified amount, any reduction will
be applied to the most recent increase.
What Is the Timing of Transactions Under the Policy?
We will ordinarily pay any death benefit, loan proceeds or partial or
full surrender proceeds, and will make transfers among the investment options
and the fixed interest option, within seven days after receipt at our office of
all the documents required for completion of the transaction. Other than the
death benefit, which is determined as of the date of death, transactions will be
based on values at the end of the valuation period in which we receive all
required instructions and necessary documentation. A valuation period is the
period commencing with the close of the New York Stock Exchange and ending at
the close of the next succeeding business day of the New York Stock Exchange.
A planned premium and an unplanned premium which does not require
evaluation of additional insurance risk will be credited to the Policy and the
net premium will be allocated to the designated investment options based on
values at the end of the valuation period in which we receive the premium.
Any premium requiring evaluation of additional insurance risk will be
allocated to the Penn Series Money Market Fund investment option until our
evaluation has been completed and the premium has been accepted. When accepted,
the net premium will be allocated to the investment options you have designated.
We may defer making a payment or transfer from a variable account
investment option if (1) the disposal or valuation of the Separate Account's
assets is not reasonably practicable because the New York Stock Exchange is
closed for other than a regular holiday or weekend, trading is restricted by the
SEC, or the SEC declares that an emergency exists; or (2) the SEC by order
permits postponement of payment to protect our Policy owners.
We may also defer making a payment or transfer from the fixed interest
option for up to six months from the date we receive the written request.
However, we will not defer payment of a partial surrender or policy loan
requested to pay a premium due on a Penn Mutual Policy. If a payment from the
fixed interest option is deferred for 30 days or more, it will bear interest at
a rate of 3% per year compounded annually while it is deferred.
How Much Life Insurance Does My Policy Provide?
In your application for the Policy, you will tell us how much life
insurance coverage you want on the life of the insured. This is called the
"specified amount" of insurance. The minimum specified amount of insurance under
the Policy is $50,000.
Death Benefits Options
When the insured person dies, we will pay the death benefit less the
amount of any outstanding policy loan. We offer two different types of death
benefits payable under the Policy. You choose which one you want in the
application. They are:
o Option 1 -- The death benefit is the greater of (a) the
specified amount of insurance or (b) the "applicable
percentage" of the policy value on the date of the insured's
death.
15
<PAGE>
o Option 2 -- The death benefit is the greater of (a) the
specified amount of insurance plus your policy value on the
date of death, or (b) the "applicable percentage" of the
policy value on the date of the insured's death.
The "applicable percentage" is 250% when the insured has attained age
40 or less and decreases each year to 100% when the insured attains age 95. A
table showing the "applicable percentages" for attained ages 0 to 95 is included
as Appendix B.
If the investment performance of the variable account investment
options you have chosen is favorable, the amount of the death benefit may
increase. However, under Option 1, favorable investment performance will not
ordinarily increase the death benefit for several years and may not increase it
at all, whereas under Option 2, the death benefit will vary directly with the
investment performance of the policy value. To see how and when investment
performance may begin to affect the death benefit, see the Illustrations section
of this prospectus.
Assuming favorable investment performance, the death benefit under
Option 2 will tend to be higher than the death benefit under Option 1. On the
other hand, the monthly insurance charge will be higher under Option 2 to
compensate us for the additional insurance risk we take. 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 $50,000;
o no change may be made in the first policy year and no more
than one change may be made in any policy year; and
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 insured, the requested change will not be
allowed.
Changes in the Specified Amount of Insurance
You may increase the specified amount of insurance, subject to the
following conditions:
o you must submit an application along with evidence of
insurability acceptable to Penn Mutual;
o you must return your Policy so we can amend it to reflect
the increase;
o any increase in the specified amount must be at least $10,000;
and
o no change may be made if it would cause the Policy not to
qualify as insurance under federal income tax law.
16
<PAGE>
If you increase the specified amount within the first three policy
years, the three-year no- lapse period will be extended.
You may decrease the specified amount of insurance, subject to the
following conditions:
o no change may be made in the first policy year;
o no change may be made if it would cause the Policy not to
qualify as insurance under federal income tax law;
o no decrease may be made within one year of an increase in the
specified amount;
o any decrease in the specified amount of insurance must be at
least $5,000 and the specified amount after the decrease must
be at least $50,000.
Tax Consequences
See Federal Income Tax Considerations in the Additional Information
section of this prospectus to learn about possible tax consequences of changing
your insurance coverage under the Policy.
What Are the Supplemental Benefit Riders That I Can Buy?
We offer supplemental benefit riders that may be added to your Policy.
There are monthly charges for the riders, in addition to the charges described
above. If any of these riders are added to your Policy, monthly charges for the
supplemental benefits will be deducted from your policy value as part of the
monthly deduction.
Accidental Death Benefit. Provides a death benefit payable if the
insured's death results from certain accidental causes. There is no
cash value for this benefit.
Additional Insured Term Insurance. Provides a death benefit payable on
the death of an additional insured. More than one rider can be added
to your Policy. There is no cash value for this benefit.
Children's Term Insurance. Provides a death benefit payable on the
death of a covered child. More than one child can be covered. There is
no cash value for this benefit.
Disability Waiver of Monthly Deduction. Provides for the waiver of the
monthly deductions upon total disability of the insured.
Disability Waiver of Monthly Deduction and Disability Monthly Premium
Deposit. Provides for the waiver of the monthly deductions and payment
of stipulated premiums upon total disability of the insured. If Option
1 is in effect at the time this benefit becomes effective, it will be
changed to Option 2.
Guaranteed Continuation of Policy. Guarantees that the Policy will
remain in force and a death benefit will be payable regardless of the
sufficiency of the net cash surrender value.
17
<PAGE>
Guaranteed Option to Increase Specified Amount. Allows the owner to
increase the specified amount without evidence of insurability.
Supplemental Term Insurance. Provides a death benefit payable on the
death of the primary insured. There is no cash value for this benefit.
Additional rules and limits apply to these supplemental benefits. All
supplemental benefits may not be available in your state. Please ask your
authorized Penn Mutual representative for further information or contact our
office.
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. 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
allocated to the Penn Series Money Market Fund investment option.
Can I Choose Different Payout Options Under My Policy?
Choosing a Payout Option
You may choose to receive proceeds from the Policy as a single sum.
This includes proceeds that become payable because of death or full surrender.
Alternatively, you can elect to have proceeds of $5,000 or more applied to any
of a number of other payment options as set forth in your Policy. Periodic
payments may not be less than $50 each.
Changing a Payment Option
You can change the payment option at any time before the proceeds are
payable. If you have not made a choice, the payee may change the payment option
within the period specified in the Policy. The person entitled to the proceeds
may elect a payment option as set forth in the Policy.
Tax Impact
There may be tax consequences to you or your beneficiary depending upon
which payment option is chosen. You should consult a qualified tax adviser
before making that choice.
How Is the Policy Treated for Federal Income Tax Purposes?
Death benefits paid under life insurance policies are not subject to
income tax. Investment gains from your Policy are not subject to income tax as
long as we do not pay them out to you.
Assuming your Policy is not treated as a "modified endowment contract"
under federal income tax law, distributions from the Policy are generally
treated as first recovering the investments in the Policy and
18
<PAGE>
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, P.O. Box 7460, Philadelphia, Pennsylvania
19101-7460, or express all checks and money orders to The Penn Mutual Life
Insurance Company, Receipts Processing C3V, 600 Dresher Road, Horsham,
Pennsylvania 19044.
Certain requests pertaining to your Policy must be made in writing and
be signed and dated by you. They include the following:
o policy loans in excess of $5,000, and full and partial
surrenders,
o change of death benefit option,
o changes in specified amount of insurance,
o change of beneficiary,
o election of payment option for policy proceeds,
o tax withholding elections, and
o grant of telephone transaction privileges to third parties.
You should mail or express these requests to our office. You should
also send notice of the insured person's death and related documentation to our
office. Communications are not treated as "received" until such time as they
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 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 at 800-523-0650. Each
19
<PAGE>
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 each year we will send to you a report showing your current
policy values, premiums paid and deductions made since the last report, any
outstanding policy loans, and any additional premiums permitted under your
Policy. We will also send to you an annual and a semi-annual report for the
Separate Account and for each Fund underlying a subaccount to which you have
allocated policy value, as required by the 1940 Act. In addition, when you pay
premiums (other than by pre authorized check), or if you borrow money under your
Policy, transfer amounts among the investment options or make partial
surrenders, we will send a written confirmation to you.
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<PAGE>
ILLUSTRATIONS
The tables on the following pages show how values under a hypothetical
Policy change with investment performance over an extended period of time. The
tables illustrate how policy values, net cash surrender values and death
benefits under a Policy covering the insured of a given age on the issue date
would vary over time if planned premiums were paid annually and the return on
the assets in the selected funds were a uniform gross annual rate of 0%, 6% and
12%. The values would be different from those shown if the returns averaged 0%,
6% or 12%, but fluctuated over and under those averages throughout the years
shown. The tables also show planned premiums accumulated at 5% interest. The
hypothetical investment rates of return are illustrative only and should not be
deemed a representation of past or future investment rates of return. Actual
rates of return for a particular Policy may be more or less than the
hypothetical investment rates of return and will depend on a number of factors
including the investment allocations made by an owner, prevailing rates and
rates of inflation.
The tables reflect the daily charge against the investments for the
mortality and expense risks we assume, which is equivalent to an effective
annual charge of 0.90% 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 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%. For information on fund expenses, see the
prospectuses of 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, at current rates, 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 account 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 Insured's individual circumstances. Such illustrations may assume
different hypothetical rates of return than those illustrated in the following
tables.
21
<PAGE>
Illustration of Policy Values
Penn Mutual Life Insurance Company
Male Issue Age: 35 Non-Smoker
$750 ANNUAL PREMIUM
$75,000 SPECIFIED AMOUNT
DEATH BENEFIT OPTION 1
USING CURRENT COST OF INSURANCE RATES
<TABLE>
<CAPTION>
0% Hypothetical 6% Hypothetical 12% Hypothetical
Premiums Gross Investment Return Gross Investment Return Gross Investment Return
Accumulated
End of at Net Cash Net Cash Net Cash
Policy 5% Interest Policy Surrender Death Policy Surrender Death Policy Surrender Death
Year Per Year Value Value Benefit Value Value Benefit Value Value Benefit
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 788 381 0 75,000 413 0 75,000 446 0 75,000
2 1,614 898 435 75,000 991 529 75,000 1,089 626 75,000
3 2,483 1,399 936 75,000 1,587 1,124 75,000 1,791 1,328 75,000
4 3,394 1,884 1,421 75,000 2,201 1,738 75,000 2,558 2,096 75,000
5 4,351 2,353 1,891 75,000 2,834 2,371 75,000 3,397 2,935 75,000
6 5,357 2,808 2,345 75,000 3,487 3,025 75,000 4,316 3,853 75,000
7 6,412 3,247 2,784 75,000 4,161 3,698 75,000 5,322 4,859 75,000
8 7,520 3,667 3,297 75,000 4,852 4,482 75,000 6,420 6,050 75,000
9 8,683 4,064 3,787 75,000 5,558 5,280 75,000 7,617 7,339 75,000
10 9,905 4,440 4,255 75,000 6,279 6,094 75,000 8,924 8,738 75,000
15 16,993 5,947 5,947 75,000 10,101 10,101 75,000 17,522 17,522 75,000
20 26,039 6,839 6,839 75,000 14,435 14,435 75,000 31,566 31,566 75,000
25 37,585 6,849 6,849 75,000 19,170 19,170 75,000 54,886 54,886 75,000
30 52,321 5,371 5,371 75,000 23,984 23,984 75,000 93,602 93,602 114,194
</TABLE>
(1) Assumes that no policy loans have been made.
(2) Current values reflect current cost of insurance rates, a monthly
administrative charge of $9.00 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: 35 Non-Smoker
$750 ANNUAL PREMIUM
$75,000 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>
1 788 369 0 75,000 400 0 75,000 432 0 75,000
2 1,614 815 352 75,000 904 442 75,000 998 535 75,000
3 2,483 1,246 783 75,000 1,423 960 75,000 1,615 1,152 75,000
4 3,394 1,662 1,199 75,000 1,955 1,492 75,000 2,287 1,824 75,000
5 4,351 2,061 1,598 75,000 2,500 2,038 75,000 3,018 2,556 75,000
6 5,357 2,443 1,980 75,000 3,060 2,597 75,000 3,815 3,353 75,000
7 6,412 2,807 2,344 75,000 3,631 3,168 75,000 4,683 4,220 75,000
8 7,520 3,152 2,782 75,000 4,214 3,844 75,000 5,628 5,258 75,000
9 8,683 3,477 3,200 75,000 4,809 4,532 75,000 6,658 6,380 75,000
10 9,905 3,783 3,598 75,000 5,417 5,232 75,000 7,782 7,597 75,000
15 16,993 4,964 4,964 75,000 8,592 8,592 75,000 15,143 15,143 75,000
20 26,039 5,387 5,387 75,000 11,855 11,855 75,000 26,671 26,671 75,000
25 37,585 4,558 4,558 75,000 14,749 14,749 75,000 45,085 45,085 75,000
30 52,321 1,638 1,638 75,000 16,476 16,476 75,000 75,561 75,561 92,185
</TABLE>
(1) Assumes that no policy loans have been made.
(2) Guaranteed values reflect guaranteed cost of insurance rates, a monthly
administrative charge of $9.00 per month, and a mortality and expense
risk charge of 0.90% of assets.
(3) Net investment returns are calculated as the hypothetical gross
investment returns less all charges and deductions shown in the
prospectus.
(4) Assumes that the premium is paid at the beginning of each policy year.
Values would be different if the premiums are paid with a different
frequency or in different amounts.
THE HYPOTHETICAL INVESTMENT RATES OF RETURN SHOWN ABOVE AND ELSEWHERE IN THIS
PROSPECTUS ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF
PAST OR FUTURE INVESTMENT RATES OF RETURN. ACTUAL RATES OF RETURN MAY BE MORE OR
LESS THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS INCLUDING THE
INVESTMENT ALLOCATIONS MADE BY AN OWNER, PREVAILING RATES AND RATES OF
INFLATION. THE DEATH BENEFIT AND CASH VALUE FOR A POLICY WOULD BE DIFFERENT FROM
THOSE SHOWN IF THE ACTUAL RATES OF RETURN AVERAGED 0%, 6% OR 12% OVER A PERIOD
OF YEARS BUT ALSO FLUCTUATED ABOVE OR BELOW THOSE AVERAGES FOR INDIVIDUAL POLICY
YEARS. NO REPRESENTATION CAN BE MADE BY THE COMPANY OR THE FUND THAT THESE
HYPOTHETICAL RATES OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER
ANY PERIOD OF TIME.
23
<PAGE>
Illustration of Policy Values
Penn Mutual Life Insurance Company
Male Issue Age: 35 Non-Smoker
$1,200 ANNUAL PREMIUM
$75,000 SPECIFIED AMOUNT
DEATH BENEFIT OPTION 2
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 1,260 802 339 75,802 859 397 75,859 917 455 75,917
2 2,583 1,731 1,268 76,731 1,902 1,439 76,902 2,080 1,617 77,080
3 3,972 2,636 2,173 77,636 2,980 2,518 77,980 3,353 2,891 78,353
4 5,431 3,517 3,055 78,517 4,097 3,634 79,097 4,749 4,287 79,749
5 6,962 4,375 3,913 79,375 5,253 4,790 80,253 6,280 5,817 81,280
6 8,570 5,211 4,748 80,211 6,449 5,987 81,449 7,959 7,496 82,959
7 10,259 6,023 5,560 81,023 7,688 7,225 82,688 9,801 9,338 84,801
8 12,032 6,807 6,437 81,807 8,966 8,596 83,966 11,817 11,447 86,817
9 13,893 7,562 7,284 82,562 10,281 10,003 85,281 14,023 13,745 89,023
10 15,848 8,286 8,101 83,286 11,634 11,449 86,634 16,436 16,251 91,436
15 27,189 11,411 11,411 86,411 18,968 18,968 93,968 32,380 32,380 107,380
20 41,663 13,798 13,798 88,798 27,602 27,602 102,602 58,220 58,220 133,220
25 60,136 15,097 15,097 90,097 37,334 37,334 112,334 99,681 99,681 174,681
30 83,713 14,704 14,704 89,704 47,643 47,643 122,643 166,019 166,019 241,019
</TABLE>
(1) Assumes that no policy loans have been made.
(2) Current values reflect current cost of insurance rates, a monthly
administrative charge of $9.00 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: 35 Non-Smoker
$1,200 ANNUAL PREMIUM
$75,000 SPECIFIED AMOUNT
DEATH BENEFIT OPTION 2
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 1,260 781 319 75,781 838 375 75,838 895 432 75,895
2 2,583 1,632 1,169 76,632 1,797 1,335 76,797 1,970 1,508 76,970
3 3,972 2,459 1,997 77,459 2,789 2,327 77,789 3,147 2,684 78,147
4 5,431 3,264 2,801 78,264 3,814 3,351 78,814 4,435 3,972 79,435
5 6,962 4,043 3,581 79,043 4,872 4,409 79,872 5,844 5,381 80,844
6 8,570 4,798 4,336 79,798 5,963 5,500 80,963 7,385 6,923 82,385
7 10,259 5,527 5,064 80,527 7,086 6,624 82,086 9,070 8,608 84,070
8 12,032 6,229 5,859 81,229 8,244 7,874 83,244 10,914 10,544 85,914
9 13,893 6,904 6,626 81,904 9,435 9,157 84,435 12,930 12,653 87,930
10 15,848 7,551 7,366 82,551 10,660 10,475 85,660 15,136 14,951 90,136
15 27,189 10,318 10,318 85,318 17,276 17,276 92,276 29,684 29,684 104,684
20 41,663 12,125 12,125 87,125 24,588 24,588 99,588 52,423 52,423 127,423
25 60,136 12,472 12,472 87,472 32,089 32,089 107,089 87,739 87,739 162,739
30 83,713 10,612 10,612 85,612 38,826 38,826 113,826 142,406 142,406 217,406
</TABLE>
(1) Assumes that no policy loans have been made.
(2) Guaranteed values reflect guaranteed cost of insurance rates, a monthly
administrative charge of $9.00 per month, and a mortality and expense
risk charge of 0.90% of assets.
(3) Net investment returns are calculated as the hypothetical gross
investment returns less all charges and deductions shown in the
prospectus.
(4) Assumes that the premium is paid at the beginning of each policy year.
Values would be different if the premiums are paid with a different
frequency or in different amounts.
THE HYPOTHETICAL INVESTMENT RATES OF RETURN SHOWN ABOVE AND ELSEWHERE IN THIS
PROSPECTUS ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF
PAST OR FUTURE INVESTMENT RATES OF RETURN. ACTUAL RATES OF RETURN MAY BE MORE OR
LESS THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS INCLUDING THE
INVESTMENT ALLOCATIONS MADE BY AN OWNER, PREVAILING RATES AND RATES OF
INFLATION. THE DEATH BENEFIT AND CASH VALUE FOR A POLICY WOULD BE DIFFERENT FROM
THOSE SHOWN IF THE ACTUAL RATES OF RETURN AVERAGED 0%, 6% OR 12% OVER A PERIOD
OF YEARS BUT ALSO FLUCTUATED ABOVE OR BELOW THOSE AVERAGES FOR INDIVIDUAL POLICY
YEARS. NO REPRESENTATION CAN BE MADE BY THE COMPANY OR THE FUND THAT THESE
HYPOTHETICAL RATES OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER
ANY PERIOD OF TIME.
25
<PAGE>
Illustration of Policy Values
Penn Mutual Life Insurance Company
Female Issue Age: 45 Non-Smoker
$1,500 ANNUAL PREMIUM
$125,000 SPECIFIED AMOUNT
DEATH BENEFIT OPTION 1
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 1,575 800 0 125,000 865 0 125,000 931 0 125,000
2 3,229 1,776 790 125,000 1,965 978 125,000 2,162 1,175 125,000
3 4,965 2,707 1,720 125,000 3,082 2,095 125,000 3,490 2,503 125,000
4 6,788 3,595 2,608 125,000 4,221 3,234 125,000 4,928 3,941 125,000
5 8,703 4,440 3,453 125,000 5,381 4,394 125,000 6,487 5,500 125,000
6 10,713 5,241 4,254 125,000 6,561 5,574 125,000 8,177 7,190 125,000
7 12,824 6,006 5,019 125,000 7,770 6,783 125,000 10,022 9,035 125,000
8 15,040 6,735 5,945 125,000 9,010 8,220 125,000 12,038 11,248 125,000
9 17,367 7,422 6,830 125,000 10,276 9,684 125,000 14,238 13,645 125,000
10 19,810 8,071 7,676 125,000 11,571 11,177 125,000 16,664 16,249 125,000
15 33,986 10,565 10,565 125,000 18,372 18,372 125,000 32,503 32,503 125,000
20 52,079 11,709 11,709 125,000 25,914 25,914 125,000 58,568 58,568 125,000
25 75,170 10,804 10,804 125,000 33,786 33,786 125,000 102,341 102,341 125,000
30 104,641 7,053 7,053 125,000 41,741 41,741 125,000 176,699 176,699 189,068
</TABLE>
(1) Assumes that no policy loans have been made.
(2) Current values reflect current cost of insurance rates, a monthly
administrative charge of $9.00 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
Female Issue Age: 45 Non-Smoker
$1,500 ANNUAL PREMIUM
$125,000 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 1,575 757 0 125,000 821 0 125,000 885 0 125,000
2 3,229 1,627 640 125,000 1,807 820 125,000 1,996 1,009 125,000
3 4,965 2,457 1,471 125,000 2,811 1,824 125,000 3,196 2,210 125,000
4 6,788 3,248 2,261 125,000 3,832 2,845 125,000 4,494 3,507 125,000
5 8,703 3,997 3,010 125,000 4,870 3,883 125,000 5,899 4,912 125,000
6 10,713 4,702 3,715 125,000 5,920 4,933 125,000 7,417 6,430 125,000
7 12,824 5,361 4,374 125,000 6,983 5,996 125,000 9,060 8,073 125,000
8 15,040 5,970 5,180 125,000 8,053 7,264 125,000 10,838 10,048 125,000
9 17,367 6,523 5,931 125,000 9,126 8,534 125,000 12,759 12,166 125,000
10 19,810 7,021 6,626 125,000 10,202 9,807 125,000 14,838 14,444 125,000
15 33,986 8,649 8,649 125,000 15,588 15,588 125,000 28,315 28,315 125,000
20 52,079 8,429 8,429 125,000 20,606 20,606 125,000 49,333 49,333 125,000
25 75,170 4,604 4,604 125,000 23,491 23,491 125,000 82,902 82,902 125,000
30 104,641 0 0 0 21,493 21,493 125,000 140,467 140,467 150,300
</TABLE>
(1) Assumes that no policy loans have been made.
(2) Guaranteed values reflect guaranteed cost of insurance rates, a monthly
administrative charge of $9.00 per month, and a mortality and expense
risk charge of 0.90% of assets.
(3) Net investment returns are calculated as the hypothetical gross
investment returns less all charges and deductions shown in the
prospectus.
(4) Assumes that the premium is paid at the beginning of each policy year.
Values would be different if the premiums are paid with a different
frequency or in different amounts.
THE HYPOTHETICAL INVESTMENT RATES OF RETURN SHOWN ABOVE AND ELSEWHERE IN THIS
PROSPECTUS ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF
PAST OR FUTURE INVESTMENT RATES OF RETURN. ACTUAL RATES OF RETURN MAY BE MORE OR
LESS THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS INCLUDING THE
INVESTMENT ALLOCATIONS MADE BY AN OWNER, PREVAILING RATES AND RATES OF
INFLATION. THE DEATH BENEFIT AND CASH VALUE FOR A POLICY WOULD BE DIFFERENT FROM
THOSE SHOWN IF THE ACTUAL RATES OF RETURN AVERAGED 0%, 6% OR 12% OVER A PERIOD
OF YEARS BUT ALSO FLUCTUATED ABOVE OR BELOW THOSE AVERAGES FOR INDIVIDUAL POLICY
YEARS. NO REPRESENTATION CAN BE MADE BY THE COMPANY OR THE FUND THAT THESE
HYPOTHETICAL RATES OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER
ANY PERIOD OF TIME.
27
<PAGE>
Illustration of Policy Values
Penn Mutual Life Insurance Company
Female Issue Age: 45 Non-Smoker
$2,100 ANNUAL PREMIUM
$125,000 SPECIFIED AMOUNT
DEATH BENEFIT OPTION 2
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 2,205 1,359 372 126,359 1,458 471 126,458 1,558 571 126,558
2 4,520 2,881 1,895 127,881 3,173 2,186 128,173 3,477 2,490 128,477
3 6,951 4,345 3,358 129,345 4,927 3,940 129,927 5,558 4,571 130,558
4 9,504 5,753 4,767 130,753 6,725 5,738 131,725 7,821 6,834 132,821
5 12,184 7,106 6,119 132,106 8,568 7,581 133,568 10,283 9,296 135,283
6 14,998 8,401 7,414 133,401 10,453 9,466 135,453 12,961 11,974 137,961
7 17,953 9,647 8,660 134,647 12,391 11,405 137,391 15,885 14,898 140,885
8 21,056 10,844 10,055 135,844 14,385 13,595 139,385 19,081 18,291 144,081
9 24,314 11,987 11,395 136,987 16,428 15,836 141,428 22,568 21,976 147,568
10 27,734 13,078 12,683 138,078 18,525 18,130 143,525 26,379 25,984 151,379
15 47,581 17,573 17,573 142,593 29,671 29,671 154,671 51,318 51,318 176,318
20 72,910 20,474 20,474 145,474 42,237 42,237 167,237 91,143 91,143 216,143
25 105,238 20,984 20,984 145,984 55,409 55,409 180,409 153,991 153,991 278,991
30 146,498 18,445 18,445 143,445 68,386 68,386 193,386 253,769 253,769 378,769
</TABLE>
(1) Assumes that no policy loans have been made.
(2) Current values reflect current cost of insurance rates, a monthly
administrative charge of $9.00 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.
28
<PAGE>
Illustration of Policy Values
Penn Mutual Life Insurance Company
Female Issue Age: 45 Non-Smoker
$2,100 ANNUAL PREMIUM
$125,000 SPECIFIED AMOUNT
DEATH BENEFIT OPTION 2
USING GUARANTEED COST OF INSURANCE RATES
<TABLE>
<CAPTION>
0% Hypothetical 6% Hypothetical 12% Hypothetical
Premiums Gross Investment Return Gross Investment Return Gross Investment Return
Accumulated
End of at Net Cash Net Cash Net Cash
Policy 5% Interest Policy Surrender Death Policy Surrender Death Policy Surrender Death
Year Per Year Value Value Benefit Value Value Benefit Value Value Benefit
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 2,205 1,305 318 126,305 1,402 415 126,402 1,500 513 126,500
2 4,520 2,710 1,723 127,710 2,991 2,004 127,991 3,285 2,298 128,285
3 6,951 4,064 3,077 129,064 4,620 3,633 129,620 5,224 4,237 130,224
4 9,504 5,364 4,377 130,364 6,288 5,301 131,288 7,331 6,344 132,331
5 12,184 6,611 5,624 131,611 7,994 7,007 132,994 9,620 8,633 134,620
6 14,998 7,800 6,813 132,800 9,736 8,749 134,736 12,106 11,119 137,106
7 17,953 8,930 7,943 133,930 11,513 10,526 136,513 14,806 13,819 139,806
8 21,056 9,997 9,208 134,997 13,320 12,530 138,320 17,737 16,948 142,737
9 24,314 10,995 10,403 135,995 15,152 14,560 140,152 20,914 20,322 145,914
10 27,734 11,923 11,529 136,923 17,008 16,613 142,008 24,362 23,967 149,362
15 47,581 15,504 15,504 140,504 26,620 26,620 151,620 46,655 46,655 171,655
20 72,910 16,903 16,903 141,903 36,308 36,308 161,308 80,514 80,514 205,514
25 105,238 14,435 14,435 139,435 43,919 43,919 168,919 130,706 130,706 255,706
30 146,498 6,097 6,097 131,097 46,343 46,343 171,343 204,556 204,556 329,556
</TABLE>
(1) Assumes that no policy loans have been made.
(2) Guaranteed values reflect guaranteed cost of insurance rates, a monthly
administrative charge of $9.00 per month, and a mortality and expense
risk charge of 0.90% of assets.
(3) Net investment returns are calculated as the hypothetical gross
investment returns less all charges and deductions shown in the
prospectus.
(4) Assumes that the premium is paid at the beginning of each policy year.
Values would be different if the premiums are paid with a different
frequency or in different amounts.
THE HYPOTHETICAL INVESTMENT RATES OF RETURN SHOWN ABOVE AND ELSEWHERE IN THIS
PROSPECTUS ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF
PAST OR FUTURE INVESTMENT RATES OF RETURN. ACTUAL RATES OF RETURN MAY BE MORE OR
LESS THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS INCLUDING THE
INVESTMENT ALLOCATIONS MADE BY AN OWNER, PREVAILING RATES AND RATES OF
INFLATION. THE DEATH BENEFIT AND CASH VALUE FOR A POLICY WOULD BE DIFFERENT FROM
THOSE SHOWN IF THE ACTUAL RATES OF RETURN AVERAGED 0%, 6% OR 12% OVER A PERIOD
OF YEARS BUT ALSO FLUCTUATED ABOVE OR BELOW THOSE AVERAGES FOR INDIVIDUAL POLICY
YEARS. NO REPRESENTATION CAN BE MADE BY THE COMPANY OR THE FUND THAT THESE
HYPOTHETICAL RATES OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER
ANY PERIOD OF TIME.
29
<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.........................................................................31
Penn Mutual Variable Life Account I............................................................................31
The Funds......................................................................................................32
More Information About Policy Values...........................................................................34
Federal Income Tax Considerations..............................................................................36
Sale of Policies...............................................................................................39
Penn Mutual Trustees and Officers..............................................................................39
State Regulation...............................................................................................41
Additional Information.........................................................................................41
Experts........................................................................................................41
Litigation.....................................................................................................41
Independent Auditors...........................................................................................42
Legal Matters..................................................................................................42
Financial Statements...........................................................................................42
Appendix A -..................................................................................................A-1
Sample Minimum Initial Premiums
Appendix B -..................................................................................................B-1
Sample Applicable Percentages Under the Cash Value Accumulation Life Insurance
Qualification Test
</TABLE>
30
<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 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.
31
<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 subclassification 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.
Penn Series-- Emerging Growth Fund-- capital appreciation.
Penn Series -- Small Cap Value Fund (formerly, "Small Capitalization
Fund") -- capital appreciation.
32
<PAGE>
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 Incorporated, 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.
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
33
<PAGE>
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 Policyowners. This could include discontinuance of investment in a Fund.
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
34
<PAGE>
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 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.
35
<PAGE>
Cash Surrender Value
The cash surrender value on a valuation date is the policy value
reduced by any surrender charge that would be assessed if the Policy were
surrendered on that date. The cash surrender value is used to calculate the loan
value.
Net Cash Surrender Value
The net cash surrender value on a valuation date is equal to the net
policy value reduced by any surrender charge that would be imposed if the Policy
were surrendered on that date. The net cash surrender value is used to calculate
the amount available to you for full or partial surrenders.
Federal Income Tax Considerations
The following summary provides a general description of the federal
income tax considerations associated with the Policy and does not purport to be
complete or to cover all situations. This discussion is not intended as tax
advice. Counsel or other competent tax advisers 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 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 the Policy as a life insurance
contract under Section 7702.
Section 817(h) of the Code requires that the investments of each
subaccount of the Separate Account must be "adequately diversified" in
accordance with Treasury regulations in order for the Policy to qualify as a
life insurance contract under Section 7702 of the Code (discussed above). The
Separate Account, through the funds, intends to comply with the diversification
requirements prescribed in Treas. Reg. 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
36
<PAGE>
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 exceed 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.
The rules relating to whether a Policy will be treated as a modified
endowment contract are complex and make it impracticable to adequately describe
them 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 modified endowment contracts will be subject to
the following tax rules. First, all distributions, including distributions upon
surrender and partial withdrawals from such a Policy are treated as ordinary
income subject to tax up to the amount equal to the excess (if any) 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% 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
37
<PAGE>
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% additional tax.
Policy Loan Interest
Generally, personal interest paid on a loan under a Policy which is
owned by an individual is not deductible. In addition, interest on any loan
under a Policy owned by a taxpayer and covering the life of any individual will
generally not be tax deductible. The deduction of interest on policy loans may
also be subject to the restrictions of Section 264 of the Code. An owner should
consult a tax adviser before deducting any interest paid in respect of a policy
loan.
Investment in the Policy
Investment in the Policy means: (i) the aggregate amount of any
premiums or other consideration paid for a Policy, minus (ii) the aggregate
amount received under the Policy which is excluded from gross income of the
owner (except that the amount of any loan from, or secured by, a Policy that is
a modified endowment contract, to the extent such amount is excluded from gross
income, will be disregarded), plus (iii) the amount of any loan from, or secured
by, a Policy that is a modified endowment contract to the extent that such
amount is included in the gross income of the owner.
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, 3% on premiums paid during the
second through fifteenth policy years, and 1.2% on premiums paid after the first
fifteen policy years. Registered representatives may also be paid commissions of
up to 0.25% of policy value. Other allowances and overrides also may be paid.
Registered representatives who meet certain productivity and profitability
standards may be eligible for additional compensation.
For 1999, 1998 and 1997, Penn Mutual received premium payments on the
Policy in the approximate amount of $48,789,746, $50,165,566 and $37,235,661,
respectively, and compensated HTK in the approximate amounts of $236,786,
$261,524 and $152,836, 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 Chairman of the Board and Chief Executive Officer (since
The Penn Mutual Life Board and Chief December 1996), President and Chief Executive Officer
Insurance Company Executive Officer (April 1995 to 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 to 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, N.W. 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, BankAmerica 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
- ------------------------------------------------------------------------------------------------------------
</TABLE>
39
<PAGE>
<TABLE>
<CAPTION>
POSITION WITH
NAME AND ADDRESS PENN MUTUAL PRINCIPAL OCCUPATION DURING PAST FIVE YEARS
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
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 & 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
Philadelphia, PA 19103 Montgomery 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.,
N.W.
P.O. Box 7566
Washington, DC 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), 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.
- ----------------------------------------------------------------------------------------------------------
</TABLE>
40
<PAGE>
<TABLE>
<CAPTION>
NAME PRINCIPAL OCCUPATION DURING PAST FIVE YEARS
- ----------------------------------------------------------------------------------------------------------
<S> <C>
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 Company
Insurance Company (September 1994 to May 1997); Vice President, Security Benefit Insurance
Philadelphia, PA 19172 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
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
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.
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>
Independent Auditors
Ernst & Young LLP serve 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.
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 Accounts and should
be considered only as bearing upon Penn Mutual's ability to meet its obligations
under the Policies.
42
<PAGE>
PENN MUTUAL VARIABLE LIFE ACCOUNT I
STATEMENT OF ASSETS AND LIABILITIES - DECEMBER 31, 1999
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Money Quality High Yield
Total Market Fund+ Bond Fund+ Bond Fund+
------------ ------------ ---------- ----------
<S> <C> <C> <C> <C>
Investment in Common Stock
Number of Shares ........................................................ 26,314,175 808,876 976,640
Cost .................................................................... 331,143,943 $26,314,175 $8,419,173 $9,279,758
Assets:
Investments at market value ............................................. 415,163,095 $26,314,175 $8,412,326 $9,356,213
Dividends receivable .................................................... 99,160 99,160 - -
Liabilities:
Due to(from) the Penn Mutual Life Insurance Company ..................... (409,814) (568,781) 2,945 3,245
------------ ----------- ---------- ----------
Net Assets .............................................................. $415,672,069 $26,982,116 $8,409,381 $9,352,968
============ =========== ========== ==========
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
[RESTUBED FOR ABOVE]
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
Flexibly
Growth Equity Value Equity Managed
Fund+ Fund+ Fund+
----------- ------------ -----------
<S> <C> <C> <C>
Investment in Common Stock
Number of Shares ........................................................ 711,571 1,756,163 3,012,632
Cost .................................................................... $19,153,246 $35,263,907 $56,394,230
Assets:
Investments at market value ............................................. $29,466,217 $39,004,376 $59,107,839
Dividends receivable .................................................... - - -
Liabilities:
Due to(from) the Penn Mutual Life Insurance Company ..................... 15,247 13,831 20,896
----------- ----------- ------------
Net Assets .............................................................. $29,450,970 $38,990,545 $59,086,943
=========== =========== ===========
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
[RESTUBED FOR ABOVE]
<TABLE>
<CAPTION>
Small Emerging
International Capitalization Growth
Equity Fund+ Fund+ Fund+
------------- -------------- ------------
<S> <C> <C> <C>
Investment in Common Stock
Number of Shares ........................................................ 1,273,775 820,791 594,401
Cost .................................................................... $20,526,548 $10,790,412 $11,618,219
Assets:
Investments at market value ............................................. $34,111,715 $10,374,806 $29,529,819
Dividends receivable .................................................... - - -
Liabilities:
Due to(from) the Penn Mutual Life Insurance Company ..................... 16,356 4,031 14,547
----------- ----------- -----------
Net Assets .............................................................. $34,095,359 $10,370,775 $29,515,272
=========== =========== ===========
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
43
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
PENN MUTUAL VARIABLE LIFE ACCOUNT I
STATEMENT OF OPERATIONS - FOR THE YEAR ENDED DECEMBER 31, 1999
Money Quality High Yield
Total Market Fund+ Bond Fund+ Bond Fund+
------------ ------------ ---------- ----------
<S> <C> <C> <C> <C>
Investment Income:
Dividends .............................................................. $ 1,697,544 $ 776,851 $ - $ -
Expense:
Mortality and expense risk charges ..................................... 2,766,443 134,820 62,224 72,682
------------ ----------- ---------- ----------
Net investment income (loss) ........................................... (1,068,899) 642,031 (62,224) (72,682)
------------ ----------- ---------- ----------
Realized and Unrealized Gains (Losses) on
Investments:
Realized gains (losses) from redemption of fund
shares ............................................................ 1,853,264 - 300 416
Capital gains distributions ............................................ 4,604,784 - - -
------------ ----------- ---------- ----------
Net realized gains (losses) from investment
transactions ...................................................... 6,458,048 - 300 416
Net change in unrealized appreciation/depreciation
of investments .................................................... 61,995,442 - 3,611 349,711
------------ ----------- ---------- ----------
Net realized and unrealized gains (losses) on
investments ....................................................... 68,453,490 - 3,911 350,127
------------ ----------- ---------- ----------
Net increase (decrease) in net assets resulting
from operations ................................................... $ 67,384,591 $ 642,031 $(58,313) $277,445
============ =========== ========== ==========
</TABLE>
[RESTUBED FOR ABOVE]
<TABLE>
<CAPTION>
Flexibly
Growth Equity Value Equity Managed
Fund+ Fund+ Fund+
------------- ------------ -----------
<S> <C> <C> <C>
Investment Income:
Dividends .............................................................. $ - $ - $ -
Expense:
Mortality and expense risk charges ..................................... 176,930 317,240 470,251
----------- ----------- -----------
Net investment income (loss) ........................................... (176,930) (317,240) (470,251)
----------- ----------- -----------
Realized and Unrealized Gains (Losses) on
Investments:
Realized gains (losses) from redemption of fund
shares ............................................................ 51,190 (37,587) 16,311
Capital gains distributions ............................................ - - -
----------- ----------- -----------
Net realized gains (losses) from investment
transactions ...................................................... 51,190 (37,587) 16,311
Net change in unrealized appreciation/depreciation
of investments .................................................... 6,911,635 (296,100) 3,692,338
----------- ----------- -----------
Net realized and unrealized gains (losses) on
investments ....................................................... 6,962,825 (333,687) 3,708,649
----------- ----------- -----------
Net increase (decrease) in net assets resulting
from operations ................................................... $ 6,785,895 $ (650,927) $ 3,238,398
=========== =========== ===========
</TABLE>
44
<PAGE>
[RESTUBED FOR ABOVE]
<TABLE>
<CAPTION>
Small Emerging
International Capitalization Growth
Equity Fund+ Fund+ Fund+
------------- -------------- --------
<S> <C> <C> <C>
Investment Income:
Dividends .............................................................. $ - $ - $ -
Expense:
Mortality and expense risk charges ..................................... 226,031 80,192 134,466
----------- ----------- -----------
Net investment income (loss) ........................................... (226,031) (80,192) (134,466)
----------- ----------- -----------
Realized and Unrealized Gains (Losses) on
Investments:
Realized gains (losses) from redemption of fund
shares ............................................................ 1,131,146 8,164 195,921
Capital gains distributions ............................................ - - -
----------- ----------- -----------
Net realized gains (losses) from investment
transactions ...................................................... 1,131,146 8,164 195,921
Net change in unrealized appreciation/depreciation
of investments .................................................... 10,566,719 (63,045) 16,746,334
----------- ----------- -----------
Net realized and unrealized gains (losses) on
investments ....................................................... 11,697,865 (54,881) 16,942,255
----------- ----------- -----------
Net increase (decrease) in net assets resulting
from operations ................................................... $11,471,834 $(135,073) $16,807,789
=========== =========== ===========
</TABLE>
[RESTUBED FOR ABOVE]
+ 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.
45
<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 $12,754,874 $9,011,460
========== ========== =========== ==========
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
PENN MUTUAL VARIABLE LIFE ACCOUNT I
STATEMENT OF OPERATIONS - FOR THE YEAR ENDED DECEMBER 31, 1999 (CONT'D )
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.
46
<PAGE>
[RESTUBBED]
<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>
<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.
47
<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>
48
<PAGE>
<TABLE>
<CAPTION>
Quality Bond Fund+ Flexibly Managed Fund+
------------------------------- ---------------------------------
1999 1998 1999 1998
----------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
Operations:
Net investment income (loss) ................ ($62,224) $252,041 ($470,251) $1,144,764
Net realized gains (losses) from
investment transactions ................... 300 203,736 16,311 5,784,840
Net change in unrealized appreciation/
depreciation of investments ............... 3,611 (14,899) 3,692,338 (4,524,890)
----------- ----------- ------------ ------------
Net increase (decrease) in net assets
resulting from operations ................. (58,313) 440,878 3,238,398 2,404,714
----------- ----------- ------------ ------------
Variable Life Activities:
Purchase payments ........................... 1,355,013 1,155,232 12,696,631 12,234,331
Death benefits .............................. (2,243) (249) (82,516) (17,851)
Cost of insurance ........................... (360,405) (259,658) (3,522,739) (3,137,840)
Net transfers ............................... 1,123,017 1,041,850 (6,182,355) 1,345,485
Transfers of policy loans ................... 11,409 10,440 211,590 139,613
Contract administration charges ............. (73,285) (42,018) (690,067) (646,642)
Surrender benefits .......................... (226,335) (105,331) (1,818,495) (1,299,724)
----------- ----------- ------------ ------------
Net increase in net assets resulting
from variable annuity activities ............ 1,827,171 1,800,266 612,049 8,617,372
----------- ----------- ------------ ------------
Total increase (decrease) in net assets .... 1,768,858 2,241,144 3,850,447 11,022,086
Net Assets:
Beginning of year ............................ 6,640,523 4,399,379 55,236,496 44,214,410
----------- ----------- ------------ ------------
End of year .................................. $8,409,381 $6,640,523 $59,086,943 $55,236,496
=========== =========== ============ ============
Value Equity Fund+ Emerging Growth Fund+
------------------------------- ---------------------------------
1999 1998 1999 1998
----------- ----------- ------------ ------------
Operations:
Net investment income (loss) ................ ($317,240) $181,632 ($134,466) ($29,768)
Net realized gains (losses) from
investment transactions ................... (37,587) 3,177,280 195,921 10,412
Net change in unrealized appreciation/
depreciation of investments ............... (296,100) (904,321) 16,746,334 1,277,385
------------ ------------ ------------ ------------
Net increase (decrease) in net assets
resulting from operations ................. (650,927) 2,454,591 16,807,789 1,258,029
------------ ------------ ------------ ------------
Variable Life Activities:
Purchase payments ........................... 9,300,537 7,712,812 2,612,183 1,376,626
Death benefits .............................. (34,277) (3,109) (7,463) -
Cost of insurance ........................... (2,317,035) (2,002,921) (575,948) (270,389)
Net transfers ............................... (1,332,367) 2,352,575 5,165,425 2,271,306
Transfers of policy loans ................... 83,517 129,894 27,154 949
Contract administration charges ............. (490,439) (471,036) (190,593) (117,695)
Surrender benefits .......................... (1,050,128) (800,734) (260,812) (61,482)
------------ ------------ ------------ ------------
Net increase in net assets resulting
from variable annuity activities ............ 4,159,808 6,917,481 6,769,946 3,199,315
------------ ------------ ------------ ------------
Total increase (decrease) in net assets .... 3,508,881 9,372,072 23,577,735 4,457,344
Net Assets:
Beginning of year ............................ 35,481,664 26,109,592 5,937,537 1,480,193
------------ ------------ ------------ ------------
End of year .................................. $38,990,545 $35,481,664 $29,515,272 $5,937,537
============ ============ ============ ============
</TABLE>
49
<PAGE>
<TABLE>
<CAPTION>
Small
International Equity Fund+ Capitalization Fund +
------------------------------ ----------------------------------
1999 1998 1999 1998
------------ ------------ ------------ -----------
<S> <C> <C> <C> <C>
Operations:
Net investment income (loss) ................ ($226,031) $56,661 ($80,192) ($5,543)
Net realized gains (losses) from
investment transactions ................... 1,131,146 970,588 8,164 135,416
Net change in unrealized appreciation/
depreciation of investments ............... 10,566,719 2,087,405 (63,045) (791,507)
------------ ------------ ------------ -----------
Net increase (decrease) in net assets
resulting from operations ................. 11,471,834 3,114,654 (135,073) (661,634)
------------ ------------ ------------ -----------
Variable Life Activities:
Purchase payments ........................... 6,485,087 4,244,414 3,124,582 2,372,356
Death benefits .............................. (7,506) (15,627) (7,256) (10,571)
Cost of insurance ........................... (1,671,752) (1,050,548) (604,903) (505,718)
Net transfers ............................... (3,336,017) 3,160,776 (12,470) 2,227,491
Transfers of policy loans ................... 72,417 65,814 45,711 11,010
Contract administration charges ............. (408,378) (252,405) (147,833) (165,296)
Surrender benefits .......................... (906,723) (633,058) (228,773) (129,707)
------------ ------------ ------------ -----------
Net increase in net assets resulting
from variable annuity activities ............ 227,128 5,519,366 2,169,058 3,799,565
------------ ------------ ------------ -----------
Total increase (decrease) in net assets .... 11,698,962 8,634,020 2,033,985 3,137,931
Net Assets:
Beginning of year ............................ 22,396,397 13,762,377 8,336,790 5,198,859
------------ ------------ ------------ -----------
End of year .................................. $34,095,359 $22,396,397 $10,370,775 $8,336,790
============ ============ ============ ===========
Limited Maturity
Balanced Portfolio++ Bond Portfolio++
------------------------------ ----------------------------------
1999 1998 1999 1998
------------ ------------ ------------ -----------
Operations:
Net investment income (loss) ................ $35,671 $52,777 $62,320 $41,895
Net realized gains (losses) from
investment transactions ................... 145,588 610,655 ($1,650) 242
Net change in unrealized appreciation/
depreciation of investments ............... 1,736,544 (184,479) (73,233) (13,221)
------------ ------------ ------------ -----------
Net increase (decrease) in net assets
resulting from operations ................. 1,917,803 478,953 (12,563) 28,916
------------ ------------ ------------ -----------
Variable Life Activities:
Purchase payments ........................... 1,484,570 1,068,630 539,187 300,887
Death benefits .............................. (6,801) (2,001) (2,119) -
Cost of insurance ........................... (353,927) (278,391) (97,258) (58,968)
Net transfers ............................... (12,467) 526,196 (23,735) 318,853
Transfers of policy loans ................... 18,188 83,335 2,417 5,849
Contract administration charges ............. (73,565) (50,297) (27,049) (14,141)
Surrender benefits .......................... (174,227) (163,220) (29,913) (9,313)
------------ ------------ ------------ -----------
Net increase in net assets resulting
from variable annuity activities ............ 881,771 1,184,252 361,530 543,167
------------ ------------ ------------ -----------
Total increase (decrease) in net assets .... 2,799,574 1,663,205 348,967 572,083
Net Assets:
Beginning of year ............................ 5,134,483 3,471,278 1,228,598 656,515
------------ ------------ ------------ -----------
End of year .................................. $7,934,057 $5,134,483 $1,577,565 $1,228,598
============ ============ ============ ===========
</TABLE>
50
<PAGE>
<TABLE>
<CAPTION>
Partners
Portfolio++
-------------------------------
1999 1998
------------ -----------
<S> <C> <C>
Operations:
Net investment income (loss) ................ $20,897 ($33,955)
Net realized gains (losses) from
investment transactions ................... 214,394 486,053
Net change in unrealized appreciation/
depreciation of investments ............... 412,343 (271,429)
------------ -----------
Net increase (decrease) in net assets
resulting from operations ................. 647,634 180,669
------------ -----------
Variable Life Activities:
Purchase payments ........................... 2,466,761 2,301,846
Death benefits .............................. (13,903) -
Cost of insurance ........................... (469,143) (484,655)
Net transfers ............................... 2,236,859 3,388,292
Transfers of policy loans ................... 14,898 11,914
Contract administration charges ............. (126,557) (201,761)
Surrender benefits .......................... (211,368) (138,687)
------------ -----------
Net increase in net assets resulting
from variable annuity activities ............ 3,897,547 4,876,949
------------ -----------
Total increase (decrease) in net assets .... 4,545,181 5,057,618
Net Assets:
Beginning of year ............................ 8,209,694 3,152,076
------------ -----------
End of year .................................. $12,754,875 $8,209,694
============ ===========
Growth
Portfolio++++
-------------------------------
1999 1998
------------ -----------
Operations:
Net investment income (loss) ................ ($56,208) ($47,491)
Net realized gains (losses) from
investment transactions ................... 35,362 140,032
Net change in unrealized appreciation/
depreciation of investments ............... 3,540,972 (261,202)
------------ -----------
Net increase (decrease) in net assets
resulting from operations ................. 3,520,126 (168,661)
------------ -----------
Variable Life Activities:
Purchase payments ........................... 1,370,035 1,577,063
Death benefits .............................. (2,858) (3,745)
Cost of insurance ........................... (342,503) (342,552)
Net transfers ............................... (932,409) (1,352,477)
Transfers of policy loans ................... 15,155 35,632
Contract administration charges ............. (57,224) (53,636)
Surrender benefits .......................... (323,009) (244,500)
------------ -----------
Net increase in net assets resulting
from variable annuity activities ............ (272,813) (384,215)
------------ -----------
Total increase (decrease) in net assets .... 3,247,313 (552,876)
Net Assets:
Beginning of year ............................ 5,764,147 6,317,023
------------ -----------
End of year .................................. $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
51
<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
Portfolio++++ Portfolio++++
------------------------------------- -------------------------------------
1999 1998 1999 1998
----------------- ----------------- ------------------ ----------------
<S> <C> <C> <C> <C>
Operations:
Net investment income (loss) ........... $95,807 $40,458 ($310,681) ($106,277)
Net realized gains (losses) from
investment transactions ........... 675,484 649,737 3,375,626 2,143,029
Net change in unrealized appreciation/
depreciation of investments ....... 330,734 963,306 10,574,337 5,047,623
----------------- ----------------- ------------------ ----------------
Net increase (decrease) in net assets
resulting from operations ......... 1,102,025 1,653,501 13,639,282 7,084,375
----------------- ----------------- ------------------ ----------------
Variable Life Activities:
Purchase payments ...................... 6,666,334 4,640,276 10,979,093 5,974,648
Death benefits ......................... (14,032) (20,055) (38,816) (45,153)
Cost of insurance ...................... (1,603,588) (1,115,035) (2,562,252) (1,459,882)
Net transfers .......................... 1,627,390 2,979,305 8,714,008 2,873,583
Transfers of policy loans .............. 71,994 25,171 68,165 22,413
Contract administration charges ........ (373,064) (297,186) (720,794) (385,848)
Surrender benefits ..................... (726,919) (430,380) (1,358,474) (689,227)
----------------- ----------------- ------------------ ----------------
Net increase in net assets resulting
from variable annuity activities ....... 5,648,115 5,782,096 15,080,930 6,290,534
----------------- ----------------- ------------------ ----------------
Total increase (decrease) in net assets. 6,750,140 7,435,597 28,720,212 13,374,909
Net Assets:
Beginning of year ......................... 19,866,250 12,430,653 28,561,805 15,186,896
----------------- ----------------- ------------------ ----------------
End of year ............................... $26,616,390 $19,866,250 $57,282,017 $28,561,805
================= ================= ================== ================
</TABLE>
[RESTUB]
<TABLE>
<CAPTION>
Asset Manager
Portfolio++++
---------------------------------------
1999 1998
------------------ -------------------
<S> <C> <C>
Operations:
Net investment income (loss) ........... $84,186 $43,537
Net realized gains (losses) from
investment transactions ........... 160,654 202,236
Net change in unrealized appreciation/
depreciation of investments ....... 272,683 136,988
------------------ -------------------
Net increase (decrease) in net assets
resulting from operations ......... 517,523 382,761
------------------ -------------------
Variable Life Activities:
Purchase payments ...................... 1,375,866 834,804
Death benefits ......................... (1,237) -
Cost of insurance ...................... (347,344) (216,443)
Net transfers .......................... 1,102,953 807,683
Transfers of policy loans .............. 3,213 1,050
Contract administration charges ........ (73,304) (49,185)
Surrender benefits ..................... (129,352) (115,461)
------------------ -------------------
Net increase in net assets resulting
from variable annuity activities ....... 1,930,795 1,262,448
------------------ -------------------
Total increase (decrease) in net assets. 2,448,318 1,645,209
Net Assets:
Beginning of year ......................... 3,718,485 2,073,276
------------------ -------------------
End of year ............................... $6,166,803 $3,718,485
================== ===================
</TABLE>
52
<PAGE>
<TABLE>
<CAPTION>
Index 500 Emerging Markets
Portfolio++++ Portfolio+++++
------------------------------------ -------------------------------------
1999 1998 1999 1998
---------------- ----------------- ------------------ ----------------
<S> <C> <C> <C> <C>
Operations:
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 integral part of these financial statements.
53
<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 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
sinvestments 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.
54
<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.
55
<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
56
<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
57
<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.
[GRAPHIC OMITTED]
Philadelphia, Pennsylvania
April 4, 2000
58
<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.
59
<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.
60
<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.
61
<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.
62
<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.
63
<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
64
<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,
65
<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
66
<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,
67
<PAGE>
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements, continued
(In Thousands of Dollars)
- --------------------------------------------------------------------------------
reserves for payment of future policy benefits at December 31, 1999 include
$7,458 related to the remaining 5% of the DI business.
As this is a disposal of a segment of business, the Company has modified the
presentation in the accompanying income statements to separate the results of
operations attributable to this business. Revenue from discontinued operations
for the year ended December 31, 1999, 1998 and 1997 were $16,855, $28,854 and
$29,884, respectively.
The reinsurance agreement is secured for the Company by a collateralized trust
which names the Company as the beneficiary. As of December 31, 1999, the Company
had a reinsurance recoverable from Christian Mutual of $141,707 which was
secured by investment grade securities with a market value of $155,046 held in
trust.
3. INVESTMENTS:
Debt Securities
The following tables summarize the Company's investment in debt securities,
including redeemable preferred stocks. All debt securities are classified as
available for sale and are carried at estimated fair value. Amortized cost is
net of cumulative writedowns for other than temporary declines in value of
$8,703 and $3,056 as of December 31, 1999 and 1998, respectively.
<TABLE>
<CAPTION>
December 31, 1999
--------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
U.S. Treasury securities and U.S.
Government and agency securities $ 10,527 $ 119 $ 178 $ 10,468
States and political subdivisions 11,600 -- 58 11,542
Foreign governments 19,854 758 -- 20,612
Corporate securities 2,678,302 69,875 116,357 2,631,820
Mortgage and other asset-backed securities 2,106,506 9,975 58,011 2,058,470
---------- ---------- ---------- ----------
Total bonds 4,826,789 80,727 174,604 4,732,912
Redeemable preferred stocks 360 -- 11 349
---------- ---------- ---------- ----------
Total $4,827,149 $ 80,727 $ 174,615 $4,733,261
========== ========== ========== ==========
December 31, 1998
--------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------- ---------- ---------- ----------
U.S. Treasury securities and U.S.
Government and agency securities $ 13,109 $ 1,271 $ -- $ 14,380
States and political subdivisions 12,094 2,216 -- 14,310
Foreign governments 24,920 3,323 -- 28,243
Corporate securities 3,058,066 299,489 4,956 3,352,599
Mortgage and other asset-backed securities 2,006,891 86,271 4,399 2,088,763
---------- ---------- ---------- ----------
Total bonds 5,115,080 392,570 9,355 5,498,295
Redeemable preferred stocks 2,696 -- 67 2,629
---------- ---------- ---------- ----------
Total $5,117,776 $ 392,570 $ 9,422 $5,500,924
========== ========== ========== ==========
</TABLE>
68
<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.
69
<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
============ ============
1999 1998
------------ ------------
Geographic Concentration
Northeast $ 5,506 $10,273
Midwest 5,515 5,728
South 11,612 12,075
West 5,982 14,552
Valuation Allowance (1,500) (3,800)
------------ ------------
Total $27,115 $38,828
============ ============
The following table presents changes in the mortgage loan valuation allowance
for the years presented:
1999 1998
------------ ------------
Balance at January 1 $ 3,800 $ 3,800
Reduction in provision (2,300) -
Charge-offs - -
------------ ------------
Balance at December 31 $ 1,500 $ 3,800
============ ============
</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.
70
<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>
71
<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
============= ============= =============
The following table summarizes the change in unrealized gains and losses for
investments carried at fair value which are reflected in other comprehensive
income for the year ended December 31.
1999 1998 1997
---------------- ------------- -------------
Unrealized gains/(losses):
Debt securities $ (477,036) $ 86,594 $ 160,850
Equity securities (43) (2,092) 408
Other 5,555 (2,091) (14,581)
---------------- ------------- -------------
(471,524) 82,411 146,677
---------------- ------------- -------------
Less:
Deferred policy acquisition costs 117,050 (12,841) (45,043)
Deferred income taxes 123,937 (24,440) (35,355)
---------------- ------------- -------------
Net change in unrealized gains/(losses) $ (230,537) $ 45,130 $ 66,279
================ ============= =============
The following table sets forth the reclassification adjustment required to avoid
double-counting in comprehensive income items that are included as part of net
income for a period that also had been part of other comprehensive income in
earlier periods:
Reclassification Adjustments 1999 1998 1997
-------------- -------------- -------------
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.
72
<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
--------------- -------------- --------------- --------------
Financial Assets:
<S> <C> <C> <C> <C>
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.
73
<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.
74
<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>
75
<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.
76
<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.
77
<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.
78
<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
79
<PAGE>
APPENDIX A -- MINIMUM INITIAL PREMIUMS
- --------------------------------------------------------------------------------
The following table shows for Insureds of varying ages, the minimum
initial premium for a Policy with the basic death benefit indicated. The table
assumes the Insured will be placed in a nonsmoker class and that no supplemental
benefits will be added to the base Policy.
Minimum
Issue Age of Sex of Basic Death Initial
Insured Insured Benefit Premium
- -----------------------------------------------------------------------------
25 M $ 50,000 $289.00
- -----------------------------------------------------------------------------
30 F $ 75,000 $459.00
- -----------------------------------------------------------------------------
35 M $ 75,000 $651.00
- -----------------------------------------------------------------------------
40 F $100,000 $931.00
- -----------------------------------------------------------------------------
45 M $100,000 $1,368.00
- -----------------------------------------------------------------------------
50 F $100,000 $1,456.00
- -----------------------------------------------------------------------------
55 M $100,000 $2,257.00
- -----------------------------------------------------------------------------
60 F $ 75,000 $1,787.00
- -----------------------------------------------------------------------------
65 M $ 75,000 $2,950.00
- -----------------------------------------------------------------------------
70 F $ 50,000 $2,117.00
- -----------------------------------------------------------------------------
A-1
<PAGE>
- --------------------------------------------------------------------------------
APPENDIX B -- APPLICABLE PERCENTAGES
<TABLE>
<CAPTION>
Attained Age Percentage Attained Age Percentage
- --------------------------- --------------------------- -------------------------- --------------------------
<S> <C> <C> <C> <C>
0-40 250 61 128
- --------------------------- --------------------------- -------------------------- --------------------------
41 243 62 126
- --------------------------- --------------------------- -------------------------- --------------------------
42 236 63 124
- --------------------------- --------------------------- -------------------------- --------------------------
43 229 64 122
- --------------------------- --------------------------- -------------------------- --------------------------
44 222 65 120
- --------------------------- --------------------------- -------------------------- --------------------------
45 215 66 119
- --------------------------- --------------------------- -------------------------- --------------------------
46 209 67 118
- --------------------------- --------------------------- -------------------------- --------------------------
47 203 68 117
- --------------------------- --------------------------- -------------------------- --------------------------
48 197 69 116
- --------------------------- --------------------------- -------------------------- --------------------------
49 191 70 115
- --------------------------- --------------------------- -------------------------- --------------------------
50 185 71 113
- --------------------------- --------------------------- -------------------------- --------------------------
51 178 72 111
- --------------------------- --------------------------- -------------------------- --------------------------
52 171 73 109
- --------------------------- --------------------------- -------------------------- --------------------------
53 164 74 107
- --------------------------- --------------------------- -------------------------- --------------------------
54 157 75-90 105
- --------------------------- --------------------------- -------------------------- --------------------------
55 150 91 104
- --------------------------- --------------------------- -------------------------- --------------------------
56 146 92 103
- --------------------------- --------------------------- -------------------------- --------------------------
57 142 93 102
- --------------------------- --------------------------- -------------------------- --------------------------
58 138 94 101
- --------------------------- --------------------------- -------------------------- --------------------------
59 134 95 100
- --------------------------- --------------------------- -------------------------- --------------------------
60 130
- --------------------------- --------------------------- -------------------------- --------------------------
</TABLE>
B-1
<PAGE>
PROSPECTUS
FOR
CORNERSTONE VUL III
a flexible premium adjustable variable life
insurance policy issued by THE PENN MUTUAL LIFE
INSURANCE COMPANY
and funded through
PENN MUTUAL VARIABLE LIFE ACCOUNT I
The Penn Mutual Life Insurance Company
Philadelphia, PA 19172
800-523-0650
The Policy provides life insurance and a cash surrender value that
varies with the investment performance of one or more of the funds set forth
below. These and other Policy provisions are described in this Prospectus.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
<S> <C>
Penn Series Funds, Inc. Manager
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 Incorporated
- --------------------------------------------------------------------------------------------------------------------
Fidelity Investments' Variable Insurance Products Fund Manager
Equity-Income Portfolio Fidelity Management and Research Company
Growth Portfolio Fidelity Management and Research Company
- --------------------------------------------------------------------------------------------------------------------
Fidelity Investments' Variable Insurance Products Fund II Manager
Asset Manager Portfolio Fidelity Management and Research Company
- --------------------------------------------------------------------------------------------------------------------
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" section start on
page 21.
o After the Illustrations section is the "Additional Information"
section. It gives additional information about Penn Mutual, Penn Mutual
Variable Life Account I and the Policy. It generally does not repeat
information that is in the Basic Information section. A table of
contents for the Additional Information section appears on page 38.
o The financial statements for Penn Mutual and Penn Mutual Variable Life
Account I follow the Additional Information section. They start on page
52.
o Appendices A and B are after the financial statements. The Appendices
are referred to in the Basic Information section. They provide specific
information and examples to help you understand how the Policy works.
**********
The prospectuses of the funds that accompany this prospectus contains
important information that you should know about the investments that may be
made under the Policy. You should read the relevant prospectus(es) carefully
before you invest.
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?.............................7
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?..........12
How Can I Change My Policy's Investment Allocations?..........................12
What Is a Policy Loan?........................................................13
How Can I Withdraw Money from My Policy?......................................14
What Is the Timing of Transactions Under the Policy?..........................14
How Much Life Insurance Does the Policy Provide?..............................15
Can I Change Insurance Coverage Under My Policy?..............................16
What Are the Supplemental Benefit Riders That I Can Buy?......................17
Do I Have the Right to Cancel My Policy?......................................18
Can I Choose Different Payout Options Under My Policy? .......................19
How Is the Policy Treated for Federal Income Tax Purposes?....................19
How Do I Communicate With Penn Mutual?........................................19
How Does Penn Mutual Communicate With Me?.....................................20
3
<PAGE>
What Is the Policy?
The Policy provides life insurance on you or another individual you
name. The value of your Policy will increase or decrease based upon the
performance of the investment options you choose. The death benefit may also
increase or decrease based on investment performance. In addition, the Policy
allows you to allocate a part of your policy value to a fixed interest option
where the value will accumulate interest.
You will have several options under the Policy. Here are some major
ones:
o Determine when and how much you pay to us under the Policy
o Determine when and how much to allocate your policy value to the
investment options
o Borrow from your Policy
o Change the beneficiary who will receive the death benefit
o Change the amount of insurance protection
o Change the death benefit option you have selected under your Policy
o Surrender or partially surrender your Policy for all or part of its net
cash surrender value
o Choose the form in which you would like the death benefit or other
proceeds paid out from your Policy
Most of these options are subject to limits that are explained later in
this prospectus.
If you want to purchase a Policy, you must complete an application and
submit it to one of our authorized agents. We require satisfactory evidence of
insurability, which may include a medical examination of the proposed insured.
We evaluate the information provided in accordance with our underwriting rules
and then decide whether to accept or not accept the application.
The maturity date of a Policy is the policy anniversary nearest the
insured's 100th birthday. If the Policy is still in force on the maturity date,
a maturity benefit will be paid. The maturity benefit is equal to the policy
value less any policy loan on the maturity date. Upon written request of the
owner, the policy will continue in force beyond the maturity date. Thereafter,
the death benefit will be the net policy value.
Who Owns the Policy?
You decide who owns the Policy when you apply for it. The owner of the
Policy is the person who can exercise most of the rights under the Policy, such
as the right to choose the death benefit option, the beneficiary, the investment
options, and the right to surrender the Policy. 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. If you have chosen to
qualify your Policy as life insurance under the Guideline Premium\Cash Value
Corridor Test of the Internal Revenue Code, federal tax law limits the amount of
premium payments you may make in relation to the amount of life insurance
provided under the Policy. We will not accept or retain a premium payment that
exceeds the maximum permitted under federal tax law.
If you make a premium payment that exceeds certain other limits imposed
under federal tax law, you could incur a penalty on the amount you take out of
the Policy. We will monitor the Policy and will attempt to notify you on a
timely basis if you are about to exceed this limit and the Policy is in jeopardy
of becoming a "modified endowment contract" under the Code. See How Much Life
Insurance Does the Policy Provide? and How Is the Policy Treated for Federal
Income Tax Purposes? below.
Planned Premiums
The Policy Specifications page of your Policy will show the "planned
premium" for the Policy. You choose this amount in the Policy application. We
will send a premium reminder notice to you based upon the planned premium that
you specified in your application. You also chose in your application how often
to pay planned premiums -- annually, semi-annually, quarterly or monthly. You
are not required to pay the planned premium as long as your Policy has
sufficient net cash surrender value to pay Policy charges. You need only pay
enough premium to maintain net cash surrender value sufficient to pay Policy
charges. See Three Year No-Lapse Feature and Lapse and Reinstatement below.
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.
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<PAGE>
We will also accept premiums:
o by wire or by exchange from another insurance company,
o via an electronic funds transfer program (any owner interested in
making monthly premium payments must use this method), or
o if we agree to it, through a salary deduction plan with your employer.
You can obtain information on these other methods of premium payment by
contacting your Penn Mutual representative or by contacting our office.
Three Year No-Lapse Feature
Your Policy will remain in force during the first three policy years,
regardless of investment performance and your net cash surrender value, if
(a) the total premiums you have paid, less any partial surrenders you
made,
equal or exceeds
(b) the "no-lapse premium" specified in your Policy, multiplied by the
number of months the Policy has been in force.
If you increase the specified amount of insurance under your Policy
during the first three policy years, we will extend the three year no-lapse
provision to three years after the effective date of the increase.
The "no-lapse premium" will generally be less than the monthly
equivalent of the planned premium you specified.
The three year no-lapse feature will not apply if the amount borrowed
under your Policy results in excessive indebtedness. See What Is a Policy Loan?
later in this section.
Lapse and Reinstatement
If the net cash surrender value of your Policy is not sufficient to pay
Policy charges, and the three-year no-lapse feature is not in effect, we will
notify you of how much premium you will need to pay to keep the Policy in force.
You will have a 61 day "grace period" 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 you die during the grace period, we will pay the death benefit to
your beneficiary less any unpaid Policy charges and outstanding policy loan.
If the Policy terminates, you can reinstate it within five years from
the beginning of the grace period if the insured is alive. You will have to
provide evidence that the insured person still meets our requirements for
issuing insurance. You will also have to pay a minimum amount of premium and be
subject to the other terms and conditions applicable to reinstatements, as
specified in the Policy.
6
<PAGE>
Premiums Upon an Increase in the Specified Amount.
If you increase the specified amount of insurance, you may wish to pay
an additional premium or make a change in planned premiums. See Changes in the
Specified Amount of Insurance on page 17. We will notify you if an additional
premium or a change in planned premiums is necessary.
How Will the Value of the Policy Change Over Time?
From each premium payment you make, we deduct a premium charge. We
allocate the rest to the investment options you have selected (except, in some
states, the net first premium 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 3%. The current declared rate will appear in the annual statement we will
send to you. If you want to know what the current declared rate is, simply call
or write to us. Amounts you allocate to the fixed interest option will not be
subject to the mortality and expense risk charge described later in this
section. Your policy value will be affected by deductions we make from your
Policy for policy charges.
At any time, your policy value is equal to:
o the net premiums you have paid,
o plus or minus the investment results in the part of your policy value
allocated to the variable investment options,
o plus interest credited to the amount in the part of your policy value
(if any) allocated to the fixed interest option,
o minus 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? later in this section.
For more information on policy values and the variable and fixed
investment options, see More Information About Policy Values in the Additional
Information section of this prospectus.
What Are the Fees and Charges Under the Policy?
Premium Charge
o Premium Charge - 7.5% (currently reduced to 5.75% for all premiums paid
in excess of the maximum surrender charge) is deducted from premium
payments before allocation to the
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<PAGE>
investment options. It consists of 3.5% to cover state premium taxes
and the federal income tax burden (DAC tax) that we expect will result
from the receipt of premiums and 4% (currently reduced to 2.25% for all
premiums paid in excess of the maximum surrender charge) to partially
compensate us for the expense of selling and distributing the Policies.
State premium taxes range from 0.5% to 3.5%; some states do not impose
premium taxes. We will notify you in advance if we change our current
rates.
Monthly Deductions
o Insurance Charge - A monthly charge for the cost of insurance
protection. The amount of insurance risk we assume varies from Policy
to Policy and from month to month. The insurance charge therefore also
varies. To determine the charge for a particular month, we multiply the
amount of insurance for which we are at risk by a cost of insurance
rate based upon an actuarial table. The table in your Policy will show
the maximum cost of insurance rates that we can charge. The cost of
insurance rates that we currently apply are generally less than the
maximum rates shown in your Policy. The table of rates we use will vary
by attained age and the insurance risk characteristics. We place
insureds in a rate class when we issue the Policy, based on our
examination of information bearing on insurance risk. Regardless of the
table used, cost of insurance rates generally increase each year that
you own your Policy, as the insured's attained age increases. We
currently place people we insure in the following rate classes: a
smoker, nonsmoker or preferred nonsmoker rate class, or a rate class
involving a higher mortality risk (a "substandard class"). Insureds age
19 and under are placed in a rate class that does not distinguish
between smoker and nonsmoker. They are assigned to a smoker class at
age 20 unless they have provided satisfactory evidence that they
qualify for a nonsmoker class. When an increase in the specified amount
of insurance is requested, we determine whether a different rate will
apply to the increase. The charge is deducted pro-rata from your
variable investment and fixed interest accounts.
o Administrative Charge - A monthly charge to help cover our
administrative costs. This charge has two parts: (1) a flat dollar
charge of up to $9 (Currently, the flat charge is $8 - we will notify
you in advance if we change our current rates); and (2) for the first
12 months after the policy date, a charge based on the initial
specified amount of insurance ($0.10 per $1,000 per month of initial
specified amount of insurance), and for the first 12 months after an
increase in the specified amount of insurance, a charge based on the
increase ($0.10 per $1,000 increase in the specified amount of
insurance). Administrative expenses relate to premium billing and
collection, recordkeeping, 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. Our
current charge is 0.45%. We will notify you in advance if we
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<PAGE>
change our current rates. We may realize a profit from this charge, and if we
do, it will be added to our surplus.
The mortality risk we assume is the risk that the persons we insure may
die sooner than anticipated and that Penn Mutual will pay an aggregate amount of
death benefits greater than anticipated. The expense risk we assume is the risk
that expenses incurred in issuing and administering the policies and the
Separate Account will exceed the amount we charge for administration.
Transfer Charge
We reserve the right to impose a $10 charge on any transfer of policy
value among investment funds and/or the fixed interest option if the transfer
exceeds 12 transfers in a policy year. We will notify policy owners in advance
if we decide to impose the charge. We will not impose a charge on any transfer
made under dollar cost averaging or asset rebalancing. Also, we will not impose
a charge on any transfer which exceeds $4,999,999.
Surrender Charge
If you surrender your Policy within the first 11 policy years or within
11 years of an increase in the specified amount of insurance under your Policy,
we will deduct a surrender charge from your policy value.
With respect to a surrender within the first 11 policy years, the
surrender charge equals (a) plus (b), multiplied by (c), where:
(a) = 25% of the lesser of (i) the sum of all premiums paid and (ii)
the maximum surrender charge premium (which is an amount calculated
separately for each Policy);
(b) = an administrative charge based on the initial amount of insurance
and the Insured's age at the issue date (ranging from $1.00 up to
attained age 9 to $7.00 at age 60 and over, per $1,000 of initial
specified amount of insurance); and
(c) = the applicable surrender factor from the table below in which the
policy year is determined.
With respect to a surrender within 11 years of an increase in the
specified amount of insurance under your Policy, the surrender charge is based
on the amount of the increase and on the attained age of the insured at the time
of the increase. The charge equals (a) multiplied by (b), where:
(a) = an administrative charge based on the increase in the initial
amount of insurance and the insured's attained age on the effective
date of the increase (ranging from $1.00 up to attained age 9 to $7.00
at attained age 60 and over, per $1,000 is initial specified amount of
insurance; and
(b) = the applicable surrender factor from the table below, assuming
for this purpose only that the first policy year commences with the
policy year in which the increase in specified amount of insurance
becomes effective.
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<PAGE>
- --------------------------------------------------------------------------------
Surrender During Policy Year Surrender Factor
- --------------------------------------------------------------------------------
1st through 7th 1.00
- --------------------------------------------------------------------------------
8th .80
- --------------------------------------------------------------------------------
9th .60
- --------------------------------------------------------------------------------
10th .40
- --------------------------------------------------------------------------------
11th .20
- --------------------------------------------------------------------------------
12th and later 0
- --------------------------------------------------------------------------------
If the Policy is surrendered within the first 11 policy years, the
surrender charge consists of a sales charge component and an administrative
charge component. The sales charge component is to reimburse us for some of the
expenses incurred in the distribution of the Policies. The sales charge
component, together with the sales charge component of the premium charge, may
be insufficient to recover distribution expenses related to the sale of the
Policies. Our unrecovered sales expenses are paid for from our surplus. The
administrative charge component covers administrative expenses associated with
underwriting and issuing the Policy, including the costs of processing
applications, conducting medical exams, determining insurability and the
insured's rate class, and creating and maintaining Policy records, as well as
the administrative costs of processing surrender requests.
If the Policy is surrendered after the first 11 years, but within 11
years of an increase in the specified amount of insurance, the surrender charge
consists solely of an administrative charge for administrative expenses
associated with the increase in the specified amount of insurance.
We do not anticipate making any profit on the administrative charge
component of the surrender charge.
Partial Surrender Charge
If you partially surrender your Policy, we will deduct the lesser of
$25 or 2% of the amount surrendered. The charge will be deducted from the
available net cash surrender value and will be considered part of the partial
surrender. We also do not anticipate making a profit on this charge.
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>
Management Administrative Total
Fees and Corporate Accounting Other Fund
(after waiver) Service Fees Fees Expenses Expenses
-------------- -------------- ---------- -------- --------
<S> <C> <C> <C> <C> <C>
Money Market (1) .......... 0.20% 0.15% 0.08% 0.08% 0.51%
Limited Maturity Bond(1) .. 0.30% 0.15% 0.08% 0.03% 0.56%
Quality Bond(1) ........... 0.35% 0.15% 0.08% 0.10% 0.68%
High Yield Bond(2) ........ 0.50% 0.15% 0.08% 0.09% 0.82%
Flexibly Managed(1) ....... 0.60% 0.15% 0.05% 0.06% 0.86%
Growth Equity(1) .......... 0.65% 0.15% 0.06% 0.05% 0.91%
Large Cap Value(1)* ....... 0.60% 0.15% 0.06% 0.05% 0.86%
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
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% 0.86%
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)
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.
- --------------------------------------------------------------------------------
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.
11
<PAGE>
- --------------------------------------------------------------------------------
Morgan Stanley's The Universal Institutional Funds, Inc.
Underlying Fund Annual Expenses (as a % of portfolio average net assets)
<TABLE>
<CAPTION>
Management Other Total Fund
Fee Expenses Expenses
---------- -------- -----------
<S> <C> <C> <C>
Emerging Markets Equity (International)......... 1.25% 0.50% 1.75%
</TABLE>
- --------------------------------------------------------------------------------
Are There Other Charges That Penn Mutual Could Deduct in the Future?
We currently make no charge against policy values to pay federal income
taxes on investment gains. However, we reserve the right to do so in the event
there is a change in the tax laws. We currently do not expect that any such
charge will be necessary.
Under current laws, we may incur state and local taxes (in addition to
premium taxes) in several states. At present, these taxes are not significant.
If there is a material change in applicable state or local tax laws, we reserve
the right to make such deductions for such taxes.
How Can I Change My Policy's Investment Allocations?
Future Premium Payments
You may change the investment allocation for future premium payments at
any time. You make your original allocation in the application for your Policy.
The percentages you select for allocating premium payments must be in whole
numbers and must equal 100% in total.
Transfers Among Existing Investment Options
You may also transfer amounts from one investment option to another,
and to and from the fixed interest option. To do so, you must tell us how much
to transfer, either as a percentage or as a specific dollar amount. Transfers
are subject to the following conditions:
o the minimum amount that may be transferred is $250 (or the amount held
under the investment options from which you are making the transfer, if
less);
o if less than the full amount held under an investment option is
transferred, the amount remaining under the investment option must be
at least $250;
o we may defer transfers under certain conditions;
o transfers may not be made during the free look period;
o transfers may be made from the fixed interest option only during the 30
day period following the end of each policy year.
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<PAGE>
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 program automatically makes monthly transfers from the money
market variable investment option to one or more of the other investment options
and to the fixed interested option. You choose the investment options and the
dollar amount and timing of the transfers. The program is designed to reduce the
risks that result from market fluctuations. It does this by spreading out the
allocation of your money to investment options over a longer period of time.
This allows you to reduce the risk of investing most of your money at a time
when market prices are high. The success of this strategy depends on market
trends. The program allows owners to take advantage of investment fluctuations,
but does not assume a profit or protect against lows in a declining market. To
begin the program, the planned premium for the year must be $600 and the amount
transferred each month must be at least $50. You may discontinue the program at
any time.
Asset Rebalancing
This program automatically reallocates your policy value among the
variable investment options in accordance with the proportions you originally
specified. Over time, variations in investment results will change the
allocation percentage. On a quarterly basis, the rebalancing program will
periodically transfer your policy value among the variable investment options to
reestablish the percentages you had chosen. Rebalancing can result in
transferring amounts from a variable investment option with relatively higher
investment performance to one with relatively lower investment performance. The
minimum policy value to start the program is $1,000. If you also have a dollar
cost averaging program in effect, the portion of your policy value invested in
the Money Market Fund may not be included in the Rebalancing Program. You may
discontinue the program at any time.
What Is a Policy Loan?
You may borrow up to 90% of your cash surrender value. The minimum
amount you may borrow is $250.
Interest charged on a policy loan is 4.0% and is payable at the end of
each policy year. If interest is not paid when due, it is added to the loan. A
policy loan does not reduce your policy value. An amount equivalent to the loan
is withdrawn from the variable investment options and the fixed interest option
on a prorated basis (unless you designate a different withdrawal allocation when
you request the loan) and is transferred to a special loan account. Amounts
withdrawn from the investment options cease to participate in the investment
experience of the options. The special loan account is guaranteed to earn
interest at 3.0% during the first ten policy years and 3.75% thereafter. With
the interest we credit to the special loan account, the net cost of the policy
loan is 1% during the first ten policy years and 0.25% thereafter.
You may repay all or part of a loan at any time. Upon repayment, an
amount equal to the repayment will be transferred from the special loan account
to the investment options you specify. If
13
<PAGE>
you do not specify the allocation for the repayment, the amount will be
allocated in accordance with your current standing allocation instructions.
If your Policy lapses (see What Payments Must Be Paid Under the
Policy?) and you have a loan outstanding under the Policy, you may have to pay
federal income tax on the amount of the loan, to the extent there is gain in the
Policy. See Federal Income Tax Considerations in the Additional Information
section of this prospectus.
The amount of any loan outstanding under your Policy on the death of
the 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
$50,000.
If you elected the Option 1 insurance coverage (see How Much Insurance
Does My Policy Provide? below), a partial surrender may reduce your specific
amount of insurance.
If you have increased the initial specified amount, any reduction will
be applied to the most recent increase.
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<PAGE>
What Is the Timing of Transactions Under the Policy?
We will ordinarily pay any death benefit, loan proceeds or partial or
full surrender proceeds, and will make transfers among the investment options
and the fixed interest option, within seven days after receipt at our office of
all the documents required for completion of the transaction. Other than the
death benefit, which is determined as of the date of death, transactions will be
based on values at the end of the valuation period in which we receive all
required instructions and necessary documentation. A valuation period is the
period commencing with the close of the New York Stock Exchange and ending at
the close of the next succeeding business day of the New York Stock Exchange.
A planned premium and an unplanned premium which does not require
evaluation of additional insurance risk will be credited to the Policy and the
net premium will be allocated to the designated investment options based on
values at the end of the valuation period in which we receive the premium.
Any premium requiring evaluation of additional insurance risk will be
allocated to the Penn Series money market investment option until our evaluation
has been completed and the premium has been accepted. When accepted, the net
premium will be allocated to the investment options you have designated.
We may defer making a payment or transfer from a variable account
investment option if (1) the disposal or valuation of the Separate Account's
assets is not reasonably practicable because the New York Stock Exchange is
closed for other than a regular holiday or weekend, trading is restricted by the
SEC, or the SEC declares that an emergency exists; or (2) the SEC by order
permits postponement of payment to protect our Policy owners.
We may also defer making a payment or transfer from the fixed interest
option for up to six months from the date we receive the written request.
However, we will not defer payment of a partial surrender or policy loan
requested to pay a premium due on a Penn Mutual Policy. If a payment from the
fixed interest option is deferred for 30 days or more, it will bear interest at
a rate of 3% per year compounded annually while it is deferred.
How Much Life Insurance Does the Policy Provide?
In your application for the Policy, you will tell us how much life
insurance coverage you want on the life of the insured. This is called the
"specified amount" of insurance. The minimum specified amount of insurance that
you can purchase is $50,000.
Death Benefit Options
When the insured dies, we will pay the beneficiary the death benefit
less the amount of any outstanding loan. We offer two different types of death
benefits payable under the Policy. You choose which one you want in the
application. They are:
o Option 1 - The death benefit is the greater of (a) the specified amount
of insurance or (b) the "applicable percentage" of the policy value on
the date of the insured's death.
15
<PAGE>
o Option 2 - The death benefit is the greater of (a) the specified amount
of insurance plus your policy value on the date of death, or (b) the
"applicable percentage" of the policy value on the date of the
insured's death.
The "applicable percentages" depend on the life insurance qualification
test you chose on the application. If you chose the Guideline Premium Test/Cash
Value Corridor Test, the "applicable percentage" is 250% when the insured has
attained age 40 or less and decreases to 100% when the insured attains age 100.
For the Cash Value Accumulation Test, the "applicable percentages" will vary by
attained age and the insurance risk characteristics. A table showing "sample
applicable percentages" is included as Appendix B.
If the investment performance of the variable account investment
options you have chosen is favorable, the amount of the death benefit may
increase. However, under Option 1, favorable investment performance will not
ordinarily increase the death benefit for several years and may not increase it
at all, whereas under Option 2, the death benefit will vary directly with the
investment performance of the policy value. To see how and when investment
performance may begin to affect the death benefit, see the Illustrations section
of this prospectus.
Assuming favorable investment performance, the death benefit under
Option 2 will tend to be higher than the death benefit under Option 1. On the
other hand, the monthly insurance charge will be higher under Option 2 to
compensate us for the additional insurance risk we take. Because of that, the
policy value will tend to be higher under Option 1 than under Option 2 for the
same premium payments.
IRC Qualification
For a Policy to be treated as a life insurance contract under the
Internal Revenue Code, it must pass one of two tests -- a cash value
accumulation test or a guideline premium/cash value corridor test. At the time
of issuance of the Policy, you choose which test you want to be applied. It may
not thereafter be changed. If you do not choose the test to be applied to your
Policy, the Guideline Premium/Cash Value Corridor Test will be applied.
o Cash Value Accumulation Test - Under the terms of the Policy, the
policy value may not at any time exceed the net single premium cost (at
any such time) for the benefits promised under the Policy.
o Guideline Premium/Cash Value Corridor Test - The Policy must at all
times satisfy a guideline premium requirement and a cash value corridor
requirement. Under the guideline premium requirement, the sum of the
premiums paid under the policy may not at any time exceed the greater
of the guideline single premium or the sum of the guideline level
premiums, for the benefits promised under the Policy. Under the cash
value corridor requirement, the death benefit at any time must be equal
to or greater than the applicable percentage of policy value specified
in the Internal Revenue Code.
The Cash Value Accumulation Test does not limit the amount of premiums
that may be paid under the Policy. If you desire to pay premiums in excess of
those permitted under the Guideline Premium/Cash Value Corridor Test, you should
consider electing to have your Policy qualify under the Cash Value Accumulation
Test. However, any premium that would increase the net amount at risk is
16
<PAGE>
subject to evidence of insurability satisfactory to us. Required increases in
the minimum death benefit due to growth in the policy value will generally be
greater under the Cash Value Accumulation Test than under the Guideline
Premium/Cash Value Corridor Test.
The Guideline Premium/Cash Value Corridor Test limits the amount of
premium that may be paid under the Policy. If you do not desire to pay premiums
in excess of those permitted Guideline Premium/Cash Value Corridor Test
limitations, you should consider electing to have your Policy qualify under the
Guideline Premium/Cash Value Corridor Test.
Can I Change Insurance Coverage Under My Policy?
Change of Death Benefit Option
You may change your insurance coverage from Option 1 to Option 2 and
vice-versa, subject to the following conditions:
o after the change, the specified amount of insurance must be at least
$50,000;
o no change may be made in the first policy year and no more than one
change may be made in any policy year;
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 insured, the requested change will not be allowed.
Changes in the Specified Amount of Insurance
You may increase the specified amount of insurance, subject to the
following conditions:
o you must submit an application along with evidence of insurability
acceptable to Penn Mutual;
o you must return your policy so we can amend it to reflect the increase;
o no change may be made if it would cause the Policy not to qualify as
insurance under federal income tax law.
If you increase the specified amount within the first three policy
years, the three year no-lapse period will be extended.
You may decrease the specified amount of insurance, subject to the
following conditions:
o no change may be made in the first policy year;
o no change may be made if it would cause the Policy not to qualify as
insurance under federal income tax law;
o no decrease may be made within one year of an increase in the specified
amount;
17
<PAGE>
o any decrease in the specified amount of insurance must be at least
$5,000 and the specified amount after the decrease must be at least
$50,000.
Tax Consequences
See Federal Income Tax Considerations in the Additional Information
section of this Prospectus to learn about possible tax consequences of changing
your insurance coverage under the Policy.
What Are the Supplemental Benefit Riders That I Can Buy?
We offer supplemental benefit riders that may be added to your Policy.
There are monthly charges for the riders, in addition to the charges described
above. If any of these riders are added to your Policy, monthly charges for the
supplemental benefits will be deducted from your policy value as part of the
monthly deduction.
Additional Insured Term Insurance. Provides a death benefit payable on
the death of an additional insured. More than one rider can be added to
your Policy. There is no cash value for this benefit.
Accidental Death Benefit. Provides a death benefit payable if the
Insured's death results from certain accidental causes. There is no
cash value for this benefit.
Business Accounting Benefit. For Policies sold in certain corporate
markets, the rider provides enhanced early year surrender values.
Children's Term Insurance. Provides a death benefit payable on the
death of a covered child. More than one child can be covered. There is
no cash value for this benefit.
Disability Waiver of Monthly Deduction. Provides for the waiver of the
monthly deductions upon total disability of the insured.
Disability Waiver of Monthly Deduction and Disability Monthly Premium
Deposit. Provides for the waiver of the monthly deductions and payment
of stipulated premiums upon total disability of the Insured. If Option
1 is in effect at the time this benefit becomes effective, it will be
changed to Option 2.
Guaranteed Continuation of Policy. Guarantees that the policy will
remain in force and a death benefit will be payable regardless of the
sufficiency of the net cash surrender value.
Guaranteed Option to Extend Maturity Date. Allows the owner to extend
the maturity date of the Policy, subject to conditions and limitations.
Guaranteed Option to Increase Specified Amount. Allows the owner to
increase the specified amount without evidence of insurability.
18
<PAGE>
Return of Premium Supplemental Term Insurance. Provides term insurance
which will not be less than the amount of all premiums paid up to the
most recent policy month. It is only available on policies that provide
an Option 1 death benefit. There is no cash value for this benefit.
Supplemental Term Insurance. Provides a death benefit payable on the
death of the primary insured. There is no cash value for this benefit.
Additional rules and limits apply to these supplemental benefits. All
supplemental benefits may not be available in your state. Please ask your
authorized Penn Mutual representative for further information or contact our
office.
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 longer in some states). This is referred to as the "free look"
period. To cancel your Policy, simply deliver or mail the Policy to our office
or to our representative who delivered the Policy to you.
In most states, you will receive a refund of your policy value as of
the date of cancellation plus the premium charge and the monthly deductions. The
date of cancellation will be the date we receive the Policy.
In some states, you will receive a refund of any premiums you have
paid. In these states money held under your Policy will be allocated to the Penn
Series Money Market investment option during the "free look" period. At the end
of the period, the money will be transferred to the investment options you have
chosen.
Can I Choose Different Payout Options Under My Policy?
Choosing a Payout Option
You may choose to receive proceeds from the Policy as a single sum.
This includes proceeds that become payable because of death or full surrender.
Alternatively, you can elect to have proceeds of $5,000 or more applied to any
of a number of other payment options as set forth in your Policy. Periodic
payments may not be less than $50 each.
Changing a Payment Option
You can change the payment option at any time before the proceeds are
payable. If you have not made a choice, the payee may change the payment option
within the period specified in the Policy. The person entitled to the proceeds
may elect a payment option as set forth in the Policy.
Tax Impact
There may be tax consequences to you or your beneficiary depending upon
which payment option is chosen. You should consult a qualified tax adviser
before making that choice.
19
<PAGE>
How Is the Policy Treated for Federal Income Tax Purposes?
Death benefits paid under life insurance policies are not subject to
income tax. Investment gains from your Policy are not subject to income tax as
long as we do not pay them out to you.
Assuming your Policy is not treated as a "modified endowment contract"
under federal income tax law, distributions from the Policy are generally
treated as first recovering the investments in the Policy and then, only after
the return of all investment in the Policy, as receiving taxable income. Amounts
borrowed under the Policy also are not generally subject to federal income tax
at the time of the borrowing.
However, some of the tax rules change if your Policy is found to be a
"modified endowment contract." This can happen if you have paid more than a
certain amount of premiums in relation to the insurance provided under the
Policy. Under those circumstances, additional taxes and penalties may be payable
for Policy distributions and loans.
For further information about the qualifications of the Policy as life
insurance under federal tax law and the tax consequences of owning a Policy, see
Federal Income Tax Considerations in the Additional Information section of this
prospectus.
How Do I Communicate With Penn Mutual?
General Rules
You may mail all checks and money orders for premium payments to The
Penn Mutual Life Insurance Company, P.O. Box 7460, Philadelphia, Pennsylvania,
19101-7460, or express all checks and money orders to The Penn Mutual Life
Insurance Company, Receipts Processing C3V, 600 Dresher Road, Horsham,
Pennsylvania, 19044.
Certain requests pertaining to your Policy must be made in writing and
be signed and dated by you. They include the following:
o policy loans in excess of $5,000, and full and partial surrenders
o change of death benefit option
o changes in specified amount of insurance
o change of beneficiary
o election of payment option for Policy proceeds
o tax withholding elections
o grant of telephone transaction privileges to third parties
You should mail or express these requests to our office. You should
also send notice of the insured person's death and related documentation to our
office. Communications are not treated as
20
<PAGE>
"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 each year we will send to you a report showing your current
policy values, premiums paid and deductions made since the last report, any
outstanding policy loans, and any additional premiums permitted under your
Policy. We will also send to you an annual and a semi-annual report for the
Separate Account and for each Fund underlying a subaccount to which you have
allocated policy value, as required by the 1940 Act. In addition, when you pay
premiums (other than by pre- authorized check), or if you borrow money under
your policy, transfer amounts among the investment options or make partial
surrenders, we will send a written confirmation to you.
21
<PAGE>
ILLUSTRATIONS
The tables on the following pages show how values under a hypothetical
Policy change with investment performance over an extended period of time. The
tables illustrate how policy values, net cash surrender values and death
benefits under a Policy covering the insured of a given age on the issue date,
would vary over time if planned premiums were paid annually and the return on
the assets in the selected funds were a uniform gross annual rate of 0%, 6% and
12%. The values would be different from those shown if the returns averaged 0%,
6% or 12%, but fluctuated over and under those averages throughout the years
shown. The tables also show planned premiums accumulated at 5% interest. The
hypothetical investment rates of return are illustrative only and should not be
deemed a representation of past or future investment rates of return. Actual
rates of return for a particular Policy may be more or less than the
hypothetical investment rates of return and will depend on a number of factors
including the investment allocations made by an Owner, prevailing rates and
rates of inflation.
The tables reflect the daily charge against the investments for the
mortality and expense risks we assume, which is equivalent to an effective
annual charge of 0.45% of assets at the current rate and 0.90% at the maximum
guaranteed rate. In addition, the tables assume an average annual expense ratio
of 0.85% of the underlying investment funds available under the Policies. The
average annual expense ratio is based on a 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 end of the current year. If they were discontinued and
expenses increased, the values in the illustration would be lower. For
information on fund expenses, see What Are the Fees and Expenses Paid by the
Investment Funds? in the Basic Information section of this prospectus.
After deduction of fund expenses and the mortality and expense risk
charge, the illustrated gross annual investment rates of return of 0%, 6% and
12% would correspond to approximate net annual rates of -1.25%, 4.75% and
10.75%, respectively, at current rates, and -1.75%, 4.25% and 10.25%,
respectively, at guaranteed rates.
The tables also reflect the deduction of the monthly administrative
charge and the monthly cost of insurance charge for the hypothetical insured
persons. Our current cost of insurance charges and the higher guaranteed maximum
cost of insurance charges we have the contractual right to charge are reflected
in separate tables on the following pages.
The illustrations are based on our sex distinct rates for standard
nonsmokers. Upon request, we will furnish a comparable illustration based upon
the proposed Insured's individual circumstances. Such illustrations may assume
different hypothetical rates of return than those illustrated in the following
tables.
For New Jersey residents, the illustrations using current cost of
insurance rates may differ. Upon request, we will furnish illustrations
reflecting current costs and changes for New Jersey residents.
22
<PAGE>
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23
<PAGE>
Illustration of Policy Values
Penn Mutual Life Insurance Company
Male Issue Age: 35 Non-Smoker
$750 ANNUAL PREMIUM
$75,000 SPECIFIED AMOUNT
DEATH BENEFIT OPTION 1
LIFE INSURANCE QUALIFICATION TEST -CASH VALUE ACCUMULATION
USING GUARANTEED COST OF INSURANCE RATES
<TABLE>
<CAPTION>
0% Hypothetical 6% Hypothetical 12% Hypothetical
Premiums Gross Investment Return Gross Investment Return Gross Investment Return
Accumulated
End of at Net Cash Net Cash Net Cash
Policy 5% Interest Policy Surrender Death Policy Surrender Death Policy Surrender Death
Year Per Year Value Value Benefit Value Value Benefit Value Value Benefit
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 788 361 0 75,000 392 0 75,000 424 0 75,000
2 1,614 800 337 75,000 888 426 75,000 980 518 75,000
3 2,483 1,224 761 75,000 1,398 935 75,000 1,587 1,124 75,000
4 3,394 1,632 1,170 75,000 1,921 1,458 75,000 2,247 1,785 75,000
5 4,351 2,024 1,562 75,000 2,457 1,994 75,000 2,966 2,504 75,000
6 5,357 2,400 1,937 75,000 3,006 2,544 75,000 3,749 3,287 75,000
7 6,412 2,756 2,294 75,000 3,567 3,104 75,000 4,602 4,139 75,000
8 7,520 3,095 2,725 75,000 4,140 3,770 75,000 5,530 5,160 75,000
9 8,683 3,414 3,136 75,000 4,723 4,446 75,000 6,541 6,264 75,000
10 9,905 3,713 3,528 75,000 5,319 5,134 75,000 7,644 7,459 75,000
15 16,993 4,861 4,861 75,000 8,424 8,424 75,000 14,862 14,862 75,000
20 26,039 5,252 5,252 75,000 11,597 11,597 75,000 26,145 26,145 75,000
25 37,585 4,389 4,389 75,000 14,369 14,369 75,000 43,966 43,966 88,571
30 52,321 1,428 1,428 75,000 15,920 15,920 75,000 70,854 70,854 124,766
</TABLE>
(1) Assumes that no policy loans have been made.
(2) Guaranteed values reflect guaranteed cost of insurance rates, a monthly
administrative charge of $9.00 per month, and a mortality and expense
risk charge of 0.90% of assets.
(3) Net investment returns are calculated as the hypothetical gross
investment returns less all charges and deductions shown in the
prospectus.
(4) Assumes that the premium is paid at the beginning of each policy year.
Values would be different if the premiums are paid with a different
frequency or in different amounts.
THE HYPOTHETICAL INVESTMENT RATES OF RETURN SHOWN ABOVE AND ELSEWHERE IN THIS
PROSPECTUS ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF
PAST OR FUTURE INVESTMENT RATES OF RETURN. ACTUAL RATES OF RETURN MAY BE MORE OR
LESS THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS INCLUDING THE
INVESTMENT ALLOCATIONS MADE BY AN OWNER, PREVAILING RATES AND RATES OF
INFLATION. THE DEATH BENEFIT AND CASH VALUE FOR A POLICY WOULD BE DIFFERENT FROM
THOSE SHOWN IF THE ACTUAL RATES OF RETURN AVERAGED 0%, 6% OR 12% OVER A PERIOD
OF YEARS BUT ALSO FLUCTUATED ABOVE OR BELOW THOSE AVERAGES FOR INDIVIDUAL POLICY
YEARS. NO REPRESENTATION CAN BE MADE BY THE COMPANY OR THE FUND THAT THESE
HYPOTHETICAL RATES OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER
ANY PERIOD OF TIME.
24
<PAGE>
Illustration of Policy Values
Penn Mutual Life Insurance Company
Male Issue Age: 35 Non-Smoker
$750 ANNUAL PREMIUM
$75,000 SPECIFIED AMOUNT
DEATH BENEFIT OPTION 1
LIFE INSURANCE QUALIFICATION TEST -CASH VALUE ACCUMULATION
USING CURRENT COST OF INSURANCE RATES
<TABLE>
<CAPTION>
0% Hypothetical 6% Hypothetical 12% Hypothetical
Premiums Gross Investment Return Gross Investment Return Gross Investment Return
Accumulated
End of at Net Cash Net Cash Net Cash
Policy 5% Interest Policy Surrender Death Policy Surrender Death Policy Surrender Death
Year Per Year Value Value Benefit Value Value Benefit Value Value Benefit
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 788 388 0 75,000 420 0 75,000 452 0 75,000
2 1,614 866 403 75,000 958 496 75,000 1,055 592 75,000
3 2,483 1,330 868 75,000 1,514 1,052 75,000 1,714 1,252 75,000
4 3,394 1,782 1,319 75,000 2,090 1,627 75,000 2,437 1,975 75,000
5 4,351 2,221 1,758 75,000 2,685 2,223 75,000 3,231 2,768 75,000
6 5,357 2,647 2,184 75,000 3,302 2,839 75,000 4,103 3,641 75,000
7 6,412 3,060 2,597 75,000 3,940 3,478 75,000 5,061 4,599 75,000
8 7,520 3,456 3,085 75,000 4,597 4,227 75,000 6,111 5,741 75,000
9 8,683 3,831 3,554 75,000 5,270 4,992 75,000 7,260 6,982 75,000
10 9,905 4,187 4,002 75,000 5,959 5,774 75,000 8,517 8,332 75,000
15 16,993 5,618 5,618 75,000 9,648 9,648 75,000 16,890 16,890 75,000
20 26,039 6,359 6,359 75,000 13,702 13,702 75,000 30,406 30,406 75,000
25 37,585 6,220 6,220 75,000 18,098 18,098 75,000 52,334 52,334 105,429
30 52,321 4,573 4,573 75,000 22,473 22,473 75,000 86,546 86,546 152,398
</TABLE>
(1) Assumes that no policy loans have been made.
(2) Current values reflect current cost of insurance rates, a monthly
administrative charge of $8.00 in all years and a mortality and expense
risk charge of 0.45% of assets in all years.
(3) Net investment returns are calculated as the hypothetical gross investment
returns less all charges and deductions shown in the prospectus.
(4) Assumes that the premium is paid at the beginning of each policy year.
Values would be different if the premiums are paid with a different
frequency or in different amounts.
THE HYPOTHETICAL INVESTMENT RATES OF RETURN SHOWN ABOVE AND ELSEWHERE IN THIS
PROSPECTUS ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF
PAST OR FUTURE INVESTMENT RATES OF RETURN. ACTUAL RATES OF RETURN MAY BE MORE OR
LESS THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS INCLUDING THE
INVESTMENT ALLOCATIONS MADE BY AN OWNER, PREVAILING RATES AND RATES OF
INFLATION. THE DEATH BENEFIT AND CASH VALUE FOR A POLICY WOULD BE DIFFERENT FROM
THOSE SHOWN IF THE ACTUAL RATES OF RETURN AVERAGED 0%, 6% OR 12% OVER A PERIOD
OF YEARS BUT ALSO FLUCTUATED ABOVE OR BELOW THOSE AVERAGES FOR INDIVIDUAL POLICY
YEARS. NO REPRESENTATION CAN BE MADE BY THE COMPANY OR THE FUND THAT THESE
HYPOTHETICAL RATES OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER
ANY PERIOD OF TIME.
25
<PAGE>
Illustration of Policy Values
Penn Mutual Life Insurance Company
Male Issue Age: 35 Non-Smoker
$1,200 ANNUAL PREMIUM
$75,000 SPECIFIED AMOUNT
DEATH BENEFIT OPTION 2
LIFE INSURANCE QUALIFICATION TEST -CASH VALUE ACCUMULATION
USING GUARANTEED COST OF INSURANCE RATES
<TABLE>
<CAPTION>
0% Hypothetical 6% Hypothetical 12% Hypothetical
Premiums Gross Investment Return Gross Investment Return Gross Investment Return
Accumulated
End of at Net Cash Net Cash Net Cash
Policy 5% Interest Policy Surrender Death Policy Surrender Death Policy Surrender Death
Year Per Year Value Value Benefit Value Value Benefit Value Value Benefit
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 1,260 769 307 75,769 825 363 75,825 882 419 75,882
2 2,583 1,608 1,146 76,608 1,772 1,309 76,772 1,942 1,480 76,942
3 3,972 2,424 1,962 77,424 2,750 2,287 77,750 3,103 2,640 78,103
4 5,431 3,217 2,755 78,217 3,760 3,298 78,760 4,373 3,910 79,373
5 6,962 3,986 3,523 78,986 4,803 4,340 79,803 5,762 5,299 80,762
6 8,570 4,730 4,267 79,730 5,878 5,416 80,878 7,281 6,819 82,281
7 10,259 5,448 4,985 80,448 6,986 6,523 81,986 8,943 8,480 83,943
8 12,032 6,139 5,769 81,139 8,126 7,756 83,126 10,760 10,390 85,760
9 13,893 6,803 6,526 81,803 9,299 9,022 84,299 12,747 12,469 87,747
10 15,848 7,440 7,255 82,440 10,506 10,321 85,506 14,921 14,736 89,921
15 27,189 10,159 10,159 85,159 17,017 17,017 92,017 29,249 29,249 104,249
20 41,663 11,920 11,920 86,920 24,198 24,198 99,198 51,631 51,631 126,631
25 60,136 12,225 12,225 87,225 31,537 31,537 106,537 86,360 86,360 161,360
30 83,713 10,323 10,323 85,323 38,070 38,070 113,070 140,063 140,063 215,063
</TABLE>
(1) Assumes that no policy loans have been made.
(2) Guaranteed values reflect guaranteed cost of insurance rates, a monthly
administrative charge of $9.00 per month, and a mortality and expense
risk charge of 0.90% of assets.
(3) Net investment returns are calculated as the hypothetical gross
investment returns less all charges and deductions shown in the
prospectus.
(4) Assumes that the premium is paid at the beginning of each policy year.
Values would be different if the premiums are paid with a different
frequency or in different amounts.
THE HYPOTHETICAL INVESTMENT RATES OF RETURN SHOWN ABOVE AND ELSEWHERE IN THIS
PROSPECTUS ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF
PAST OR FUTURE INVESTMENT RATES OF RETURN. ACTUAL RATES OF RETURN MAY BE MORE OR
LESS THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS INCLUDING THE
INVESTMENT ALLOCATIONS MADE BY AN OWNER, PREVAILING RATES AND RATES OF
INFLATION. THE DEATH BENEFIT AND CASH VALUE FOR A POLICY WOULD BE DIFFERENT FROM
THOSE SHOWN IF THE ACTUAL RATES OF RETURN AVERAGED 0%, 6% OR 12% OVER A PERIOD
OF YEARS BUT ALSO FLUCTUATED ABOVE OR BELOW THOSE AVERAGES FOR INDIVIDUAL POLICY
YEARS. NO REPRESENTATION CAN BE MADE BY THE COMPANY OR THE FUND THAT THESE
HYPOTHETICAL RATES OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER
ANY PERIOD OF TIME.
26
<PAGE>
Illustration of Policy Values
Penn Mutual Life Insurance Company
Male Issue Age: 35 Non-Smoker
$1,200 ANNUAL PREMIUM
$75,000 SPECIFIED AMOUNT
DEATH BENEFIT OPTION 2
LIFE INSURANCE QUALIFICATION TEST -CASH VALUE ACCUMULATION
USING CURRENT COST OF INSURANCE RATES
<TABLE>
<CAPTION>
0% Hypothetical 6% Hypothetical 12% Hypothetical
Premiums Gross Investment Return Gross Investment Return Gross Investment Return
Accumulated
End of at Net Cash Net Cash Net Cash
Policy 5% Interest Policy Surrender Death Policy Surrender Death Policy Surrender Death
Year Per Year Value Value Benefit Value Value Benefit Value Value Benefit
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 1,260 806 343 75,806 863 401 75,863 921 458 75,921
2 2,583 1,696 1,233 76,696 1,865 1,402 76,865 2,041 1,579 77,041
3 3,972 2,566 2,103 77,566 2,906 2,443 77,906 3,273 2,811 78,273
4 5,431 3,417 2,955 78,417 3,987 3,524 78,987 4,629 4,166 79,629
5 6,962 4,249 3,787 79,249 5,111 4,648 80,111 6,121 5,659 81,121
6 8,570 5,063 4,600 80,063 6,280 5,817 81,280 7,765 7,302 82,765
7 10,259 5,857 5,395 80,857 7,495 7,032 82,495 9,575 9,112 84,575
8 12,032 6,628 6,258 81,628 8,753 8,383 83,753 11,564 11,194 86,564
9 13,893 7,372 7,095 82,372 10,053 9,775 85,053 13,749 13,472 88,749
10 15,848 8,089 7,904 83,089 11,396 11,211 86,396 16,149 15,964 91,149
15 27,189 11,226 11,226 86,226 18,776 18,776 93,776 32,213 32,213 107,213
20 41,663 13,489 13,489 88,489 27,276 27,276 102,276 58,009 58,009 133,009
25 60,136 14,684 14,684 89,684 36,912 36,912 111,912 99,679 99,679 174,690
30 83,713 14,195 14,195 89,195 47,179 47,179 122,179 166,816 166,816 241,816
</TABLE>
(1) Assumes that no policy loans have been made.
(2) Current values reflect current cost of insurance rates, a monthly
administrative charge of $8.00 in all years and a mortality and expense
risk charge of 0.45% of assets in all years.
(3) Net investment returns are calculated as the hypothetical gross
investment returns less all charges and deductions shown in the
prospectus.
(4) Assumes that the premium is paid at the beginning of each policy year.
Values would be different if the premiums are paid with a different
frequency or in different amounts.
THE HYPOTHETICAL INVESTMENT RATES OF RETURN SHOWN ABOVE AND ELSEWHERE IN THIS
PROSPECTUS ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF
PAST OR FUTURE INVESTMENT RATES OF RETURN. ACTUAL RATES OF RETURN MAY BE MORE OR
LESS THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS INCLUDING THE
INVESTMENT ALLOCATIONS MADE BY AN OWNER, PREVAILING RATES AND RATES OF
INFLATION. THE DEATH BENEFIT AND CASH VALUE FOR A POLICY WOULD BE DIFFERENT FROM
THOSE SHOWN IF THE ACTUAL RATES OF RETURN AVERAGED 0%, 6% OR 12% OVER A PERIOD
OF YEARS BUT ALSO FLUCTUATED ABOVE OR BELOW THOSE AVERAGES FOR INDIVIDUAL POLICY
YEARS. NO REPRESENTATION CAN BE MADE BY THE COMPANY OR THE FUND THAT THESE
HYPOTHETICAL RATES OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER
ANY PERIOD OF TIME.
27
<PAGE>
Illustration of Policy Values
Penn Mutual Life Insurance Company
Male Issue Age: 35 Non-Smoker
$750 ANNUAL PREMIUM
$75,000 SPECIFIED AMOUNT
DEATH BENEFIT OPTION 1
LIFE INSURANCE QUALIFICATION TEST - GUIDELINE PREMIUM
USING GUARANTEED COST OF INSURANCE RATES
<TABLE>
<CAPTION>
0% Hypothetical 6% Hypothetical 12% Hypothetical
Premiums Gross Investment Return Gross Investment Return Gross Investment Return
Accumulated
End of at Net Cash Net Cash Net Cash
Policy 5% Interest Policy Surrender Death Policy Surrender Death Policy Surrender Death
Year Per Year Value Value Benefit Value Value Benefit Value Value Benefit
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 788 361 0 75,000 392 0 75,000 424 0 75,000
2 1,614 800 337 75,000 888 426 75,000 980 518 75,000
3 2,483 1,224 761 75,000 1,398 935 75,000 1,587 1,124 75,000
4 3,394 1,632 1,170 75,000 1,921 1,458 75,000 2,247 1,785 75,000
5 4,351 2,024 1,562 75,000 2,457 1,994 75,000 2,966 2,504 75,000
6 5,357 2,400 1,937 75,000 3,006 2,544 75,000 3,749 3,287 75,000
7 6,412 2,756 2,294 75,000 3,567 3,104 75,000 4,602 4,139 75,000
8 7,520 3,095 2,725 75,000 4,140 3,770 75,000 5,530 5,160 75,000
9 8,683 3,414 3,136 75,000 4,723 4,446 75,000 6,541 6,264 75,000
10 9,905 3,713 3,528 75,000 5,319 5,134 75,000 7,644 7,459 75,000
15 16,993 4,861 4,861 75,000 8,424 8,424 75,000 14,862 14,862 75,000
20 26,039 5,252 5,252 75,000 11,597 11,597 75,000 26,145 26,145 75,000
25 37,585 4,389 4,389 75,000 14,369 14,369 75,000 44,130 44,130 75,000
30 52,321 1,428 1,428 75,000 15,920 15,920 75,000 73,900 73,900 90,158
</TABLE>
(1) Assumes that no policy loans have been made.
(2) Guaranteed values reflect guaranteed cost of insurance rates, a monthly
administrative charge of $9.00 per month, and a mortality and expense
risk charge of 0.90% of assets.
(3) Net investment returns are calculated as the hypothetical gross
investment returns less all charges and deductions shown in the
prospectus.
(4) Assumes that the premium is paid at the beginning of each policy year.
Values would be different if the premiums are paid with a different
frequency or in different amounts.
THE HYPOTHETICAL INVESTMENT RATES OF RETURN SHOWN ABOVE AND ELSEWHERE IN THIS
PROSPECTUS ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF
PAST OR FUTURE INVESTMENT RATES OF RETURN. ACTUAL RATES OF RETURN MAY BE MORE OR
LESS THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS INCLUDING THE
INVESTMENT ALLOCATIONS MADE BY AN OWNER, PREVAILING RATES AND RATES OF
INFLATION. THE DEATH BENEFIT AND CASH VALUE FOR A POLICY WOULD BE DIFFERENT FROM
THOSE SHOWN IF THE ACTUAL RATES OF RETURN AVERAGED 0%, 6% OR 12% OVER A PERIOD
OF YEARS BUT ALSO FLUCTUATED ABOVE OR BELOW THOSE AVERAGES FOR INDIVIDUAL POLICY
YEARS. NO REPRESENTATION CAN BE MADE BY THE COMPANY OR THE FUND THAT THESE
HYPOTHETICAL RATES OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER
ANY PERIOD OF TIME.
28
<PAGE>
Illustration of Policy Values
Penn Mutual Life Insurance Company
Male Issue Age: 35 Non-Smoker
$750 ANNUAL PREMIUM
$75,000 SPECIFIED AMOUNT
DEATH BENEFIT OPTION 1
LIFE INSURANCE QUALIFICATION TEST - GUIDELINE PREMIUM
USING CURRENT COST OF INSURANCE RATES
<TABLE>
<CAPTION>
0% Hypothetical 6% Hypothetical 12% Hypothetical
Premiums Gross Investment Return Gross Investment Return Gross Investment Return
Accumulated
End of at Net Cash Net Cash Net Cash
Policy 5% Interest Policy Surrender Death Policy Surrender Death Policy Surrender Death
Year Per Year Value Value Benefit Value Value Benefit Value Value Benefit
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 788 388 0 75,000 420 0 75,000 452 0 75,000
2 1,614 866 403 75,000 958 496 75,000 1,055 592 75,000
3 2,483 1,330 868 75,000 1,514 1,052 75,000 1,714 1,252 75,000
4 3,394 1,782 1,319 75,000 2,090 1,627 75,000 2,437 1,975 75,000
5 4,351 2,221 1,758 75,000 2,685 2,223 75,000 3,231 2,768 75,000
6 5,357 2,647 2,184 75,000 3,302 2,839 75,000 4,103 3,641 75,000
7 6,412 3,060 2,597 75,000 3,940 3,478 75,000 5,061 4,599 75,000
8 7,520 3,456 3,085 75,000 4,597 4,227 75,000 6,111 5,741 75,000
9 8,683 3,831 3,554 75,000 5,270 4,992 75,000 7,260 6,982 75,000
10 9,905 4,187 4,002 75,000 5,959 5,774 75,000 8,517 8,332 75,000
15 16,993 5,618 5,618 75,000 9,648 9,648 75,000 16,890 16,890 75,000
20 26,039 6,359 6,359 75,000 13,702 13,702 75,000 30,406 30,406 75,000
25 37,585 6,220 6,220 75,000 18,098 18,098 75,000 52,955 52,955 75,000
30 52,321 4,573 4,573 75,000 22,473 22,473 75,000 90,753 90,753 110,718
</TABLE>
(1) Assumes that no policy loans have been made.
(2) Current values reflect current cost of insurance rates, a monthly
administrative charge of $8.00 in all years and a mortality and expense
risk charge of 0.45% of assets in all years.
(3) Net investment returns are calculated as the hypothetical gross investment
returns less all charges and deductions shown in the prospectus.
(4) Assumes that the premium is paid at the beginning of each policy year.
Values would be different if the premiums are paid with a different
frequency or in different amounts.
THE HYPOTHETICAL INVESTMENT RATES OF RETURN SHOWN ABOVE AND ELSEWHERE IN THIS
PROSPECTUS ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF
PAST OR FUTURE INVESTMENT RATES OF RETURN. ACTUAL RATES OF RETURN MAY BE MORE OR
LESS THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS INCLUDING THE
INVESTMENT ALLOCATIONS MADE BY AN OWNER, PREVAILING RATES AND RATES OF
INFLATION. THE DEATH BENEFIT AND CASH VALUE FOR A POLICY WOULD BE DIFFERENT FROM
THOSE SHOWN IF THE ACTUAL RATES OF RETURN AVERAGED 0%, 6% OR 12% OVER A PERIOD
OF YEARS BUT ALSO FLUCTUATED ABOVE OR BELOW THOSE AVERAGES FOR INDIVIDUAL POLICY
YEARS. NO REPRESENTATION CAN BE MADE BY THE COMPANY OR THE FUND THAT THESE
HYPOTHETICAL RATES OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER
ANY PERIOD OF TIME.
29
<PAGE>
Illustration of Policy Values
Penn Mutual Life Insurance Company
Male Issue Age: 35 Non-Smoker
$1,200 ANNUAL PREMIUM
$75,000 SPECIFIED AMOUNT
DEATH BENEFIT OPTION 2
LIFE INSURANCE QUALIFICATION TEST - GUIDELINE PREMIUM
USING GUARANTEED COST OF INSURANCE RATES
<TABLE>
<CAPTION>
0% Hypothetical 6% Hypothetical 12% Hypothetical
Premiums Gross Investment Return Gross Investment Return Gross Investment Return
Accumulated
End of at Net Cash Net Cash Net Cash
Policy 5% Interest Policy Surrender Death Policy Surrender Death Policy Surrender Death
Year Per Year Value Value Benefit Value Value Benefit Value Value Benefit
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 1,260 769 307 75,769 825 363 75,825 882 419 75,882
2 2,583 1,608 1,146 76,608 1,772 1,309 76,772 1,942 1,480 76,942
3 3,972 2,424 1,962 77,424 2,750 2,287 77,750 3,103 2,640 78,103
4 5,431 3,217 2,755 78,217 3,760 3,298 78,760 4,373 3,910 79,373
5 6,962 3,986 3,523 78,986 4,803 4,340 79,803 5,762 5,299 80,762
6 8,570 4,730 4,267 79,730 5,878 5,416 80,878 7,281 6,819 82,281
7 10,259 5,448 4,985 80,448 6,986 6,523 81,986 8,943 8,480 83,943
8 12,032 6,139 5,769 81,139 8,126 7,756 83,126 10,760 10,390 85,760
9 13,893 6,803 6,526 81,803 9,299 9,022 84,299 12,747 12,469 87,747
10 15,848 7,440 7,255 82,440 10,506 10,321 85,506 14,921 14,736 89,921
15 27,189 10,159 10,159 85,159 17,017 17,017 92,017 29,249 29,249 104,249
20 41,663 11,920 11,920 86,920 24,198 24,198 99,198 51,631 51,631 126,631
25 60,136 12,225 12,225 87,225 31,537 31,537 106,537 86,360 86,360 161,360
30 83,713 10,323 10,323 85,323 38,070 38,070 113,070 140,063 140,063 215,063
</TABLE>
(1) Assumes that no policy loans have been made.
(2) Guaranteed values reflect guaranteed cost of insurance rates, a monthly
administrative charge of $9.00 per month, and a mortality and expense
risk charge of 0.90% of assets.
(3) Net investment returns are calculated as the hypothetical gross
investment returns less all charges and deductions shown in the
prospectus.
(4) Assumes that the premium is paid at the beginning of each policy year.
Values would be different if the premiums are paid with a different
frequency or in different amounts.
THE HYPOTHETICAL INVESTMENT RATES OF RETURN SHOWN ABOVE AND ELSEWHERE IN THIS
PROSPECTUS ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF
PAST OR FUTURE INVESTMENT RATES OF RETURN. ACTUAL RATES OF RETURN MAY BE MORE OR
LESS THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS INCLUDING THE
INVESTMENT ALLOCATIONS MADE BY AN OWNER, PREVAILING RATES AND RATES OF
INFLATION. THE DEATH BENEFIT AND CASH VALUE FOR A POLICY WOULD BE DIFFERENT FROM
THOSE SHOWN IF THE ACTUAL RATES OF RETURN AVERAGED 0%, 6% OR 12% OVER A PERIOD
OF YEARS BUT ALSO FLUCTUATED ABOVE OR BELOW THOSE AVERAGES FOR INDIVIDUAL POLICY
YEARS. NO REPRESENTATION CAN BE MADE BY THE COMPANY OR THE FUND THAT THESE
HYPOTHETICAL RATES OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER
ANY PERIOD OF TIME.
30
<PAGE>
Illustration of Policy Values
Penn Mutual Life Insurance Company
Male Issue Age: 35 Non-Smoker
$1,200 ANNUAL PREMIUM
$75,000 SPECIFIED AMOUNT
DEATH BENEFIT OPTION 2
LIFE INSURANCE QUALIFICATION TEST - GUIDELINE PREMIUM
USING CURRENT COST OF INSURANCE RATES
<TABLE>
<CAPTION>
0% Hypothetical 6% Hypothetical 12% Hypothetical
Premiums Gross Investment Return Gross Investment Return Gross Investment Return
Accumulated
End of at Net Cash Net Cash Net Cash
Policy 5% Interest Policy Surrender Death Policy Surrender Death Policy Surrender Death
Year Per Year Value Value Benefit Value Value Benefit Value Value Benefit
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 1,260 806 343 75,806 863 401 75,863 921 458 75,921
2 2,583 1,696 1,233 76,696 1,865 1,402 76,865 2,041 1,579 77,041
3 3,972 2,566 2,103 77,566 2,906 2,443 77,906 3,273 2,811 78,273
4 5,431 3,417 2,955 78,417 3,987 3,524 78,987 4,629 4,166 79,629
5 6,962 4,249 3,787 79,249 5,111 4,648 80,111 6,121 5,659 81,121
6 8,570 5,063 4,600 80,063 6,280 5,817 81,280 7,765 7,302 82,765
7 10,259 5,857 5,395 80,857 7,495 7,032 82,495 9,575 9,112 84,575
8 12,032 6,628 6,258 81,628 8,753 8,383 83,753 11,564 11,194 86,564
9 13,893 7,372 7,095 82,372 10,053 9,775 85,053 13,749 13,472 88,749
10 15,848 8,089 7,904 83,089 11,396 11,211 86,396 16,149 15,964 91,149
15 27,189 11,226 11,226 86,226 18,776 18,776 93,776 32,213 32,213 107,213
20 41,663 13,489 13,489 88,489 27,276 27,276 102,276 58,009 58,009 133,009
25 60,136 14,684 14,684 89,684 36,912 36,912 111,912 99,679 99,679 174,679
30 83,713 14,195 14,195 89,195 47,179 47,179 122,179 166,816 166,816 241,816
</TABLE>
(1) Assumes that no policy loans have been made.
(2) Current values reflect current cost of insurance rates, a monthly
administrative charge of $8.00 in all years and a mortality and expense
risk charge of 0.45% of assets in all years.
(3) Net investment returns are calculated as the hypothetical gross
investment returns less all charges and deductions shown in the
prospectus.
(4) Assumes that the premium is paid at the beginning of each policy year.
Values would be different if the premiums are paid with a different
frequency or in different amounts.
THE HYPOTHETICAL INVESTMENT RATES OF RETURN SHOWN ABOVE AND ELSEWHERE IN THIS
PROSPECTUS ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF
PAST OR FUTURE INVESTMENT RATES OF RETURN. ACTUAL RATES OF RETURN MAY BE MORE OR
LESS THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS INCLUDING THE
INVESTMENT ALLOCATIONS MADE BY AN OWNER, PREVAILING RATES AND RATES OF
INFLATION. THE DEATH BENEFIT AND CASH VALUE FOR A POLICY WOULD BE DIFFERENT FROM
THOSE SHOWN IF THE ACTUAL RATES OF RETURN AVERAGED 0%, 6% OR 12% OVER A PERIOD
OF YEARS BUT ALSO FLUCTUATED ABOVE OR BELOW THOSE AVERAGES FOR INDIVIDUAL POLICY
YEARS. NO REPRESENTATION CAN BE MADE BY THE COMPANY OR THE FUND THAT THESE
HYPOTHETICAL RATES OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER
ANY PERIOD OF TIME.
31
<PAGE>
Illustration of Policy Values
Penn Mutual Life Insurance Company
Female Issue Age: 45 Non-Smoker
$1,500 ANNUAL PREMIUM
$125,000 SPECIFIED AMOUNT
DEATH BENEFIT OPTION 1
LIFE INSURANCE QUALIFICATION TEST -CASH VALUE ACCUMULATION
USING GUARANTEED COST OF INSURANCE RATES
<TABLE>
<CAPTION>
0% Hypothetical 6% Hypothetical 12% Hypothetical
Premiums Gross Investment Return Gross Investment Return Gross Investment Return
Accumulated
End of at Net Cash Net Cash Net Cash
Policy 5% Interest Policy Surrender Death Policy Surrender Death Policy Surrender Death
Year Per Year Value Value Benefit Value Value Benefit Value Value Benefit
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 1,575 742 0 125,000 805 0 125,000 868 0 125,000
2 3,229 1,597 610 125,000 1,774 787 125,000 1,960 973 125,000
3 4,965 2,413 1,426 125,000 2,761 1,774 125,000 3,140 2,153 125,000
4 6,788 3,189 2,202 125,000 3,763 2,777 125,000 4,415 3,428 125,000
5 8,703 3,924 2,937 125,000 4,782 3,795 125,000 5,794 4,807 125,000
6 10,713 4,614 3,627 125,000 5,812 4,825 125,000 7,284 6,297 125,000
7 12,824 5,259 4,272 125,000 6,853 5,866 125,000 8,896 7,909 125,000
8 15,040 5,854 5,064 125,000 7,901 7,112 125,000 10,639 9,849 125,000
9 17,367 6,393 5,801 125,000 8,951 8,359 125,000 12,520 11,928 125,000
10 19,810 6,877 6,482 125,000 10,002 9,607 125,000 14,557 14,162 125,000
15 33,986 8,437 8,437 125,000 15,241 15,241 125,000 27,732 27,732 125,000
20 52,079 8,146 8,146 125,000 20,063 20,063 125,000 48,222 48,222 125,000
25 75,170 4,240 4,240 125,000 22,666 22,666 125,000 80,667 80,667 138,129
30 104,641 0 0 0 20,225 20,225 125,000 129,944 129,944 196,425
</TABLE>
(1) Assumes that no policy loans have been made.
(2) Guaranteed values reflect guaranteed cost of insurance rates, a monthly
administrative charge of $9.00 per month, and a mortality and expense
risk charge of 0.90% of assets.
(3) Net investment returns are calculated as the hypothetical gross
investment returns less all charges and deductions shown in the
prospectus.
(4) Assumes that the premium is paid at the beginning of each policy year.
Values would be different if the premiums are paid with a different
frequency or in different amounts.
THE HYPOTHETICAL INVESTMENT RATES OF RETURN SHOWN ABOVE AND ELSEWHERE IN THIS
PROSPECTUS ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF
PAST OR FUTURE INVESTMENT RATES OF RETURN. ACTUAL RATES OF RETURN MAY BE MORE OR
LESS THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS INCLUDING THE
INVESTMENT ALLOCATIONS MADE BY AN OWNER, PREVAILING RATES AND RATES OF
INFLATION. THE DEATH BENEFIT AND CASH VALUE FOR A POLICY WOULD BE DIFFERENT FROM
THOSE SHOWN IF THE ACTUAL RATES OF RETURN AVERAGED 0%, 6% OR 12% OVER A PERIOD
OF YEARS BUT ALSO FLUCTUATED ABOVE OR BELOW THOSE AVERAGES FOR INDIVIDUAL POLICY
YEARS. NO REPRESENTATION CAN BE MADE BY THE COMPANY OR THE FUND THAT THESE
HYPOTHETICAL RATES OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER
ANY PERIOD OF TIME.
32
<PAGE>
Illustration of Policy Values
Penn Mutual Life Insurance Company
Female Issue Age: 45 Non-Smoker
$1,500 ANNUAL PREMIUM
$125,000 SPECIFIED AMOUNT
DEATH BENEFIT OPTION 1
LIFE INSURANCE QUALIFICATION TEST -CASH VALUE ACCUMULATION
USING CURRENT COST OF INSURANCE RATES
<TABLE>
<CAPTION>
0% Hypothetical 6% Hypothetical 12% Hypothetical
Premiums Gross Investment Return Gross Investment Return Gross Investment Return
Accumulated
End of at Net Cash Net Cash Net Cash
Policy 5% Interest Policy Surrender Death Policy Surrender Death Policy Surrender Death
Year Per Year Value Value Benefit Value Value Benefit Value Value Benefit
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 1,575 802 0 125,000 866 0 125,000 932 0 125,000
2 3,229 1,736 749 125,000 1,923 936 125,000 2,118 1,131 125,000
3 4,965 2,629 1,643 125,000 2,999 2,012 125,000 3,401 2,414 125,000
4 6,788 3,485 2,498 125,000 4,099 3,112 125,000 4,794 3,807 125,000
5 8,703 4,302 3,315 125,000 5,224 4,238 125,000 6,311 5,324 125,000
6 10,713 5,078 4,091 125,000 6,373 5,386 125,000 7,961 6,974 125,000
7 12,824 5,821 4,835 125,000 7,554 6,567 125,000 9,768 8,781 125,000
8 15,040 6,533 5,744 125,000 8,769 7,980 125,000 11,751 10,962 125,000
9 17,367 7,207 6,615 125,000 10,015 9,423 125,000 13,923 13,331 125,000
10 19,810 7,844 7,450 125,000 11,296 10,901 125,000 16,308 15,913 125,000
15 33,986 10,321 10,321 125,000 18,098 18,098 125,000 32,227 32,227 125,000
20 52,079 11,304 11,304 125,000 25,441 25,441 125,000 58,136 58,136 125,000
25 75,170 10,233 10,233 125,000 33,101 33,101 125,000 100,642 100,642 172,332
30 104,641 6,280 6,280 125,000 40,812 40,812 125,000 167,862 167,862 253,743
</TABLE>
(1) Assumes that no policy loans have been made.
(2) Current values reflect current cost of insurance rates, a monthly
administrative charge of $8.00 in all years and a mortality and expense
risk charge of 0.45% of assets in all years.
(3) Net investment returns are calculated as the hypothetical gross
investment returns less all charges and deductions shown in the
prospectus.
(4) Assumes that the premium is paid at the beginning of each policy year.
Values would be different if the premiums are paid with a different
frequency or in different amounts.
THE HYPOTHETICAL INVESTMENT RATES OF RETURN SHOWN ABOVE AND ELSEWHERE IN THIS
PROSPECTUS ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF
PAST OR FUTURE INVESTMENT RATES OF RETURN. ACTUAL RATES OF RETURN MAY BE MORE OR
LESS THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS INCLUDING THE
INVESTMENT ALLOCATIONS MADE BY AN OWNER, PREVAILING RATES AND RATES OF
INFLATION. THE DEATH BENEFIT AND CASH VALUE FOR A POLICY WOULD BE DIFFERENT FROM
THOSE SHOWN IF THE ACTUAL RATES OF RETURN AVERAGED 0%, 6% OR 12% OVER A PERIOD
OF YEARS BUT ALSO FLUCTUATED ABOVE OR BELOW THOSE AVERAGES FOR INDIVIDUAL POLICY
YEARS. NO REPRESENTATION CAN BE MADE BY THE COMPANY OR THE FUND THAT THESE
HYPOTHETICAL RATES OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER
ANY PERIOD OF TIME.
33
<PAGE>
Illustration of Policy Values
Penn Mutual Life Insurance Company
Female Issue Age: 45 Non-Smoker
$2,100 ANNUAL PREMIUM
$125,000 SPECIFIED AMOUNT
DEATH BENEFIT OPTION 2
LIFE INSURANCE QUALIFICATION TEST -CASH VALUE ACCUMULATION
USING GUARANTEED COST OF INSURANCE RATES
<TABLE>
<CAPTION>
0% Hypothetical 6% Hypothetical 12% Hypothetical
Premiums Gross Investment Return Gross Investment Return Gross Investment Return
Accumulated
End of at Net Cash Net Cash Net Cash
Policy 5% Interest Policy Surrender Death Policy Surrender Death Policy Surrender Death
Year Per Year Value Value Benefit Value Value Benefit Value Value Benefit
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 2,205 1,284 297 126,284 1,380 393 126,380 1,476 489 126,476
2 4,520 2,669 1,682 127,669 2,946 1,959 127,946 3,235 2,249 128,235
3 6,951 4,002 3,015 129,002 4,551 3,564 129,551 5,146 4,159 130,146
4 9,504 5,283 4,296 130,283 6,193 5,206 131,193 7,221 6,234 132,221
5 12,184 6,510 5,523 131,510 7,873 6,886 132,873 9,476 8,489 134,476
6 14,998 7,680 6,693 132,680 9,587 8,601 134,587 11,924 10,937 136,924
7 17,953 8,791 7,804 133,791 11,335 10,348 136,335 14,581 13,594 139,581
8 21,056 9,839 9,049 134,839 13,113 12,323 138,113 17,465 16,676 142,465
9 24,314 10,818 10,226 135,818 14,913 14,321 139,913 20,591 19,999 145,591
10 27,734 11,728 11,334 136,728 16,736 16,342 141,736 23,981 23,587 148,981
15 47,581 15,223 15,223 140,223 26,162 26,162 151,162 45,887 45,887 170,887
20 72,910 16,540 16,540 141,540 35,618 35,618 160,618 79,111 79,111 204,111
25 105,238 13,994 13,994 138,994 42,937 42,937 167,937 128,260 128,260 253,260
30 146,498 5,579 5,579 130,579 44,995 44,995 169,995 200,389 200,389 325,389
</TABLE>
(1) Assumes that no policy loans have been made.
(2) Guaranteed values reflect guaranteed cost of insurance rates, a monthly
administrative charge of $9.00 per month, and a mortality and expense
risk charge of 0.90% of assets.
(3) Net investment returns are calculated as the hypothetical gross
investment returns less all charges and deductions shown in the
prospectus.
(4) Assumes that the premium is paid at the beginning of each policy year.
Values would be different if the premiums are paid with a different
frequency or in different amounts.
THE HYPOTHETICAL INVESTMENT RATES OF RETURN SHOWN ABOVE AND ELSEWHERE IN THIS
PROSPECTUS ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF
PAST OR FUTURE INVESTMENT RATES OF RETURN. ACTUAL RATES OF RETURN MAY BE MORE OR
LESS THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS INCLUDING THE
INVESTMENT ALLOCATIONS MADE BY AN OWNER, PREVAILING RATES AND RATES OF
INFLATION. THE DEATH BENEFIT AND CASH VALUE FOR A POLICY WOULD BE DIFFERENT FROM
THOSE SHOWN IF THE ACTUAL RATES OF RETURN AVERAGED 0%, 6% OR 12% OVER A PERIOD
OF YEARS BUT ALSO FLUCTUATED ABOVE OR BELOW THOSE AVERAGES FOR INDIVIDUAL POLICY
YEARS. NO REPRESENTATION CAN BE MADE BY THE COMPANY OR THE FUND THAT THESE
HYPOTHETICAL RATES OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER
ANY PERIOD OF TIME.
34
<PAGE>
Illustration of Policy Values
Penn Mutual Life Insurance Company
Female Issue Age: 45 Non-Smoker
$2,100 ANNUAL PREMIUM
$125,000 SPECIFIED AMOUNT
DEATH BENEFIT OPTION 2
LIFE INSURANCE QUALIFICATION TEST -CASH VALUE ACCUMULATION
USING CURRENT COST OF INSURANCE RATES
<TABLE>
<CAPTION>
0% Hypothetical 6% Hypothetical 12% Hypothetical
Premiums Gross Investment Return Gross Investment Return Gross Investment Return
Accumulated
End of at Net Cash Net Cash Net Cash
Policy 5% Interest Policy Surrender Death Policy Surrender Death Policy Surrender Death
Year Per Year Value Value Benefit Value Value Benefit Value Value Benefit
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 2,205 1,357 370 126,357 1,456 469 126,456 1,555 568 126,555
2 4,520 2,837 1,850 127,837 3,126 2,139 128,126 3,427 2,440 128,427
3 6,951 4,265 3,279 129,265 4,841 3,854 129,841 5,465 4,478 130,465
4 9,504 5,645 4,659 130,645 6,606 5,619 131,606 7,689 6,702 132,689
5 12,184 6,976 5,989 131,976 8,421 7,434 133,421 10,118 9,131 135,118
6 14,998 8,255 7,268 133,255 10,286 9,299 135,286 12,770 11,783 137,770
7 17,953 9,492 8,505 134,492 12,212 11,225 137,212 15,678 14,691 140,678
8 21,056 10,685 9,896 135,685 14,201 13,412 139,201 18,869 18,079 143,869
9 24,314 11,829 11,237 136,829 16,248 15,656 141,248 22,365 21,773 147,365
10 27,734 12,926 12,532 137,926 18,359 17,964 143,359 26,201 25,806 151,201
15 47,581 17,517 17,517 142,517 29,734 29,734 154,734 51,644 51,644 176,644
20 72,910 20,290 20,290 145,290 42,283 42,283 167,283 91,907 91,907 216,907
25 105,238 20,691 20,691 145,691 55,532 55,532 180,532 155,914 155,914 280,914
30 146,498 18,039 18,039 143,039 68,707 68,707 193,707 258,253 258,253 390,378
</TABLE>
(1) Assumes that no policy loans have been made.
(2) Current values reflect current cost of insurance rates, a monthly
administrative charge of $8.00 in all years and a mortality and expense
risk charge of 0.45% of assets in all years.
(3) Net investment returns are calculated as the hypothetical gross
investment returns less all charges and deductions shown in the
prospectus.
(4) Assumes that the premium is paid at the beginning of each policy year.
Values would be different if the premiums are paid with a different
frequency or in different amounts.
THE HYPOTHETICAL INVESTMENT RATES OF RETURN SHOWN ABOVE AND ELSEWHERE IN THIS
PROSPECTUS ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF
PAST OR FUTURE INVESTMENT RATES OF RETURN. ACTUAL RATES OF RETURN MAY BE MORE OR
LESS THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS INCLUDING THE
INVESTMENT ALLOCATIONS MADE BY AN OWNER, PREVAILING RATES AND RATES OF
INFLATION. THE DEATH BENEFIT AND CASH VALUE FOR A POLICY WOULD BE DIFFERENT FROM
THOSE SHOWN IF THE ACTUAL RATES OF RETURN AVERAGED 0%, 6% OR 12% OVER A PERIOD
OF YEARS BUT ALSO FLUCTUATED ABOVE OR BELOW THOSE AVERAGES FOR INDIVIDUAL POLICY
YEARS. NO REPRESENTATION CAN BE MADE BY THE COMPANY OR THE FUND THAT THESE
HYPOTHETICAL RATES OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER
ANY PERIOD OF TIME.
35
<PAGE>
Illustration of Policy Values
Penn Mutual Life Insurance Company
Female Issue Age: 45 Non-Smoker
$1,500 ANNUAL PREMIUM
$125,000 SPECIFIED AMOUNT
DEATH BENEFIT OPTION 1
LIFE INSURANCE QUALIFICATION TEST - GUIDELINE PREMIUM
USING GUARANTEED COST OF INSURANCE RATES
<TABLE>
<CAPTION>
0% Hypothetical 6% Hypothetical 12% Hypothetical
Premiums Gross Investment Return Gross Investment Return Gross Investment Return
Accumulated
End of at Net Cash Net Cash Net Cash
Policy 5% Interest Policy Surrender Death Policy Surrender Death Policy Surrender Death
Year Per Year Value Value Benefit Value Value Benefit Value Value Benefit
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 1,575 742 0 125,000 805 0 125,000 868 0 125,000
2 3,229 1,597 610 125,000 1,774 787 125,000 1,960 973 125,000
3 4,965 2,413 1,426 125,000 2,761 1,774 125,000 3,140 2,153 125,000
4 6,788 3,189 2,202 125,000 3,763 2,777 125,000 4,415 3,428 125,000
5 8,703 3,924 2,937 125,000 4,782 3,795 125,000 5,794 4,807 125,000
6 10,713 4,614 3,627 125,000 5,812 4,825 125,000 7,284 6,297 125,000
7 12,824 5,259 4,272 125,000 6,853 5,866 125,000 8,896 7,909 125,000
8 15,040 5,854 5,064 125,000 7,901 7,112 125,000 10,639 9,849 125,000
9 17,367 6,393 5,801 125,000 8,951 8,359 125,000 12,520 11,928 125,000
10 19,810 6,877 6,482 125,000 10,002 9,607 125,000 14,557 14,162 125,000
15 33,986 8,437 8,437 125,000 15,241 15,241 125,000 27,732 27,732 125,000
20 52,079 8,146 8,146 125,000 20,063 20,063 125,000 48,222 48,222 125,000
25 75,170 4,240 4,240 125,000 22,666 22,666 125,000 80,820 80,820 125,000
30 104,641 0 0 0 20,225 20,225 125,000 136,705 136,705 146,274
</TABLE>
(1) Assumes that no policy loans have been made.
(2) Guaranteed values reflect guaranteed cost of insurance rates, a monthly
administrative charge of $9.00 per month, and a mortality and expense
risk charge of 0.90% of assets.
(3) Net investment returns are calculated as the hypothetical gross
investment returns less all charges and deductions shown in the
prospectus.
(4) Assumes that the premium is paid at the beginning of each policy year.
Values would be different if the premiums are paid with a different
frequency or in different amounts.
THE HYPOTHETICAL INVESTMENT RATES OF RETURN SHOWN ABOVE AND ELSEWHERE IN THIS
PROSPECTUS ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF
PAST OR FUTURE INVESTMENT RATES OF RETURN. ACTUAL RATES OF RETURN MAY BE MORE OR
LESS THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS INCLUDING THE
INVESTMENT ALLOCATIONS MADE BY AN OWNER, PREVAILING RATES AND RATES OF
INFLATION. THE DEATH BENEFIT AND CASH VALUE FOR A POLICY WOULD BE DIFFERENT FROM
THOSE SHOWN IF THE ACTUAL RATES OF RETURN AVERAGED 0%, 6% OR 12% OVER A PERIOD
OF YEARS BUT ALSO FLUCTUATED ABOVE OR BELOW THOSE AVERAGES FOR INDIVIDUAL POLICY
YEARS. NO REPRESENTATION CAN BE MADE BY THE COMPANY OR THE FUND THAT THESE
HYPOTHETICAL RATES OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER
ANY PERIOD OF TIME.
36
<PAGE>
Illustration of Policy Values
Penn Mutual Life Insurance Company
Female Issue Age: 45 Non-Smoker
$1,500 ANNUAL PREMIUM
$125,000 SPECIFIED AMOUNT
DEATH BENEFIT OPTION 1
LIFE INSURANCE QUALIFICATION TEST - GUIDELINE PREMIUM
USING CURRENT COST OF INSURANCE RATES
<TABLE>
<CAPTION>
0% Hypothetical 6% Hypothetical 12% Hypothetical
Premiums Gross Investment Return Gross Investment Return Gross Investment Return
Accumulated
End of at Net Cash Net Cash Net Cash
Policy 5% Interest Policy Surrender Death Policy Surrender Death Policy Surrender Death
Year Per Year Value Value Benefit Value Value Benefit Value Value Benefit
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 1,575 802 0 125,000 866 0 125,000 932 0 125,000
2 3,229 1,736 749 125,000 1,923 936 125,000 2,118 1,131 125,000
3 4,965 2,629 1,643 125,000 2,999 2,012 125,000 3,401 2,414 125,000
4 6,788 3,485 2,498 125,000 4,099 3,112 125,000 4,794 3,807 125,000
5 8,703 4,302 3,315 125,000 5,224 4,238 125,000 6,311 5,324 125,000
6 10,713 5,078 4,091 125,000 6,373 5,386 125,000 7,961 6,974 125,000
7 12,824 5,821 4,835 125,000 7,554 6,567 125,000 9,768 8,781 125,000
8 15,040 6,533 5,744 125,000 8,769 7,980 125,000 11,751 10,962 125,000
9 17,367 7,207 6,615 125,000 10,015 9,423 125,000 13,923 13,331 125,000
10 19,810 7,844 7,450 125,000 11,296 10,901 125,000 16,308 15,913 125,000
15 33,986 10,321 10,321 125,000 18,098 18,098 125,000 32,227 32,227 125,000
20 52,079 11,304 11,304 125,000 25,441 25,441 125,000 58,136 58,136 125,000
25 75,170 10,233 10,233 125,000 33,101 33,101 125,000 101,923 101,923 125,000
30 104,641 6,280 6,280 125,000 40,812 40,812 125,000 176,834 176,834 189,212
</TABLE>
(1) Assumes that no policy loans have been made.
(2) Current values reflect current cost of insurance rates, a monthly
administrative charge of $8.00 in all years and a mortality and expense
risk charge of 0.45% of assets in all years.
(3) Net investment returns are calculated as the hypothetical gross
investment returns less all charges and deductions shown in the
prospectus.
(4) Assumes that the premium is paid at the beginning of each policy year.
Values would be different if the premiums are paid with a different
frequency or in different amounts.
THE HYPOTHETICAL INVESTMENT RATES OF RETURN SHOWN ABOVE AND ELSEWHERE IN THIS
PROSPECTUS ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF
PAST OR FUTURE INVESTMENT RATES OF RETURN. ACTUAL RATES OF RETURN MAY BE MORE OR
LESS THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS INCLUDING THE
INVESTMENT ALLOCATIONS MADE BY AN OWNER, PREVAILING RATES AND RATES OF
INFLATION. THE DEATH BENEFIT AND CASH VALUE FOR A POLICY WOULD BE DIFFERENT FROM
THOSE SHOWN IF THE ACTUAL RATES OF RETURN AVERAGED 0%, 6% OR 12% OVER A PERIOD
OF YEARS BUT ALSO FLUCTUATED ABOVE OR BELOW THOSE AVERAGES FOR INDIVIDUAL POLICY
YEARS. NO REPRESENTATION CAN BE MADE BY THE COMPANY OR THE FUND THAT THESE
HYPOTHETICAL RATES OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER
ANY PERIOD OF TIME.
37
<PAGE>
Illustration of Policy Values
Penn Mutual Life Insurance Company
Female Issue Age: 45 Non-Smoker
$2,100 ANNUAL PREMIUM
$125,000 SPECIFIED AMOUNT
DEATH BENEFIT OPTION 2
LIFE INSURANCE QUALIFICATION TEST - GUIDELINE PREMIUM
USING GUARANTEED COST OF INSURANCE RATES
<TABLE>
<CAPTION>
0% Hypothetical 6% Hypothetical 12% Hypothetical
Premiums Gross Investment Return Gross Investment Return Gross Investment Return
Accumulated
End of at Net Cash Net Cash Net Cash
Policy 5% Interest Policy Surrender Death Policy Surrender Death Policy Surrender Death
Year Per Year Value Value Benefit Value Value Benefit Value Value Benefit
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 2,205 1,284 297 126,284 1,380 393 126,380 1,476 489 126,476
2 4,520 2,669 1,682 127,669 2,946 1,959 127,946 3,235 2,249 128,235
3 6,951 4,002 3,015 129,002 4,551 3,564 129,551 5,146 4,159 130,146
4 9,504 5,283 4,296 130,283 6,193 5,206 131,193 7,221 6,234 132,221
5 12,184 6,510 5,523 131,510 7,873 6,886 132,873 9,476 8,489 134,476
6 14,998 7,680 6,693 132,680 9,587 8,601 134,587 11,924 10,937 136,924
7 17,953 8,791 7,804 133,791 11,335 10,348 136,335 14,581 13,594 139,581
8 21,056 9,839 9,049 134,839 13,113 12,323 138,113 17,465 16,676 142,465
9 24,314 10,818 10,226 135,818 14,913 14,321 139,913 20,591 19,999 145,591
10 27,734 11,728 11,334 136,728 16,736 16,342 141,736 23,981 23,587 148,981
15 47,581 15,223 15,223 140,223 26,162 26,162 151,162 45,887 45,887 170,887
20 72,910 16,540 16,540 141,540 35,618 35,618 160,618 79,111 79,111 204,111
25 105,238 13,994 13,994 138,994 42,937 42,937 167,937 128,260 128,260 253,260
30 146,498 5,579 5,579 130,579 44,995 44,995 169,995 200,389 200,389 325,389
</TABLE>
(1) Assumes that no policy loans have been made.
(2) Guaranteed values reflect guaranteed cost of insurance rates, a monthly
administrative charge of $9.00 per month, and a mortality and expense
risk charge of 0.90% of assets.
(3) Net investment returns are calculated as the hypothetical gross
investment returns less all charges and deductions shown in the
prospectus.
(4) Assumes that the premium is paid at the beginning of each policy year.
Values would be different if the premiums are paid with a different
frequency or in different amounts.
THE HYPOTHETICAL INVESTMENT RATES OF RETURN SHOWN ABOVE AND ELSEWHERE IN THIS
PROSPECTUS ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF
PAST OR FUTURE INVESTMENT RATES OF RETURN. ACTUAL RATES OF RETURN MAY BE MORE OR
LESS THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS INCLUDING THE
INVESTMENT ALLOCATIONS MADE BY AN OWNER, PREVAILING RATES AND RATES OF
INFLATION. THE DEATH BENEFIT AND CASH VALUE FOR A POLICY WOULD BE DIFFERENT FROM
THOSE SHOWN IF THE ACTUAL RATES OF RETURN AVERAGED 0%, 6% OR 12% OVER A PERIOD
OF YEARS BUT ALSO FLUCTUATED ABOVE OR BELOW THOSE AVERAGES FOR INDIVIDUAL POLICY
YEARS. NO REPRESENTATION CAN BE MADE BY THE COMPANY OR THE FUND THAT THESE
HYPOTHETICAL RATES OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER
ANY PERIOD OF TIME.
38
<PAGE>
Illustration of Policy Values
Penn Mutual Life Insurance Company
Female Issue Age: 45 Non-Smoker
$2,100 ANNUAL PREMIUM
$125,000 SPECIFIED AMOUNT
DEATH BENEFIT OPTION 2
LIFE INSURANCE QUALIFICATION TEST - GUIDELINE PREMIUM
USING CURRENT COST OF INSURANCE RATES
<TABLE>
<CAPTION>
0% Hypothetical 6% Hypothetical 12% Hypothetical
Premiums Gross Investment Return Gross Investment Return Gross Investment Return
Accumulated
End of at Net Cash Net Cash Net Cash
Policy 5% Interest Policy Surrender Death Policy Surrender Death Policy Surrender Death
Year Per Year Value Value Benefit Value Value Benefit Value Value Benefit
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 2,205 1,357 370 126,357 1,456 469 126,456 1,555 568 126,555
2 4,520 2,837 1,850 127,837 3,126 2,139 128,126 3,427 2,440 128,427
3 6,951 4,265 3,279 129,265 4,841 3,854 129,841 5,465 4,478 130,465
4 9,504 5,645 4,659 130,645 6,606 5,619 131,606 7,689 6,702 132,689
5 12,184 6,976 5,989 131,976 8,421 7,434 133,421 10,118 9,131 135,118
6 14,998 8,255 7,268 133,255 10,286 9,299 135,286 12,770 11,783 137,770
7 17,953 9,492 8,505 134,492 12,212 11,225 137,212 15,678 14,691 140,678
8 21,056 10,685 9,896 135,685 14,201 13,412 139,201 18,869 18,079 143,869
9 24,314 11,829 11,237 136,829 16,248 15,656 141,248 22,365 21,773 147,365
10 27,734 12,926 12,532 137,926 18,359 17,964 143,359 26,201 25,806 151,201
15 47,581 17,517 17,517 142,517 29,734 29,734 154,734 51,644 51,644 176,644
20 72,910 20,290 20,290 145,290 42,283 42,283 167,283 91,907 91,907 216,907
25 105,238 20,691 20,691 145,691 55,532 55,532 180,532 155,914 155,914 280,914
30 146,498 18,039 18,039 143,039 68,707 68,707 193,707 258,296 258,296 383,296
</TABLE>
(1) Assumes that no policy loans have been made.
(2) Current values reflect current cost of insurance rates, a monthly
administrative charge of $8.00 in all years and a mortality and expense
risk charge of 0.45% of assets in all years.
(3) Net investment returns are calculated as the hypothetical gross
investment returns less all charges and deductions shown in the
prospectus.
(4) Assumes that the premium is paid at the beginning of each policy year.
Values would be different if the premiums are paid with a different
frequency or in different amounts.
THE HYPOTHETICAL INVESTMENT RATES OF RETURN SHOWN ABOVE AND ELSEWHERE IN THIS
PROSPECTUS ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF
PAST OR FUTURE INVESTMENT RATES OF RETURN. ACTUAL RATES OF RETURN MAY BE MORE OR
LESS THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS INCLUDING THE
INVESTMENT ALLOCATIONS MADE BY AN OWNER, PREVAILING RATES AND RATES OF
INFLATION. THE DEATH BENEFIT AND CASH VALUE FOR A POLICY WOULD BE DIFFERENT FROM
THOSE SHOWN IF THE ACTUAL RATES OF RETURN AVERAGED 0%, 6% OR 12% OVER A PERIOD
OF YEARS BUT ALSO FLUCTUATED ABOVE OR BELOW THOSE AVERAGES FOR INDIVIDUAL POLICY
YEARS. NO REPRESENTATION CAN BE MADE BY THE COMPANY OR THE FUND THAT THESE
HYPOTHETICAL RATES OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER
ANY PERIOD OF TIME.
39
<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...............................41
Penn Mutual Variable Life Account I..................................41
The Funds............................................................42
More Information About Policy Values.................................45
Federal Income Tax Considerations....................................46
Sale of Policies.....................................................50
Penn Mutual Trustee and Officers.....................................50
State Regulation.....................................................52
Additional Information...............................................52
Experts..............................................................52
Litigation...........................................................53
Independent Auditors.................................................53
Legal Matters........................................................53
Financial Statements.................................................53
Appendix A..........................................................A-1
- Sample Minimum Initial Premiums
Appendix B..........................................................B-1
- Sample Applicable Percentages Under the Cash Value
Accumulation Life Insurance Qualification Test
40
<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 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
41
<PAGE>
the meeting of shareholders. Shares for which no timely instructions are
received will be voted by Penn Mutual in the same proportion as those shares for
which voting instructions are received.
We may, if required by state insurance officials, disregard owner
voting instructions if such instructions would require shares to be voted so as
to cause a change in sub-classification or investment objectives of one or more
of the funds, or to approve or disapprove an investment advisory agreement. In
addition, we may under certain circumstances disregard voting instructions that
would require changes in the investment Policy or investment adviser of one or
more of the funds, provided that we reasonably disapprove of such changes in
accordance with applicable federal regulations. If we ever disregard voting
instructions, we will advise owners of that action and of our reasons for such
action in the next semiannual report. Finally, we reserve the right to modify
the manner in which we calculate the weight to be given to pass-through voting
instructions where such a change is necessary to comply with current federal
regulations or the current interpretation thereof.
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
seconday.
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.
42
<PAGE>
Penn Series -- Mid Cap Growth Fund -- maximize capital appreciation.
Penn Series -- Mid Cap Value Fund -- growth of capital.
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.
43
<PAGE>
Neuberger Berman Management Incorporated, 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.
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 Policyowners and variable life Policyowners
(and also qualified pension and retirement plans with respect to Neuberger
Berman) arises.
44
<PAGE>
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 Policyowners and those given by
variable life Policyowners. In the event of a material irreconcilable conflict,
we will take the steps necessary to protect our variable annuity and variable
life Policyowners. This could include discontinuance of investment in a Fund.
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.
45
<PAGE>
Net Investment Factor
The net investment factor is an index used to measure the investment
performance of a subaccount from one valuation period to the next. It is based
on the change in net asset value of the fund shares held by the subaccount, and
reflects any dividend or capital gain distributions on fund shares and the
deduction of the daily mortality and expense risk charge.
Fixed Account Value
On any valuation date, the fixed account value of a Policy is the
total of all net premiums allocated to the fixed account, plus any amounts
transferred to the fixed account, plus interest credited on such net premiums
and transferred amounts, less the amount of any transfers from the fixed
account, less the amount of any partial surrenders taken from the fixed account
(including the partial surrender charges), and less the pro rata portion of the
monthly deduction deducted from the fixed account. If there have been any policy
loans, the fixed account value is further adjusted to reflect the amount in the
special loan account, including transfers to and from the special loan account
as loans are taken and repayments are made, and interest credited on the 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 to you for full or partial surrenders.
Federal Income Tax Considerations
The following summary provides a general description of the Federal
income tax considerations associated with the Policy and does not purport to be
complete or to cover all situations. This discussion is not intended as tax
advice. Counsel or other competent tax advisors should be consulted for more
complete information. This discussion is based on Penn Mutual's understanding of
the present Federal income tax laws as they are currently interpreted by the
Internal Revenue Service (the "IRS"). No representation is made as to the
likelihood of continuation of the present Federal income tax laws or of the
current interpretations by the IRS.
46
<PAGE>
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.
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.
47
<PAGE>
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.
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
48
<PAGE>
in the case of a decrease in the Policy's death benefit or any other change that
reduces benefits under the Policy in the first 15 years after the Policy is
issued and that results in a cash distribution to the owner in order for the
Policy to continue complying with the Section 7702 definitional limits. Such a
cash distribution will be taxed in whole or in part as ordinary income (to the
extent of any gain in the Policy) under rules prescribed in Section 7702.
Loans from, or secured by, a Policy that is not a modified endowment
contract are not treated as distributions. Instead, such loans are treated as
indebtedness of the owner.
Finally, neither distributions (including distributions upon surrender)
nor loans from, or secured by, a Policy that is not a modified endowment
contract are subject to the 10 percent additional tax.
Policy Loan Interest
Generally, personal interest paid on a loan under a Policy which is
owned by an individual is not deductible. In addition, interest on any loan
under a Policy owned by a taxpayer and covering the life of any individual will
generally not be tax deductible. The deduction of interest on policy loans may
also be subject to the restrictions of Section 264 of the Code. An owner should
consult a tax adviser before deducting any interest paid in respect of a policy
loan.
Investment in the Policy
Investment in the Policy means: (i) the aggregate amount of any
premiums or other consideration paid for a Policy, minus (ii) the aggregate
amount received under the Policy which is excluded from gross income of the
owner (except that the amount of any loan from, or secured by, a Policy that is
a modified endowment contract, to the extent such amount is excluded from gross
income, will be disregarded), plus (iii) the amount of any loan from, or secured
by, a Policy that is a modified endowment contract to the extent that such
amount is included in the gross income of the owner.
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.
49
<PAGE>
The individual situation of each owner or beneficiary will determine
the extent, if any, to which federal, state and local transfer taxes may be
imposed. Consult with your tax adviser for specific information in connection
with these taxes.
Sale of Policies
Hornor, Townsend & Kent, Inc. ("HTK"), a wholly-owned subsidiary of
Penn Mutual, acts as a principal underwriter of the Policies. HTK also acts as
principal underwriter for Penn Mutual Variable Annuity Account III, a separate
account also established by Penn Mutual and for PIA Variable Annuity Account I,
a separate account established by The Penn Insurance and Annuity Company, a
wholly-owned subsidiary of Penn Mutual. HTK is a registered broker-dealer under
the Securities Exchange Act of 1934 and a member of the National Association of
Securities Dealers, Inc. The Policy is sold by registered representatives of HTK
who are also appointed and licensed as insurance agents. The Policy may also be
offered through other insurance and securities brokers. Registered
representatives may be paid commissions on a Policy they sell based on premiums
paid in amounts up to 53.5% of first year premiums, 3% on premiums paid during
the second through fifteenth policy years, and 1.2% on premiums paid after the
first fifteen policy years. Registered representatives may also be paid
commissions of up to 0.25% of policy value. Other allowances and overrides also
may be paid. Registered representatives who meet certain productivity and
profitability standards may be eligible for additional compensation.
For the period July 1, 1999 to December 31, 1999, Penn Mutual received premium
payments on the Policy in the approximate amount of $9,537,433 and compensated
HTK in the approximate amounts of $60,422 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, Instituteof International Relations
1743 22nd Street, NW in Beijing, China, and distinguished adviser, American
Washington, DC 20008 Studies Center (April 1998 to present); President, US-
Japan Foundation (July 1996 to March 1998); Group
Executive Vice President, Bank America NT & SA (June
1993 to June 1996).
- -----------------------------------------------------------------------------------------------------------
</TABLE>
50
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
- ----------------------------------------------------------------------------------------------------------
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 Betz Laboratories, Inc. (prior thereto).
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, Janney Montgomery Scott Inc. (a
Philadelphia, PA 19103 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), 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
- ----------------------------------------------------------------------------------------------------------
</TABLE>
51
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
- ----------------------------------------------------------------------------------------------------------
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
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.
Experts
Actuarial matters included in this prospectus have been examined by
Ralph I. Pence, FSA, MAAA, Vice President and Chief Actuary, Penn Mutual, whose
opinion is filed as an exhibit to the Registration Statement.
52
<PAGE>
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 for 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.
Financial Statements
The financial statements of the Separate Account and the consolidated
financial statements of Penn Mutual appear on the following pages. The
consolidated financial statements of Penn Mutual should be considered only as
bearing upon Penn Mutual's ability to meet its obligations under the Policies.
53
<PAGE>
PENN MUTUAL VARIABLE LIFE ACCOUNT I
STATEMENT OF ASSETS AND LIABILITIES - DECEMBER 31, 1999
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Money Quality High Yield
Total Market Fund+ Bond Fund+ Bond Fund+
------------ ------------ ---------- ----------
<S> <C> <C> <C> <C>
Investment in Common Stock
Number of Shares ........................................................ 26,314,175 808,876 976,640
Cost .................................................................... 331,143,943 $26,314,175 $8,419,173 $9,279,758
Assets:
Investments at market value ............................................. 415,163,095 $26,314,175 $8,412,326 $9,356,213
Dividends receivable .................................................... 99,160 99,160 - -
Liabilities:
Due to(from) the Penn Mutual Life Insurance Company ..................... (409,814) (568,781) 2,945 3,245
------------ ----------- ---------- ----------
Net Assets .............................................................. $415,672,069 $26,982,116 $8,409,381 $9,352,968
============ =========== ========== ==========
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
[RESTUBED FOR ABOVE]
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
Flexibly
Growth Equity Value Equity Managed
Fund+ Fund+ Fund+
----------- ------------ -----------
<S> <C> <C> <C>
Investment in Common Stock
Number of Shares ........................................................ 711,571 1,756,163 3,012,632
Cost .................................................................... $19,153,246 $35,263,907 $56,394,230
Assets:
Investments at market value ............................................. $29,466,217 $39,004,376 $59,107,839
Dividends receivable .................................................... - - -
Liabilities:
Due to(from) the Penn Mutual Life Insurance Company ..................... 15,247 13,831 20,896
----------- ----------- ------------
Net Assets .............................................................. $29,450,970 $38,990,545 $59,086,943
=========== =========== ===========
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
[RESTUBED FOR ABOVE]
<TABLE>
<CAPTION>
Small Emerging
International Capitalization Growth
Equity Fund+ Fund+ Fund+
------------- -------------- ------------
<S> <C> <C> <C>
Investment in Common Stock
Number of Shares ........................................................ 1,273,775 820,791 594,401
Cost .................................................................... $20,526,548 $10,790,412 $11,618,219
Assets:
Investments at market value ............................................. $34,111,715 $10,374,806 $29,529,819
Dividends receivable .................................................... - - -
Liabilities:
Due to(from) the Penn Mutual Life Insurance Company ..................... 16,356 4,031 14,547
----------- ----------- -----------
Net Assets .............................................................. $34,095,359 $10,370,775 $29,515,272
=========== =========== ===========
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
54
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
PENN MUTUAL VARIABLE LIFE ACCOUNT I
STATEMENT OF OPERATIONS - FOR THE YEAR ENDED DECEMBER 31, 1999
Money Quality High Yield
Total Market Fund+ Bond Fund+ Bond Fund+
------------ ------------ ---------- ----------
<S> <C> <C> <C> <C>
Investment Income:
Dividends .............................................................. $ 1,697,544 $ 776,851 $ - $ -
Expense:
Mortality and expense risk charges ..................................... 2,766,443 134,820 62,224 72,682
------------ ----------- ---------- ----------
Net investment income (loss) ........................................... (1,068,899) 642,031 (62,224) (72,682)
------------ ----------- ---------- ----------
Realized and Unrealized Gains (Losses) on
Investments:
Realized gains (losses) from redemption of fund
shares ............................................................ 1,853,264 - 300 416
Capital gains distributions ............................................ 4,604,784 - - -
------------ ----------- ---------- ----------
Net realized gains (losses) from investment
transactions ...................................................... 6,458,048 - 300 416
Net change in unrealized appreciation/depreciation
of investments .................................................... 61,995,442 - 3,611 349,711
------------ ----------- ---------- ----------
Net realized and unrealized gains (losses) on
investments ....................................................... 68,453,490 - 3,911 350,127
------------ ----------- ---------- ----------
Net increase (decrease) in net assets resulting
from operations ................................................... $ 67,384,591 $ 642,031 $(58,313) $277,445
============ =========== ========== ==========
</TABLE>
[RESTUBED FOR ABOVE]
<TABLE>
<CAPTION>
Flexibly
Growth Equity Value Equity Managed
Fund+ Fund+ Fund+
------------- ------------ -----------
<S> <C> <C> <C>
Investment Income:
Dividends .............................................................. $ - $ - $ -
Expense:
Mortality and expense risk charges ..................................... 176,930 317,240 470,251
----------- ----------- -----------
Net investment income (loss) ........................................... (176,930) (317,240) (470,251)
----------- ----------- -----------
Realized and Unrealized Gains (Losses) on
Investments:
Realized gains (losses) from redemption of fund
shares ............................................................ 51,190 (37,587) 16,311
Capital gains distributions ............................................ - - -
----------- ----------- -----------
Net realized gains (losses) from investment
transactions ...................................................... 51,190 (37,587) 16,311
Net change in unrealized appreciation/depreciation
of investments .................................................... 6,911,635 (296,100) 3,692,338
----------- ----------- -----------
Net realized and unrealized gains (losses) on
investments ....................................................... 6,962,825 (333,687) 3,708,649
----------- ----------- -----------
Net increase (decrease) in net assets resulting
from operations ................................................... $ 6,785,895 $ (650,927) $ 3,238,398
=========== =========== ===========
</TABLE>
55
<PAGE>
[RESTUBED FOR ABOVE]
<TABLE>
<CAPTION>
Small Emerging
International Capitalization Growth
Equity Fund+ Fund+ Fund+
------------- -------------- --------
<S> <C> <C> <C>
Investment Income:
Dividends .............................................................. $ - $ - $ -
Expense:
Mortality and expense risk charges ..................................... 226,031 80,192 134,466
----------- ----------- -----------
Net investment income (loss) ........................................... (226,031) (80,192) (134,466)
----------- ----------- -----------
Realized and Unrealized Gains (Losses) on
Investments:
Realized gains (losses) from redemption of fund
shares ............................................................ 1,131,146 8,164 195,921
Capital gains distributions ............................................ - - -
----------- ----------- -----------
Net realized gains (losses) from investment
transactions ...................................................... 1,131,146 8,164 195,921
Net change in unrealized appreciation/depreciation
of investments .................................................... 10,566,719 (63,045) 16,746,334
----------- ----------- -----------
Net realized and unrealized gains (losses) on
investments ....................................................... 11,697,865 (54,881) 16,942,255
----------- ----------- -----------
Net increase (decrease) in net assets resulting
from operations ................................................... $11,471,834 $(135,073) $16,807,789
=========== =========== ===========
</TABLE>
[RESTUBED FOR ABOVE]
+ 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.
56
<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 $12,754,874 $9,011,460
========== ========== =========== ==========
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
PENN MUTUAL VARIABLE LIFE ACCOUNT I
STATEMENT OF OPERATIONS - FOR THE YEAR ENDED DECEMBER 31, 1999 (CONT'D )
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.
57
<PAGE>
[RESTUBBED]
<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>
<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.
58
<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>
59
<PAGE>
<TABLE>
<CAPTION>
Quality Bond Fund+ Flexibly Managed Fund+
------------------------------- ---------------------------------
1999 1998 1999 1998
----------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
Operations:
Net investment income (loss) ................ ($62,224) $252,041 ($470,251) $1,144,764
Net realized gains (losses) from
investment transactions ................... 300 203,736 16,311 5,784,840
Net change in unrealized appreciation/
depreciation of investments ............... 3,611 (14,899) 3,692,338 (4,524,890)
----------- ----------- ------------ ------------
Net increase (decrease) in net assets
resulting from operations ................. (58,313) 440,878 3,238,398 2,404,714
----------- ----------- ------------ ------------
Variable Life Activities:
Purchase payments ........................... 1,355,013 1,155,232 12,696,631 12,234,331
Death benefits .............................. (2,243) (249) (82,516) (17,851)
Cost of insurance ........................... (360,405) (259,658) (3,522,739) (3,137,840)
Net transfers ............................... 1,123,017 1,041,850 (6,182,355) 1,345,485
Transfers of policy loans ................... 11,409 10,440 211,590 139,613
Contract administration charges ............. (73,285) (42,018) (690,067) (646,642)
Surrender benefits .......................... (226,335) (105,331) (1,818,495) (1,299,724)
----------- ----------- ------------ ------------
Net increase in net assets resulting
from variable annuity activities ............ 1,827,171 1,800,266 612,049 8,617,372
----------- ----------- ------------ ------------
Total increase (decrease) in net assets .... 1,768,858 2,241,144 3,850,447 11,022,086
Net Assets:
Beginning of year ............................ 6,640,523 4,399,379 55,236,496 44,214,410
----------- ----------- ------------ ------------
End of year .................................. $8,409,381 $6,640,523 $59,086,943 $55,236,496
=========== =========== ============ ============
Value Equity Fund+ Emerging Growth Fund+
------------------------------- ---------------------------------
1999 1998 1999 1998
----------- ----------- ------------ ------------
Operations:
Net investment income (loss) ................ ($317,240) $181,632 ($134,466) ($29,768)
Net realized gains (losses) from
investment transactions ................... (37,587) 3,177,280 195,921 10,412
Net change in unrealized appreciation/
depreciation of investments ............... (296,100) (904,321) 16,746,334 1,277,385
------------ ------------ ------------ ------------
Net increase (decrease) in net assets
resulting from operations ................. (650,927) 2,454,591 16,807,789 1,258,029
------------ ------------ ------------ ------------
Variable Life Activities:
Purchase payments ........................... 9,300,537 7,712,812 2,612,183 1,376,626
Death benefits .............................. (34,277) (3,109) (7,463) -
Cost of insurance ........................... (2,317,035) (2,002,921) (575,948) (270,389)
Net transfers ............................... (1,332,367) 2,352,575 5,165,425 2,271,306
Transfers of policy loans ................... 83,517 129,894 27,154 949
Contract administration charges ............. (490,439) (471,036) (190,593) (117,695)
Surrender benefits .......................... (1,050,128) (800,734) (260,812) (61,482)
------------ ------------ ------------ ------------
Net increase in net assets resulting
from variable annuity activities ............ 4,159,808 6,917,481 6,769,946 3,199,315
------------ ------------ ------------ ------------
Total increase (decrease) in net assets .... 3,508,881 9,372,072 23,577,735 4,457,344
Net Assets:
Beginning of year ............................ 35,481,664 26,109,592 5,937,537 1,480,193
------------ ------------ ------------ ------------
End of year .................................. $38,990,545 $35,481,664 $29,515,272 $5,937,537
============ ============ ============ ============
</TABLE>
60
<PAGE>
<TABLE>
<CAPTION>
Small
International Equity Fund+ Capitalization Fund +
------------------------------ ----------------------------------
1999 1998 1999 1998
------------ ------------ ------------ -----------
<S> <C> <C> <C> <C>
Operations:
Net investment income (loss) ................ ($226,031) $56,661 ($80,192) ($5,543)
Net realized gains (losses) from
investment transactions ................... 1,131,146 970,588 8,164 135,416
Net change in unrealized appreciation/
depreciation of investments ............... 10,566,719 2,087,405 (63,045) (791,507)
------------ ------------ ------------ -----------
Net increase (decrease) in net assets
resulting from operations ................. 11,471,834 3,114,654 (135,073) (661,634)
------------ ------------ ------------ -----------
Variable Life Activities:
Purchase payments ........................... 6,485,087 4,244,414 3,124,582 2,372,356
Death benefits .............................. (7,506) (15,627) (7,256) (10,571)
Cost of insurance ........................... (1,671,752) (1,050,548) (604,903) (505,718)
Net transfers ............................... (3,336,017) 3,160,776 (12,470) 2,227,491
Transfers of policy loans ................... 72,417 65,814 45,711 11,010
Contract administration charges ............. (408,378) (252,405) (147,833) (165,296)
Surrender benefits .......................... (906,723) (633,058) (228,773) (129,707)
------------ ------------ ------------ -----------
Net increase in net assets resulting
from variable annuity activities ............ 227,128 5,519,366 2,169,058 3,799,565
------------ ------------ ------------ -----------
Total increase (decrease) in net assets .... 11,698,962 8,634,020 2,033,985 3,137,931
Net Assets:
Beginning of year ............................ 22,396,397 13,762,377 8,336,790 5,198,859
------------ ------------ ------------ -----------
End of year .................................. $34,095,359 $22,396,397 $10,370,775 $8,336,790
============ ============ ============ ===========
Limited Maturity
Balanced Portfolio++ Bond Portfolio++
------------------------------ ----------------------------------
1999 1998 1999 1998
------------ ------------ ------------ -----------
Operations:
Net investment income (loss) ................ $35,671 $52,777 $62,320 $41,895
Net realized gains (losses) from
investment transactions ................... 145,588 610,655 ($1,650) 242
Net change in unrealized appreciation/
depreciation of investments ............... 1,736,544 (184,479) (73,233) (13,221)
------------ ------------ ------------ -----------
Net increase (decrease) in net assets
resulting from operations ................. 1,917,803 478,953 (12,563) 28,916
------------ ------------ ------------ -----------
Variable Life Activities:
Purchase payments ........................... 1,484,570 1,068,630 539,187 300,887
Death benefits .............................. (6,801) (2,001) (2,119) -
Cost of insurance ........................... (353,927) (278,391) (97,258) (58,968)
Net transfers ............................... (12,467) 526,196 (23,735) 318,853
Transfers of policy loans ................... 18,188 83,335 2,417 5,849
Contract administration charges ............. (73,565) (50,297) (27,049) (14,141)
Surrender benefits .......................... (174,227) (163,220) (29,913) (9,313)
------------ ------------ ------------ -----------
Net increase in net assets resulting
from variable annuity activities ............ 881,771 1,184,252 361,530 543,167
------------ ------------ ------------ -----------
Total increase (decrease) in net assets .... 2,799,574 1,663,205 348,967 572,083
Net Assets:
Beginning of year ............................ 5,134,483 3,471,278 1,228,598 656,515
------------ ------------ ------------ -----------
End of year .................................. $7,934,057 $5,134,483 $1,577,565 $1,228,598
============ ============ ============ ===========
</TABLE>
61
<PAGE>
<TABLE>
<CAPTION>
Partners
Portfolio++
-------------------------------
1999 1998
------------ -----------
<S> <C> <C>
Operations:
Net investment income (loss) ................ $20,897 ($33,955)
Net realized gains (losses) from
investment transactions ................... 214,394 486,053
Net change in unrealized appreciation/
depreciation of investments ............... 412,343 (271,429)
------------ -----------
Net increase (decrease) in net assets
resulting from operations ................. 647,634 180,669
------------ -----------
Variable Life Activities:
Purchase payments ........................... 2,466,761 2,301,846
Death benefits .............................. (13,903) -
Cost of insurance ........................... (469,143) (484,655)
Net transfers ............................... 2,236,859 3,388,292
Transfers of policy loans ................... 14,898 11,914
Contract administration charges ............. (126,557) (201,761)
Surrender benefits .......................... (211,368) (138,687)
------------ -----------
Net increase in net assets resulting
from variable annuity activities ............ 3,897,547 4,876,949
------------ -----------
Total increase (decrease) in net assets .... 4,545,181 5,057,618
Net Assets:
Beginning of year ............................ 8,209,694 3,152,076
------------ -----------
End of year .................................. $12,754,875 $8,209,694
============ ===========
Growth
Portfolio++++
-------------------------------
1999 1998
------------ -----------
Operations:
Net investment income (loss) ................ ($56,208) ($47,491)
Net realized gains (losses) from
investment transactions ................... 35,362 140,032
Net change in unrealized appreciation/
depreciation of investments ............... 3,540,972 (261,202)
------------ -----------
Net increase (decrease) in net assets
resulting from operations ................. 3,520,126 (168,661)
------------ -----------
Variable Life Activities:
Purchase payments ........................... 1,370,035 1,577,063
Death benefits .............................. (2,858) (3,745)
Cost of insurance ........................... (342,503) (342,552)
Net transfers ............................... (932,409) (1,352,477)
Transfers of policy loans ................... 15,155 35,632
Contract administration charges ............. (57,224) (53,636)
Surrender benefits .......................... (323,009) (244,500)
------------ -----------
Net increase in net assets resulting
from variable annuity activities ............ (272,813) (384,215)
------------ -----------
Total increase (decrease) in net assets .... 3,247,313 (552,876)
Net Assets:
Beginning of year ............................ 5,764,147 6,317,023
------------ -----------
End of year .................................. $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
62
<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
Portfolio++++ Portfolio++++
------------------------------------- -------------------------------------
1999 1998 1999 1998
----------------- ----------------- ------------------ ----------------
<S> <C> <C> <C> <C>
Operations:
Net investment income (loss) ........... $95,807 $40,458 ($310,681) ($106,277)
Net realized gains (losses) from
investment transactions ........... 675,484 649,737 3,375,626 2,143,029
Net change in unrealized appreciation/
depreciation of investments ....... 330,734 963,306 10,574,337 5,047,623
----------------- ----------------- ------------------ ----------------
Net increase (decrease) in net assets
resulting from operations ......... 1,102,025 1,653,501 13,639,282 7,084,375
----------------- ----------------- ------------------ ----------------
Variable Life Activities:
Purchase payments ...................... 6,666,334 4,640,276 10,979,093 5,974,648
Death benefits ......................... (14,032) (20,055) (38,816) (45,153)
Cost of insurance ...................... (1,603,588) (1,115,035) (2,562,252) (1,459,882)
Net transfers .......................... 1,627,390 2,979,305 8,714,008 2,873,583
Transfers of policy loans .............. 71,994 25,171 68,165 22,413
Contract administration charges ........ (373,064) (297,186) (720,794) (385,848)
Surrender benefits ..................... (726,919) (430,380) (1,358,474) (689,227)
----------------- ----------------- ------------------ ----------------
Net increase in net assets resulting
from variable annuity activities ....... 5,648,115 5,782,096 15,080,930 6,290,534
----------------- ----------------- ------------------ ----------------
Total increase (decrease) in net assets. 6,750,140 7,435,597 28,720,212 13,374,909
Net Assets:
Beginning of year ......................... 19,866,250 12,430,653 28,561,805 15,186,896
----------------- ----------------- ------------------ ----------------
End of year ............................... $26,616,390 $19,866,250 $57,282,017 $28,561,805
================= ================= ================== ================
</TABLE>
[RESTUB]
<TABLE>
<CAPTION>
Asset Manager
Portfolio++++
---------------------------------------
1999 1998
------------------ -------------------
<S> <C> <C>
Operations:
Net investment income (loss) ........... $84,186 $43,537
Net realized gains (losses) from
investment transactions ........... 160,654 202,236
Net change in unrealized appreciation/
depreciation of investments ....... 272,683 136,988
------------------ -------------------
Net increase (decrease) in net assets
resulting from operations ......... 517,523 382,761
------------------ -------------------
Variable Life Activities:
Purchase payments ...................... 1,375,866 834,804
Death benefits ......................... (1,237) -
Cost of insurance ...................... (347,344) (216,443)
Net transfers .......................... 1,102,953 807,683
Transfers of policy loans .............. 3,213 1,050
Contract administration charges ........ (73,304) (49,185)
Surrender benefits ..................... (129,352) (115,461)
------------------ -------------------
Net increase in net assets resulting
from variable annuity activities ....... 1,930,795 1,262,448
------------------ -------------------
Total increase (decrease) in net assets. 2,448,318 1,645,209
Net Assets:
Beginning of year ......................... 3,718,485 2,073,276
------------------ -------------------
End of year ............................... $6,166,803 $3,718,485
================== ===================
</TABLE>
63
<PAGE>
<TABLE>
<CAPTION>
Index 500 Emerging Markets
Portfolio++++ Portfolio+++++
------------------------------------ -------------------------------------
1999 1998 1999 1998
---------------- ----------------- ------------------ ----------------
<S> <C> <C> <C> <C>
Operations:
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 integral part of these financial statements.
64
<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
sinvestments 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.
65
<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 Estate Max; Momentum Builder is determined daily at an annual
rate of 0.65% of the average value of Momentum Builder.
For each Cornerstone VUL, Cornerstone VUL II, 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.
66
<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
67
<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
68
<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.
[GRAPHIC OMITTED]
Philadelphia, Pennsylvania
April 4, 2000
69
<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.
70
<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.
71
<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.
72
<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.
73
<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.
74
<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
75
<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,
76
<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
77
<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,
78
<PAGE>
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements, continued
(In Thousands of Dollars)
- --------------------------------------------------------------------------------
reserves for payment of future policy benefits at December 31, 1999 include
$7,458 related to the remaining 5% of the DI business.
As this is a disposal of a segment of business, the Company has modified the
presentation in the accompanying income statements to separate the results of
operations attributable to this business. Revenue from discontinued operations
for the year ended December 31, 1999, 1998 and 1997 were $16,855, $28,854 and
$29,884, respectively.
The reinsurance agreement is secured for the Company by a collateralized trust
which names the Company as the beneficiary. As of December 31, 1999, the Company
had a reinsurance recoverable from Christian Mutual of $141,707 which was
secured by investment grade securities with a market value of $155,046 held in
trust.
3. INVESTMENTS:
Debt Securities
The following tables summarize the Company's investment in debt securities,
including redeemable preferred stocks. All debt securities are classified as
available for sale and are carried at estimated fair value. Amortized cost is
net of cumulative writedowns for other than temporary declines in value of
$8,703 and $3,056 as of December 31, 1999 and 1998, respectively.
<TABLE>
<CAPTION>
December 31, 1999
--------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
U.S. Treasury securities and U.S.
Government and agency securities $ 10,527 $ 119 $ 178 $ 10,468
States and political subdivisions 11,600 -- 58 11,542
Foreign governments 19,854 758 -- 20,612
Corporate securities 2,678,302 69,875 116,357 2,631,820
Mortgage and other asset-backed securities 2,106,506 9,975 58,011 2,058,470
---------- ---------- ---------- ----------
Total bonds 4,826,789 80,727 174,604 4,732,912
Redeemable preferred stocks 360 -- 11 349
---------- ---------- ---------- ----------
Total $4,827,149 $ 80,727 $ 174,615 $4,733,261
========== ========== ========== ==========
December 31, 1998
--------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------- ---------- ---------- ----------
U.S. Treasury securities and U.S.
Government and agency securities $ 13,109 $ 1,271 $ -- $ 14,380
States and political subdivisions 12,094 2,216 -- 14,310
Foreign governments 24,920 3,323 -- 28,243
Corporate securities 3,058,066 299,489 4,956 3,352,599
Mortgage and other asset-backed securities 2,006,891 86,271 4,399 2,088,763
---------- ---------- ---------- ----------
Total bonds 5,115,080 392,570 9,355 5,498,295
Redeemable preferred stocks 2,696 -- 67 2,629
---------- ---------- ---------- ----------
Total $5,117,776 $ 392,570 $ 9,422 $5,500,924
========== ========== ========== ==========
</TABLE>
79
<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
80
<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
============ ============
1999 1998
------------ ------------
Geographic Concentration
Northeast $ 5,506 $10,273
Midwest 5,515 5,728
South 11,612 12,075
West 5,982 14,552
Valuation Allowance (1,500) (3,800)
------------ ------------
Total $27,115 $38,828
============ ============
The following table presents changes in the mortgage loan valuation allowance
for the years presented:
1999 1998
------------ ------------
Balance at January 1 $ 3,800 $ 3,800
Reduction in provision (2,300) -
Charge-offs - -
------------ ------------
Balance at December 31 $ 1,500 $ 3,800
============ ============
</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.
81
<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>
82
<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
============= ============= =============
The following table summarizes the change in unrealized gains and losses for
investments carried at fair value which are reflected in other comprehensive
income for the year ended December 31.
1999 1998 1997
---------------- ------------- -------------
Unrealized gains/(losses):
Debt securities $ (477,036) $ 86,594 $ 160,850
Equity securities (43) (2,092) 408
Other 5,555 (2,091) (14,581)
---------------- ------------- -------------
(471,524) 82,411 146,677
---------------- ------------- -------------
Less:
Deferred policy acquisition costs 117,050 (12,841) (45,043)
Deferred income taxes 123,937 (24,440) (35,355)
---------------- ------------- -------------
Net change in unrealized gains/(losses) $ (230,537) $ 45,130 $ 66,279
================ ============= =============
The following table sets forth the reclassification adjustment required to avoid
double-counting in comprehensive income items that are included as part of net
income for a period that also had been part of other comprehensive income in
earlier periods:
Reclassification Adjustments 1999 1998 1997
-------------- -------------- -------------
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.
83
<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
--------------- -------------- --------------- --------------
Financial Assets:
<S> <C> <C> <C> <C>
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.
84
<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.
85
<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>
86
<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.
87
<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.
88
<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.
89
<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
90
<PAGE>
- --------------------------------------------------------------------------------
Appendix A
- --------------------------------------------------------------------------------
Sample Minimum Initial Premiums
The following table shows for Insureds of varying ages, the minimum initial
premium for a Policy with a basic death benefit indicated. The table assumes the
Insureds will be placed in a nonsmoker class and that no supplemental benefits
will be added to the base Policy.
Issue Age Minimum Initial
of Insured Sex of Insured Base Death Benefit Premium
- --------------------------------------------------------------------------------
25 M $50,000 $286
- --------------------------------------------------------------------------------
30 F $75,000 $390
- --------------------------------------------------------------------------------
35 M $75,000 $448
- --------------------------------------------------------------------------------
40 F $100,000 $640
- --------------------------------------------------------------------------------
45 M $100,000 $827
- --------------------------------------------------------------------------------
50 F $100,000 $975
- --------------------------------------------------------------------------------
55 M $100,000 $1,377
- --------------------------------------------------------------------------------
60 F $75,000 $1,155
- --------------------------------------------------------------------------------
65 M $75,000 $2,022
- --------------------------------------------------------------------------------
70 F $50,000 $1,327
- --------------------------------------------------------------------------------
A-1
<PAGE>
- --------------------------------------------------------------------------------
Appendix B
- --------------------------------------------------------------------------------
Applicable Percentages Under the Guideline Premium / Cash Value Corridor Test
<TABLE>
<CAPTION>
Attained Attained Attained Attained Attained
Age Percentage Age Percentage Age Percentage Age Percentage Age Percentage
--- ---------- --- ---------- --- ---------- --- ---------- --- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
0-40 250% 51 178% 62 126% 73 109% 84 105%
41 243% 52 171% 63 124% 74 107% 85 105%
42 236% 53 164% 64 122% 75 105% 86 105%
43 229% 54 157% 65 120% 76 105% 87 105%
44 222% 55 150% 66 119% 77 105% 88 105%
45 215% 56 146% 67 118% 78 105% 89 105%
46 209% 57 142% 68 117% 79 105% 90 105%
47 203% 58 138% 69 116% 80 105% 91 104%
48 197% 59 134% 70 115% 81 105% 92 103%
49 191% 60 130% 71 113% 82 105% 93 102%
50 185% 61 128% 72 111% 83 105% 94-99 101%
</TABLE>
B-1
<PAGE>
Sample Applicable Percentages Under the Cash Value Accumulation Test
Male Non-Smoker
<TABLE>
<CAPTION>
Attained Attained Attained Attained Attained
Age Percentage Age Percentage Age Percentage Age Percentage Age Percentage
--- ---------- --- ---------- --- ---------- --- ---------- --- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
0-19 N/A 36 417.61% 53 240.32% 69 156.24% 85 119.81%
20 699.48% 37 403.76% 54 233.12% 70 152.83% 86 118.55%
21 679.26% 38 390.40% 55 226.22% 71 149.57% 87 117.38%
22 659.36% 39 377.52% 56 219.61% 72 146.49% 88 116.28%
23 639.73% 40 365.11% 57 213.30% 73 143.58% 89 115.23%
24 620.39% 41 353.15% 58 207.25% 74 140.85% 90 114.21%
25 601.33% 42 341.65% 59 201.45% 75 138.30% 91 113.20%
26 582.53% 43 330.57% 60 195.91% 76 135.91% 92 112.17%
27 564.06% 44 319.91% 61 190.60% 77 133.67% 93 111.08%
28 545.97% 45 309.63% 62 185.53% 78 131.57% 94 109.92%
29 528.29% 46 299.75% 63 180.70% 79 129.58% 95 108.65%
30 511.04% 47 290.24% 64 176.09% 80 127.70% 96 107.27%
31 494.24% 48 281.10% 65 171.71% 81 125.91% 97 105.80%
32 477.93% 49 272.29% 66 167.55% 82 124.22% 98 104.25%
33 462.11% 50 263.82% 67 163.60% 83 122.64% 99 102.60%
34 446.78% 51 255.67% 68 159.83% 84 121.17% 100 100.00%
35 431.94% 52 247.84%
</TABLE>
Female Non-Smoker
<TABLE>
<CAPTION>
Attained Attained Attained Attained Attained
Age Percentage Age Percentage Age Percentage Age Percentage Age Percentage
--- ---------- --- ---------- --- ---------- --- ---------- --- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
0-19 N/A 36 468.31% 53 270.97% 69 171.23% 85 122.77%
20 796.54% 37 452.83% 54 262.85% 70 166.87% 86 121.08%
21 771.20% 38 437.93% 55 255.03% 71 162.66% 87 119.50%
22 746.54% 39 423.58% 56 247.50% 72 158.63% 88 118.03%
23 722.57% 40 409.78% 57 240.24% 73 154.80% 89 116.64%
24 699.24% 41 396.51% 58 233.24% 74 151.16% 90 115.32%
25 676.63% 42 383.77% 59 226.46% 75 147.74% 91 114.03%
26 654.62% 43 371.51% 60 219.89% 76 144.52% 92 112.76%
27 633.28% 44 359.71% 61 213.54% 77 141.49% 93 111.49%
28 612.56% 45 348.34% 62 207.41% 78 138.64% 94 110.17%
29 592.47% 46 337.38% 63 201.52% 79 135.95% 95 108.79%
30 572.99% 47 326.82% 64 195.89% 80 133.39% 96 107.34%
31 554.12% 48 316.63% 65 190.51% 81 130.98% 97 105.82%
32 535.83% 49 306.81% 66 185.37% 82 128.71% 98 104.26%
33 518.10% 50 297.34% 67 180.47% 83 126.58% 99 102.60%
34 500.93% 51 288.22% 68 175.76% 84 124.60% 100 100.00%
35 484.36% 52 279.43%
</TABLE>
B-2
<PAGE>
Sample Applicable Percentages Under the Cash Value Accumulation Test
Male Smoker
<TABLE>
<CAPTION>
Attained Attained Attained Attained Attained
Age Percentage Age Percentage Age Percentage Age Percentage Age Percentage
--- ---------- --- ---------- --- ---------- --- ---------- --- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
0-19 N/A 36 342.96% 53 206.34% 69 144.93% 85 118.30%
20 567.36% 37 331.98% 54 201.00% 70 142.45% 86 117.35%
21 551.35% 38 321.41% 55 195.91% 71 140.09% 87 116.44%
22 535.65% 39 311.26% 56 191.05% 72 137.84% 88 115.56%
23 520.14% 40 301.52% 57 186.43% 73 135.71% 89 114.71%
24 504.81% 41 292.18% 58 182.01% 74 133.71% 90 113.85%
25 489.67% 42 283.23% 59 177.78% 75 131.84% 91 112.97%
26 474.70% 43 274.66% 60 173.72% 76 130.10% 92 112.04%
27 459.94% 44 266.46% 61 169.84% 77 128.48% 93 111.02%
28 445.46% 45 258.59% 62 166.14% 78 126.96% 94 109.89%
29 431.30% 46 251.07% 63 162.61% 79 125.52% 95 108.65%
30 417.48% 47 243.85% 64 159.26% 80 124.15% 96 107.27%
31 404.05% 48 236.93% 65 156.08% 81 122.84% 97 105.80%
32 391.02% 49 230.29% 66 153.08% 82 121.59% 98 104.25%
33 378.39% 50 223.92% 67 150.23% 83 120.42% 99 102.60%
34 366.17% 51 217.79% 68 147.52% 84 119.32% 100 100.00%
35 354.36% 52 211.94%
</TABLE>
Female Smoker
<TABLE>
<CAPTION>
Attained Attained Attained Attained Attained
Age Percentage Age Percentage Age Percentage Age Percentage Age Percentage
--- ---------- --- ---------- --- ---------- --- ---------- --- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
0-19 N/A 36 413.45% 53 247.46% 69 163.93% 85 121.86%
20 700.22% 37 400.10% 54 240.74% 70 160.19% 86 120.34%
21 677.90% 38 387.29% 55 234.28% 71 156.56% 87 118.94%
22 656.20% 39 375.01% 56 228.06% 72 153.07% 88 117.61%
23 635.13% 40 363.24% 57 222.06% 73 149.74% 89 116.35%
24 614.65% 41 351.98% 58 216.25% 74 146.59% 90 115.11%
25 594.81% 42 341.22% 59 210.60% 75 143.63% 91 113.90%
26 575.52% 43 330.93% 60 205.10% 76 140.85% 92 112.70%
27 556.84% 44 321.06% 61 199.75% 77 138.24% 93 111.46%
28 538.74% 45 311.58% 62 194.58% 78 135.78% 94 110.17%
29 521.19% 46 302.46% 63 189.59% 79 133.44% 95 108.79%
30 504.21% 47 293.69% 64 184.82% 80 131.22% 96 107.34%
31 487.80% 48 285.25% 65 180.27% 81 129.11% 97 105.82%
32 471.91% 49 277.11% 66 175.93% 82 127.12% 98 104.26%
33 456.54% 50 269.27% 67 171.78% 83 125.23% 99 102.60%
34 441.67% 51 261.73% 68 167.79% 84 123.48% 100 100.00%
35 427.33% 52 254.46%
</TABLE>
B-3
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
PART II
<PAGE>
UNDERTAKING TO FILE REPORTS
Subject to the terms and conditions of Section 15(d) of the Securities
Exchange Act of 1934, the undersigned Registrant hereby undertakes to file with
the Securities and Exchange Commission such supplementary and periodic
information, documents and reports as may be prescribed by any rule or
regulation of the Commission heretofore or hereafter duly adopted pursuant to
authority conferred in that section.
The undersigned Registrant represents that the fees and charges
deducted under the Flexible Premium Adjustable Variable Life Insurance Policies,
in the aggregate, are reasonable in relation to the services rendered, the
expenses expected to be incurred, and the risks assumed by the Registrant.
UNDERTAKING PURSUANT TO RULE 484 UNDER THE SECURITIES ACT OF 1933
Section 6.2 of the By-laws of The Penn Mutual Life Insurance Company
("Penn Mutual" or the "Company") provides that, in accordance with the
provisions of the Section, the Company shall indemnify trustees and officers
against expenses (including attorneys' fees), judgments, fines, excise taxes and
amounts paid in settlement actually and reasonably incurred in connection with
actions, suits and proceedings, to the extent such indemnification is not
prohibited by law, and may provide other indemnification to the extent not
prohibited by law. The By-laws are filed as Exhibit 6(b) to the Form N-4
Registration Statement of Penn Mutual Variable Annuity Account III filed
September 3, 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.
II-1
<PAGE>
REPRESENTATION PURSUANT TO SECTION 26(e)(2)(A)
OF THE INVESTMENT COMPANY ACT OF 1940
The Penn Mutual Life Insurance Company represents that the fees and
charges deducted under the Flexible Premium Adjustable Variable Life Insurance
Policies, in the aggregate, are reasonable in relation to the services rendered,
the expenses expected to be incurred, and the risks assumed by the Company.
CONTENTS OF REGISTRATION STATEMENT
This Registration Statement comprises the following papers and documents:
The facing sheet.
The prospectuses consisting of 241 pages.
Undertaking to file reports.
Rule 484 Undertaking.
Section 26(e)(2)(A) Representation.
The signatures.
Written consents of the following persons:
(a) Ernst & Young, LLP
(b) Morgan, Lewis & Bockius LLP
The following exhibits:
1. Copies of all exhibits which would be required by paragraph A of the
instructions as to exhibits in Form N-8B-2 if a Registration Statement
on that Form were currently being filed.
A(1) (a) Resolution of the Board of Trustees of The Penn Mutual Life
Insurance Company establishing the Penn Mutual Variable Life
Account I. Incorporated herein by reference to Exhibit A(1)(a) to
Post-Effective Amendment No. 6 to the Form S-6 Registration
Statement of Penn Mutual Variable Life Account I (File No.
33-87276) filed on April 30, 1999 (Accession No.
0000950116-99-000867).
(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. 8
to this Form S-6
II-2
<PAGE>
Registration Statement filed on April 30, 1999 (Accession No.
0000950116-99-000880).
A(2) Not Applicable.
A(3) (a)(1) Distribution Agreement between The Penn Mutual Life Insurance
Company and Hornor, Townsend & Kent. Incorporated herein by
reference to Exhibit A(3)(a)(1) to Post-Effective Amendment
No. 6 to the Form S-6 Registration Statement of Penn Mutual
Variable Life Account I (File No. 33-87276) filed on
April 30, 1999 (Accession No. 0000950116-99-000867).
(2) Sales Support Agreement between The Penn Mutual Life Insurance
Company and Hornor, Townsend & Kent, Inc. Incorporated herein
by reference to Exhibit A(3)(a)(2) to Post-Effective Amendment
No. 6 to the Form S-6 Registration Statement of Penn Mutual
Variable Life Account I (File No. 33-87276) filed on April 30,
1999 (Accession No. 0000950116-99-000867).
(b)(1) Form of Agent's Agreement relating to broker-dealer
supervision. Incorporated herein by reference to Exhibit 3(c)
to the Form N-4 Registration Statement of Penn Mutual Variable
Annuity Account III (File No. 333-62811) filed on September 3,
1998(Accession No. 0001036050-98-001504).
(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 Form N-4 Registration
Statement of Penn Mutual Variable Annuity Account III (File No.
333-62811) filed on November 30, 1998 (Accession No.
0001036050-98-002055).
(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 Pre-Effective Amendment to the Form N-4 Registration
Statement of Penn Mutual Variable Annuity Account III (File No.
333-62811) filed on November 30, 1999 (Accession No.
0001036050-98-002055).
II-3
<PAGE>
(c) Schedule of Sales Commissions. Incorporated herein by reference
to Exhibit A(3)(c) to Post-Effective Amendment No. 8 to this
Form S-6 Registration Statement filed on April 30, 1999
(Accession No. 0000950116-99-000880).
A(4) Not Applicable
A(5) (a) Specimen Flexible Premium Adjustable Variable Life Insurance
Policy. Incorporated herein by reference to Exhibit A5(a) to
Post-Effective Amendment No. 8 to this Form S-6 Registration
Statement filed on April 30, 1999 (Accession No.
0000950116-99-000880).
(b) Specimen Flexible Premium Adjustable Variable Life Insurance
Policy (Sex distinct). Incorporated herein by reference to
Exhibit A5(b) to Post- Effective Amendment No. 9 to this Form
S-6 Registration Statement filed on May 3, 1999 (Accession No.
0000950116-99-000884).
(c) Specimen Flexible Premium Adjustable Variable Life Insurance
Policy (Unisex). Incorporated herein by reference to Exhibit
A5(c) to Post- Effective Amendment No. 9 to this Form S-6
Registration Statement filed on May 3, 1999 (Accession No.
0000950116-99-000884).
(d) Additional Insured Term Insurance Agreement Rider. Incorporated
herein by reference to Exhibit A5(b) to Post-Effective
Amendment No. 8 to this Form S-6 Registration Statement filed
on April 30, 1999 (Accession No. 0000950116-99-000880).
(e) Children's Term Insurance Agreement Rider. Incorporated herein
by reference to Exhibit A5(c) to Post-Effective Amendment No. 8
to this Form S-6 Registration Statement filed on April 30, 1999
(Accession No. 0000950116-99-000880).
(f) Accidental Death Benefit Agreement Rider. Incorporated herein
by reference to Exhibit A5(d) to Post-Effective Amendment No. 8
to this Form S-6 Registration Statement filed on April 30, 1999
(Accession No. 0000950116-99-000880).
(g) Disability Waiver of Monthly Deduction and Disability Monthly
Premium Deposit Agreement Rider. Incorporated herein by
reference to Exhibit A5(e) to Post-Effective Amendment No. 8 to
this Form S-6 Registration Statement filed on April 30, 1999
(Accession No. 0000950116-99-000880).
II-4
<PAGE>
(h) Disability Waiver of Monthly Deduction Agreement Rider.
Incorporated herein by reference to Exhibit A5(f) to
Post-Effective Amendment No. 8 to this Form S-6 Registration
Statement filed on April 30, 1999 (Accession No.
0000950116-99-000880).
(i) Guaranteed Continuation of Policy Agreement Rider. Incorporated
herein by reference to Exhibit A5(g) to Post-Effective
Amendment No. 8 to this Form S-6 Registration Statement filed
on April 30, 1999 (Accession No. 0000950116-99-000880).
(j) Guaranteed Option to Increase Specified Amount Agreement Rider.
Incorporated herein by reference to Exhibit A5(h) to
Post-Effective Amendment No. 8 to this Form S-6 Registration
Statement filed on April 30, 1999 (Accession No.
0000950116-99-000880).
(k) Supplemental Term Insurance Agreement Rider. Incorporated
herein by reference to Exhibit A5(i) to Post-Effective
Amendment No. 8 to this Form S-6 Registration Statement filed
on April 30, 1999 (Accession No. 0000950116-99-000880).
(l) Specimen Flexible Premium Adjustable Variable Life Insurance
Policy (revised). Incorporated herein by reference to Exhibit
A5(j) to Post-Effective Amendment No. 8 to this Form S-6
Registration Statement filed on April 30, 1999 (Accession No.
0000950116-99-000880).
(m) Flexible Periodic Supplemental Term Insurance Agreement Rider.
Incorporated herein by reference to Exhibit A5(k) to
Post-Effective Amendment No. 8 to this Form S-6 Registration
Statement filed on April 30, 1999 (Accession No.
0000950116-99-000880).
(n) Option to Extend the Maturity Date. Incorporated herein by
reference to Exhibit A5(n) to Post-Effective Amendment No. 9 to
this Form S-6 Registration Statement filed on May 3, 1999
(Accession No. 0000950116-99-000884).
(o) Option to Extend the Maturity Date. Incorporated herein by
reference to Exhibit A5(o) to Post-Effective Amendment No. 9 to
this Form S-6 Registration Statement filed on May 3, 1999
(Accession No. 0000950116-99-000884).
(p) Return of Premium Term Insurance Agreement. Incorporated herein
by reference to Exhibit A5(p) to Post-Effective Amendment No. 9
to this
II-5
<PAGE>
Form S-6 Registration Statement filed on May 3, 1999 (Accession
No. 0000950116-99-000884).
(q) Return of Premium Term Insurance Agreement. Incorporated herein
by reference to Exhibit A5(q) to Post-Effective Amendment No. 9
to this Form S-6 Registration Statement filed on May 3, 1999
(Accession No. 0000950116-99-000884).
(r) Supplemental Exchange Agreement. Incorporated herein by
reference to Exhibit A5(r) to Post-Effective Amendment No. 9 to
this Form S-6 Registration Statement filed on May 3, 1999
(Accession No. 0000950116-99-000884).
(s) Endorsement - Business Accounting Benefit. Incorporated herein
by reference to Exhibit A5(s) to Post-Effective Amendment No. 9
to this Form S-6 Registration Statement filed on May 3, 1999
(Accession No. 0000950116-99-000884).
(t) Endorsement - Cost of Insurance. Incorporated herein by
reference to Exhibit A5(t) to Post-Effective Amendment No. 9 to
this Form S-6 Registration Statement filed on May 3, 1999
(Accession No. 0000950116-99-000884).
A(6) (a) Charter of the Penn Mutual Life Insurance Company.
Incorporated herein by reference to Exhibit 6(a) to the Form
N-4 Registration Statement of Penn Mutual Variable Annuity
Account III (File No. 333-62811) filed on September 3, 1998
(Accession No. 0001036050-98-001504).
(b) By-laws of The Penn Mutual Life Insurance Company. Incorporated
herein by reference to Exhibit 6(b) to the Form N-4
Registration Statement of Penn Mutual Variable Annuity Account
III (File No. 333-62811) filed on September 3, 1998 (Accession
No. 0001036050-98-001504).
A(7) Not Applicable.
A(8) (a) Agreement between The Penn Mutual Life Insurance Company and
Penn Series Funds, Inc. Incorporated herein by reference to
Exhibit A(1)(a) to Post-Effective Amendment No. 6 to the Form
S-6 Registration Statement of Penn Mutual Variable Life Account
I (File No. 33-87276) filed on April 30, 1999 (Accession No.
0000950116-99-000867).
II-6
<PAGE>
(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 the Form
N-4 Registration Statement of Penn Mutual Variable Annuity
Account III (File No. 333-62811) filed on September 3, 1998
(Accession No. 0001036050-98-001504).
(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 Form S-6 Registration Statement
(File No. 33-87276) of Penn Mutual Variable Life Account I
filed on April 29, 1996. (Accession No. 0000950109-96-002471).
(b)(3) Amendment to Agreement between The Penn Mutual Life Insurance
Company and Neuberger & Berman Advisers Management Trust.
Incorporated herein by reference to Exhibit 8(b)(3) to
Post-Effective Amendment No. 5 to this Form S-6 Registration
Statement filed on April 30, 1997. (Accession No.
0000950109-97-003328).
(c) 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 Form N-4 Registration
Statement of Penn Mutual Variable Annuity Account III (File No.
333-62811) filed on September 3, 1998 (Accession No.
0001036050-98-001504).
(d) 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 Form
N-4 Registration Statement of Penn Mutual Variable Annuity
Account III (File No. 333-62811) filed on September 3, 1998
(Accession No. 0001036050-98-001504).
(e) Participation Agreement between The Penn Mutual Life Insurance
Company and Morgan Stanley Universal Funds, Inc. (renamed The
Universal Institutional Funds, Inc. effective May 1, 2000).
Incorporated herein by reference to Exhibit 8(f) to
Post-Effective Amendment No. 22 to the Form N-4 Registration
Statement of Penn Mutual Variable Annuity Account III (File No.
2-77283) filed on April 29, 1997 (Accession No.
0001021408-97-000161).
II-7
<PAGE>
A(9) Not applicable.
A(10) (a) Incorporated herein by reference to Exhibit A(1)(b) to
Post-Effective Amendment No. 6 to the Form S-6 Registration
Statement of Penn Mutual Variable Life Account I (File No.
33-87276) filed on April 30, 1999 (Accession No.
0000950116-99-000867).
(b) Supplemental Application Form for Flexible Premium Adjustable
Variable Life Insurance. Incorporated herein by reference to
Exhibit A(1)(b) to Post-Effective Amendment No. 6 to the Form
S-6 Registration Statement of Penn Mutual Variable Life Account
I (File No. 33-87276) filed on April 30, 1999 (Accession No.
0000950116-99-000867).
A(11) Memorandum describing issuance, transfer and redemption
procedures. Incorporated herein by reference to Exhibit A(11)
to Post-Effective Amendment No. 8 to this Form S-6 Registration
Statement filed on April 30, 1999 (Accession No.
0000950116-99-000880).
2. Opinion and consent of Franklin L Best, Jr. Esq., Associate General
Counsel, The Penn Mutual Life Insurance Company, dated June 23, 1999 as to
the legality of the Policies being registered. Incorporated herein by
reference to Exhibit (2) to Post- Effective Amendment No. 10 to this Form
S-6 Registration Statement filed 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. Chappell, 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. Filed as
exhibits and incorporated herein by reference to Exhibit 5(a) to
Post-Effective Amendment No. 5 to this Form S-6 Registration Statement
filed on April 29, 1997. (Accession No. 0000950109-97-003328).
(b) Powers of Attorney of Edmond F. Notebaert and Robert H. Rock. Filed as
exhibits and incorporated herein by reference to Exhibit 5(b) to
Post-Effective
II-8
<PAGE>
Amendment No. 7 to this Form S-6 Registration Statement filed on
April 23, 1998 (Accession No. 0001036050-98-000671).
(c) Power of Attorney of Julia Chang Bloch. Incorporated herein by
reference to Exhibit 5(c) to Post-Effective Amendment No. 8 to this
Form S-6 Registration Statement filed on April 30, 1999 (Accession No.
0000950116-99-000880).
II-9
<PAGE>
SIGNATURES
On its behalf and on behalf of Penn Mutual Variable Life
Account I, pursuant to the requirements of the Securities Act of 1933, The Penn
Mutual Life Insurance Company certifies that it meets the requirements of
Securities Act Rule 485(b) for effectiveness of this Registration Statement and
has duly caused this Post-Effective Amendment No. 11 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 18th 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. 11 to the Registration Statement has been signed
below by the following persons in the capacities indicated on the 18th 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-10
<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-11
<PAGE>
Exhibit Index
Ex-99.3 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.
Ex-99.4(a) Consent of Ernst & Young, LLP.
Ex-99.4(b) Consent of Morgan, Lewis & Bockius LLP.
II-12
<PAGE>
[PENN MUTUAL LETTERHEAD]
April 12, 2000
Board of Trustees
The Penn Mutual Life Insurance Company
Independence Square
Philadelphia, PA 19172
Re: Flexible Premium Adjustable Life Insurance Policy
To the Board of Trustees:
This opinion is furnished in connection with the filing of Post-Effective
Amendment No. 11 to Penn Mutual's Registration Statement on Form S-6 (the
"Registration Statement") covering 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. 33-54662).
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 11 to Registration Statement Number 33-54662 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. 33-54662
-----------------------------
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. 11. 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
