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As filed with the Securities and Exchange Commission on January 8, 2001
Registration No. 33-54662
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-6
FOR REGISTRATION UNDER THE SECURITIES ACT OF 1933
OF SECURITIES OF UNIT INVESTMENT TRUSTS
REGISTERED ON FORM N-8B-2
POST-EFFECTIVE AMENDMENT NO. 13
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:
C. Ronald Rubley, Esq.
Morgan, Lewis & Bockius LLP
Philadelphia, PA 19103-6993
It is proposed that this filing will become effective:
|X| Immediately upon filing pursuant to paragraph (b) of Rule 485.
|_| On (date) 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.
================================================================================
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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
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<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
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 IV
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>
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Penn Series Funds, Inc. Manager
<S> <C>
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.
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Neuberger Berman Advisers Management Trust Manager
Balanced Portfolio Neuberger Berman Management, Inc.
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Fidelity Investments' Variable Insurance Products Fund Manager
Equity-Income Portfolio Fidelity Management and Research Company
Growth Portfolio Fidelity Management and Research Company
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Fidelity Investments' Variable Insurance Products Fund II Manager
Asset Manager Portfolio Fidelity Management and Research Company
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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.
____________, 2001
<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 25.
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 42.
o The financial statements for Penn Mutual and Penn Mutual Variable Life
Account I follow the Additional Information section. They start on
page 55.
o Appendices A, B, C and D 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.
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BASIC INFORMATION
This part of the prospectus provides answers to basic questions that
may be asked about the Policy. Here are the page numbers where the questions and
answers appear.
Question Page
-------- ----
What Is the Policy?.........................................................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 Supplemental Benefit Riders That I Can Buy?...................10
What Are the Fees and Expenses Paid by the Investment Funds?...............14
Are There Other Charges That Penn Mutual Could Deduct in the Future?.......17
How Can I Change My Policy's Investment Allocations?.......................17
What Is a Policy Loan?.....................................................18
How Can I Withdraw Money from My Policy?...................................19
What Is the Timing of Transactions Under the Policy?.......................19
How Much Life Insurance Does the Policy Provide?...........................20
Can I Change Insurance Coverage Under My Policy?...........................22
Do I Have the Right to Cancel My Policy?...................................23
Can I Choose Different Payout Options Under My Policy?.....................23
How Is the Policy Treated for Federal Income Tax Purposes?.................24
How Do I Communicate With Penn Mutual?.....................................24
How Does Penn Mutual Communicate With Me?..................................25
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What Is the Policy?
The Policy provides life insurance on you or another individual you name.
The value of your Policy will increase or decrease based upon the performance of
the investment options you choose. The death benefit may also increase or
decrease based on investment performance. In addition, the Policy allows you to
allocate a part of your policy value to a fixed interest option where the value
will accumulate interest.
You will have several options under the Policy. Here are some major ones:
o Determine when and how much you pay to us under the Policy
o Determine when and how much to allocate your policy value to the
investment options
o Borrow from your Policy
o Change the beneficiary who will receive the death benefit
o Change the amount of insurance protection
o Change the death benefit option you have selected under your Policy
o Surrender or partially surrender your Policy for all or part of its
net cash surrender value
o Choose the form in which you would like the death benefit or other
proceeds paid out from your Policy
Most of these options are subject to limits that are explained later in
this prospectus.
If you want to purchase a Policy, you must complete an application and
submit it to one of our authorized agents. We require satisfactory evidence of
insurability, which may include a medical examination of the proposed insured.
We evaluate the information provided in accordance with our underwriting rules
and then decide whether to accept or not accept the application.
The maturity date of a Policy is the policy anniversary nearest the
insured's 100th birthday. If the Policy is still in force on the maturity date,
a maturity benefit will be paid. The maturity benefit is equal to the policy
value less any policy loan on the maturity date. Upon written request of the
owner, the policy will continue in force beyond the maturity date. Thereafter,
the death benefit will be the net policy value.
Who Owns the Policy?
You decide who owns the Policy when you apply for it. The owner of the
Policy is the person who can exercise most of the rights under the Policy, such
as the right to choose the death benefit option, the beneficiary, the investment
options, and the right to surrender the Policy. 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.
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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, your Policy could become a "modified endowment policy"
under the Code and you could incur a penalty on the amount you take out of the
Policy. We will monitor your 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.
We will also accept premiums:
o by wire or by exchange from another insurance company,
5
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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 loans.
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
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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 5.0% of all premiums paid)
is deducted from premium payments before allocation to the
investment options. It consists of 3.5% to cover state premium taxes
and the federal income tax burden (DAC tax) that we expect will result
from the receipt of
7
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premiums and 4% (currently reduced to 1.5% of all premiums paid) 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 issue age, policy duration, and the insurance risk
characteristics. We place insureds in a rate class when we issue the
Policy and when an increase in coverage is effective, based on our
examination of information bearing on insurance risk. We currently
place people we insure in the following rate classes: a tobacco,
non-tobacco or preferred non-tobacco 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 tobacco and non-tobacco rates. In all states except New
Jersey, they are assigned to a tobacco class at age 20 unless they
have provided satisfactory evidence that they qualify for a
non-tobacco class. When an increase in the specified amount of
insurance is requested, we determine whether a different rate will
apply to the increase based on the age of the insured on the effective
date of the increase and the risk class of the insured on that date.
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 is 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). 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 Mortality and Expense Risk Charge - A monthly charge to cover
mortality and expense risks. 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. The
charges are deducted pro-rata from your variable investment accounts.
We will notify you in advance if we change our current rates. We may
realize a profit from the charges, and if we do, it will become part
of our surplus.
This charge has two parts:
(1) Mortality and Expense Risk Face Amount Charge. For the first 120
months after the policy date we will deduct the charge based on the
initial specified amount of insurance, and for the first 120 months
after any increase in the specified amount we will deduct the charge
based on the
8
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increase. The charge is equal to the current rate stated in Appendix B
to this prospectus times each $1,000 of the initial or increased
specified amount of insurance. The charge varies with the issue age of
the insured or the age of the insured on the effective date of the
increase. Current and guaranteed rates for the specified amount
component are shown in Appendix B.
(2) Mortality and Expense Risk Asset Charge. The current charge is
equivalent to an annual effective rate of .45% of the first $50,000 of
policy value, plus an annual rate of .15% of the policy value is in
excess of $50,000. The guaranteed charge is equivalent to an annual
effective rate of .60% of the first $50,000 of policy value, plus an
annual rate of .30% of the policy value in excess of $50,000.
o Optional Supplemental Benefit Charges - Monthly charges for any
optional supplemental insurance benefits that are added to the Policy
by means of a rider.
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 attained 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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Surrender During Policy Year Surrender Factor
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1st through 7th 1.00
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8th .80
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9th .60
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10th .40
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11th .20
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12th and later 0
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If the Policy is surrendered within the first 11 policy years, the
surrender charge consists of a sales charge component and an administrative
charge component. The sales charge component is to reimburse us for some of the
expenses incurred in the distribution of the Policies. The sales charge
component, together with the sales charge component of the premium charge, may
be insufficient to recover distribution expenses related to the sale of the
Policies. Our unrecovered sales expenses are paid for from our surplus. The
administrative charge component covers administrative expenses associated with
underwriting and issuing the Policy, including the costs of processing
applications, conducting medical exams, determining insurability and the
insured's rate class, and creating and maintaining Policy records, as well as
the administrative costs of processing surrender requests.
If the Policy is surrendered after the first 11 years, but within 11 years
of an increase in the specified amount of insurance, the surrender charge
consists solely of an administrative charge for administrative expenses
associated with the increase in the specified amount of insurance.
We do not anticipate making any profit on the administrative charge
component of the surrender charge.
Partial Surrender Charge
If you partially surrender your Policy, we will deduct the lesser of $25 or
2% of the amount surrendered. The charge will be deducted from the available net
cash surrender value and will be considered part of the partial surrender. We
also do not anticipate making a profit on this charge.
What Are the Supplemental Benefit Riders That I Can Buy?
We offer supplemental benefit riders that may be added to your Policy. If
any of these riders are added, monthly charges for the supplemental benefits
will be deducted from your policy value as part of the monthly deduction.
Accidental Death Benefit
This Agreement provides an additional death benefit if the insured's death
results from accidental causes as defined in the Agreement. This Agreement is
not available to all Policies. The cost of insurance rates for this Agreement
is based on the age, gender and rate class of the additional insured. The
benefits provided under the Agreement are subject to the provisions in the
Agreement.
Additional Insured Term Insurance Agreement
This Agreement provides term insurance on other persons in addition to the
insured, in amounts specified in the Additional Policy Specification in the
Policy. If the named insured in the Policy dies, the term insurance on the
additional insured person will continue for 90 days during which time it may be
converted into permanent insurance. The term insurance may be converted to a
life or endowment policy without evidence of insurability.
Under the Agreement, we will deduct the cost of insurance charges from the
cash value of the Policy, and a separate charge of $0.10 per $1,000 of specified
amount of insurance for each additional insured during the first twelve months
of the Agreement. If the specified amount of insurance has increased within the
past year, we will deduct a charge of $0.10 per $1,000 of the increased
specified amount. The cost of insurance rates are based on the age, gender and
rate class of the additional insured. The benefits provided under the Agreement
are subject to all of the provisions in the Policy.
Business Accounting Benefit
This Agreement provides enhanced early year cash surrender values for
policies sold in certain limited corporate markets, such as 401(k)s and is not
for sale in the individual markets. The higher cash
10
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surrender is attained through a waiver of all surrender charges. To be eligible
for this Agreement (i) Policies must be corporate owned, (ii) the corporation
must be at least a partial beneficiary, and (iii) the Policies must be in
support of a corporate sponsored non-qualified deferred compensation plan with a
minimum of five insureds under the plan. Under this Agreement, we will deduct a
monthly charge of $.03 per $1,000 of original specified amount of insurance
assessed over the original surrender charge period and a monthly charge of $.03
per $1,000 of increases in the specified amount of insurance for the duration of
the new surrender period. Decreases in coverage do not affect the charge for
this Agreement. The $.03 per $1,000 charge will continue to be applied based on
the higher original and/or increased specified amount. This charge will be
included in the no-lapse premium calculation. If the Agreement is terminated by
the owner of the Policy, the Agreement is terminated with respect to insurance
coverages provided under the Policy and all applicable surrender charges would
resume. The benefits provided under the Agreement are subject to all provisions
of the Agreement.
Children's Term Insurance Agreement
This Agreement provides term insurance on one or more children of the owner
of the Policy in amounts specified in the Additional Policy Specifications in
the Policy. If the named insured in the Policy dies, the term insurance on the
insured child will continue until the anniversary of the Policy nearest the
insured child's twenty-third birthday and we will waive the cost of insurance
for the term insurance. On the anniversary of the Policy nearest the child's
twenty-first birthday, the Agreement may be converted without evidence of
insurability to a new life insurance policy.
Under the Agreement, we will deduct a cost of insurance charge. We will
also deduct a separate charge of $0.15 per $1,000 of specified amount of
insurance without regard to the number of children, their ages or gender. The
cost of insurance charge will be based on the attained age, gender and rate
class of the insured child. The cost of insurance rate will not exceed the rate
set forth in the Additional Policy Specifications of the Policy. The benefits
provided by the Agreement are subject to the provisions in the Agreement.
Disability Waiver of Monthly Deduction
This Agreement provides a waiver of the monthly deductions from the value
of the Policy value upon disability of the insured. The cost of insurance
charges for this benefit are based upon the insurance provided under the Policy
and the value of the Policy. The rates are based on the attained age, gender and
rate class of the insured. The rates will not exceed those set forth in the
Additional Policy Specifications in the Policy. Monthly deductions for this
benefit are made until the policy anniversary nearest the insured's sixty-fifth
birthday. The benefits provided under this Agreement are subject to the
provisions of the Agreement.
Disability Waiver of Monthly Deduction and Disability Completion Benefit
This Agreement provides a waiver of the monthly deductions from the policy
value and payment by us of a stipulated premium upon disability of the insured.
The stipulated premium is stated in the Policy. The cost of insurance for waiver
of the monthly deductions is based on the insurance provided by the base Policy
and the value of the Policy. The cost of insurance for the monthly premium
deposit is based on the amount of the stipulated premium. The cost of insurance
rates is based on the issue age, gender and rate class of the insured. The rates
will not exceed the rates shown in the Additional Policy Specifications
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section of the Policy. The benefits are subject to the provisions in the
Agreement.
Guaranteed Continuation of Policy.
This Agreement provides that the insurance provided under the Policy will
not lapse even if the cash surrender value of the Policy goes to zero, as long
as the sum of the gross premiums paid less the sum of partial withdrawals,
policy loans and unpaid interest equals or exceeds the "total guaranteed
continuation of policy premium." The "total guaranteed continuation of policy
premium" is based upon issue age, gender, rate class, other policy benefits and
the death benefit option chosen, and is stated in the Policy. If the insured is
disabled, the "total guaranteed continuation of policy premium" is equal to the
stipulated premium. While this Agreement is in force, the allocation or transfer
of amounts to variable investment options may be restricted. The monthly charge
for this Agreement is $0.01 per $1,000 of the specified amount of insurance in
the Policy. This benefit is subject to the provisions in the Agreement.
Guaranteed Option to Extend Maturity Date
This Agreement provides the owner of the Policy with an option to continue
the insurance past the maturity date stated in the Policy without evidence of
insurability. During the maturity extension period, new policy loans will not be
made and premium payments will not be accepted unless required to prevent lapse.
Although the Agreement extends the maturity date of the Policy, it does not
extend the maturity or termination date of other agreements and riders attached
to the Policy (other than the Supplemental Term Insurance Agreement). The cost
of insurance charge for this Agreement is based on the attained age and rate
class of the insured. The cost of insurance rates for this Agreement, combined
with the cost of insurance rates in the Policy, will not exceed the rates shown
in the Additional Policy Specifications section of the Policy. The option to
extend the maturity date is subject to the provisions in the Agreement.
Guaranteed Option to Increase Specified Amount
This Agreement provides the owner of the Policy with the option to increase
the specified amount of insurance in the Policy without providing evidence of
insurability. The option may be exercised as of any of the regular option dates
or as of any alternative option date. The regular option dates are the
anniversaries of the Policy nearest the insured's birthday at ages 22, 25, 28,
31, 37 and 40. In addition, subject to certain conditions, the option may be
exercised on the ninetieth day following marriage of the insured, birth of a
child of the insured and legal adoption by the insured of a child less than 18
years of age. The cost of insurance charge for the Agreement is based on the
attained age, gender and rate class of the insured. The cost of insurance rates
for this Agreement, combined with the cost of insurance rates in the Policy,
will not exceed the rates shown in the Additional Policy Specifications in the
Policy. This option is subject to the provisions in the Agreement.
Return of Premium Supplemental Term Insurance.
This Agreement provides term insurance equivalent to the sum of all
premiums paid under the Policy up to the most recent monthiversary less any
amount credited to the Policy under a waiver of premium or waiver of monthly
deductions agreement. The cost of insurance charge for this Agreement include
the cost of insurance charge for the term insurance provided under the Agreement
and the cost of insurance charge for a waiver of monthly deductions. The cost of
insurance rates for the Agreement are
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based on the age, gender and rate class of the insured. The rates will not
exceed the rates shown for this Agreement in the Additional Policy
Specifications in the Policy. The term insurance provided under the Agreement is
subject to the provisions of the Agreement.
Supplemental Term Insurance Agreement.
This Agreement adds term insurance to the death benefit provided under the
Policy. The Agreement modifies the death benefit options (as provided in the
Policy) as follows.
Option 1 - The death benefit is the greater of (a) the sum of the
amount of insurance specified in the Policy and the amount of term
insurance added by the Agreement or (b) the "applicable percentage" of the
policy value on the date of the insured's death.
Option 2 - The death benefit is the greater of (a) the sum of the
amount of insurance specified in the Policy, the amount of term insurance
added by the Agreement and the policy value on the date of the insured's
death or (b) the "applicable percentage" of the policy value on the date of
the insured's death.
Additional information on the death benefit options appears earlier in this
section under How Much Life Insurance Does the Policy Provide?
The amount of term insurance added by the Agreement may, upon written
application and receipt by us of satisfactory evidence of insurability, be
increased in increments of at least $5,000.
The monthly deductions under the Policy may include a mortality and expense
risk face amount charge applied to the amount of term insurance added to the
Policy by the Agreement. We are not currently applying the charge to term
insurance added by the Agreement, but may do so in the future. If a mortality
and expense risk face amount charge is applied to term insurance added by the
Agreement, it will not exceed the charges shown in the Additional Policy
Specifications in the Policy. Guaranteed maximum mortality and expense risk face
amount charges for term insurance added by the Agreement are shown in Appendix
D.
The monthly deductions under the Policy will include a cost of insurance
charge for the term insurance added by the Agreement. The cost of insurance
rates for the term insurance will not exceed those shown for the Agreement in
the Additional Policy Specifications in the Policy.
It may be to your economic advantage to add life insurance protection to
the Policy through the Agreement. The total current charges that you pay for
your insurance will be less with term insurance added by the Agreement. It also
should be noted, however, that the guaranteed maximum charges under the Policy
will be higher with a portion of the insurance added by the Agreement than they
would be if all of the insurance were provided under the base Policy
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General Rules and Limitations
Additional rules and limitations 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.
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%
Index 500(1)............... 0.07% 0.09% 0.06% 0.03% 0.25%(3)
Mid Cap Growth(1) 0.70% 0.15% 0.08% 0.07% 0.86%
Mid Cap Value(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>
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(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
Service 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.
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<PAGE>
Fidelity Investments' Variable Insurance Products Fund II
Underlying Fund Annual Expenses (as a % of portfolio average net assets)
Management Other Total Fund
Fee Expenses Expenses
---------- -------- ----------
Asset Manager (a).................. 0.54% 0.08% 0.62%
(a) The expenses presented are for the last fiscal year. Some of the
brokerage commissions paid by the fund reduced the expenses shown in
this table. Without this reduction, total expenses would have been
0.63% for the Asset Manager Portfolio.
Morgan Stanley's The Universal Institutional Funds, Inc.
Underlying Fund Annual Expenses (as a % of portfolio average net assets)
Total
Management Other Fund
Fee Expenses Expenses
----------- -------- --------
Emerging Markets Equity (International).... 1.25% 0.50% 1.75%
Are There Other Charges That Penn Mutual Could Deduct in the Future?
We currently make no charge against policy values to pay federal income
taxes on investment gains. However, we reserve the right to do so in the event
there is a change in the tax laws. We currently do not expect that any such
charge will be necessary.
Under current laws, we may incur state and local taxes (in addition to
premium taxes) in several states. At present, these taxes are not significant.
If there is a material change in applicable state or local tax laws, we reserve
the right to make such deductions for such taxes.
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);
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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;
o the maximum amount that may be transferred out of the fixed interest
option is limited to the greater of $5,000 or 25% of the accumulated
value of the fixed interest option;
o the amount that may be transferred excludes any amount held in the
policy loan account.
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 95% of your cash surrender value. The minimum amount
you may borrow is $250.
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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. On a
current basis, the special loan account will earn interest at 3.0% during the
first ten policy years and 4.0% thereafter.
You may repay all or part of a loan at any time. Upon repayment, an amount
equal to the repayment will be transferred from the special loan account to the
investment options you specify. If you do not specify the allocation for the
repayment, the amount will be allocated in accordance with your current standing
allocation instructions.
If your Policy lapses (see What Payments Must Be Paid Under the Policy?)
and you have a loan outstanding under the Policy, you may have to pay federal
income tax on the amount of the loan, to the extent there is gain in the Policy.
See Federal Income Tax Considerations in the Additional Information section of
this prospectus.
The amount of any loan outstanding under your Policy on the death of the
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;
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<PAGE>
o during the first five policy years, the partial surrender may not
reduce the specified amount of insurance under your Policy to less
than $50,000.
If you elected the Option 1 insurance coverage (see How Much Insurance Does
My Policy Provide? below), a partial surrender may reduce your specific amount
of insurance.
If you have increased the initial specified amount, any reduction will be
applied to the most recent increase.
What Is the Timing of Transactions Under the Policy?
We will ordinarily pay any death benefit, loan proceeds or partial or full
surrender proceeds, and will make transfers among the investment options and the
fixed interest option, within seven days after receipt at our office of all the
documents required for completion of the transaction. Other than the death
benefit, which is determined as of the date of death, transactions will be based
on values at the end of the valuation period in which we receive all required
instructions and necessary documentation. A valuation period is the period
commencing with the close of the New York Stock Exchange and ending at the close
of the next succeeding business day of the New York Stock Exchange.
A planned premium and an unplanned premium which does not require
evaluation of additional insurance risk will be credited to the Policy and the
net premium will be allocated to the designated investment options based on
values at the end of the valuation period in which we receive the premium.
Any premium requiring evaluation of additional insurance risk will be
allocated to the Penn Series money market investment option until our evaluation
has been completed and the premium has been accepted. When accepted, the net
premium will be allocated to the investment options you have designated.
We may defer making a payment or transfer from a variable account
investment option if (1) the disposal or valuation of the Separate Account's
assets is not reasonably practicable 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.
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<PAGE>
Death Benefit Options
When the insured dies, we will pay the beneficiary the death benefit less
the amount of any outstanding loan. We offer two different types of death
benefits payable under the Policy. You choose which one you want in the
application. They are:
o Option 1 - The death benefit is the greater of (a) the specified
amount of insurance or (b) the "applicable percentage" of the policy
value on the date of the insured's death.
o Option 2 - The death benefit is the greater of (a) the specified
amount of insurance plus your policy value on the date of death, or
(b) the "applicable percentage" of the policy value on the date of the
insured's death.
The "applicable percentages" depend on the life insurance qualification
test you chose on the application. If you chose the Guideline Premium Test/Cash
Value Corridor Test, the "applicable percentage" is 250% when the insured has
attained age 40 or less and decreases to 100% when the insured attains age 100.
For the Cash Value Accumulation Test, the "applicable percentages" will vary by
attained age and the insurance risk characteristics. A table showing "applicable
percentages" is included in Appendix C.
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
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<PAGE>
time must be equal to or greater than the applicable percentage of
policy value specified in the Internal Revenue Code.
The Cash Value Accumulation Test does not limit the amount of premiums that
may be paid under the Policy. If you desire to pay premiums in excess of those
permitted under the Guideline Premium/Cash Value Corridor Test, you should
consider electing to have your Policy qualify under the Cash Value Accumulation
Test. However, any premium that would increase the net amount at risk is subject
to evidence of insurability satisfactory to us. Required increases in the
minimum death benefit due to growth in the policy value will generally be
greater under the Cash Value Accumulation Test than under the Guideline
Premium/Cash Value Corridor Test.
The Guideline Premium/Cash Value Corridor Test limits the amount of premium
that may be paid under the Policy. If you do not desire to pay premiums in
excess of those permitted under 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:
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<PAGE>
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.
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.
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
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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 "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
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<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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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 assume an average annual expense ratio of 0.85% of the
underlying investment funds available under the Policies. The average annual
expense ratio is based on the expense ratios of each of the funds for their last
fiscal year or, in the case of certain funds, estimates of their expense ratios.
In the absence of certain voluntary waivers of fees and limitations on expenses,
the average annual expense ratios of the investment funds would have been 0.91%.
We expect the fee waivers and expense limitations to continue past the 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, the illustrated gross annual investment
rates of return of 0%, 6% and 12% would correspond to approximate net annual
rates of -0.85%, 5.15% and 11.15%, respectively.
The tables also reflect the deduction of monthly mortality and expense risk
face amount charge, the monthly mortality and expense risk asset charge, 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
non-tobacco risks. 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.
The illustrations on pages 26 through 33 show how values and benefits would
vary under different scenarios based on our current charges and pages 34 through
41 show how values and benefits would vary under the scenarios based on the
maximum charges (guaranteed) we may make under the Policy.
25
<PAGE>
Illustration of Policy Values
Penn Mutual Life Insurance Company
<TABLE>
<CAPTION>
Male Issue Age: 35 Non-Tobacco
$750 ANNUAL PREMIUM
$75,000 SPECIFIED AMOUNT
DEATH BENEFIT OPTION 1
LIFE INSURANCE QUALIFICATION TEST - GUIDELINE PREMIUM
USING CURRENT COST OF INSURANCE RATES
0% Hypothetical 6% Hypothetical 12% Hypothetical
Gross Investment Return Gross Investment Return Gross Investment Return
End of Premiums Policy Net Cash Death Policy Net Cash Death Policy Net Cash Death
Policy Accumulated at Value Surrender Benefit Value Surrender Benefit Value Surrender Benefit
Year 5% Interest Per Value Value Value
Year
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 788 400 - 75,000 433 - 75,000 466 3 75,000
2 1,614 798 335 75,000 889 426 75,000 984 522 75,000
3 2,483 1,191 728 75,000 1,367 905 75,000 1,559 1,096 75,000
4 3,394 1,581 1,118 75,000 1,870 1,407 75,000 2,197 1,735 75,000
5 4,351 1,967 1,505 75,000 2,397 1,935 75,000 2,905 2,443 75,000
6 5,357 2,351 1,888 75,000 2,952 2,490 75,000 3,691 3,229 75,000
7 6,412 2,731 2,268 75,000 3,535 3,073 75,000 4,564 4,102 75,000
8 7,520 3,110 2,739 75,000 4,149 3,779 75,000 5,534 5,164 75,000
9 8,683 3,487 3,210 75,000 4,796 4,519 75,000 6,612 6,335 75,000
10 9,905 3,865 3,680 75,000 5,479 5,294 75,000 7,812 7,627 75,000
15 16,993 6,064 6,064 75,000 9,868 9,868 75,000 16,591 16,591 75,000
20 26,039 7,788 7,788 75,000 15,050 15,050 75,000 30,902 30,902 75,000
25 37,585 9,080 9,080 75,000 21,312 21,312 75,000 54,733 54,733 75,000
30 52,321 9,603 9,603 75,000 28,705 28,705 75,000 94,749 94,749 115,594
</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, a mortality and expense risk
asset charge of 0.45% of account value up to $50,000 and 0.15% of account
value over $50,000 and a mortality and expense risk face amount charge as
shown in Appendix C of this prospectus.
(3) New 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
<TABLE>
<CAPTION>
Male Issue Age: 35 Non-Tobacco
$1,200 ANNUAL PREMIUM
$75,000 SPECIFIED AMOUNT
DEATH BENEFIT OPTION 2
LIFE INSURANCE QUALIFICATION TEST - GUIDELINE PREMIUM
USING CURRENT COST OF INSURANCE RATES
0% Hypothetical 6% Hypothetical 12% Hypothetical
Gross Investment Return Gross Investment Return Gross Investment Return
End of Premiums Policy Net Cash Death Policy Net Cash Death Policy Net Cash Death
Policy Accumulated Value Surrender Benefit Value Surrender Benefit Value Surrender Benefit
Year at 5% Value Value Value
Interest Per
Year
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 1,260 821 359 75,821 880 417 75,880 938 475 75,938
2 2,583 1,634 1,171 76,634 1,802 1,339 76,802 1,978 1,515 76,978
3 3,972 2,436 1,974 77,436 2,768 2,306 77,768 3,129 2,666 78,129
4 5,431 3,229 2,767 78,229 3,781 3,318 78,781 4,403 3,941 79,403
5 6,962 4,013 3,550 79,013 4,841 4,379 79,841 5,815 5,352 80,815
6 8,570 4,788 4,325 79,788 5,953 5,491 80,953 7,378 6,915 82,378
7 10,259 5,554 5,091 80,554 7,118 6,656 82,118 9,109 8,647 84,109
8 12,032 6,313 5,943 81,313 8,341 7,971 83,341 11,028 10,658 86,028
9 13,893 7,066 6,789 82,066 9,625 9,347 84,625 13,155 12,877 88,155
10 15,848 7,814 7,629 82,814 10,974 10,788 85,974 15,513 15,328 90,513
15 27,189 11,779 11,779 86,779 19,161 19,161 94,161 32,171 32,171 107,171
20 41,663 15,105 15,105 90,105 29,000 29,000 104,000 59,303 59,303 134,303
25 60,136 17,833 17,833 92,833 40,922 40,922 115,922 104,331 104,331 179,331
30 83,713 19,579 19,579 94,579 54,990 54,990 129,990 179,076 179,076 254,076
</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, a mortality and expense risk
asset charge of 0.45% of account value up to $50,000 and 0.15% of account
value over $50,000 and a mortality and expense risk face amount charge as
shown in Appendix C of this prospectus.
(3) New 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
<TABLE>
<CAPTION>
Male Issue Age: 35 Non-Tobacco
$750 ANNUAL PREMIUM
$75,000 SPECIFIED AMOUNT
DEATH BENEFIT OPTION 1
LIFE INSURANCE QUALIFICATION TEST - CASH VALUE ACCUMULATION
USING CURRENT COST OF INSURANCE RATES
0% Hypothetical 6% Hypothetical 12% Hypothetical
Gross Investment Return Gross Investment Return Gross Investment Return
End of Premiums Policy Net Cash Death Policy Net Cash Death Policy Net Cash Death
Policy Accumulated Value Surrender Benefit Value Surrender Benefit Value Surrender Benefit
Year at 5% Value Value Value
Interest Per
Year
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 788 400 - 75,000 433 - 75,000 466 3 75,000
2 1,614 798 335 75,000 889 426 75,000 984 522 75,000
3 2,483 1,191 728 75,000 1,367 905 75,000 1,559 1,096 75,000
4 3,394 1,581 1,118 75,000 1,870 1,407 75,000 2,197 1,735 75,000
5 4,351 1,967 1,505 75,000 2,397 1,935 75,000 2,905 2,443 75,000
6 5,357 2,351 1,888 75,000 2,952 2,490 75,000 3,691 3,229 75,000
7 6,412 2,731 2,268 75,000 3,535 3,073 75,000 4,564 4,102 75,000
8 7,520 3,110 2,739 75,000 4,149 3,779 75,000 5,534 5,164 75,000
9 8,683 3,487 3,210 75,000 4,796 4,519 75,000 6,612 6,335 75,000
10 9,905 3,865 3,680 75,000 5,479 5,294 75,000 7,812 7,627 75,000
15 16,993 6,064 6,064 75,000 9,868 9,868 75,000 16,591 16,591 75,000
20 26,039 7,788 7,788 75,000 15,050 15,050 75,000 30,902 30,902 75,000
25 37,585 9,080 9,080 75,000 21,312 21,312 75,000 54,402 54,402 109,594
30 52,321 9,603 9,603 75,000 28,705 28,705 75,000 92,585 92,585 163,032
</TABLE>
(1) Assumes that no policy loans have been made.
(2) Current values reflect current cost of insurance rates, a monthly
administrative charge of $8.00 in all years, a mortality and expense risk
asset charge of 0.45% of account value up to $50,000 and 0.15% of account
value over $50,000 and a mortality and expense risk face amount charge as
shown in Appendix C of this prospectus.
(3) New 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
<TABLE>
<CAPTION>
Male Issue Age: 35 Non-Tobacco
$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
0% Hypothetical 6% Hypothetical 12% Hypothetical
Gross Investment Return Gross Investment Return Gross Investment Return
End of Premiums Policy Net Cash Death Policy Net Cash Death Policy Net Cash Death
Policy Accumulated Value Surrender Benefit Value Surrender Benefit Value Surrender Benefit
Year at 5% Value Value Value
Interest Per
Year
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 1,260 821 359 75,821 880 417 75,880 938 475 75,938
2 2,583 1,634 1,171 76,634 1,802 1,339 76,802 1,978 1,515 76,978
3 3,972 2,436 1,974 77,436 2,768 2,306 77,768 3,129 2,666 78,129
4 5,431 3,229 2,767 78,229 3,781 3,318 78,781 4,403 3,941 79,403
5 6,962 4,013 3,550 79,013 4,841 4,379 79,841 5,815 5,352 80,815
6 8,570 4,788 4,325 79,788 5,953 5,491 80,953 7,378 6,915 82,378
7 10,259 5,554 5,091 80,554 7,118 6,656 82,118 9,109 8,647 84,109
8 12,032 6,313 5,943 81,313 8,341 7,971 83,341 11,028 10,658 86,028
9 13,893 7,066 6,789 82,066 9,625 9,347 84,625 13,155 12,877 88,155
10 15,848 7,814 7,629 82,814 10,974 10,788 85,974 15,513 15,328 90,513
15 27,189 11,779 11,779 86,779 19,161 19,161 94,161 32,171 32,171 107,171
20 41,663 15,105 15,105 90,105 29,000 29,000 104,000 59,300 59,300 138,239
25 60,136 17,833 17,833 92,833 40,922 40,922 115,922 103,978 103,978 209,469
30 83,713 19,579 19,579 94,579 54,990 54,990 129,990 176,908 176,908 311,516
</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, a mortality and expense risk
asset charge of 0.45% of account value up to $50,000 and 0.15% of account
value over $50,000 and a mortality and expense risk face amount charge as
shown in Appendix C of this prospectus.
(3) New 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
<TABLE>
<CAPTION>
Female Issue Age: 45 Non-Tobacco
$1,500 ANNUAL PREMIUM
$125,000 SPECIFIED AMOUNT
DEATH BENEFIT OPTION 1
LIFE INSURANCE QUALIFICATION TEST - GUIDELINE PREMIUM
USING CURRENT COST OF INSURANCE RATES
0% Hypothetical 6% Hypothetical 12% Hypothetical
Gross Investment Return Gross Investment Return Gross Investment Return
End of Premiums Policy Net Cash Death Policy Net Cash Death Policy Net Cash Death
Policy Accumulated at Value Surrender Benefit Value Surrender Benefit Value Surrender Benefit
Year 5% Interest Value Value Value
Per Year
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 1,575 802 - 125,000 868 - 125,000 934 - 125,000
2 3,229 1,595 608 125,000 1,778 791 125,000 1,969 982 125,000
3 4,965 2,380 1,393 125,000 2,732 1,746 125,000 3,117 2,130 125,000
4 6,788 3,157 2,170 125,000 3,735 2,748 125,000 4,391 3,405 125,000
5 8,703 3,929 2,942 125,000 4,791 3,804 125,000 5,808 4,822 125,000
6 10,713 4,696 3,709 125,000 5,902 4,915 125,000 7,384 6,397 125,000
7 12,824 5,461 4,474 125,000 7,073 6,087 125,000 9,137 8,151 125,000
8 15,040 6,225 5,435 125,000 8,310 7,521 125,000 11,090 10,300 125,000
9 17,367 6,988 6,396 125,000 9,616 9,024 125,000 13,264 12,672 125,000
10 19,810 7,756 7,361 125,000 10,999 10,604 125,000 15,687 15,293 125,000
15 33,986 12,240 12,240 125,000 19,921 19,921 125,000 33,501 33,501 125,000
20 52,079 15,646 15,646 125,000 30,397 30,397 125,000 62,672 62,672 125,000
25 75,170 17,689 17,689 125,000 42,699 42,699 125,000 112,096 112,096 130,032
30 104,641 17,470 17,470 125,000 56,947 56,947 125,000 195,912 195,912 209,626
</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, a mortality and expense risk
asset charge of 0.45% of account value up to $50,000 and 0.15% of account
value over $50,000 and a mortality and expense risk face amount charge as
shown in Appendix C of this prospectus.
(3) New 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
<TABLE>
<CAPTION>
Female Issue Age: 45 Non-Tobacco
$2,100 ANNUAL PREMIUM
$125,000 SPECIFIED AMOUNT
DEATH BENEFIT OPTION 2
LIFE INSURANCE QUALIFICATION TEST - GUIDELINE PREMIUM
USING CURRENT COST OF INSURANCE RATES
0% Hypothetical 6% Hypothetical 12% Hypothetical
Gross Investment Return Gross Investment Return Gross Investment Return
End of Premiums Policy Net Cash Death Policy Net Cash Death Policy Net Cash Death
Policy Accumulated Value Surrender Benefit Value Surrender Benefit Value Surrender Benefit
Year at 5% Value Value Value
Interest Per
Year
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 2,205 1,362 375 126,362 1,461 474 126,461 1,561 574 126,561
2 4,520 2,705 1,718 127,705 2,990 2,003 127,990 3,287 2,301 128,287
3 6,951 4,031 3,044 129,031 4,590 3,603 129,590 5,197 4,210 130,197
4 9,504 5,340 4,353 130,340 6,265 5,278 131,265 7,311 6,325 132,311
5 12,184 6,635 5,648 131,635 8,022 7,035 133,022 9,654 8,667 134,654
6 14,998 7,916 6,929 132,916 9,865 8,878 134,865 12,249 11,262 137,249
7 17,953 9,187 8,200 134,187 11,799 10,812 136,799 15,127 14,140 140,127
8 21,056 10,448 9,659 135,448 13,832 13,042 138,832 18,319 17,530 143,319
9 24,314 11,702 11,110 136,702 15,968 15,376 140,968 21,860 21,268 146,860
10 27,734 12,953 12,558 137,953 18,218 17,823 143,218 25,793 25,398 150,793
15 47,581 19,712 19,712 144,712 32,038 32,038 157,038 53,766 53,766 178,766
20 72,910 25,089 25,089 150,089 48,305 48,305 173,305 99,354 99,354 224,354
25 105,238 28,726 28,726 153,726 67,276 67,276 192,276 174,257 174,257 299,257
30 146,498 29,593 29,593 154,593 88,558 88,558 213,558 297,055 297,055 422,055
</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, a mortality and expense risk
asset charge of 0.45% of account value up to $50,000 and 0.15% of account
value over $50,000 and a mortality and expense risk face amount charge as
shown in Appendix C of this prospectus.
(3) New 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
<TABLE>
<CAPTION>
Female Issue Age: 45 Non-Tobacco
$1,500 ANNUAL PREMIUM
$125,000 SPECIFIED AMOUNT
DEATH BENEFIT OPTION 2
LIFE INSURANCE QUALIFICATION TEST - CASH VALUE ACCUMULATION
USING CURRENT COST OF INSURANCE RATES
0% Hypothetical 6% Hypothetical 12% Hypothetical
Gross Investment Return Gross Investment Return Gross Investment Return
End of Premiums Policy Net Cash Death Policy Net Cash Death Policy Net Cash Death
Policy Accumulated Value Surrender Benefit Value Surrender Benefit Value Surrender Benefit
Year at 5% Value Value Value
Interest Per
Year
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 1,575 802 - 125,000 868 - 125,000 934 - 125,000
2 3,229 1,595 608 125,000 1,778 791 125,000 1,969 982 125,000
3 4,965 2,380 1,393 125,000 2,732 1,746 125,000 3,117 2,130 125,000
4 6,788 3,157 2,170 125,000 3,735 2,748 125,000 4,391 3,405 125,000
5 8,703 3,929 2,942 125,000 4,791 3,804 125,000 5,808 4,822 125,000
6 10,713 4,696 3,709 125,000 5,902 4,915 125,000 7,384 6,397 125,000
7 12,824 5,461 4,474 125,000 7,073 6,087 125,000 9,137 8,151 125,000
8 15,040 6,225 5,435 125,000 8,310 7,521 125,000 11,090 10,300 125,000
9 17,367 6,988 6,396 125,000 9,616 9,024 125,000 13,264 12,672 125,000
10 19,810 7,756 7,361 125,000 10,999 10,604 125,000 15,687 15,293 125,000
15 33,986 12,240 12,240 125,000 19,921 19,921 125,000 33,501 33,501 125,000
20 52,079 15,646 15,646 125,000 30,397 30,397 125,000 62,672 62,672 125,000
25 75,170 17,689 17,689 125,000 42,699 42,699 125,000 110,933 110,933 189,954
30 104,641 17,470 17,470 125,000 56,947 56,947 125,000 189,197 189,197 285,992
</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, a mortality and expense risk
asset charge of 0.45% of account value up to $50,000 and 0.15% of account
value over $50,000 and a mortality and expense risk face amount charge as
shown in Appendix C of this prospectus.
(3) New 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
<TABLE>
<CAPTION>
Female Issue Age: 45 Non-Tobacco
$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
0% Hypothetical 6% Hypothetical 12% Hypothetical
Gross Investment Return Gross Investment Return Gross Investment Return
End of Premiums Policy Net Cash Death Policy Net Cash Death Policy Net Cash Death
Policy Accumulated Value Surrender Benefit Value Surrender Benefit Value Surrender Benefit
Year at 5% Value Value Value
Interest Per
Year
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 2,205 1,362 375 126,362 1,461 474 126,461 1,561 574 126,561
2 4,520 2,705 1,718 127,705 2,990 2,003 127,990 3,287 2,301 128,287
3 6,951 4,031 3,044 129,031 4,590 3,603 129,590 5,197 4,210 130,197
4 9,504 5,340 4,353 130,340 6,265 5,278 131,265 7,311 6,325 132,311
5 12,184 6,635 5,648 131,635 8,022 7,035 133,022 9,654 8,667 134,654
6 14,998 7,916 6,929 132,916 9,865 8,878 134,865 12,249 11,262 137,249
7 17,953 9,187 8,200 134,187 11,799 10,812 136,799 15,127 14,140 140,127
8 21,056 10,448 9,659 135,448 13,832 13,042 138,832 18,319 17,530 143,319
9 24,314 11,702 11,110 136,702 15,968 15,376 140,968 21,860 21,268 146,860
10 27,734 12,953 12,558 137,953 18,218 17,823 143,218 25,793 25,398 150,793
15 47,581 19,712 19,712 144,712 32,038 32,038 157,038 53,766 53,766 178,766
20 72,910 25,089 25,089 150,089 48,305 48,305 173,305 99,354 99,354 224,354
25 105,238 28,726 28,726 153,726 67,276 67,276 192,276 174,257 174,257 299,257
30 146,498 29,593 29,593 154,593 88,558 88,558 213,558 296,420 296,420 448,072
</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, a mortality and expense risk
asset charge of 0.45% of account value up to $50,000 and 0.15% of account
value over $50,000 and a mortality and expense risk face amount charge as
shown in Appendix C of this prospectus.
(3) New 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
<TABLE>
<CAPTION>
Male Issue Age: 35 Non-Tobacco
$750 ANNUAL PREMIUM
$75,000 SPECIFIED AMOUNT
DEATH BENEFIT OPTION 1
LIFE INSURANCE QUALIFICATION TEST - GUIDELINE PREMIUM
USING GUARANTEED COST OF INSURANCE RATES
0% Hypothetical 6% Hypothetical 12% Hypothetical
Gross Investment Return Gross Investment Return Gross Investment Return
End of Premiums Policy Net Cash Death Policy Net Cash Death Policy Net Cash Death
Policy Accumulated Value Surrender Benefit Value Surrender Benefit Value Surrender Benefit
Year at 5% Value Value Value
Interest Per
Year
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 788 336 - 75,000 366 - 75,000 396 - 75,000
2 1,614 662 199 75,000 743 281 75,000 829 366 75,000
3 2,483 975 513 75,000 1,130 667 75,000 1,299 837 75,000
4 3,394 1,276 814 75,000 1,526 1,063 75,000 1,810 1,348 75,000
5 4,351 1,563 1,101 75,000 1,930 1,468 75,000 2,365 1,903 75,000
6 5,357 1,836 1,374 75,000 2,343 1,880 75,000 2,969 2,506 75,000
7 6,412 2,092 1,630 75,000 2,761 2,299 75,000 3,623 3,161 75,000
8 7,520 2,333 1,963 75,000 3,187 2,817 75,000 4,335 3,965 75,000
9 8,683 2,555 2,278 75,000 3,617 3,340 75,000 5,108 4,830 75,000
10 9,905 2,760 2,575 75,000 4,053 3,868 75,000 5,949 5,764 75,000
15 16,993 4,029 4,029 75,000 6,920 6,920 75,000 12,171 12,171 75,000
20 26,039 4,540 4,540 75,000 9,819 9,819 75,000 21,865 21,865 75,000
25 37,585 3,775 3,775 75,000 12,242 12,242 75,000 37,227 37,227 75,000
30 52,321 866 866 75,000 13,289 13,289 75,000 62,776 62,776 76,587
</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 all years, a mortality and expense risk
asset charge of 0.60% of account value up to $50,000 and 0.30% of account
value over $50,000 and a mortality and expense risk face amount charge as
shown in Appendix C of this prospectus.
(3) New 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
<TABLE>
<CAPTION>
Male Issue Age: 35 Non-Tobacco
$1,200 ANNUAL PREMIUM
$75,000 SPECIFIED AMOUNT
DEATH BENEFIT OPTION 2
LIFE INSURANCE QUALIFICATION TEST - GUIDELINE PREMIUM
USING GUARANTEED COST OF INSURANCE RATES
0% Hypothetical 6% Hypothetical 12% Hypothetical
Gross Investment Return Gross Investment Return Gross Investment Return
End of Premiums Policy Net Cash Death Policy Net Cash Death Policy Net Cash Death
Policy Accumulated Value Surrender Benefit Value Surrender Benefit Value Surrender Benefit
Year at 5% Value Value Value
Interest Per
Year
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 1,260 745 283 75,745 800 338 75,800 855 393 75,855
2 2,583 1,474 1,011 76,474 1,630 1,168 76,630 1,794 1,331 76,794
3 3,972 2,184 1,721 77,184 2,490 2,027 77,490 2,822 2,360 77,822
4 5,431 2,875 2,412 77,875 3,379 2,916 78,379 3,949 3,487 78,949
5 6,962 3,545 3,083 78,545 4,298 3,835 79,298 5,183 4,721 80,183
6 8,570 4,195 3,732 79,195 5,246 4,783 80,246 6,535 6,072 81,535
7 10,259 4,822 4,359 79,822 6,224 5,761 81,224 8,013 7,551 83,013
8 12,032 5,426 5,056 80,426 7,232 6,862 82,232 9,633 9,263 84,633
9 13,893 6,006 5,729 81,006 8,269 7,992 83,269 11,406 11,129 86,406
10 15,848 6,563 6,378 81,563 9,338 9,153 84,338 13,349 13,163 88,349
15 27,189 9,486 9,486 84,486 15,767 15,767 90,767 26,962 26,962 101,962
20 41,663 11,471 11,471 86,471 22,946 22,946 97,946 48,413 48,413 123,413
25 60,136 12,001 12,001 87,001 30,390 30,390 105,390 82,248 82,248 157,248
30 83,713 10,297 10,297 85,297 37,158 37,158 112,158 135,897 135,897 210,897
</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 all years, a mortality and expense risk
asset charge of 0.60% of account value up to $50,000 and 0.30% of account
value over $50,000 and a mortality and expense risk face amount charge as
shown in Appendix C of this prospectus.
(3) New 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
<TABLE>
<CAPTION>
Male Issue Age: 35 Non-Tobacco
$750 ANNUAL PREMIUM
$75,000 SPECIFIED AMOUNT
DEATH BENEFIT OPTION 1
LIFE INSURANCE QUALIFICATION TEST - CASH VALUE ACCUMULATION
USING GUARANTEED COST OF INSURANCE RATES
0% Hypothetical 6% Hypothetical 12% Hypothetical
Gross Investment Return Gross Investment Return Gross Investment Return
End of Premiums Policy Net Cash Death Policy Net Cash Death Policy Net Cash Death
Policy Accumulated Value Surrender Benefit Value Surrender Benefit Value Surrender Benefit
Year at 5% Value Value Value
Interest Per
Year
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 788 336 - 75,000 366 - 75,000 396 - 75,000
2 1,614 662 199 75,000 743 281 75,000 829 366 75,000
3 2,483 975 513 75,000 1,130 667 75,000 1,299 837 75,000
4 3,394 1,276 814 75,000 1,526 1,063 75,000 1,810 1,348 75,000
5 4,351 1,563 1,101 75,000 1,930 1,468 75,000 2,365 1,903 75,000
6 5,357 1,836 1,374 75,000 2,343 1,880 75,000 2,969 2,506 75,000
7 6,412 2,092 1,630 75,000 2,761 2,299 75,000 3,623 3,161 75,000
8 7,520 2,333 1,963 75,000 3,187 2,817 75,000 4,335 3,965 75,000
9 8,683 2,555 2,278 75,000 3,617 3,340 75,000 5,108 4,830 75,000
10 9,905 2,760 2,575 75,000 4,053 3,868 75,000 5,949 5,764 75,000
15 16,993 4,029 4,029 75,000 6,920 6,920 75,000 12,171 12,171 75,000
20 26,039 4,540 4,540 75,000 9,819 9,819 75,000 21,865 21,865 75,000
25 37,585 3,775 3,775 75,000 12,242 12,242 75,000 37,227 37,227 75,000
30 52,321 866 866 75,000 13,289 13,289 75,000 61,257 61,257 107,867
</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 all years, a mortality and expense risk
asset charge of 0.60% of account value up to $50,000 and 0.30% of account
value over $50,000 and a mortality and expense risk face amount charge as
shown in Appendix C of this prospectus.
(3) New 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
<TABLE>
<CAPTION>
Male Issue Age: 35 Non-Tobacco
$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
0% Hypothetical 6% Hypothetical 12% Hypothetical
Gross Investment Return Gross Investment Return Gross Investment Return
End of Premiums Policy Net Cash Death Policy Net Cash Death Policy Net Cash Death
Policy Accumulated Value Surrender Benefit Value Surrender Benefit Value Surrender Benefit
Year at 5% Value Value Value
Interest Per
Year
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 1,260 745 283 75,745 800 338 75,800 855 393 75,855
2 2,583 1,474 1,011 76,474 1,630 1,168 76,630 1,794 1,331 76,794
3 3,972 2,184 1,721 77,184 2,490 2,027 77,490 2,822 2,360 77,822
4 5,431 2,875 2,412 77,875 3,379 2,916 78,379 3,949 3,487 78,949
5 6,962 3,545 3,083 78,545 4,298 3,835 79,298 5,183 4,721 80,183
6 8,570 4,195 3,732 79,195 5,246 4,783 80,246 6,535 6,072 81,535
7 10,259 4,822 4,359 79,822 6,224 5,761 81,224 8,013 7,551 83,013
8 12,032 5,426 5,056 80,426 7,232 6,862 82,232 9,633 9,263 84,633
9 13,893 6,006 5,729 81,006 8,269 7,992 83,269 11,406 11,129 86,406
10 15,848 6,563 6,378 81,563 9,338 9,153 84,338 13,349 13,163 88,349
15 27,189 9,486 9,486 84,486 15,767 15,767 90,767 26,962 26,962 101,962
20 41,663 11,471 11,471 86,471 22,946 22,946 97,946 48,413 48,413 123,413
25 60,136 12,001 12,001 87,001 30,390 30,390 105,390 82,178 82,178 165,551
30 83,713 10,297 10,297 85,297 37,158 37,158 112,158 134,244 134,244 236,390
</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 all years, a mortality and expense risk
asset charge of 0.60% of account value up to $50,000 and 0.30% of account
value over $50,000 and a mortality and expense risk face amount charge as
shown in Appendix C of this prospectus.
(3) New 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
<TABLE>
<CAPTION>
Female Issue Age: 45 Non-Tobacco
$1,500 ANNUAL PREMIUM
$125,000 SPECIFIED AMOUNT
DEATH BENEFIT OPTION 1
LIFE INSURANCE QUALIFICATION TEST - GUIDELINE PREMIUM
USING GUARANTEED COST OF INSURANCE RATES
0% Hypothetical 6% Hypothetical 12% Hypothetical
Gross Investment Return Gross Investment Return Gross Investment Return
End of Premiums Policy Net Cash Death Policy Net Cash Death Policy Net Cash Death
Policy Accumulated Value Surrender Benefit Value Surrender Benefit Value Surrender Benefit
Year at 5% Value Value Value
Interest Per
Year
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 1,575 670 - 125,000 731 - 125,000 791 - 125,000
2 3,229 1,308 321 125,000 1,471 484 125,000 1,642 655 125,000
3 4,965 1,913 926 125,000 2,220 1,233 125,000 2,557 1,570 125,000
4 6,788 2,481 1,494 125,000 2,976 1,989 125,000 3,540 2,553 125,000
5 8,703 3,013 2,026 125,000 3,737 2,751 125,000 4,598 3,611 125,000
6 10,713 3,505 2,518 125,000 4,501 3,514 125,000 5,736 4,749 125,000
7 12,824 3,954 2,968 125,000 5,265 4,278 125,000 6,960 5,973 125,000
8 15,040 4,358 3,568 125,000 6,024 5,234 125,000 8,275 7,485 125,000
9 17,367 4,708 4,116 125,000 6,772 6,179 125,000 9,684 9,092 125,000
10 19,810 5,006 4,611 125,000 7,507 7,112 125,000 11,200 10,805 125,000
15 33,986 6,765 6,765 125,000 12,215 12,215 125,000 22,303 22,303 125,000
20 52,079 6,653 6,653 125,000 16,367 16,367 125,000 39,350 39,350 125,000
25 75,170 2,845 2,845 125,000 18,000 18,000 125,000 65,945 65,945 125,000
30 104,641 - - - 13,937 13,937 125,000 111,627 111,627 125,000
</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 all years, a mortality and expense risk
asset charge of 0.60% of account value up to $50,000 and 0.30% of account
value over $50,000 and a mortality and expense risk face amount charge as
shown in Appendix C of this prospectus.
(3) New 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
<TABLE>
<CAPTION>
Female Issue Age: 45 Non-Tobacco
$2,100 ANNUAL PREMIUM
$125,000 SPECIFIED AMOUNT
DEATH BENEFIT OPTION 2
LIFE INSURANCE QUALIFICATION TEST - GUIDELINE PREMIUM
USING GUARANTEED COST OF INSURANCE RATES
0% Hypothetical 6% Hypothetical 12% Hypothetical
Gross Investment Return Gross Investment Return Gross Investment Return
End of Premiums Policy Net Cash Death Policy Net Cash Death Policy Net Cash Death
Policy Accumulated Value Surrender Benefit Value Surrender Benefit Value Surrender Benefit
Year at 5% Value Value Value
Interest Per
Year
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 2,205 1,214 227 126,214 1,307 320 126,307 1,401 414 126,401
2 4,520 2,386 1,399 127,386 2,648 1,661 127,648 2,922 1,935 127,922
3 6,951 3,514 2,527 128,514 4,021 3,035 129,021 4,574 3,587 129,574
4 9,504 4,595 3,609 129,595 5,426 4,439 130,426 6,368 5,381 131,368
5 12,184 5,631 4,644 130,631 6,863 5,876 131,863 8,316 7,329 133,316
6 14,998 6,615 5,628 131,615 8,327 7,340 133,327 10,431 9,444 135,431
7 17,953 7,547 6,560 132,547 9,818 8,831 134,818 12,727 11,740 137,727
8 21,056 8,422 7,632 133,422 11,331 10,542 136,331 15,217 14,428 140,217
9 24,314 9,234 8,642 134,234 12,861 12,269 137,861 17,915 17,323 142,915
10 27,734 9,982 9,587 134,982 14,406 14,011 139,406 20,840 20,445 145,840
15 47,581 13,819 13,819 138,819 23,581 23,581 148,581 41,193 41,193 166,193
20 72,910 15,494 15,494 140,494 32,862 32,862 157,862 72,362 72,362 197,362
25 105,238 13,271 13,271 138,271 40,091 40,091 165,091 119,394 119,394 244,394
30 146,498 5,077 5,077 130,077 42,111 42,111 167,111 189,974 189,974 314,974
</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 all years, a mortality and expense risk
asset charge of 0.60% of account value up to $50,000 and 0.30% of account
value over $50,000 and a mortality and expense risk face amount charge as
shown in Appendix C of this prospectus.
(3) New investment returns are calculated as the hypothetical gross investment
returns less all charges and deductions shown in the prospectus.
(4) Assumes that the premium is paid at the beginning of each policy year.
Values would be different if the premiums are paid with a different
frequency or in different amounts.
The hypothetical investment rates of return shown above and elsewhere in this
Prospectus are illustrative only and should not be deemed a representation of
past or future investment rates of return. Actual rates of return may be more or
less than those shown and will depend on a number of factors including the
investment allocations made by an owner, prevailing rates and rates of
inflation. The death benefit and cash value for a policy would be different from
those shown if the actual rates of return averaged 0%, 6% or 12% over a period
of years but also fluctuated above or below those averages for individual policy
years. No representation can be made by the company or the fund that these
hypothetical rates of return can be achieved for any one year or sustained over
any period of time.
39
<PAGE>
Illustration of Policy Values
Penn Mutual Life Insurance Company
<TABLE>
<CAPTION>
Female Issue Age: 45 Non-Tobacco
$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
0% Hypothetical 6% Hypothetical 12% Hypothetical
Gross Investment Return Gross Investment Return Gross Investment Return
End of Premiums Policy Net Cash Death Policy Net Cash Death Policy Net Cash Death
Policy Accumulated Value Surrender Benefit Value Surrender Benefit Value Surrender Benefit
Year at 5% Value Value Value
Interest Per
Year
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 1,575 670 - 125,000 731 - 125,000 791 - 125,000
2 3,229 1,308 321 125,000 1,471 484 125,000 1,642 655 125,000
3 4,965 1,913 926 125,000 2,220 1,233 125,000 2,557 1,570 125,000
4 6,788 2,481 1,494 125,000 2,976 1,989 125,000 3,540 2,553 125,000
5 8,703 3,013 2,026 125,000 3,737 2,751 125,000 4,598 3,611 125,000
6 10,713 3,505 2,518 125,000 4,501 3,514 125,000 5,736 4,749 125,000
7 12,824 3,954 2,968 125,000 5,265 4,278 125,000 6,960 5,973 125,000
8 15,040 4,358 3,568 125,000 6,024 5,234 125,000 8,275 7,485 125,000
9 17,367 4,708 4,116 125,000 6,772 6,179 125,000 9,684 9,092 125,000
10 19,810 5,006 4,611 125,000 7,507 7,112 125,000 11,200 10,805 125,000
15 33,986 6,765 6,765 125,000 12,215 12,215 125,000 22,303 22,303 125,000
20 52,079 6,653 6,653 125,000 16,367 16,367 125,000 39,350 39,350 125,000
25 75,170 2,845 2,845 125,000 18,000 18,000 125,000 65,945 65,945 125,000
30 104,641 - - - 13,937 13,937 125,000 109,233 109,233 165,118
</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 all years, a mortality and expense risk
asset charge of 0.60% of account value up to $50,000 and 0.30% of account
value over $50,000 and a mortality and expense risk face amount charge as
shown in Appendix C of this prospectus.
(3) New investment returns are calculated as the hypothetical gross investment
returns less all charges and deductions shown in the prospectus.
(4) Assumes that the premium is paid at the beginning of each policy year.
Values would be different if the premiums are paid with a different
frequency or in different amounts.
The hypothetical investment rates of return shown above and elsewhere in this
Prospectus are illustrative only and should not be deemed a representation of
past or future investment rates of return. Actual rates of return may be more or
less than those shown and will depend on a number of factors including the
investment allocations made by an owner, prevailing rates and rates of
inflation. The death benefit and cash value for a policy would be different from
those shown if the actual rates of return averaged 0%, 6% or 12% over a period
of years but also fluctuated above or below those averages for individual policy
years. No representation can be made by the company or the fund that these
hypothetical rates of return can be achieved for any one year or sustained over
any period of time.
40
<PAGE>
Illustration of Policy Values
Penn Mutual Life Insurance Company
<TABLE>
<CAPTION>
Female Issue Age: 45 Non-Tobacco
$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
0% Hypothetical 6% Hypothetical 12% Hypothetical
Gross Investment Return Gross Investment Return Gross Investment Return
End of Premiums Policy Net Cash Death Policy Net Cash Death Policy Net Cash Death
Policy Accumulated Value Surrender Benefit Value Surrender Benefit Value Surrender Benefit
Year at 5% Value Value Value
Interest Per
Year
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 2,205 1,214 227 126,214 1,307 320 126,307 1,401 414 126,401
2 4,520 2,386 1,399 127,386 2,648 1,661 127,648 2,922 1,935 127,922
3 6,951 3,514 2,527 128,514 4,021 3,035 129,021 4,574 3,587 129,574
4 9,504 4,595 3,609 129,595 5,426 4,439 130,426 6,368 5,381 131,368
5 12,184 5,631 4,644 130,631 6,863 5,876 131,863 8,316 7,329 133,316
6 14,998 6,615 5,628 131,615 8,327 7,340 133,327 10,431 9,444 135,431
7 17,953 7,547 6,560 132,547 9,818 8,831 134,818 12,727 11,740 137,727
8 21,056 8,422 7,632 133,422 11,331 10,542 136,331 15,217 14,428 140,217
9 24,314 9,234 8,642 134,234 12,861 12,269 137,861 17,915 17,323 142,915
10 27,734 9,982 9,587 134,982 14,406 14,011 139,406 20,840 20,445 145,840
15 47,581 13,819 13,819 138,819 23,581 23,581 148,581 41,193 41,193 166,193
20 72,910 15,494 15,494 140,494 32,862 32,862 157,862 72,362 72,362 197,362
25 105,238 13,271 13,271 138,271 40,091 40,091 165,091 119,394 119,394 244,394
30 146,498 5,077 5,077 130,077 42,111 42,111 167,111 189,974 189,974 314,974
</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 all years, a mortality and expense risk
asset charge of 0.60% of account value up to $50,000 and 0.30% of account
value over $50,000 and a mortality and expense risk face amount charge as
shown in Appendix C of this prospectus.
(3) New investment returns are calculated as the hypothetical gross investment
returns less all charges and deductions shown in the prospectus.
(4) Assumes that the premium is paid at the beginning of each policy year.
Values would be different if the premiums are paid with a different
frequency or in different amounts.
The hypothetical investment rates of return shown above and elsewhere in this
Prospectus are illustrative only and should not be deemed a representation of
past or future investment rates of return. Actual rates of return may be more or
less than those shown and will depend on a number of factors including the
investment allocations made by an owner, prevailing rates and rates of
inflation. The death benefit and cash value for a policy would be different from
those shown if the actual rates of return averaged 0%, 6% or 12% over a period
of years but also fluctuated above or below those averages for individual policy
years. No representation can be made by the company or the fund that these
hypothetical rates of return can be achieved for any one year or sustained over
any period of time.
41
<PAGE>
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>
<S> <C>
Contents of this Section Page
-----------------------------------------------------------------------------------------------------------------
The Penn Mutual Life Insurance Company................................................................43
Penn Mutual Variable Life Account I...................................................................43
The Funds.............................................................................................44
More Information About Policy Values..................................................................46
Federal Income Tax Considerations.....................................................................48
Sale of Policies......................................................................................51
Penn Mutual Trustees and Officers.....................................................................51
State Regulation......................................................................................53
Additional Information................................................................................53
Experts...............................................................................................54
Litigation............................................................................................54
Independent Auditors..................................................................................54
Legal Matters.........................................................................................54
Financial Statements..................................................................................54
APPENDIX A...........................................................................................A-1
- Sample Minimum Initial Premiums
APPENDIX B...........................................................................................B-1
- Current and Guaranteed Mortality and Expense Risk Face Amounts Charges
APPENDIX C...........................................................................................C-1
- Sample Applicable Percentages Under the Cash Value Accumulation Life Insurance
Qualification Test
APPENDIX D...........................................................................................D-1
Guaranteed Mortality and Expense Risk Face Amount Charges-Supplemental Term
Insurance Rider
</TABLE>
42
<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.
43
<PAGE>
We may, if required by state insurance officials, disregard owner
voting instructions if such instructions would require shares to be voted so as
to cause a change in sub-classification or investment objectives of one or more
of the funds, or to approve or disapprove an investment advisory agreement. In
addition, we may under certain circumstances disregard voting instructions that
would require changes in the investment Policy or investment adviser of one or
more of the funds, provided that we reasonably disapprove of such changes in
accordance with applicable federal regulations. If we ever disregard voting
instructions, we will advise owners of that action and of our reasons for such
action in the next semiannual report. Finally, we reserve the right to modify
the manner in which we calculate the weight to be given to pass-through voting
instructions where such a change is necessary to comply with current federal
regulations or the current interpretation thereof.
The Funds
Penn Series Funds, Inc., Neuberger Berman Advisors Management Trust,
Fidelity Investments' Variable Insurance Products Fund, Fidelity Investments'
Variable Insurance Products Fund II and Morgan Stanley's The Universal
Institutional Funds, Inc. are each registered with the SEC as a diversified
open-end management investment company under the 1940 Act. Each is a series-type
mutual fund made up of different series or Funds.
The investment objective of each of the Funds available as investment
options under the Policy is set forth below. There is, of course, no assurance
that these objectives will be met.
Penn Series -- Money Market Fund -- preserve capital, maintain
liquidity and achieve the highest possible level of current income
consistent therewith.
Penn Series -- Limited Maturity Bond Fund -- the highest current income
consistent with low risk to principal and liquidity; total return is
secondary.
Penn Series -- Quality Bond Fund -- highest income over the long term
consistent with the preservation of principal.
Penn Series -- High Yield Bond Fund -- high current income.
Penn Series -- Flexibly Managed Fund -- maximize total return (capital
appreciation and income).
Penn Series -- Growth Equity Fund -- long-term growth of capital and
increase of future income.
Penn Series -- Large Cap Value Fund (formerly, "Value Equity Fund") --
maximize total return (capital appreciation and income).
Penn Series -- Index 500 Fund -- total return (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.
44
<PAGE>
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.
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.
45
<PAGE>
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.
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.
46
<PAGE>
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.
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.
47
<PAGE>
Net Policy Value
The net policy value on a valuation date is the policy value less the
amount of any policy loan on that date.
Cash Surrender Value
The cash surrender value on a valuation date is the policy value
reduced by any surrender charge that would be assessed if the Policy were
surrendered on that date. The cash surrender value is used to calculate the loan
value.
Net Cash Surrender Value
The net cash surrender value on a valuation date is equal to the net
policy value reduced by any surrender charge that would be imposed if the Policy
were surrendered on that date. The net cash surrender value is used to calculate
the amount available to you for full or partial surrenders.
Federal Income Tax Considerations
The following summary provides a general description of the Federal
income tax considerations associated with the Policy and does not purport to be
complete or to cover all situations. This discussion is not intended as tax
advice. Counsel or other competent tax advisors should be consulted for more
complete information. This discussion is based on Penn Mutual's understanding of
the present Federal income tax laws as they are currently interpreted by the
Internal Revenue Service (the "IRS"). No representation is made as to the
likelihood of continuation of the present Federal income tax laws or of the
current interpretations by the IRS.
Tax Status of the Policy
To qualify as a life insurance contract for federal income tax
purposes, the Policy must meet the definition of a life insurance contract which
is set forth in Section 7702 of the Internal Revenue Code of 1986, as amended
(the "Code"). The manner in which Section 7702 should be applied to certain
features of the Policy offered in this prospectus is not directly addressed by
Section 7702 or any guidance issued to date under Section 7702. Nevertheless,
Penn Mutual believes it is reasonable to conclude that the Policy will meet the
Section 7702 definition of a life insurance contract. In the absence of final
regulations or other pertinent interpretations of Section 7702, however, there
is necessarily some uncertainty as to whether a Policy will meet the statutory
life insurance contract definition, particularly if it insures a substandard
risk. If a Policy were determined not to be a life insurance contract for
purposes of Section 7702, such contract would not provide most of the tax
advantages normally provided by a life insurance contract.
If it is subsequently determined that a Policy does not satisfy Section
7702, we may take whatever steps that are appropriate and reasonable to comply
with Section 7702. For these reasons, we reserve the right to restrict Policy
transactions as necessary to attempt to qualify it as a life insurance contract
under Section 7702.
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.
48
<PAGE>
The IRS has stated in published rulings that a variable contract owner
will be considered the owner of separate account assets if the contract owner
possesses incidents of ownership in those assets, such as the ability to
exercise investment control over the assets. In circumstances where the variable
contract owner is considered the owner of separate account assets, income and
gain from the assets would be includable in the variable contract owner's gross
income. In connection with the issuance of regulations on the phrase "adequate
diversification," the Treasury Department announced in 1984 that guidance would
be given, by way of regulation or ruling, on the "extent to which Policyholders
may direct their investments to particular subaccounts without being treated as
owners of underlying assets." As of the date of this Prospectus, no ruling or
regulation has been issued.
The following discussion assumes that the Policy qualifies as a life
insurance contract for federal income tax purposes.
We believe that the proceeds and cash value increases of a Policy
should be treated in a manner consistent with a fixed-benefit life insurance
Policy for Federal income tax purposes. Thus, the death benefit under the Policy
should be excludable from the gross income of the beneficiary under Section
101(a)(1) of the Code.
Modified Endowment Contracts
The Internal Revenue Code establishes a class of life insurance
contracts designated as "modified endowment contracts," which applies to
Policies entered into or materially changed after June 20, 1988.
Due to the Policy's flexibility, classification as a modified endowment
contract will depend on the individual circumstances of each Policy. In general,
a Policy will be a modified endowment contract if the accumulated premiums paid
at any time during the first seven policy years exceeds the sum of the net level
premiums which would have been paid on or before such time if the Policy
provided for paid-up future benefits after the payment of seven level annual
premiums. The determination of whether a Policy will be a modified endowment
contract after a material change generally depends upon the relationship of the
death benefit and policy value at the time of such change and the additional
premiums paid in the seven years following the material change. At the time a
premium is credited which would cause the Policy to become a modified endowment
contract, we will notify you that unless a refund of the excess premium (with
interest) is requested, your Policy will become a modified endowment contract.
You will have 30 days after receiving such notification to request the refund.
All policies that we or our affiliate issues to the same owner during
any calendar year, which are treated as modified endowment contracts, are
treated as one modified endowment contract for purposes of determining the
amount includable in the gross income under Section 72(e) of the Code.
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.
49
<PAGE>
Distributions from Policies Classified as Modified Endowment Contracts
Policies classified as a modified endowment contract will be subject
to the following tax rules. First, all distributions, including distributions
upon surrender and partial withdrawals from such a Policy are treated as
ordinary income subject to tax up to the amount equal to the excess (if any) of
the policy value immediately before the distribution over the investment in the
Policy (described below) at such time. Second, loans taken from or secured by,
such a Policy are treated as distributions from such a Policy and taxed
accordingly. Past due loan interest that is added to the loan amount will be
treated as a loan. Third, a 10 percent additional income tax is imposed on the
portion of any distribution from, or loan taken from or secured by, such a
Policy that is included in income except where the distribution or loan is made
on or after the owner attains age 59 1/2, is attributable to the owner's
becoming totally and permanently disabled, or is part of a series of
substantially equal periodic payments for the life (or life expectancy) of the
owner or the joint lives (or joint life expectancies) of the owner and the
owner's Beneficiary.
Distributions from Policies Not Classified as Modified Endowment Contracts
Distributions from a Policy that is not a modified endowment contract,
are generally treated as first recovering the investment in the Policy
(described below) and then, only after the return of all such investment in the
Policy, as distributing taxable income. An exception to this general rule occurs
in the case of a decrease in the Policy's death benefit or any other change that
reduces benefits under the Policy in the first 15 years after the Policy is
issued and that results in a cash distribution to the owner in order for the
Policy to continue complying with the Section 7702 definitional limits. Such a
cash distribution will be taxed in whole or in part as ordinary income (to the
extent of any gain in the Policy) under rules prescribed in Section 7702.
Loans from, or secured by, a Policy that is not a modified endowment
contract are not treated as distributions. Instead, such loans are treated as
indebtedness of the owner.
Finally, neither distributions (including distributions upon surrender)
nor loans from, or secured by, a Policy that is not a modified endowment
contract are subject to the 10 percent additional tax.
Policy Loan Interest
Generally, personal interest paid on a loan under a Policy which is
owned by an individual is not deductible. In addition, interest on any loan
under a Policy owned by a taxpayer and covering the life of any individual will
generally not be tax deductible. The deduction of interest on policy loans may
also be subject to the restrictions of Section 264 of the Code. An owner should
consult a tax adviser before deducting any interest paid in respect of a policy
loan.
Investment in the Policy
Investment in the Policy means: (i) the aggregate amount of any
premiums or other consideration paid for a Policy, minus (ii) the aggregate
amount received under the Policy which is excluded from gross 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.
50
<PAGE>
Tax Consequences of the Guaranteed Option to Extend Maturity Date
The Guaranteed Option to Extend Maturity Date that we offer allows the Policy
Owner to extend the original maturity date by 20 years. An extension of maturity
could have adverse tax consequences. Before you exercise your rights under this
option, you should consult with a competent tax advisor regarding the possible
tax consequences of an extension of maturity.
Other Tax Considerations
The transfer of the Policy or the designation of a beneficiary may have
federal, state, and/or local transfer and inheritance tax consequences,
including the imposition of gift, estate and generation-skipping transfer taxes.
For example, the transfer of the Policy to, or the designation as beneficiary
of, or the payment of proceeds to, a person who is assigned to a generation
which is two or more generations below the generation of the owner, may have
generation skipping transfer tax considerations under Section 2601 of the Code.
The individual situation of each owner or beneficiary will determine
the extent, if any, to which federal, state and local transfer taxes may be
imposed. Consult with your tax adviser for specific information in connection
with these taxes.
Sale of Policies
Hornor, Townsend & Kent, Inc. ("HTK"), a wholly-owned subsidiary of
Penn Mutual, acts as a principal underwriter of the Policies. HTK, located at
600 Dresher Road, Suite 4C, Horsham, Pennsylvania 19044, was organized as a
Pennsylvania corporation on March 13, 1969. HTK also acts as principal
underwriter for Penn Mutual Variable Annuity Account III, a separate account
also established by Penn Mutual and for PIA Variable Annuity Account I, a
separate account established by The Penn Insurance and Annuity Company, a
wholly-owned subsidiary of Penn Mutual. HTK is a registered broker-dealer under
the Securities Exchange Act of 1934 and a member of the National Association of
Securities Dealers, Inc. The Policy is sold by registered representatives of HTK
who are also appointed and licensed as insurance agents. The Policy may also be
offered through other insurance and securities brokers. Registered
representatives may be paid commissions on a Policy they sell based on premiums
paid in amounts up to 53.5% of first year premiums, 3% on premiums paid during
the second through fifteenth policy years, and 1.2% on premiums paid after the
first fifteen policy years. Registered representatives may also be paid
commissions of up to 0.25% of policy value. Other allowances and overrides also
may be paid. Registered representatives who meet certain productivity and
profitability standards may be eligible for additional compensation.
Penn Mutual Trustees and Officers
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.
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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
The Penn Mutual Life Board (since December 1996), President and Chief Executive
Insurance Company and Chief Officer (April 1995-December 1996), President and Chief
Philadelphia, PA 19172 Executive Officer 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 1997), Executive Vice President, (May 1996-January 1997),
Insurance Company Officer and The Penn Mutual Life Insurance Company;
Philadelphia, PA 19172 Trustee Executive Vice President, The New England Mutual Life
Insurance Company (prior thereto).
-----------------------------------------------------------------------------------------------------------
Julia Chang Bloch Trustee Visiting Professor, Institute of International
1743 22nd Street, NW Relations in Beijing, China, and distinguished adviser,
Washington, DC 20008 American Studies Center (April 1998 to present);
President, US-Japan Foundation (July 1996 to March 1998);
Group Executive Vice President, Bank America NT &
SA (June 1993 to June 1996).
-----------------------------------------------------------------------------------------------------------
James A. Hagen Trustee Retired (since May 1996), Chairman of the Board,
2040 Montrose Lane Conrail, Inc. (prior thereto).
Wilmington, NC 28405
-----------------------------------------------------------------------------------------------------------
Philip E. Lippincott Trustee Retired (since April 1994), Chairman and Chief
4301 Bayberry Drive Executive Officer, Scott Paper Company (prior thereto).
Avalon, NJ 08202
-----------------------------------------------------------------------------------------------------------
John F. McCaughan Trustee Retired Chairman, (since 1996), Chairman of the Board
921 Pebble Hill Road (prior thereto), Betz Laboratories, Inc.
Doylestown, PA 18901
-----------------------------------------------------------------------------------------------------------
Alan B. Miller Trustee Chairman and President, Universal Health Services, Inc.
367 S. Gulph Road
King of Prussia, PA 19406
-----------------------------------------------------------------------------------------------------------
Edmond F. Notebaert Trustee President and Chief Executive Officer, The Children's
34th and Civic Center 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., 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).
52
<PAGE>
Senior Officers
<TABLE>
<CAPTION>
Name Principal Occupation During Past Five Years
-----------------------------------------------------------------------------------------------------------
<S> <C>
John M. Albanese Executive Vice President, Systems and Service (since June 2000); Senior
The Penn Mutual Life Vice President, Customer Service and Information Systems (June 1997-
Insurance Company June 2000), Vice President, Information Systems Application (prior thereto),
Philadelphia, PA 19172 The Penn Mutual Life Insurance Company.
-----------------------------------------------------------------------------------------------------------
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
The Penn Mutual Life 2000), Regional Vice President, Independence Financial Network
Insurance Company (1997-2000), The Penn Mutual Life Insurance Company; Vice President of
Philadelphia, PA 19172 Agencies (since 1994), General Manager, Western and Northwest Regions
(prior thereto), Aetna Life and Casualty.
-----------------------------------------------------------------------------------------------------------
Larry L. Mast Executive Vice President, The Penn Mutual Life Insurance Company (May 1997
The Penn Mutual Life to present). Formerly Senior Vice President, Lafayette Life Insurance
Insurance Company Company (September 1994 to May 1997); Vice President, Security Benefit
Philadelphia, PA 19172 Insurance Company (May 1993 to September 1994); Vice President, Home Life
Insurance Company (July 1990 to May 1993); Agency Manager, The Equitable
Life Insurance Company (August 1978 to July 1990).
-----------------------------------------------------------------------------------------------------------
Nina M. Mulrooney General Auditor (since November 1991), Vice President, Market
The Penn Mutual Life Conduct (since December 1997), Assistant Vice President,
Insurance Company Corporate Accounting and Control (prior thereto), The Penn
Philadelphia, PA 19172 Mutual Life Insurance Company.
-----------------------------------------------------------------------------------------------------------
Peter M. Sherman Executive Vice President (since December 1998), Chief Investment Officer
The Penn Mutual Life (May 1996-December 1998), Senior Vice President (May 1996 to December 1996),
Insurance Company Vice President, Investments (January 1996 to April 1996), Vice President,
Philadelphia, PA, 19172 Fixed 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.
53
<PAGE>
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
Raymond G. Caucci, FSA, MAAA, Assistant Vice President and Product Manager
Actuary, Penn Mutual, whose opinion is filed as an exhibit to the Registration
Statement.
Litigation
No litigation is pending that would have a material effect upon the
subaccounts or Penn Mutual.
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 at June 30, 2000
(unaudited) and December 31, 1999 (audited), and the consolidated financial
statements of Penn Mutual at December 31, 1999 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.
The consolidated financial statements of Penn Mutual are as of the end of
the most recent fiscal year. Penn Mutual does not prepare financial statements
more often than annually and believes that any incremental benefit to
prospective policy owners that may result from preparing and delivering more
current financial statements, though unaudited, does not justify the additional
cost that would be incurred. In addition, Penn Mutual represents that there have
been no adverse changes in its financial condition or operations between the end
of the most current fiscal year and the date of this prospectus.
54
<PAGE>
PENN MUTUAL VARIABLE LIFE ACCOUNT I
STATEMENT OF ASSETS AND LIABILITIES - JUNE 30, 2000 (UNAUDITED)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Money Quality High Yield Growth Equity
Total Market Fund+ Bond Fund+ Bond Fund+ Fund+
------------- ------------ ----------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Investment in Common Stock
Number of Shares .............................. 21,087,888 839,654 1,099,778 924,718
Cost .......................................... $358,477,468 $21,120,055 $8,617,388 $10,440,698 $26,558,073
Assets:
Investments at market value ................... $440,857,615 $21,120,055 $8,319,707 $9,412,420 $30,886,496
Dividends receivable .......................... 118,783 118,783 - - -
Liabilities:
Due to(from) the Penn Mutual Life
Insurance Company ............................ $402,786 (43,840) 67,745 44,449 89,410
------------ ----------- ---------- ----------- ------------
Net Assets .................................... $440,573,612 $21,282,678 $8,251,962 $9,367,971 $30,797,086
============ =========== ========== =========== ============
</TABLE>
--------------------------------------------------------------------------------
PENN MUTUAL VARIABLE LIFE ACCOUNT I
STATEMENT OF OPERATIONS - FOR THE SIX MONTHS ENDED JUNE 30, 2000 (UNAUDITED)
<TABLE>
<CAPTION>
Money Quality High Yield Growth Equity
Total Market Fund+ Bond Fund+ Bond Fund+ Fund+
-------------- ------------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C>
Investment Income:
Dividends ....................................... $4,242,227 $538,141 $437,660 $869,958 $ -
Expense:
Mortality and expense risk charges .............. 1,337,061 74,923 28,596 31,525 111,246
-------------- ------------- ------------ ----------- -------------
Net investment income (loss) .................... 2,905,166 463,218 409,064 838,433 (111,246)
-------------- ------------- ------------ ----------- -------------
Realized and Unrealized Gains (Losses) on
Investments:
Realized gains (losses) from redemption
of fund shares ............................. (592,677) - (11,839) 791 27,995
Capital gains distributions ..................... 29,331,344 - - - 3,864,754
-------------- ------------- ------------ ----------- -------------
Net realized gains (losses) from investment
transactions ............................... 28,738,667 - (11,839) 791 3,892,749
Net change in unrealized appreciation/
depreciation of investments ................ (56,735,063) - (290,834) (1,104,734) (5,984,548)
-------------- ------------- ------------ ----------- -------------
Net realized and unrealized gains (losses) on
investments ................................ (27,996,396) - (302,673) (1,103,943) (2,091,799)
-------------- ------------- ------------ ----------- -------------
Net increase (decrease) in net assets
resulting from operations .................. $ (25,091,230) $ 463,218 $ 106,391 $(265,510) $ (2,203,045)
============== ============= ============ =========== =============
</TABLE>
* Prior to May 1, 2000, the Large Cap Value Fund was named the Value Equity
Fund.
** Prior to May 1, 2000, the Small Cap Value Fund was named the Small
Capitalization Fund.
# For the period from May 1, 2000 (commencement of operations) through June
30, 2000.
+ Investment in Penn Series Funds, Inc.
++ Investment in Neuberger Berman Advisers Management Trust
+++ Investment in Fidelity Investments' Variable Insurance Products Funds I and
II
++++ Investment in The Universal Institutional Funds, Inc.
The accompanying notes are an integral part of these financial statements.
55
<PAGE>
<TABLE>
<CAPTION>
Large Cap Flexibly Small Cap Emerging
Value Managed International Value Growth
Fund*+ Fund+ Equity Fund+ Fund**+ Fund+
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
1,979,735 3,166,823 1,887,863 1,707,358 1,016,300
$11,477,347 $22,666,900 $33,371,204 $12,437,365 $30,004,104
$39,634,509 $56,179,817 $38,118,944 $12,497,331 $35,661,668
- - - - -
118,590 144,531 (420,967) 14,044 123,950
------------ ------------ ------------ ------------ -----------
$39,515,919 $56,035,286 $38,539,911 $12,483,287 $35,537,718
============ ============ ============ ============ ===========
Large Cap Flexibly Small Cap Emerging
Value Managed International Value Growth
Fund*+ Fund+ Equity Fund+ Fund**+ Fund+
----------- ------------- ------------- ---------- ------------
$376,960 $916,215 $178,294 $64,927 $ -
128,910 203,011 123,622 39,565 134,407
----------- ------------- ------------- ---------- ------------
248,050 713,204 54,672 25,362 (134,407)
----------- ------------- ------------- ---------- ------------
(195,485) (127,347) 51,370 (13,060) (259,305)
5,774,007 1,876,185 2,982,082 - 4,866,814
---------- ------------- ------------- ---------- ------------
5,578,522 1,748,838 3,033,452 (13,060) 4,607,509
(6,020,473) (4,341,784) (8,837,427) 475,572 (12,254,036)
---------- ------------- ------------- ---------- ------------
(441,951) (2,592,946) (5,803,975) 462,512 (7,646,527)
---------- ------------- ------------- ---------- ------------
$(193,901) $ (1,879,742) $ (5,749,303) $ 487,874 $(7,780,934)
========== ============= ============= ========== ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
56
<PAGE>
PENN MUTUAL VARIABLE LIFE ACCOUNT I
STATEMENT OF ASSETS AND LIABILITIES - JUNE 30, 2000 (UNAUDITED) (Cont'd)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Limited Mid Cap
Maturity Bond Index 500 Growth
Portfolio#+ Fund#+ Fund#+
-------------- ------------ -----------
<S> <C> <C> <C>
Investment in Common Stock
Number of Shares ............................................... 153,149 5,595,594 1,080,444
Cost ........................................................... $1,539,567 $54,625,596 $6,370,920
Assets:
Investments at market value .................................... $1,545,756 $53,513,857 $5,816,096
Dividends receivable .......................................... - - -
Liabilities:
Due to(from) the Penn Mutual Life Insurance Company ............ (1,093) 86,994 4,660
------------- ----------- ----------
Net Assets ..................................................... $1,546,849 $53,426,863 $5,811,436
============= =========== ==========
</TABLE>
--------------------------------------------------------------------------------
PENN MUTUAL VARIABLE LIFE ACCOUNT I
STATEMENT OF OPERATIONS - FOR THE SIX MONTHS ENDED JUNE 30, 2000
(UNAUDITED) (Cont'd)
<TABLE>
<CAPTION>
Limited Mid Cap
Maturity Bond Index 500 Growth
Portfolio#+ Fund#+ Fund#+
-------------- ------------ -----------
<S> <C> <C> <C>
Investment Income:
Dividends ...................................................... $ - $ - $ -
Expense:
Mortality and expense risk charges ............................. 1,108 37,561 4,434
------------- ----------- ----------
Net investment income (loss) ................................... (1,108) (37,561) (4,434)
------------- ----------- ----------
Realized and Unrealized Gains (Losses) on
Investments:
Realized gains (losses) from redemption of fund
shares .................................................... 70 (5,465) 204
Capital gains distributions .................................... - - -
------------- ----------- ----------
Net realized gains (losses) from investment
transactions .............................................. 70 (5,465) 204
Net change in unrealized appreciation/depreciation
of investments ............................................ 6,189 (1,111,739) (554,824)
------------- ----------- ----------
Net realized and unrealized gains (losses) on
investments ............................................... 6,259 (1,117,204) (554,620)
------------- ----------- ----------
Net increase (decrease) in net assets resulting
from operations ........................................... $ 5,151 $(1,154,765) $ (559,054)
============= ============ ===========
</TABLE>
* Prior to May 1, 2000, the Large Cap Value Fund was named the Value Equity
Fund.
** Prior to May 1, 2000, the Small Cap Value Fund was named the Small
Capitalization Fund.
# For the period from May 1, 2000 (commencement of operations) through June
30, 2000.
+ Investment in Penn Series Funds, Inc.
++ Investment in Neuberger Berman Advisers Management Trust
+++ Investment in Fidelity Investments' Variable Insurance Products Funds I and
II
++++ Investment in The Universal Institutional Funds, Inc.
The accompanying notes are an integral part of these financial statements.
57
<PAGE>
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------
Mid Cap Emerging
Value Balanced Equity-Income Growth Asset Manager Markets Equity
Fund#+ Portfolio++ Portfolio+++ Portfolio+++ Portfolio+++ Portfolio++++
------------- ----------- ------------- ------------- -------------- --------------
1,275,200 547,531 1,109,999 1,443,768 435,550 535,951
$12,784,984 $9,563,690 $26,083,678 $58,016,990 $7,253,468 $5,545,441
$9,658,743 $9,918,514 $27,399,077 $67,647,660 $7,074,480 $6,452,485
- - - - - -
179 35,223 46,752 102,078 16,673 (26,592)
----------- ---------- ------------ ----------- ------------- ------------
$ 9,658,564 $9,883,291 $27,352,325 $67,545,582 $7,057,807 $6,479,077
=========== ========== ============ =========== ============= ============
Mid Cap Emerging
Value Balanced Equity-Income Growth Asset Manager Markets Equity
Fund#+ Portfolio++ Portfolio+++ Portfolio+++ Portfolio+++ Portfolio++++
------------- ----------- ------------- ------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
$ - $ 153,838 $ 441,935 $ 66,517 $ 197,782 $ -
8,529 34,245 93,992 236,608 23,701 21,078
------------- ----------- ------------- ------------- -------------- --------------
(8,529) 119,593 347,943 (170,091) 174,081 (21,078)
------------- ----------- ------------- ------------- -------------- --------------
(717) 8,583 (62,758) 1,103 (3,252) (3,565)
- 1,218,223 1,664,963 6,618,354 465,962 -
------------- ----------- ------------- ------------- -------------- --------------
(717) 1,226,806 1,602,205 6,619,457 462,710 (3,565)
(3,126,241) (1,652,238) (1,930,394) (8,419,027) (819,938) (768,587)
------------- ----------- ------------- ------------- -------------- --------------
(3,126,958) (425,432) (328,189) (1,799,570) (357,228) (772,152)
------------- ----------- ------------- ------------- -------------- --------------
$ (3,135,487) $ (305,839) $ 19,754 $ (1,969,661) $ (183,147) $ (793,230)
============= =========== ============= ============= ============== ==============
</TABLE>
The accompanying notes are an integral part of these financial statements.
58
<PAGE>
PENN MUTUAL VARIABLE LIFE ACCOUNT I
STATEMENTS OF CHANGES IN NET ASSETS (UNAUDITED)
<TABLE>
<CAPTION>
Total Money Market Fund+
--------------------------------------------- ----------------------------------------
Six months Year Six months Year
ended ended ended ended
6/30/00 Dec. 31, 6/30/00 Dec. 31,
(Unaudited) 1999 (Unaudited) 1999
--------------------- ------------------- ------------------- -----------------
<S> <C> <C> <C> <C>
Operations:
Net investment income (loss) ........ $2,905,166 ($1,020,540) $463,218 $642,031
Net realized gains (losses) from
investment transactions ........ 28,738,667 6,093,381 - -
Net change in unrealized appreciation/
depreciation of investments .... (56,735,063) 52,910,067 - -
---------------- --------------- ------------- -------------
Net increase (decrease) in net assets
resulting from operations ...... (25,091,230) 57,982,908 463,218 642,031
---------------- --------------- ------------- -------------
Variable Life Activities:
Purchase payments ................... 60,472,310 118,334,715 23,747,617 54,823,381
Death Benefits ...................... (84,243) (261,374) - (23,803)
Cost of Insurance ................... (10,075,248) (17,467,919) (1,010,162) (1,662,531)
Net Transfers ....................... 71,738,725 (24,435,727) (28,200,856) (36,567,835)
Transfer of Policy Loans ............ 859,057 1,917,182 1,923 1,221,644
Contract administration charges ..... (2,285,300) (4,890,431) (438,397) (1,161,009)
Surrender benefits .................. (4,026,870) (9,489,178) (262,781) (1,709,339)
---------------- --------------- ------------- -------------
Net increase in net assets resulting
from variable annuity activities .... 116,598,431 63,707,268 (6,162,656) 14,920,508
---------------- --------------- ------------- -------------
Total increase (decrease) in net
assets ........................... 91,507,201 121,690,176 (5,699,438) 15,562,539
Net Assets:
Beginning of year ...................... 349,066,411 227,376,235 26,982,116 11,419,577
---------------- --------------- ------------- -------------
End of year ............................ $440,573,612 $349,066,411 $21,282,678 $26,982,116
================ =============== ============= =============
Quality Bond Fund+
---------------------------------------
Six months Year
ended ended
6/30/00 Dec. 31,
(Unaudited) 1999
------------------- -----------------
Operations:
Net investment income (loss) ........ $409,064 ($62,224)
Net realized gains (losses) from
investment transactions ........ (11,839) 300
Net change in unrealized appreciation/
depreciation of investments .... (290,834) 3,611
------------ ----------
Net increase (decrease) in net assets
resulting from operations ...... 106,391 (58,313)
------------ ----------
Variable Life Activities:
Purchase payments ................... 555,059 1,355,013
Death Benefits ...................... - (2,243)
Cost of Insurance ................... (188,898) (360,405)
Net Transfers ....................... (516,567) 1,123,017
Transfer of Policy Loans ............ 1,161 11,409
Contract administration charges ..... (34,782) (73,285)
Surrender benefits .................. (79,783) (226,335)
------------ ----------
Net increase in net assets resulting
from variable annuity activities .... (263,810) 1,827,171
------------ ----------
Total increase (decrease) in net
assets ........................... (157,419) 1,768,858
Net Assets:
Beginning of year ...................... 8,409,381 6,640,523
------------ ----------
End of year ............................ $8,251,962 $8,409,381
============ ==========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
High Yield Bond Fund+ Growth Equity Fund+
--------------------------------------------- ----------------------------------------
Six months Year Six months Year
ended ended ended ended
6/30/00 Dec. 31, 6/30/00 Dec. 31,
(Unaudited) 1999 (Unaudited) 1999
--------------------- ------------------- ------------------- -----------------
<S> <C> <C> <C> <C>
Operations:
Net investment income (loss) ......... $838,433 ($72,682) ($111,246) ($176,930)
Net realized gains (losses) from
investment transactions ......... 791 416 3,892,749 51,190
Net change in unrealized appreciation/
depreciation of investments ..... (1,104,734) 349,711 (5,984,548) 6,911,635
------------- ------------- ------------- ------------
Net increase (decrease) in net assets
resulting from operations ....... (265,510) 277,445 (2,203,045) 6,785,895
------------- ------------- ------------- ------------
Variable Life Activities:
Purchase payments .................... 792,279 2,380,766 3,138,528 4,496,063
Surrender benefits ................... (6,160) (19,671) - (13,556)
Net Transfers ........................ (225,452) (545,364) (731,087) (1,235,541)
Death Benefits ....................... (159,153) (330,639) 1,638,797 5,205,840
Contract administration charges ...... 15,653 8,662 72,605 69,797
Deferred sales charges ............... (35,461) (126,960) (168,147) (330,511)
Annuity benefits ..................... (101,193) (208,829) (401,535) (654,069)
------------- ------------- ------------- ------------
Net increase in net assets resulting
from variable annuity activities ..... 280,513 1,157,965 3,549,161 7,538,023
------------- ------------- ------------- ------------
Total increase (decrease) in net
assets ............................. 15,003 1,435,410 1,346,116 14,323,918
Net Assets:
Beginning of year ....................... 9,352,968 7,917,558 29,450,970 15,127,052
------------- ------------- ------------- ------------
End of year ............................. $9,367,971 $9,352,968 $30,797,086 $29,450,970
============= ============= ============= ============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Large Cap Value Fund*+
---------------------------------------
Six months Year
ended ended
6/30/00 Dec. 31,
(Unaudited) 1999
------------------- -----------------
<S> <C> <C>
Operations:
Net investment income (loss) ......... $248,050 ($317,240)
Net realized gains (losses) from
investment transactions ......... 5,578,522 (37,587)
Net change in unrealized appreciation/
depreciation of investments ..... (6,020,473) (296,100)
------------ -----------
Net increase (decrease) in net assets
resulting from operations ....... (193,901) (650,927)
------------ -----------
Variable Life Activities:
Purchase payments .................... 3,389,853 9,300,537
Surrender benefits ................... (5,489) (34,277)
Net Transfers ........................ (887,605) (2,317,035)
Death Benefits ....................... (1,298,222) (1,332,367)
Contract administration charges ...... 77,045 83,517
Deferred sales charges ............... (140,315) (490,439)
Annuity benefits ..................... (415,992) (1,050,128)
------------ -----------
Net increase in net assets resulting
from variable annuity activities ..... 719,275 4,159,808
------------ -----------
Total increase (decrease) in net
assets ............................. 525,374 3,508,881
Net Assets:
Beginning of year ....................... 38,990,545 35,481,664
------------ -----------
End of year ............................. $39,515,919 $38,990,545
============ ===========
</TABLE>
* Prior to May 1, 2000, the Large Cap Value Fund was named the Value Equity
Fund.
** Prior to May 1, 2000, the Small Cap Value Fund was named the Small
Capitalization Fund.
# For the period from May 1, 2000 (commencement of operations) through June
30, 2000.
+ Investment in Penn Series Funds, Inc.
++ Investment in Neuberger Berman Advisers Management Trust
+++ Investment in Fidelity Investments' Variable Insurance Products Funds I and
II
++++ Investment in The Universal Institutional Funds, Inc.
The accompanying notes are an integral part of these financial statements.
59
<PAGE>
<TABLE>
<CAPTION>
Small Cap
Flexibly Managed Fund+ International Equity Fund+ Value Fund*+
------------------------------------------- ------------------------------------------ ----------------------------------------
Six months Year Six months Year Six months Year
ended ended ended ended ended ended
6/30/00 Dec. 31, 6/30/00 Dec. 31, 6/30/00 Dec. 31,
(Unaudited) 1999 (Unaudited) 1999 (Unaudited) 1999
-------------------- ------------------ -------------------- ------------------ ------------------ ------------------
<S> <C> <C> <C> <C> <C>
$713,204 ($470,251) $54,672 ($226,031) $25,362 ($80,192)
1,748,838 16,311 3,033,452 1,131,146 (13,060) 8,164
(4,341,784) 3,692,338 (8,837,427) 10,566,719 475,572 (63,045)
------------ ------------ ---------- ----------- --------- -----------
(1,879,742) 3,238,398 (5,749,303) 11,471,834 487,874 (135,073)
------------ ------------ ---------- ----------- --------- -----------
4,447,404 12,696,631 3,333,902 6,485,087 1,260,873 3,124,582
(28,287) (82,516) (7,076) (7,506) (30,977) (7,256)
(1,442,200) (3,522,739) (814,432) (1,671,752) (268,735) (604,903)
(3,273,852) (6,182,355) 8,311,500 (3,336,017) 797,507 (12,470)
48,274 211,590 51,197 72,417 17,690 45,711
(169,304) (690,067) (152,074) (408,378) (49,101) (147,833)
(753,950) (1,818,495) (529,162) (906,723) (102,619) (228,773)
------------ ------------ ---------- ----------- --------- -----------
(1,171,915) 612,049 10,193,855 227,128 1,624,638 2,169,058
------------ ------------ ---------- ----------- --------- -----------
(3,051,657) 3,850,447 4,444,552 11,698,962 2,112,512 2,033,985
59,086,943 55,236,496 34,095,359 22,396,397 10,370,775 8,336,790
------------ ------------ ---------- ----------- --------- -----------
$56,035,286 $59,086,943 $38,539,911 $34,095,359 $12,483,287 $10,370,775
============ ============ =========== =========== =========== ===========
Emerging Growth Fund+
-------------------------------------
Six months Year
ended ended
6/30/00 Dec. 31,
(Unaudited) 1999
------------------ ---------------
($134,407) ($134,466)
4,607,509 195,921
(12,254,036) 16,746,334
------------ -----------
(7,780,934) 16,807,789
------------ -----------
4,541,022 2,612,183
(5,503) (7,463)
(958,876) (575,948)
10,364,999 5,165,425
339,421 27,154
(266,282) (190,593)
(211,401) (260,812)
------------ -----------
13,803,380 6,769,946
------------ -----------
6,022,446 23,577,735
29,515,272 5,937,537
------------ -----------
$35,537,718 $29,515,272
============ ===========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Limited Maturity Index 500 Mid Cap Mid Cap Balanced
Bond Fund#+ Fund#+ Growth Fund#+ Value Fund#+ Portfolio++
-------------------- --------------------- -------------------- ------------------- --------------------------------------
Six months Six months Six months Six months Six months Year
ended ended ended ended ended ended
6/30/00 6/30/00 6/30/00 6/30/00 6/30/00 Dec. 31,
(Unaudited) (Unaudited) (Unaudited) (Unaudited) (Unaudited) 1999
-------------------- --------------------- -------------------- ------------------- ------------------ ------------------
<S> <C> <C> <C> <C> <C>
($1,108) ($37,561) ($4,434) ($8,529) $119,593 $35,671
70 (5,465) 204 (717) 1,226,806 145,588
6,189 (1,111,739) (554,824) (3,126,241) (1,652,238) 1,736,544
-------------- ----------- ---------- ----------- ----------- ----------
5,151 (1,154,765) (559,054) (3,135,487) (305,839) 1,917,803
-------------- ----------- ---------- ----------- ----------- ----------
11,287 1,888,279 145,577 312,688 923,642 1,484,570
- - - - - (6,801)
(12,061) (456,920) (26,165) (78,297) (238,179) (353,927)
1,544,314 53,349,821 6,267,569 12,603,413 1,684,621 (12,467)
80 1,649 (12) 176 2,075 18,188
(1,922) (152,652) (4,043) (15,217) (40,123) (73,565)
- (48,549) (12,436) (28,712) (76,963) (174,227)
-------------- ----------- ---------- ----------- ----------- ----------
1,541,698 54,581,628 6,370,490 12,794,051 2,255,073 881,771
-------------- ----------- ---------- ----------- ----------- ----------
1,546,849 53,426,863 5,811,436 9,658,564 1,949,234 2,799,574
- - - - 7,934,057 5,134,483
-------------- ----------- ---------- ----------- ----------- ----------
$1,546,849 $53,426,863 $5,811,436 $9,658,564 $9,883,291 $7,934,057
============== =========== ========== =========== =========== ==========
</TABLE>
* Prior to May 1, 2000, the Large Cap Value Fund was named the Value Equity
Fund.
** Prior to May 1, 2000, the Small Cap Value Fund was named the Small
Capitalization Fund.
# For the period from May 1, 2000 (commencement of operations) through June
30, 2000.
+ Investment in Penn Series Funds, Inc.
++ Investment in Neuberger Berman Advisers Management Trust
+++ Investment in Fidelity Investments' Variable Insurance Products Funds I and
II
++++ Investment in The Universal Institutional Funds, Inc.
The accompanying notes are an integral part of these financial statements.
60
<PAGE>
PENN MUTUAL VARIABLE LIFE ACCOUNT I
STATEMENTS OF CHANGES IN NET ASSETS (UNAUDITED) (Con't)
<TABLE>
<CAPTION>
Equity-Income Growth
Portfolio+++ Portfolio+++
---------------------------------------- ------------------------------------------
Six months Year Six months Year
ended ended ended ended
6/30/00 Dec. 31, 6/30/00 Dec. 31,
(Unaudited) 1999 (Unaudited) 1999
------------------- ---------------- -------------------- -----------------
<S> <C> <C> <C> <C>
Operations:
Net investment income (loss) .......... $347,943 $95,807 ($170,091) ($310,681)
Net realized gains (losses) from
investment transactions .......... 1,602,205 675,484 6,619,457 3,375,626
Net change in unrealized appreciation/
depreciation of investments ...... (1,930,394) 330,734 (8,419,027) 10,574,337
-------------- ------------- -------------- -------------
Net increase (decrease) in net assets
resulting from operations ........ 19,754 1,102,025 (1,969,661) 13,639,282
-------------- ------------- -------------- -------------
Variable Life Activities:
Purchase payments ..................... 2,733,667 6,666,334 7,479,333 10,979,093
Death Benefits ........................ (59) (14,032) (692) (38,816)
Cost of Insurance ..................... (687,402) (1,603,588) (1,665,289) (2,562,252)
Net Transfers ......................... (874,392) 1,627,390 7,202,911 8,714,008
Transfer of Policy Loans .............. 18,768 71,994 196,817 68,165
Contract administration charges ....... (112,731) (373,064) (420,544) (720,794)
Surrender benefits .................... (361,670) (726,919) (559,310) (1,358,474)
-------------- ------------- -------------- -------------
Net increase in net assets resulting
from variable annuity activities ...... 716,181 5,648,115 12,233,226 15,080,930
-------------- ------------- -------------- -------------
Total increase (decrease) in net
assets ............................. 735,935 6,750,140 10,263,565 28,720,212
Net Assets:
Beginning of year ........................ 26,616,390 19,866,250 57,282,017 28,561,805
-------------- ------------- -------------- -------------
End of year .............................. $27,352,325 $26,616,390 $67,545,582 $57,282,017
============== ============= ============== =============
Asset Manager
Portfolio+++
---------------------------------------
Six months Year
ended ended
6/30/00 Dec. 31,
(Unaudited) 1999
------------------ ----------------
Operations:
Net investment income (loss) .......... $174,081 $84,186
Net realized gains (losses) from
investment transactions .......... 462,710 160,654
Net change in unrealized appreciation/
depreciation of investments ...... (819,938) 272,683
------------ -------------
Net increase (decrease) in net assets
resulting from operations ........ (183,147) 517,523
------------ -------------
Variable Life Activities:
Purchase payments ..................... 784,526 1,375,866
Death Benefits ........................ - (1,237)
Cost of Insurance ..................... (207,878) (347,344)
Net Transfers ......................... 585,497 1,102,953
Transfer of Policy Loans .............. 5,334 3,213
Contract administration charges ....... (37,661) (73,304)
Surrender benefits .................... (55,667) (129,352)
------------ -------------
Net increase in net assets resulting
from variable annuity activities ...... 1,074,151 1,930,795
------------ -------------
Total increase (decrease) in net
assets ............................. 891,004 2,448,318
Net Assets:
Beginning of year ........................ 6,166,803 3,718,485
------------ -------------
End of year .............................. $7,057,807 $6,166,803
============ =============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Emerging Markets
Portfolio++++
-------------------------------------
Six months Year
ended ended
6/30/00 Dec. 31,
(Unaudited) 1999
------------------- ---------------
<S> <C> <C>
Operations:
Net investment income (loss) ........... ($21,078) ($27,538)
Net realized gains (losses) from
investment transactions ........... (3,565) 370,168
Net change in unrealized appreciation/
depreciation of investments ....... (768,587) 2,084,566
------------ ------------
Net increase (decrease) in net assets
resulting from operations ......... (793,230) 2,427,196
------------ ------------
Variable Life Activities:
Purchase payments ...................... 986,774 554,609
Surrender benefits ..................... - (2,197)
Net Transfers .......................... (175,610) (104,590)
Death Benefits ......................... 1,710,818 399,790
Contract administration charges ........ 9,201 3,721
Deferred sales charges ................. (46,544) (30,629)
Annuity benefits ....................... (25,147) (36,703)
------------ ------------
Net increase in net assets resulting
from variable annuity activities ....... 2,459,492 784,001
------------ ------------
Total increase (decrease) in net .......
assets 1,666,262 3,211,197
Net Assets:
Beginning of year ......................... 4,812,815 1,601,618
------------ ------------
End of year ............................... $6,479,077 $4,812,815
============ ============
</TABLE>
* Prior to May 1, 2000, the Large Cap Value Fund was named the Value Equity
Fund.
** Prior to May 1, 2000, the Small Cap Value Fund was named the Small
Capitalization Fund.
# For the period from May 1, 2000 (commencement of operations) through June
30, 2000.
+ Investment in Penn Series Funds, Inc.
++ Investment in Neuberger Berman Advisers Management Trust
+++ Investment in Fidelity Investments' Variable Insurance Products Funds I and
II
++++ Investment in The Universal Institutional Funds, Inc.
The accompanying notes are an integral part of these financial statements.
61
<PAGE>
PENN MUTUAL VARIABLE LIFE ACCOUNT I
--------------------------------------------------------------------------------
Notes to Financial Statements
June 30, 2000 (Unaudited)
Note 1. Significant Accounting Policies
The significant accounting policies of Penn Mutual Variable Life Account I
(Account I) are as follows:
General - Account I was established by The Penn Mutual Life Insurance
Company (Penn Mutual) under the provisions of the Pennsylvania Insurance Law.
Account I is registered under the Investment Company Act of 1940, as amended, as
a unit investment trust. Account I offers units to variable life contract owners
to provide for the accumulation of value and for the payment of benefits.
Account I contains contracts of the Cornerstone VUL, Cornerstone VULII,
Cornerstone VULIII, Variable Estate Max and Momentum Builder variable life
products. Contract owners may borrow up to a specified amount depending on the
policy value at any time by submitting a written request for a policy loan. The
preparation of the accompanying financial statements requires management to make
estimates and assumptions that affect the reported values of assets and
liabilities as of June 30, 2000 and the reported amounts from operations and
contract transactions as of June 30, 2000 and December 31, 1999. 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, Large Cap Value, Flexibly Managed, International Equity, Small Cap
Value, Emerging Growth, Limited Maturity Bond, Growth and Income, Index 500, Mid
Cap Growth and Mid Cap Value Funds; Neuberger Berman Advisers Management Trust
(AMT): Balanced Portfolio; Fidelity Investments' Variable Insurance Products
(Fidelity): Equity Income, Growth, and Asset Manager; and The Universal
Institutional Funds, Inc. (Morgan Stanley): Emerging Markets Equity Portfolio.
Penn Series, AMT, Fidelity and Morgan Stanley are open-end diversified
management investment companies. The investment in shares of these funds or
portfolios are carried at market value as determined by the underlying net asset
value of the respective funds or portfolios. Dividend income is recorded on the
ex-dividend date. Investment transactions are accounted for on a trade date
basis.
Federal Income Taxes - Penn Mutual is taxed under federal law as a life
insurance company. Account I is part of Penn Mutual's total operations and is
not taxed separately. Under existing federal law, no taxes are payable on
investment income and realized gains of Account I.
Diversification Requirements - Under the provisions of Section 817(h)
of the Internal Revenue Code, a variable annuity contract other than a contract
issued in connection with certain types of employee benefit plans will not be
treated as an annuity contract for federal tax purposes for any period for which
the investments of the segregated asset account on which the contract is based
are not adequately diversified. The Code provides that the "adequately
diversified" requirement may be met if the underlying investments satisfy either
a statutory safe harbor test or diversification requirements set forth in
regulations issued by the Secretary of Treasury. The Internal Revenue Service
has issued regulations under 817(h) of the Code. Penn Mutual believes that
Account I satisfies the current requirements of the regulations, and it intends
that Account I will continue to meet such requirements.
62
<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 period ended June 30,
2000:
Purchases Sales
--------- -----
Money Market Fund ............................. $38,296,851 $43,523,137
Quality Bond Fund ............................. 1,949,271 1,641,738
High Yield Bond Fund .......................... 1,948,140 890,736
Growth Equity Fund ............................ 9,538,661 1,932,451
Large Cap Value Fund* ........................ 9,404,197 5,081,803
Flexibly Managed Fund ......................... 12,692,415 9,939,984
Small Cap Value Fund** ........................ 2,274,775 1,419,002
International Equity Fund ..................... 37,762,026 24,115,144
Emerging Growth Fund .......................... 25,136,792 3,867,637
Limited Maturity Bond Fund+ ................... 1,599,683 68,438
Index 500 Fund+ ............................... 57,676,224 1,153,979
Mid Cap Growth Fund+ .......................... 11,192,470 404,757
Mid Cap Value Fund+ ........................... 13,144,002 340,491
Balanced Portfolio ............................ 4,056,980 529,608
Equity-Income Portfolio ....................... 5,500,068 3,831,301
Growth Portfolio .............................. 22,653,884 2,330,066
Asset Manager Portfolio ....................... 2,394,020 652,964
Emerging Markets Equity Portfolio ............. 3,017,812 361,550
* Prior to May 1, 2000, the Large Cap Value Fund was named the Value Equity
Fund.
** Prior to May 1, 2000, the Small Cap Value Fund was named the Small
Capitalization Fund.
+ For the period from May 1, 2000 (commencement of operations) through June 30,
2000.
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 Estate Max is determined
daily at a current annual rate guaranteed not to exceed 0.90% of the average
value of Variable Estate Max; Momentum Builder is determined daily at an annual
rate of 0.65% of the average value of Momentum Builder.
For each Cornerstone VUL, Cornerstone VUL II, Cornerstone VUL III and
Variable Estate Max policy, on the date of issue and each monthly anniversary, a
monthly deduction is made from the policy value. The monthly deduction consists
of insurance charges, administrative charges and any charges for additional
benefits added by supplemental agreement to a policy. See original policy
documents for specific charges assessed.
For each Momentum Builder policy, each month on the date specified in
the contract (or on the date the contract is withdrawn in full if other than the
date specified), a $4 contract administration charge, or a lesser amount under
state insurance laws, is deducted from the contract value. See original policy
documents for specific charges assessed.
If a Cornerstone VUL or Cornerstone VUL II policy is surrendered within
the first 11 years, or a Cornerstone VUL III policy is surrendered within the
first 16 years, or a Variable Estate Max policy is surrendered within the first
13 years, a contingent deferred sales charge will be assessed. This charge will
be deducted before any surrender proceeds are paid. See original policy
documents for specific charges assessed.
63
<PAGE>
Note 4. Unit Values
As of June 30, 2000, the accumulation units and accumulation unit values
are as follows:
<TABLE>
<CAPTION>
Variable Life Contracts: Accumulation Accumulation Variable Life Contracts: Accumulation Accumulation
Units Unit Value Units Unit Value
------------- ------------ ------------ ------------
Money Market Fund Limited Maturity Bond Fund+
<S> <C> <C> <C> <C> <C>
Cornerstone VUL 234,510 $13.14 Cornerstone VUL 9,129 $12.96
Cornerstone VUL II 445,881 $12.32 Cornerstone VUL II/Variable Estate Max 106,773 $12.24
Cornerstone VUL III 769,888 $10.45 Cornerstone VUL III 12,639 $10.22
Variable Estate Max 204,089 $12.32
Momentum Builder 143,560 $18.06 Index 500 Fund+
Cornerstone VUL 290,033 $18.37
Quality Bond Fund Cornerstone VUL II/Variable Estate Max 2,269,846 $18.28
Cornerstone VUL 139,852 $14.63 Cornerstone VUL III 892,942 $10.27
Cornerstone VUL II/Variable Estate 416,434 $13.72
Max
Cornerstone VUL III 54,664 $10.32 Mid Cap Growth Fund+
Momentum Builder 10,181 $25.07 Cornerstone VUL 194,560 $23.68
Cornerstone VUL II/Variable Estate Max 339,928 $19.85
High Yield Bond Fund Cornerstone VUL III 18,174 $10.67
Cornerstone VUL 183,374 $16.08
Cornerstone VUL II/Variable Estate 378,942 $14.64 Mid Cap Value Fund+
Max
Cornerstone VUL III 34,383 $9.85 Cornerstone VUL 160,030 $13.64
Momentum Builder 22,382 $27.80 Cornerstone VUL II/Variable Estate Max 737,804 $13.58
Cornerstone VUL III 82,987 $9.25
Growth Equity Fund
Cornerstone VUL 309,549 $36.80 Balanced Portfolio
Cornerstone VUL II/Variable Estate 550,135 $31.83 Cornerstone VUL 134,185 $25.82
Max
Cornerstone VUL III 217,420 $11.59 Cornerstone VUL II/Variable Estate Max 280,270 $23.00
Momentum Builder 28,519 $50.39 Cornerstone VUL III 73,603 $13.86
Large Cap Value Fund* Equity-Income Portfolio
Cornerstone VUL 440,608 $22.84 Cornerstone VUL 170,510 $19.56
Cornerstone VUL II/Variable Estate 1,255,964 $18.71 Cornerstone VUL II/Variable Estate Max 1,052,077 $19.41
Max
Cornerstone VUL III 146,241 $8.70 Cornerstone VUL III 187,838 $8.95
Momentum Builder 10,539 $37.66
Growth Portfolio
Flexibly Managed Fund Cornerstone VUL 371,778 $34.22
Cornerstone VUL 1,007,479 $21.23 Cornerstone VUL II/Variable Estate Max 1,618,450 $33.95
Cornerstone VUL III 562,242 $11.97
Cornerstone VUL II/Variable Estate 1,981,537 $17.26
Max
Cornerstone VUL III 138,809 $10.25
Momentum Builder 2,722 $39.60 Asset Manager Portfolio
Cornerstone VUL 62,096 $18.99
Small Cap Value Fund** Cornerstone VUL II/Variable Estate Max 284,373 $18.84
Cornerstone VUL 80,283 $15.61 Cornerstone VUL III 65,473 $10.17
Cornerstone VUL II/Variable Estate 641,129 $15.49
Max
Cornerstone VUL III 93,080 $10.00 Emerging Markets Equity Portfolio
Cornerstone VUL 95,513 $12.43
International Equity Fund Cornerstone VUL II/Variable Estate Max 392,093 $12.37
Cornerstone VUL 476,530 $24.75 Cornerstone VUL III 78,669 $13.02
Cornerstone VUL II/Variable Estate 1,191,572 $21.46
Max
Cornerstone VUL III 241,597 $11.74
Emerging Growth Fund
Cornerstone VUL 134,155 $55.75 * Prior to May 1, 2000, the Large
Cornerstone VUL II/Variable Estate 554,739 $55.49 Cap Value Fund was named the Value
Max Equity Fund.
Cornerstone VUL III 354,962 $17.97 ** Prior to May 1, 2000, the Small Cap
Value Fund was named the Small
Capitalization Fund.
+ For the period from May 1, 2000
(commencement of operations) through
June 30, 2000.
</TABLE>
64
<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>
65
<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>
66
<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.
67
<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.
68
<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.
69
<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>
70
<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>
71
<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>
72
<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
73
<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>
74
<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.
75
<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.
76
<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.
77
<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
78
<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
79
<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
80
<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.
81
<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.
82
<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.
83
<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.
84
<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.
85
<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
86
<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,
87
<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
88
<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,
89
<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>
90
<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
91
<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.
92
<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>
93
<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.
94
<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.
95
<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.
96
<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>
97
<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.
98
<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.
99
<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.
100
<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
101
<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. This table
assumes the Insureds will be placed in a non-tobacco 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 $303
--------------------------------------------------------------------------------
30 F $75,000 $426
--------------------------------------------------------------------------------
35 M $75,000 $484
--------------------------------------------------------------------------------
40 F $100,000 $712
--------------------------------------------------------------------------------
45 M $100,000 $897
--------------------------------------------------------------------------------
50 F $100,000 $1,018
--------------------------------------------------------------------------------
55 M $100,000 $1,369
--------------------------------------------------------------------------------
60 F $75,000 $1,227
--------------------------------------------------------------------------------
65 M $75,000 $1,941
--------------------------------------------------------------------------------
70 F $50,000 $1,593
--------------------------------------------------------------------------------
A-1
<PAGE>
--------------------------------------------------------------------------------
Appendix B
--------------------------------------------------------------------------------
Mortality and Expense Risk Face Amount Charge
Current Rates per $1,000 of Initial Face Amount
<TABLE>
<CAPTION>
Non-Tobacco Tobacco
Issue Age Male Female Unisex Male Female Unisex
<S> <C> <C> <C> <C> <C> <C>
5 0.07 0.06 0.06 0.07 0.06 0.06
10 0.07 0.06 0.06 0.07 0.06 0.06
15 0.08 0.07 0.08 0.08 0.07 0.08
20 0.07 0.07 0.07 0.09 0.08 0.09
25 0.08 0.08 0.08 0.10 0.09 0.10
30 0.09 0.09 0.09 0.11 0.10 0.11
35 0.10 0.09 0.10 0.12 0.10 0.12
40 0.12 0.11 0.11 0.13 0.12 0.13
45 0.13 0.12 0.13 0.14 0.13 0.14
50 0.15 0.14 0.14 0.16 0.15 0.16
55 0.16 0.15 0.16 0.18 0.16 0.18
60 0.18 0.16 0.18 0.20 0.18 0.20
65 0.20 0.17 0.19 0.22 0.20 0.22
70 0.22 0.20 0.21 0.24 0.22 0.23
75 0.23 0.22 0.23 0.25 0.23 0.25
80 0.25 0.24 0.25 0.27 0.25 0.26
85 0.27 0.25 0.27 0.28 0.26 0.28
</TABLE>
Representative figures shown. For issue ages not listed, please ask your
registered representative.
Mortality and Expense Risk Face Amount Charge
Guaranteed Rates per $1,000 of Initial Face Amount
<TABLE>
<CAPTION>
Non-Tobacco Tobacco
Issue Age Male Female Unisex Male Female Unisex
<S> <C> <C> <C> <C> <C> <C>
5 0.08 0.07 0.08 0.08 0.07 0.08
10 0.08 0.07 0.08 0.08 0.07 0.08
15 0.10 0.08 0.09 0.10 0.08 0.09
20 0.08 0.07 0.08 0.10 0.08 0.10
25 0.10 0.09 0.09 0.12 0.10 0.11
30 0.10 0.09 0.10 0.13 0.10 0.13
35 0.13 0.11 0.12 0.16 0.13 0.15
40 0.15 0.13 0.14 0.19 0.15 0.18
45 0.18 0.15 0.17 0.23 0.17 0.22
50 0.22 0.18 0.21 0.28 0.21 0.27
55 0.28 0.23 0.27 0.29 0.26 0.29
60 0.29 0.28 0.29 0.29 0.29 0.29
65 0.29 0.29 0.29 0.29 0.29 0.29
70 0.29 0.29 0.29 0.29 0.29 0.29
75 0.29 0.29 0.29 0.29 0.29 0.29
80 0.29 0.29 0.29 0.29 0.29 0.29
85 0.29 0.29 0.29 0.29 0.29 0.29
</TABLE>
Representative figures shown. For issue ages not listed, please ask your
registered representative.
B-1
<PAGE>
--------------------------------------------------------------------------------
Appendix C
--------------------------------------------------------------------------------
Applicable Percentages Under the Guideline Premium/Cash Value Corridor Test
<TABLE>
<CAPTION>
Attained Attained Attained Attained Attained
Age % Age % Age % Age % Age %
-------- --- -------- --- -------- --- -------- --- -------- ---
<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>
<PAGE>
Sample Applicable Percentages Under the Cash Value Accumulation Test
<TABLE>
<CAPTION>
Male Non-Tobacco
Attained Attained Attained Attained Attained
Age % Age % Age % Age % Age %
-------- --- -------- --- -------- --- -------- --- -------- ---
<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>
<TABLE>
<CAPTION>
Female Non-Tobacco
Attained Attained Attained Attained Attained
Age % Age % Age % Age % Age %
-------- --- -------- --- -------- --- -------- --- -------- ---
<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>
C-1
<PAGE>
Sample Applicable Percentages Under the Cash Value Accumulation Test
<TABLE>
<CAPTION>
Male Tobacco
Attained Attained Attained Attained Attained
Age % Age % Age % Age % Age %
-------- --- -------- --- -------- --- -------- --- -------- ---
<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>
<TABLE>
<CAPTION>
Female Tobacco
Attained Attained Attained Attained Attained
Age % Age % Age % Age % Age %
-------- --- -------- --- -------- --- -------- --- -------- ---
<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% 90 125.11%
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>
C-2
<PAGE>
--------------------------------------------------------------------------------
Appendix D
--------------------------------------------------------------------------------
Mortality and Expense Risk Face Amount Charge
Guaranteed Rates per $1,000 of Initial Face Amount
Supplemental Term Insurance Rider
<TABLE>
<CAPTION>
Non-Tobacco Tobacco
Issue Age Male Female Unisex Male Female Unisex
<S> <C> <C> <C> <C> <C> <C>
5 0.13 0.12 0.13 0.13 0.12 0.13
10 0.13 0.12 0.13 0.13 0.12 0.13
15 0.15 0.13 0.14 0.15 0.13 0.14
20 0.13 0.12 0.13 0.15 0.13 0.15
25 0.15 0.14 0.14 0.17 0.15 0.16
30 0.15 0.14 0.15 0.18 0.15 0.18
35 0.18 0.16 0.17 0.21 0.18 0.20
40 0.20 0.18 0.19 0.24 0.20 0.23
45 0.23 0.20 0.22 0.28 0.22 0.27
50 0.27 0.23 0.26 0.33 0.26 0.32
55 0.33 0.28 0.32 0.34 0.31 0.34
60 0.34 0.33 0.34 0.34 0.34 0.34
65 0.34 0.34 0.34 0.34 0.34 0.34
70 0.34 0.34 0.34 0.34 0.34 0.34
75 0.34 0.34 0.34 0.34 0.34 0.34
80 0.34 0.34 0.34 0.34 0.34 0.34
85 0.34 0.34 0.34 0.34 0.34 0.34
</TABLE>
Representative figures shown. For issue ages not listed, please ask your
registered representative.
<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
The Registration Statement includes separate prospectuses for Cornerstone VUL I,
Cornerstone VUL II, Cornerstone VUL III and Cornerstone VUL IV Flexible Premium
Adjustable Variable Life Insurance Policies, consisting of 81, 81, 94 and 107
pages, respectively. The prospectuses for Cornerstone VUL I, II and III are
included in Post-Effective Amendment No. 11 filed on April 18, 2000.
The facing sheet.
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
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 Registration Statement filed on April
30, 1999 (Accession No. 0000950116-99-000880).
A(2) Not Applicable.
II-2
<PAGE>
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).
(3) Schedule I to Sales Support Agreement between The
Penn Mutual Life Insurance Company and Horner,
Townsend & Kent, Inc. Incorporated herein by reference
to Exhibit A(3)(a)(3) to Post-Effective Amendment No.
12 to this Form S-6 Registration Statement filed on
November 9, 2000 (Accession No. 0000950116-00-002672).
(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 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)(4) Form of Schedule A to Broker-Dealer Selling
Agreement. Incorporated herein by reference to
Exhibit A(3)(b)(4) to Post-Effective Amendment No.
12 to this Form S-6 Registration Statement filed on
November 9, 2000 (Accession No. 0000950116-00-002672).
(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
II-3
<PAGE>
A(5) (a) Specimen Flexible Premium Adjustable Variable Life
Insurance Policy (VU-90(S)). 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) (VU-99(S)).
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) (VU-99(U)). 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
(AIR-80). 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 CTIA-83.
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 (ADBA-80).
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 (WSP-90).
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).
(h) Disability Waiver of Monthly Deduction Agreement
Rider (WMO-80). 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
(GCP-90). 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 (GIO-80). 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).
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<PAGE>
(k) Supplemental Term Insurance Agreement Rider
(STI-108). 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) Flexible Premium Adjustable Variable Life Insurance
Policy (revised) (VU-94(S)). 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 (A0014554R). 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 (OEMD-99(s)).
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 (OEMD-99(u).
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
(ROP-99(s)). Incorporated herein by reference to
Exhibit A5(p) to Post-Effective Amendment No. 9 to
this Form S-6 Registration Statement filed on May 3,
1999 (Accession No. 0000950116-99-000884).
(q) Return of Premium Term Insurance Agreement
(ROP-99(u)). 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 (SEAU-99).
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 (1707-01).
Incorporated herein by reference to Exhibit A5(s) to
Post-Effective Amendment No. 9 lto this Form S-6
Registration Statement filed on May 3, 1999
(Accession No. 0000950116-99-000884).
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<PAGE>
(t) Endorsement - Cost of Insurance (1706-01).
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).
(u) Flexible Premium Adjustable Variable Life Insurance
Policy (VU-01(S)) (Cornerstone IV). Filed herewith.
(v) Flexible Premium Adjustable Variable Life Insurance
Policy (VU-01(U)) (Cornerstone IV). Filed herewith.
(w) Rider-Supplemental Term Insurance Agreement
(SLTI-01(S)). Filed herewith.
(x) Rider-Supplemental Term Insurance Agreement
(SLT-01(U)). Filed herewith.
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).
(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).
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<PAGE>
(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).
A (9) Not applicable.
A(10) (a) Application Form for Flexible Premium Adjustable 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).
(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).
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<PAGE>
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 January 5, 2001
Filed herewith.
3. Opinion and consent of Raymond G. Caucci, FSA, MAAA, Actuary, The Penn
Mutual Life Insurance Company, dated January 5, 2001, as to actuarial
matters pertaining to the securities being registered. Filed herewith.
4. (a) Consent of Ernst & Young, LLP. Incorporated herein by
reference to Exhibit 4(a) to Post-Effective Amendment No. 12
to this Form S-6 Registration Statement filed on November 9,
2000 (Accession No. 0000950116-00-002672).
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 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).
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<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933,
the registrant has duly caused this Post-Effective Amendment No. 13 to this
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 State of Pennsylvania, on the 8th day of
January, 2001.
[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. 13 to this Registation Statement has been signed
below by the following persons in the capacities and on the 8th day of
January, 2001.
Signature Title
--------- -----
/s/Robert E. Chappel Chairman of the Board of Trustees
------------------------------------ and Chief Executive Officer
Robert E. Chappell
/s/Nancy S. Brodie Executive Vice President
------------------------------------ and Chief Financial Officer
Nancy S. Brodie
* JULIA CHANG BLOCH Trustee
*JAMES A. HAGEN Trustee
*PHILIP E. LIPPINCOTT Trustee
*JOHN F. McCAUGHAN Trustee
*ALAN B. MILLER Trustee
*EDMOND F. NOTEBAERT Trustee
*ROBERT H. ROCK Trustee
*DANIEL J. TORAN Trustee
*NORMAN T. WILDE, JR. Trustee
*WESLEY S. WILLIAMS, JR. Trustee
*By/s/Robert E. Chappell
---------------------
Robert E. Chappell, attorney-in-fact
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<PAGE>
Exhibit Index
EX.99.1A(5)(u) Flexible Premium Adjustable Variable Life Insurance Policy
(VU-01(S)) (Cornerstone IV).
EX.99.1A(5)(v) Flexible Premium Adjustable Variale Life Insurance Policy
(VU-01(U)) (Cornerstone IV).
EX.99.1A(5)(w) Rider-Supplemental Term Insurance Agreement (SLTI-01(S)).
EX.99.1A(5)(x) Rider-Supplemental Term Insurance Agreement (SLT-01(U)).
EX.99.2 Opinion and consent of Franklin L Best, Jr. Esq., Associate
General Counsel, The Penn Mutual Life Insurance Company,
dated January 5, 2001.
EX.99.3 Opinion and consent of Raymond G. Caucci, FSA, MAAA,
Actuary, The Penn Mutual Life Insurance Company, dated
January 5, 2001, as to actuarial matters pertaining to the
securities being registered.
II-10
